By Carman J. Overholt, Q.C., Fraser Milner Casgrain LLP
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Class actions are frequently used in the U.S. to pursue employers who have policies or practices that breach legislative requirements in the area of employment, including the payment of wages. Large judgments have been obtained in U.S. courts against employers for systemically failing to pay overtime wages owed to employees for work performed (Suits on Overtime Hitting Big Firms, by Brooke A. Masters and Amy Joyce in the Washington Post, Tuesday, Feb. 21, 2006). In October 2006, a jury in Pennsylvania awarded Wal-Mart employees $78 million in connection with overtime wages.

And now class actions dealing with employment-related claims could be on the rise in Canada.

The use of class proceedings legislation to pursue claims for non-compliance with employment standards legislation should not be viewed as an unexpected development in light of the U.S. experience and the stated goal of class action legislation, which is to promote access to the justice system. Related articles Class actions without borders (April 2007) An early clue to a new direction: Enforcement of foreign non-monetary judgments (December 2006) The shareholder class-action storm (April 2006)

Class proceedings legislation was introduced in B.C. on Aug. 1, 1995; in Saskatchewan on Jan. 1, 2002; in Manitoba on July 25, 2002; and in Alberta on April 11, 2004. To date, there have been fewer than 20 class proceedings in Western Canada in connection with the employment and pension obligations of employers.

A recent decision of the B.C. Supreme Court in Macaraeg v. E Care Contact Centres Ltd. ((2006) B.C.S.C. 1851 (appeal pending)) confirms that employees who are subject to the B.C. Employment Standards Act are entitled to pursue claims in the courts for wages and benefits conferred by the Act. Although the Macaraeg decision is subject to a pending appeal, the implications of this decision in the area of human resources management in B.C. are significant. In addition, the Macaraeg decision adds another level of complexity to the overlapping jurisdiction of the courts and tribunals that administer the law in connection with employment. The availability of class proceedings means that claims may be efficiently pursued by employees for non-compliance with the Employment Standards Act. The Macaraeg decision is likely to promote the use of class proceedings to pursue employment-related claims.

Macaraeg is the named plaintiff in a proceeding brought pursuant to the Class Proceedings Act in the Supreme Court of B.C. In the course of that proceeding, the plaintiff brought an application for rulings on two points of law:

1. As a matter of law, were the minimum overtime pay requirements of the Employment Standards Act implied terms of the contract of employment between E Care and its employee, Cori Macaraeg?

2. Is Macaraeg entitled to bring a civil action to enforce her statutory rights to overtime pay, or does the jurisdiction to determine such claims lie exclusively with the director of employment standards under the enforcement mechanisms of the ESA?

The court held that it was indeed an implied term of the employment contract between Macaraeg and E Care that overtime would be paid in accordance with the requirements of the Employment Standards Act. As well, the court held that the Act did not preclude a civil action being maintained.

The Macaraeg decision is consistent with the interpretation of similar employment standards legislation in the provinces of Ontario and Alberta, holding that employment standards requirements are implied terms of employment and employees may pursue proceedings in the courts where an employer does not comply with the legislation.

The significance of the Macaraeg decision is to significantly increase the potential liability for employers where there is a breach of employment standards legislation. Non-compliance with employment standards legislation may occur in various ways. Frequently, employers have well-established practices and policies that are in breach of the legislation. For instance, some policies may require employees to report to work earlier than the time that they are scheduled to work. Other policies require specific work to be performed but with a limitation on the number of paid hours which are authorized.

Prior to the Macaraeg decision, B.C. employers relied upon the decision in Sitka Forest Products Ltd. v. Andrew (1988), 32 B.C.L.R. 2d 62, where the court held that the plaintiff could not advance a counterclaim in a civil action on the basis of rights under the Employment Standards Act. In Sitka, the court held that the Employment Standards Act included a mechanism by which the director of employment standards pursues unpaid wages and may issue a certificate of an amount owing which constitutes a lien or secured debt in favour of the director.

Given the nature and purpose of employment standards legislation and the decision of the Supreme Court of Canada in Machtinger v. HOJ Industries Ltd. [1992] 1 S.C.R. 986, the court held in Macaraeg that the Employment Standards Act does not grant exclusive jurisdiction to the director of employment standards nor does it restrict employees from pursuing a claim in the courts to wages and benefits conferred by the Employment Standards Act. On the basis of the Machtinger decision and the nature of the legislation, the court in Macaraeg decided not to follow the Sitka decision.

On April 26, 2007, the B.C. Supreme Court, in Holland v. Northwest Fuels Ltd., et al (2007) BCSC 569, followed the Macaraeg decision and similarly declined to follow the Sitka decision.

The implications of the Macaraeg decision are potentially catastrophic for employers in light of the potential value of the claim that may be made by employees. An employee who files a complaint under the Employment Standards Act may be limited to wages that ought to have been paid in a six-month period before the earlier of the complaint being filed or the termination of employment. Historically, such a claim by an individual employee may have had a nominal value in most instances. In contrast, a civil action claiming indebtedness or damages for breach of contract based upon an implied term of compliance with the Employment Standards Act, such as overtime requirements, may be very large. Such a claim may be subject only to a six-year limitation period for breach of contract. If non-compliance with the Employment Standards Act involves a large work force, the amount of the claim may reach the level commonly associated with U.S. jury awards.

The Macaraeg decision emphasizes the need for policies and practices that promote strict compliance with employment standards legislation. The availability of class proceedings legislation and the recognition that Employment Standards Act requirements are an implied term of employment, will make the pursuit of claims economical from the perspective of employees. At the same time, technology has made the organization of large groups of individuals to pursue litigation efficient and cost-effective. Although there is always the possibility of a legislative response to this development in the law in B.C., it is unlikely that governments will attempt to limit the potential liability of employers for non-compliance with employment standards legislation. In fact, governments may view this development in the law as an efficient means to promote compliance with the legislation, which may lessen the burden of the director of employment standards.

The use of class proceedings legislation to pursue claims for non-compliance with employment standards legislation should not be viewed as an unexpected development in light of the U.S. experience and the stated goal of class action legislation, which is to promote access to the justice system. An audit of current employment policies and practices to ensure compliance with employment standards legislation may be prudent in order to reduce the risk of claims.

Carman J. Overholt, Q.C., is a senior litigation lawyer with Fraser Milner Casgrain LLP who represents clients in the area of employment, labour relations and human rights issues that arise in the workplace. He has appeared on behalf of employers before the Supreme Court of British Columbia, the Court of Appeal for British Columbia, the B.C. Human Rights Tribunal, the Employment Standards Tribunal, the B.C. Labour Relations Board, the Canadian Industrial Relations Board and the Canadian Human Rights Commission.

By Danielle Lemon and Chris Bennett, Davis & Company LLP, Vancouver
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As video game lawyers, we’ve been eagerly anticipating the slate of video-game-to-movie adaptations due to hit silver screens in the next year or two: Halo, God of War, Gears of War…even the new Street Fighter. We even harboured secret hopes that, being in the “biz,” so to speak, we might get invited to a few previews or promotional screenings. But as of this May, Warner Bros. Pictures has cancelled all promotional and preview screenings of their major releases in Canada, 20th Century Fox has threatened to follow suit, and Sony Pictures spent a fortune on security guards at Canadian preview screenings of Spider-Man 3. Our hopes of any video game-related movie perks seem to have been dashed.

Why? Because, according to Warner Bros., 70 per cent of their titles are pirated in Canada and bootlegged throughout the world, costing them and other studios billions of dollars. The International Intellectual Property Alliance, which in April 2007 placed Canada on its “priority watchlist” of countries not cracking down on piracy, says Canada was responsible for losses of US$551 million in 2006 alone. “Within the first week of a film’s release, you can almost be certain that somewhere out there a Canadian copy will show up,” Darcy Antonellis, Warner Bros. senior vice-president of worldwide antipiracy operations, told Variety magazine. And the pirates are getting away with their digital booty, according to the industry, thanks to Canada’s lax copyright and camcording laws.

It’s arguable that it the U.S. crackdown on recording in their jurisdictions effectively transferred the problem to Canada: if a pirate can’t camcord Ocean’s Thirteen in Detroit, why not just drive (or, er, sail) over to Windsor? Related articles Contracts in the MMO world (April 2007) The fame game and trademarks (April 2006) Time to review payment of patent application fees (December 2005)

How did we get here?

Are Canadian anti-piracy laws really falling so short? Do we really need to be listed with Chile, India, Egypt, and the Dominican Republic as a country whose intellectual property laws don’t pass muster?

Canada does have laws in place which prohibit movie piracy. Currently, the Copyright Act provides that every person who knowingly makes available for sale, rental or distribution, exhibits in public, or imports into Canada an infringing copy of a work in which copyright subsists, is guilty of a criminal offence and liable to a maximum $1 million fine, and may face a prison sentence of up to five years. A million dollars or five years in jail – seems like a pretty stiff penalty. Further, there are civil remedies available for copyright infringement permitting a person whose rights have been infringed by a pirate to chase after that pirate for damages. So what’s the problem?

Arguably, the problem is all thanks to one little word: “knowingly.” In order to obtain a criminal conviction, the Crown must prove that a movie pirate who totes his camcorder into the latest Harry Potter flick is intending to sell, rent, distribute or publicly exhibit his bootlegged booty. A pirate making a copy to relive the magic at home with no intention of selling or distributing the pirated copy can’t, under the current law, be convicted of a criminal offence. That doesn’t mean that they aren’t still liable civilly for infringing copyright…but they won’t be going to jail or facing a criminal record.

Enforcement issues play a role, too: is a movie usher, making minimum wage and possibly still in high school, really supposed to approach a customer in a theatre and seize his camera equipment? And what if our movie pirate claims he’s only making a private copy for home use?

While the Motion Picture Theatre Association of Canada and the Canadian Motion Picture Distributors Association of Canada (CMPDA) have set up a website at http://fightfilmtheft.org where movie theatre employees can voluntarily learn about fighting camcorder piracy (and be eligible for a nice $500 reward for every instance of piracy they report), this hardly seems like the most effective way to curb the problem.

The U.S. lobby: enter The Governator

This is precisely where the vigorous U.S. lobby for stronger Canadian piracy laws has found its ammunition: enforcement under the current regime is next to impossible, and the requirement of intent to obtain a criminal conviction is unduly onerous.

The next step? Ban the use of recording devices in movie theatres, period. Since 2003, 39 states have criminalized the use of recording devices in theatres, with varying fines and penalties, from misdemeanours to felonies. In 2005, President Bush signed into law the Family Entertainment & Copyright Act. The Act makes it a federal felony to record in a movie theatre anywhere in the U.S. The Act also introduces heavy fines against the piracy of film works that have not yet been commercially released or distributed: a first-time conviction can lead to three-to-five years in a federal prison, and a fine of up to US$250,000.

The CMPDA, in conjunction with the U.S. film industry, has been lobbying hard for Canada to enact similar laws, although it’s arguable that it the U.S. crackdown on recording in their jurisdictions effectively transferred the problem to Canada: if a pirate can’t camcord Ocean’s Thirteen in Detroit, why not just drive (or, er, sail) over to Windsor?

But the film industry would not be deterred, and who better (or more entertaining) to send on a special mission to Canada to discuss the issue than Gov. Arnold Schwarzenegger? On the heels of Warner Bros.’ May 8 announcement, Prime Minister Stephen Harper met with Gov. Schwarzenegger on May 30, 2007 during the governor’s state visit from California. And it seems like "The Governator’s" presence on Parliament Hill, complete with a convoy of black limos and security guards, was either terrifying or sensationally persuasive: Prime Minister Harper immediately promised to crack down on film piracy, and just two days later, on June 1, 2007, Bill C-59, An Act to amend the Criminal Code (unauthorized recording of a movie) received first reading.

Canada gets tough

Bill C-59 amends the Criminal Code to add two new offences. First, the bill proposes that a person who, without the consent of a theatre manager, records in a movie theatre, is, regardless of whether they intend to commercially distribute their pirated copy, guilty of an offence and liable to face a prison term of up to two years. Second, a person who records without permission for the purpose of “the sale, rental or other commercial distribution” of the film could face a prison sentence of up to five years. Bill C-59 does not propose any amendments to the Copyright Act, so convicted pirates could still face fines of up to $1 million.

Blame Canada

Bill C-59 will likely be fast-tracked through Parliament to become law within the next few weeks. Whether stiffer fines and U.S.-inspired laws will deter pirates from their criminal but lucrative behaviour remains to be seen. Perhaps some of these pirates will now leave Canada for sunnier climes, setting sail for jurisdictions with less stringent camcording laws. Either way, we have no doubt that they – and "The Governator" – will eventually “be back.”

Danielle Lemon and Chris Bennett are members of the Video Games & Interactive Entertainment Law Group at Davis LLP in Vancouver. You can visit their blog at www.videogamelawblog.com.

By Michael P. Fitzgibbon, Partner, Borden Ladner Gervais LLP
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The natural consequence of increased competition on a local and global level, a shrinking talent pool and ease of mobility of workers is that employees are in the driver’s seat so far as their careers are concerned (see Hira, Nadira A., You Raised Them, Now Manage Them (Fortune, May 28, 2007) and also Dychtwald, K., Erikson, T.J. and Morison, R., Workforce Crisis – How to Beat the Coming Shortage of Skills and Talent (Boston, Harvard Business School Press, 2006)). It's a “seller's” market so far as talent is concerned, and Gen Yers, as a rule, are not averse to crossing the street in the hope that greener pastures await. Employers are making a significant investment in attracting, hiring, training, and retaining employees and they are attempting to safeguard that investment by restricting, to varying degrees, the activities in which their workforce can engage post-employment.

The rubber hits the road when the employee departs and joins the competition or engages in activities that the employer believes are in breach of the terms of the restrictive covenant agreed to by the employee. The employer tries to enforce the agreement by way of, for example, an injunction and the court is called upon to scrutinize, among other things, the reasonableness of the agreement and, hence, its enforceability.

It's a “seller's” market so far as talent is concerned, and Gen Yers, as a rule, are not averse to crossing the street in the hope that greener pastures await. Related articles Wallace damages and mitigation income - is the case closed? (April 2007) The availability of punitive damages arising from the breach of human rights legislation: Keays v. Honda (December 2006) Determining the period of reasonable notice of termination (April 2006) How a rushed investigation can double your trouble (December 2005)

It is likely that, for the reasons mentioned, this type of litigation will become more common. Though the cases seem relatively consistent regarding the inquiry that the court will engage in when assessing the enforceability of these agreements, courts have, increasingly, placed these covenants under a microscope before enforcing them.

Reasonableness in all respects

Where the employer attempts to enforce a restrictive covenant, the threshold issue confronting the court will be whether the covenant is “reasonable.” The leading Canadian case on point is Elsley v. J.G. Collins Insurance Agencies Ltd. [1978] 2 S.C.R. 916, where the court established a three-fold test for determining the enforceability of restrictive covenants:

1. the employer has a legitimate proprietary interest that it is entitled to protect;
2. the restraint is reasonable between the parties in terms of temporal length, geographical area, the nature of the activities prohibited and overall fairness; and
3. the restraint is reasonable with reference to the public interest.

The court was careful to note that reasonableness is to be determined having regard to the specific circumstances of each individual case. In other words, while other cases are of assistance in establishing general principles, they are of little value in deciding whether the specific covenant is, itself, reasonable.

Accordingly, the court will presume that the covenant is prima facie void as being in restraint of trade and is contrary to public policy unless that presumption is rebutted by the party seeking to enforce the covenant showing that it was both necessary and reasonable in all of the circumstances.

A recent decision showing the court’s approach is that of Mr. Justice Frank Newbould of the Ontario Court of Justice in Trapeze Software Inc. v. Bryans (2007) CanLII 1882 (ON S.C.).

Trapeze Software Inc. brought a motion to enjoin certain former employees by way of interlocutory injunctions from being employed by a competitor of Trapeze for a period of one year from the time when each of the defendants left the employment of Trapeze. Trapeze sought to enforce the non-competition agreements signed by the defendants with Trapeze which provided that they would not be involved with a competitor of Trapeze for 12 months after they left the employment of Trapeze. Trapeze also asked for interlocutory injunctions:

• to enforce a non-solicitation clause under which each of the defendants agreed not to contact or solicit any Trapeze clients within 12 months of their leaving their employment with Trapeze; and
• to enjoin the misuse or disclosure of confidential information of Trapeze which each of the defendants acquired in the course of their employment with Trapeze.

Justice Newbould summarized the law in the area as follows:

• the general rule in most common law jurisdictions is that non-competition clauses in employment contracts are void as being a restraint on trade;
• for a restraint on trade to be valid it must be reasonable in the interests of the contracting parties and also reasonable in the public interest;
• there are competing interests at play here. While there is an important public interest in discouraging restraints on trade, and maintaining free and open competition unencumbered by the fetters of restrictive covenants, there is also a need to enforce contracts, freely entered into, “by knowledgeable persons of equal bargaining power”;
• the notion of “reasonableness” strikes an appropriate balance between these competing interests; and
• restrictive covenants must be reasonable in the following respects (a) whether the employer has a proprietary interested entitled to protection (b) whether the temporal or spatial features of the clause are too broad (c) whether the covenant is unenforceable as being against competition generally, and not limited to proscribing solicitation of clients of the former employee.

The court went on to consider these factors and, as a general comment, concluded that, in the circumstances, 12 months was reasonable. The non-competition clause ran into difficulty because of its geographic scope (Canada, the U.S., and anywhere else in the world where Trapeze marketed its products or services during the period of employment of the defendants). The clause went “too far” in protecting what otherwise was acknowledged as a “legitimate business interest,” and was “unreasonable” and unenforceable.

Justice Newbould then went on to consider the non-solicitation covenant, which he also found to be unenforceable. In reaching that conclusion, he relied on the recent Court of Appeal case of IT/NET Inc. v. Cameron (2006) CanLII 912 (ON C.A.), where the following non-solicitation clause was found to be unenforceable in the circumstances:

>4.2 he/she will not attempt to solicit business from any IT/NET clients or prospects without the written consent of IT/NET. The intent of this clause is to reasonably protect the goodwill of IT/NET while at the same time not unduly limiting the ability of the Subcontractor to continue in the practice of his/her profession.

Goudge J.A., for the court, stated:

However, clause 4 goes considerably beyond what is needed to protect this proprietary interest. The language of clause 4.2 prevents the contractor from soliciting business from any IT/NET client or prospect, not just from the client where the contractor has been placed. This prohibition applies whether or not the contractor knows that the target of his solicitation is an IT/NET client or prospect or whether he has any prior relationship with that client or prospect due to his work for IT/NET.

Justice Newbould noted that the provision before him did not contain a geographic limitation, and this was also problematic from an enforceability perspective.

As he said, “as with the non-competition clause, Trapeze has failed to satisfy me that it has a strong prima facie case that the non-solicitation clause as drafted in this case is reasonably required or valid.” This recent case emphasizes that employers must not only be thoughtful when drafting restrictive covenants but also when selecting the covenant to use.

Conclusion

While employers are increasingly using restrictive covenants to protect their corporate assets and investments, courts appear to be adopting a more probing approach when determining their enforceability. A number of principles are worth emphasizing.

1. Employers must have a proprietary interest entitled to protection. Though this might be a relatively low standard, it is nonetheless the threshold question from which all others flow and emphasizes that a restrictive covenant must go no further than is reasonably necessary to protect the employer’s legitimate proprietary interests Tank Lining Corp. v. Dunlop Industrial Ltd. (1982), 40 O.R. (2d) 219 (C.A.).
2. A restrictive covenant’s duration, geographic reach, and scope of activities restricted must also be reasonable and not go beyond what is required for the legitimate protection of the employer’s interests. A clause that is over-reaching or which goes beyond the absolute minimum level of protection that is required to protect the otherwise legitimate business interest will not be enforced. In other words, a non-competition provision will not be enforced where a non-solicitation provision would have provided sufficient protection.
3. Generally speaking, though this may not be the case in all provinces (ACS Public Sector Solutions Inc. v. Courthouse Technologies Ltd., (2005) BCCA 605 (CanLII) and KRG Insurance Brokers (Western) Inc. v. Shafron, (2007) BCCA 79 (CanLII) however Canadian American Financial Corp. (Canada) Ltd. v. King (1989), 36 B.C.L.R. (2d) 257 (C.A.)), a court will not “read down” or “blue-pencil” an unreasonable restrictive covenant, nor will the court re-write an unreasonably broad restrictive covenant so as to make it enforceable (Maguire v. Northland Drug Co. , [1935] S.C.R. 412, Globex Foreign Exchange Corp. v. Kelcher, 2005 ABCA 419 (CanLII), Transport North American Express Inc. v. New Solutions Financial Corp. [2004] 1 S.C.R. 249, Community Credit Union Ltd. v. Ast, (2007) ABQB 46 (CanLII)).
4. While there is no substitute to “getting it right” from the outset, and though there are conflicting cases on the point, there might be some advantages to drafting a “ladder-type” restrictive covenant providing a series of scenarios where the failure of one scenario drops the enforcement to the next lesser term. An Alberta court recently found that it could, when faced with such a provision, narrow the scope of the covenant to what it believed was reasonable as a means of giving effect to the objective intentions of the parties; Community Credit Union Ltd. v. Ast (2007) ABQB 46 (CanLII)

Saying the deck is stacked against employers in these cases would be an overstatement, given that courts will and do enforce these clause in appropriate circumstances. It is probably fairer to say that courts continue to view these restrictions with some trepidation and continue to hold the party seeking to enforce them to a high standard of reasonableness.

Michael P. Fitzgibbon is a partner at the national law firm of Borden Ladner Gervais LLP, where he practices management-side labour and employment law. He runs the labour law blog Thoughts from a Management Lawyer.

By Robert Patzelt, Q.C., Vice-President, Risk Management and General Counsel, Scotia Investments Ltd.
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As organizations are increasingly scrutinized and held accountable from a variety of stakeholders, it’s little wonder that the role of general counsel needs to adjust to reflect the new reality of doing business.

Over time, in-house counsel have evolved from their initial roles as legal technicians to more strategic and operationally integrated positions. The numerous – and very public – bankruptcies and prosecutions of major companies, their officers, and the corresponding liability of the boards of directors have focused the attention of the public, regulators and the various watchdogs. These days, companies have to focus on more than just increasing value for shareholders. Now, companies, both large and small, serve, and are accountable to, other constituents, such as shareholders, customers, employees, regulators, special interest groups, the community in which they operate, and the environment. General counsel and directors alike can draw an important lesson from this: when you are granted a public privilege, then you also become public property, and the people expect you to behave accordingly.

In this new environment, general counsel are becoming the moral compass for the organizations with which they work. Related articles Leading and influencing change as in-house counsel (October 2006) Corporate governance strategies for directors and officers to mitigate personal liability (April 2006) Protecting solicitor-client privilege (December 2005)

In this new environment, general counsel are becoming the moral compass for the organizations with which they work. This evolution of the role of the general counsel is more than a risk-management process to avoid negative perception and costs incurred from lawsuits, judgments and fines; nor is it just a matter of reducing exposure to negative media and pressure from activists and others. This is also about a rebuilding of trust. In today’s post-Enron business environment, even a hint of impropriety has immediate financial ramifications. Compliance, ethics, and social responsibility are good business, and they, in turn, build your corporate brand loyalty, especially with customers, employees, and shareholders and yes, it even produces positive financial returns.

Despite the well-meaning efforts of politicians, governments, and regulators, ethics, integrity, and the resolve to do the right thing at the most difficult of times cannot be legislated. It is now – and always has been – a leadership issue that has to be established at the highest levels and delivered by everyone in the organization. This is where general counsel, with their expanded sphere of influence and responsibility, play a very important role.

Compliance

General counsel remain leaders in the areas of compliance. Beyond providing professional advice, the general counsel must keep one eye on the future in order to identify trends in corporate governance. This, in turn, will help guide the organization so that it’s ready to proactively meet future obligations, instead of responding in a purely reactive fashion, which is both extremely taxing and financially costly.

The general counsel is also a key resource for the board of directors, which includes attending board and committee meetings, providing information to the board, or responding to its legal, regulatory, and corporate governance needs. The general counsel plays a key role in matters where non-compliance is suspected or uncovered in operations, ensures the organization reacts appropriately, and that proper and timely information is provided to management and, if appropriate, to the board.

Communication

It is imperative that accurate, timely and complete information makes it to the right people. General counsel now act as information gatekeepers, ensuring the right information is used in decision-making. This allows the company and its management to meet operational obligations, but it also serves as a key risk-management tool. In short, it is the best inoculation one can get with respect to director liability.

General counsel play a key role in ensuring the proper practices are in place to facilitate the flow of information, to allow for decision-making, and for documenting those decisions. The requirements are too expansive to enumerate in a short article, but include:

• the provision of information in advance of making decisions;
• ensuring reports and expert advice was sought and received;
• the documentation of meetings and other processes through appropriate minutes and properly adopted resolutions; and
• that there was active deliberation and review within the decision-making process.

The general counsel now has to have an extra set of skills to discharge the duties of that office. This skill set includes broad general business knowledge with specific expertise, especially in key areas of high importance to the organization, in order to ensure the general counsel is able to help those involved to properly discharge their duty of care. Also, the general counsel will have helped to put in place systems to respond to areas of increased risk, such as executive compensation, senior management severance, stock options, related-party or conflict scenarios, and the usual demanding matters of merger, disposition or acquisitions, disclosure and the raising of capital. Both directorial independence and a full, timely and adequate review by the board are required, and the general counsel plays a pivotal role in ensuring they fulfill their duty of loyalty.

Independence

This is a natural segue into new role for general counsel being a champion of independence for the board. Not only should an appropriate number of directors be outsiders and independent, but they have to behave independently, both individually and collectively. The general counsel will assist in regularly educating and reminding the board that they must act independently. This includes getting additional information from other sources, and not relying solely on information management. To that end, the board may have to get independent legal advice, perhaps outside of the organization’s law firm and general counsel. This may also include advice from other professionals or experts (i.e., valuation, compensation, etc.).

Governance

Finally, the general counsel plays a key role in supporting corporate governance in special situations. Is the organization, management, and the board able to respond to major events? Are there business continuation plans, succession plans, and crisis communications plans? Is the organization able to respond to emergencies, and does it have the resources to do so? Is the insurance adequate? Has the D&O policy, including properly completed applications, been put in place? Are the insurance program and indemnity protections regularly reviewed, state-of-the-art, and adequate to protect the company? The only thing worse than having to respond to a crisis is trying to respond to a crisis without the proper plan in place.

The role of general counsel has grown substantially over the years. Although traditional legal duties and the role of professional advisor remain, general counsel now have a much broader mandate that requires a general business knowledge, more strategic integration into organizational operations, and increased interaction with all levels, especially the board. The waters of business are more difficult to swim in than ever before, and when the tide goes out, we’ll see who got caught without trunks.

Robert Patzelt, Q.C., is vice-president of risk management and general counsel with Scotia Investments Ltd., and a past president of the Canadian Corporate Counsel Association. The views expressed in this article are entirely personal.

By Edward (Ned) Levitt and Jason A. Saltzman, Partners, Gowling Lafleur Henderson LLP, Toronto
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As if there aren’t enough traps waiting to snare the unwary, there are circumstances when a franchise could be considered a security, thus requiring compliance with the relevant security regulations. The question of whether a franchise agreement constitutes a security is determined on a case-by-case basis and will depend on the facts of the arrangement at issue. U.S. and Canadian case law suggests that investor participation is a significant consideration in determining whether the sale of a security occurred. Unless the investors in the franchise opportunity will be active participants performing essential managerial tasks, which will affect the failure or success of the enterprise, the franchise agreement will likely be found to be a security.

Subsection 1(1) of the Ontario Securities Act (OSA) contains 16 branches to the definition of “security”; two of these branches are relevant to a determination of whether a franchise can be considered a security.

A security includes “any document constituting evidence of title to or interest in the capital, assets, property, profits, earnings or royalties of any person or company.” Related articles Franchise legislation in Canada (December 2006)

First, a security includes “any document constituting evidence of title to or interest in the capital, assets, property, profits, earnings or royalties of any person or company.” Second, a security is also defined to include any investment contract. The question of what constitutes a security is central to the application of securities legislation. Many requirements of securities legislation are triggered when there is a distribution of securities involved, including the registration requirements and the requirement that an issuer prepare and distribute a prospectus. The seminal case on the interpretation of the investment contract branch of the definition of security is Pacific Coast Coin Exchange of Canada Ltd. v. O.S.C. [1978] 2 S.C.R. 112, aff’g (1976), 8 O.R. (2d) 257 (C.A.), aff’g (1975), 7 O.R. (2d) 395 (Div. Ct.) [Pacific Coast]. In that case, the Supreme Court of Canada adopted the meaning of investment contract found in two leading U.S. cases: Securities and Exchange Commission v. W.J. Howey Co. (1946), 328 U.S. 293 [Howey] and State of Hawaii Commissioner of Securities v. Hawaii Market Center Inc. (1971), 485 P.2d 105 [Hawaii].

In Howey, W.J. Howey Co. raised money for the cultivation of citrus crops by selling some of its acreage. Potential buyers were also urged to enter into service contracts with a subsidiary company that cultivated, harvested, and marketed the citrus crop. The subsidiary company pooled the fruit, sold it, and allocated profits based on the output of each tract. The U.S. Supreme Court held that the buyers were “attracted solely by the prospects of a return on their investment” (supra note 7 at 300). In holding that the combination of the land sale contract, the deed giving title to the land, and the service contract was a security, the court stated that four factors must be present for an investment contract to exist:

• the investment of money;
• in a common enterprise;
• with the expectation of profit; and
• solely from the efforts of a third party.

Three other important elements were laid out by the court. First, the court stressed that most of the buyers were out-of-state residents who knew nothing about the citrus business and were therefore in need of the disclosure that would be furnished by compliance with securities legislation. Second, the court rejected the argument that a security did not exist because the investment was not speculative or promotional in character. The court held that only some risk is needed to create an investment contract. Finally, although it was argued that the land sales were not securities because the land had value independent of the success of the enterprise as a whole, the court held that substance, not form, governs the interpretation of what is a security, and an interest may be a security even though it has value independent of the enterprise as a whole.

In Hawaii, the Supreme Court of Hawaii provided a risk-capital test for the existence of an investment contract. In that case, the court held that an investment contract existed even though certain investors in a retail store could generate profits through their own efforts, and therefore did not rely solely on the efforts of a third party. The court stated that an investment contract is created whenever:

• an offeree furnishes initial value to an offeror, and
• a portion of this initial value is subjected to the risks of the enterprise, and
• the furnishing of the initial value is induced by the offeror’s promises or representations which give rise to a reasonable understanding that a valuable benefit of some kind, over and above the initial value, will accrue to the offeree as a result of the operation of the enterprise, and
• the offeree does not receive the right to exercise practical and actual control over the managerial decisions of the enterprise.

In Pacific Coast, the Supreme Court of Canada accepted the tests offered in the U.S. cases. However, the court provided a modification of the word “solely” in the Howey test, stating that a strict interpretation of the word would not serve the purpose of the legislation. The court adopted a more realistic interpretation: whether the efforts made by those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise. The court also held that a “common enterprise” is an enterprise in which the fortunes of the investor are interwoven with and dependent upon the efforts and success of those seeking the investment or of third parties. The commonality necessary for an investment contract is that between the investor and the promoter rather than between the investors themselves.

Franchising is one of the most common methods of expanding a retail business or becoming the owner of a business. There are four basic elements to a franchise. First, the franchisee is a legally independent component of the franchise, although economically it is dependent on the franchisor. Second, the franchisee is permitted and required to use the franchisor’s name and standardization. Third, the purpose of the franchisee’s business is to market the franchisor’s goods or services. Finally, the franchisor and franchisee will enter into a “franchise agreement,” the formal contract that establishes the relationship and provides for continuing association between the parties (Rex K. Linder, “Franchisor Liability Under Securities Law” (1974), 13 Washburn L.J. 68 [Linder]).

The purchase of a franchise allows the small entrepreneur to become the owner of a typically high-volume business. However, securities legislation is designed to protect this particular type of investor by requiring full, true and plain disclosure of all material facts relating to any securities issued or proposed to be distributed. Although there is a scarcity of Canadian cases dealing with the securities aspects of a franchise, there have been some developments and commentary on the subject in the U.S.

In United States v. Herr 338 F.2d 607 (7th Cir. 1964), investors in a franchise were given the choice of taking an active or inactive management role in the business. If the investor chose to be inactive, the franchisor would hire, train, and manage any employees, and monthly profits would simply be forwarded to the franchisee. The franchisor represented to the potential investors that a 60 per cent return on their investment could be expected. Most of the investors opted for the inactive management role and the court held that the arrangement constituted an investment contract under U.S. securities laws. Applying the Howey test, the court held that the investors “were led to believe that they could expect profits solely from the efforts of others” (ibid. at 610). Thus, investor participation is a significant consideration in determining whether the sale of a security occurred:

In essence … the participation by the franchisee must be influentially discretionary, not just ministerial in the sense of being a key employee or store manager, to justify a franchise agreement not being an “investment contract.” Under the real meaning of the Howey rule, the franchisee should have practical and actual control and opportunity to protect his own investment in order for him to be a realistically active participant, so as to negate the possibility of a franchise agreement being an “investment contract” security. The degree of actual or physical participation by the franchisee may be great but yet his profit-influencing, decision-making participation may be very minimal. The latter quality should be decisive because it makes for the success of an enterprise, and it is this, rather than ministerial personal service, which should govern the determination of the nature of a franchise agreement. Highly restrictive, technical tests, leading to unrealistic conclusions, will defeat instead of further the purposes of the Securities Acts: to protect the public as fully as possible while not unduly obstructing or hampering business (Bernard Goodwin, “Franchising in the Economy: The Franchise Agreement as a Security Under Securities Acts, Including 10b-5 Considerations” (1969) 24 Bus. Law. 1311 at 1318-19.).

In California, the attorney general issued an opinion of whether a franchise sale could be considered a sale of a security (Augustine, Franchise, Also a Security, 12 Practising Law Institute Workshop on Representing Franchisors II, at 11 (1968) reprinting 49 Ops. Cal. Att’y Gen. 124 (1967) as cited in Erik Edward Joh, “Franchise Sales: Are they Sales of Securities?” (1970), 34 Albany L. Rev. 383). The attorney general considered three types of franchise arrangements:

• Where the franchisee participates only nominally in the franchised business in exchange for a share of the profits.
• Where the franchisee participates actively in the franchised business and where the franchisor agrees to provide certain goods and services to the franchisee.
• Where the franchisee participates actively in the franchised business and where the franchisor agrees to provide certain goods and services to the franchisee, but where the franchisor intends to secure a substantial portion of the initial capital that is needed to provide such goods and services from the fees paid by the franchisee or franchisees.

The attorney general stated that only in the second case would the franchise not be considered a security, and that the other two arrangements involved an investment contract. Thus, with respect to the first arrangement, it appears that in California, more than minor discretionary functions on the part of the franchisee are required if the arrangement is not to be considered a security.

The third situation is based on the “risk capital” test adopted in Hawaii. In this situation, the franchisor uses the franchise fee as a part of the initial capital required to start the business. By structuring the franchise this way, “the investor is the only person really to lose money if the business fails. … On the other hand, if the business is a success, it is poor public policy to allow the promoter to make a great deal of money on someone else’s investment” (Ibid. at 392). Other states, in addition to California, have also adopted the risk capital approach (Hurst v. Dare To Be Great, Inc., 474 F.2d 483 (9th Cir. 1973) (applying Oregon securities law); Frye v. Taylor, 263 So. 2d 835 (Fla. App. 1972) as cited in Linder, supra note 10 at 78.).

However, recently in Gotham Print, Inc. v. American Speedy Printing 863 F.Supp. 447 (Dist. Ct. Mich. 1994), a modified version of the Howey test was applied on a motion for dismissal and summary judgment. In that case, the franchisor orally promised that Gotham Print, Inc., the “master franchisee,” was to be provided with a certain sales territory and working capital loan; however, neither promise was mentioned in the executed franchise agreement. The franchisor promised to amend the agreement, but then filed for bankruptcy. The court noted that the U.S. Supreme Court restated its Howey investment contract definition in United Housing Foundation, Inc. v. Forman (95 S. Ct. 2051 (1975)) as follows: “[t]he touchstone is the presence of an investment in a common venture premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others” (Ibid. at 2056).

In holding that the arrangement did not constitute a security, the court stated that the master franchisee was intended as much more than a mere “passive” investor. The franchise agreement contemplated that profits would be derived primarily from the managerial/entrepreneurial efforts of the master franchisee in recruiting other franchisees. The franchise agreement further provided that the master franchisee was to itself operate 10 franchises in the territory. The court held that:

“[w]here, as here, a franchisee/plaintiff retains managerial duties with respect to hiring and firing of personnel, maintenance of good customer relations, and day-to-day business promotion and salesmanship, even though the franchisor retains certain rights, such as the right to specify the decor of the store, operating hours, store location, quality of merchandise and physical arrangement of equipment within the store, no ‘investment contract’ exists” (supra note 17 at 455).

In Century 21 Real Estate Corp. May 30, 1975 C.F.S.D.W.S. 1 [Century 21], a franchise agreement was examined by the British Columbia Corporate and Financial Services Commission with a view to determining whether the agreement constituted an investment contract or evidence of an interest in the earnings of a franchisee within the meaning of the equivalent definitions to those found in clauses (b) and (n) of the definition of “security” in the OSA.

Under the franchise agreement in Century 21, the franchisee was required to pay an initial fee and an annual service charge equal to a percentage of the franchisee’s gross income in order to use the Century 21 system. The system included common use and promotion of the name “Century 21,” centralized advertising programs, recruiting and sales training programs, and inter-office referral programs.

Although the franchisee was characterized in the franchise agreement as an independent contractor responsible for carrying on the business, the franchisor retained the ownership of all right, title, and interest in the trade-name, trademarks, goodwill, and trade secrets of Century 21. The commission concluded that the franchise agreement was not a “document constituting evidence of title to or interest in the capital, assets, property, profits, earnings or royalties of any person or company.” The commission held that there was a distinction between the annual service payment based on gross income required by the franchise agreement, which is akin to a rental, and an interest in profits and earnings, which constitutes a security.

The commission also concluded that the franchise agreement did not constitute an “investment contract.” The commission considered the principles set out in the Howey and Hawaii cases and rejected both tests in favour of a wider understanding of the term “investment contract,” as articulated in Pacific Coast. However, even adopting this broad construction, the commission held that the agreement did not constitute an investment contract. The franchisee would undoubtedly profit from the laying out of money or placing of capital in the form of franchise and service fees; however, as the commission notes, this is literally true of contracts for the purchase of goods for resale – a retailer must pay a wholesaler money to acquire goods for resale to the public at a profit.

Thus, a literal application of the broad interpretation would result in a contract of sale constituting an investment contract, which would disregard substance for form and ignore economic reality. The commission concluded that the price paid for the goods purchased did not subject it to the risks of the enterprise of the vendor, as required by the test set out in Hawaii. The arrangement was a contract for the supply of services rather than an investment contract, and by offering its system for sale, Century 21 was merely carrying on its own business, and not investing in the business of the franchisee.

Although the franchise agreement in Century 21 did not constitute an investment contract, the commission noted that this conclusion did not mean that a franchise agreement is necessarily beyond the scope of the definition of security.

By Douglas A. Palmateer, Aird & Berlis LLP, Toronto
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A. Introduction

In 2005, Bill C-55 put reform of Canada’s law relating to bankruptcy and insolvency on the federal legislative agenda. It became Chapter 47 of the Statutes of Canada 2005 in November 2005.

Chapter 47 contained some major amendments to two existing statutes, the Bankruptcy and Insolvency Act (BIA) and the Companies’ Creditors Arrangement Act (CCCA), and also implemented a new statute, the Wage Earner Protection Program Act (WEPPA), which proposed to establish the Wage Earner Protection Program (WEPP). However, although passed by the House of Commons and the Senate, Chapter 47 was never proclaimed in force.

The bankruptcy and insolvency law reform now before Parliament combines amendments set out in both Chapter 47 and Bill C-62. Related articles Night of the living debt: debts that just won't die (October 2006) Getting your priorities in order: What you need to know about Bill C-55 (April 2006)

The Liberal government fell and was replaced by the current Conservative government in early 2006. On Dec. 8, 2006, the government delivered a notice of ways and means motion to introduce an Act to amend the BIA, the CCAA, the WEPPA and Chapter 47 itself (the 2006 Amending Act).

The 2006 Amending Act (with additional revisions to one provision dealing with exempt property under the BIA) was re-introduced in the House of Commons on June 13, 2007 as Bill C-62. The versions of the BIA and the CCAA that are being amended by Bill C-62 are the versions of those statutes as they were amended by Chapter 47, and so the bankruptcy and insolvency law reform now before Parliament combines amendments set out in both Chapter 47 and Bill C-62.

This article will examine the more significant changes of a commercial nature to Canada’s bankruptcy and insolvency law that will be made by Chapter 47 and Bill C-62.

The discussion has been organized into three broad topics: reorganization (by a proposal under Part III of the BIA or by a compromise or arrangement under the CCAA), receivership, and bankruptcy. In each area, the article reviews the current state of the law (pre-Chapter 47), the changes made by Chapter 47, which, as noted above, were enacted but have not yet been put into force) and the additional changes proposed by Bill C-62.

B. Reorganization

(1) Wages and Vacation Pay

Every proposal under the BIA by an employer must now provide for payment, immediately after the court’s approval, of unpaid wages and other compensation, including vacation pay, equal to what the employees’ claims would be in bankruptcy; that is, an amount up to $2,000 per employee for services rendered during the six-month period before commencement of the proposal, together with, in the case of a travelling salesperson, an amount up to $1,000 per employee for proper expenses incurred during the same period. In addition, to approve a proposal, the court must be satisfied that the employer can and will make the required payments.

Before Chapter 47, the CCAA contained no provisions in this regard. Chapter 47 made a minor change to the BIA regarding payment of wages in a proposal, stating that every proposal must provide for payment of amounts “at least” equal to the employees’ claims if the employer were bankrupt. Chapter 47 added requirements for the court’s sanction of compromises or arrangements under the CCAA similar to those for approval of proposals under the BIA.

Bill C-62 will make no further changes to the BIA and only minor changes to the CCAA as amended by Chapter 47, regarding payment of wage claims.

(2) Pension Plan Contributions

There are currently no mandatory provisions in proposals or compromises or arrangements relating to pension plans. Chapter 47 added provisions to the BIA and the CCAA, requiring that, unless the parties to a pension plan have entered into an agreement, approved by the relevant pension regulator, dealing with payment of unpaid contributions, every proposal and every compromise or arrangement must provide for payment, immediately after court sanction under the CCAA and at an unspecified time under the BIA, of all unpaid amounts deducted from employees’ remuneration and all unpaid employer contributions. The court must also be satisfied that the employer can and will make the required payments.

Bill C-62 will make no further changes to the BIA and only one change to the CCAA (removing the requirement of immediate payment) regarding payment of pension plan claims.

(3) Interim Financing

Chapter 47 codified existing practice under the CCAA and to a more limited extent under the BIA, giving the court the authority to approve “interim financing” (often called “debtor-in-possession” or “DIP” financing). The court will be able to authorize the debtor’s borrowing, to approve the amount borrowed and the conditions of the borrowing and to give the lender a security or charge on the debtor’s property ranking in priority to any existing security.

In deciding whether or not to authorize interim financing, the court must take into account certain enumerated factors, including the expected length of time of the reorganization proceedings, the way in which the debtor’s business and financial affairs will be governed during the proceedings, the nature and value of the debtor’s property, whether the financing will enhance the prospects of a successful reorganization and whether any creditor will be materially prejudiced by the debtor’s continued operations.

Bill C-62 will make two significant changes and several minor ones. The significant changes are that notice must be given to the secured creditors which are likely to be affected by the security or charge on the debtor’s property, and that the security or charge may not secure obligations that exist before the court’s order is made.

(4) Critical Suppliers

Chapter 47 introduced to the CCAA, but not the BIA, the ability of the court to declare a supplier to be a “critical supplier.” If the court does so, the supplier must continue to supply the goods or services specified by the court, on terms and conditions that are consistent with the existing arrangement between the parties or that the court imposes. However, the supplier must be granted a security or charge by the court over all the property of the debtor, and such security or charge may be given priority over any existing security.

Bill C-62 does not introduce the concept of “critical supplier” into proposals under the BIA.

(5) Directors and Officers

In a reorganization under both the BIA and the CCAA, Chapter 47 gave the court the authority to remove from office any director of a corporate debtor, and to appoint a new director. The court must be satisfied that the director is unreasonably impairing the possibility of a successful reorganization, is acting inappropriately in the circumstances or is likely to do either. Under the CCAA, but not the BIA, the definition of “director” includes the trustee of an income trust.

In addition, unless the court is of the opinion that the debtor can obtain adequate insurance, the court will be able to make an order declaring that the debtor’s assets and property are subject to a security or charge in favour of any officer or director, to indemnify the officer or director against liabilities that he or she may incur in that capacity after the commencement of the proceedings.

The security or charge may be given priority over any existing security. A director or officer may not be indemnified against any liability caused by the person’s gross negligence or willful misconduct.

Bill C-62 makes the definition of “director” in the BIA and CCAA consistent (including in both cases the trustee of an income trust), and adds one requirement to both statutes: that notice must be given to secured creditors which are likely to be affected by the security or charge on the debtor’s property.

(6) Professional Costs

Chapter 47 provided that, in a reorganization under both the BIA and the CCAA, the court will be able to declare the debtor’s property to be subject to a security or charge in respect of the “costs” of the interim receiver, receiver-manager or trustee (under the BIA) or the monitor (under the CCAA), as applicable, and the “remuneration and expenses” of any financial, legal or other experts that they engage or that the debtor engages. In addition, the security or charge may cover the costs of any “interested party” incurred in relation to the remuneration and expenses of experts engaged by the party if the court is satisfied that incurring the costs is necessary for the effective participation of the interested party in the proceedings. Oddly, under the BIA but not the CCAA, the security or charge may be given priority over any existing security.

Bill C-62 adds one requirement to both statutes: that notice must be given to secured creditors which are likely to be affected by the security or charge on the debtor’s property. It also replaces the word “costs” by the words “fees and expenses,” removes interim receivers and receiver-managers from the officials under the BIA whose fees and expenses may be secured by the new security (retaining the general reference to financial, legal or other experts) and empowers the court under the CCAA to order that the security or charge rank in priority over existing security.

C. Receivership

(1) Section 243 Receivers

Chapter 47 amended s. 243 of the BIA to authorize the court to appoint, on the application of a secured creditor, a receiver of a debtor’s business assets. Only a licensed trustee in bankruptcy may be so appointed. A receiver appointed under s. 243 will have authority to act throughout Canada. The new provision will obviate the need to obtain separate appointments in every province or territory where the debtor has assets.

Chapter 47 contained some deficiencies: it did not set out any test for an appointment, and it limited the powers that a court could give to a receiver.

Bill C-62 will rectify these deficiencies. The test for appointing a receiver will be that the court considers it to be just or convenient to do so (the test is the same as that under s. 101 of the (Ontario) Courts of Justice Act). And the court may authorize the receiver not only to take possession of the debtor’s business property and to exercise any control over it and the debtor’s business that the court considers advisable, but also to “take any other action that the court considers advisable.” The expanded powers undoubtedly include the powers to carry on the debtor’s business and to sell its business property.

Bill C-62 will make some additional changes. If the secured creditor intends to send to the debtor a notice of intention to enforce security, the court may not appoint a receiver until the 10-day notice period has expired unless the debtor consents to an earlier enforcement or the court considers it appropriate to appoint a receiver before then.

Bill C-62 states that the application for a receiver must be filed in a court having jurisdiction in the locality of the debtor. It also authorizes the court to grant a charge on the debtor’s property for the receiver’s fees and disbursements, and to give such charge priority over any or all of the secured creditors, provided that the court is satisfied that the secured creditors who would be materially affected by the order were given reasonable notice and an opportunity to make submissions to the court. Curiously, the word “disbursements” is defined to exclude payments made in the operation of the debtor’s business.

(2) Interim Receivers

Since 1992, secured creditors have been able to obtain the appointment by the court of an “interim receiver” where the court is satisfied that the secured creditor has sent or is about to send a notice of intention to enforce security (s.47). Although interim receivers were previously appointed only to preserve assets on a temporary basis, courts (in Ontario at least) have appointed interim receivers under s. 47 for lengthy terms and with powers of full receivers.

Chapter 47 tied the court’s hands in connection with appointments of interim receivers, limiting the period of time in which they may act (not more than 60 days) and restricting their powers to taking possession and control of the debtor’s property. These changes were undoubtedly made in conjunction with the introduction of a “national” receiver under s. 243 (discussed above).

Bill C-62 contains further restrictions. It reduces the period during which an interim receiver may act to a maximum of 30 days, subject to earlier termination on the appointment of a receiver or trustee. An application for appointment of an interim receiver must be brought in a court having jurisdiction in the locality of the debtor. However, Bill C-62 enlarges the powers that may be given to an interim receiver, to include powers to take conservatory measures and to dispose summarily of property that is perishable or likely to depreciate rapidly in value.

(3) Wages and Vacation Pay

When a debtor becomes subject to a receivership, and does not become bankrupt, it is the current law that unpaid wages are an unsecured claim, with no priority over security held by a secured creditor, but that unpaid vacation pay has priority over a security interest in accounts, inventory and their proceeds (Personal Property Security Act, s. 30(7)).

Chapter 47 changed the law dramatically, when a debtor becomes subject to a receivership, by creating “security” (a term not defined in the statute) in favour of each employee over a debtor’s “current assets” for “wages, salaries, commissions or compensation” up to a maximum of $2,000, which are owing for services rendered during the period of six months immediately preceding the receiver’s appointment, and also for proper expenses, up to $1,000, incurred by a travelling salesperson during the same period. The word “compensation” includes vacation pay, but not termination pay or severance pay.

The security has priority over any existing security against the debtor’s current assets. When the government pays wages to an employee under the WEPP, it is entitled to the benefit of the employee’s security against current assets up to the maximum of $2,000 per employee.

If the receiver takes possession of the current assets or disposes of them, the receiver is liable for the employees’ claims to the extent of the amount realized on the disposition of the current assets.

Bill C-62 leaves substantially intact the law as enacted in Chapter 47, and makes a few improvements or clarifications. Bill C-62 does not define “security.” It re-defines “current assets” to be “cash, cash equivalents – including negotiable instruments and demand deposits – inventory or accounts receivable, or the proceeds from any dealing with those assets.” Bill C-62 makes the security in favour of employees applicable on the appointment of an interim receiver as well as of a conventional receiver.

Bill C-62 clarifies employees’ claims for wages and disbursements will be reduced by any amounts therefore paid by a receiver or trustee. In addition, Bill C-62 states that no officer or director of a corporation subject to a receivership will be entitled to have a secured claim for unpaid wages or disbursements.

(4) Pension Plan Contributions

When a debtor participating in a pension plan for the benefit of employees becomes subject to a receivership, it is the current law that unpaid contributions to the plan, including both the debtor’s own required contributions and each employee’s contributions which have been deducted from wages or salaries, have priority over a security interest in accounts, inventory and their proceeds (Personal Property Security Act, s. 30(7)).

Chapter 47 changed the law, although less dramatically than for wages (above), by creating a security in favour of the fund established for the purpose of the pension plan over all assets of the debtor for unpaid contributions as described in the preceding paragraph.

The security is stated to have priority over any existing security against the debtor’s assets. There is no exclusion for realty mortgages. If the receiver disposes of any of the debtor’s assets, the receiver is liable for the fund’s claim to the extent of the amount realized on the disposition of the assets.

Bill C-62 leaves substantially intact the law as enacted in Chapter 47, and in fact, makes only one change, making the security in favour of pension funds applicable on the appointment of an interim receiver as well as of a conventional receiver.

(5) Unpaid Suppliers

Currently, when a debtor becomes subject to a receivership, a person who has supplied goods to the debtor and not received payment for them may present a written demand for repossession to the receiver, and, subject to satisfaction of certain conditions, recover possession of those goods that were delivered in the period of 30 days before presentation of the demand.

Chapter 47 changed the applicable time periods. When Chapter 47 comes into force, the supplier will have 15 days after the start of the receivership within which to present the demand, and the demand will apply to goods that were delivered in the period of 30 days before the start of the receivership. The 15-day period may be extended before its expiry by the receiver or by the court. The right of repossession will apply to goods supplied to the debtor or to the debtor’s agent.

Under Chapter 47, the following conditions will remain applicable: (a) the goods must be in the possession of the debtor or receiver, (b) they must be identifiable, (c) they must be in the same state as on delivery and (d) they must not have been resold at arm’s length and must not be subject to any agreement for sale at arm’s-length. Bill C-62 will make no further changes to the law.

Note: This is the first of a two-part article on bankruptcy and insolvency reform. A version of this portion appeared in Air & Berlis LLP's Banking Law newsletter. Reprinted with permission of the author.

Douglas A. Palmateer has been with the Aird & Berlis LLP since 1985 and a partner since 1988. Doug is a member of the firm's Financial Services Group. Contact Doug at 416-865-7759.

Steven L. Nemetz, Reiter-Nemetz, Toronto
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The Canadian Income Tax Act provides a unique system of tax incentives to encourage the disposition of cultural property to public institutions by way of donation or sale. These tax incentives comprise a tax expenditure designed to indirectly support government policy objectives with respect to art and cultural property. This cultural property program is limited to gifts of particular property – “certified cultural property” – to “designated institutions.” The income tax incentives associated with disposition of cultural property are part of a larger statutory scheme under the Cultural Property Export and Import Act which controls the export out of and import into Canada of cultural property.

At the centre of this statutory scheme is an administrative body, the Canadian Cultural Property Export Review Board, which plays a key role in fulfilling the objectives of the Cultural Property Export and Import Act and has a unique role in the administration of the income tax incentives pertaining to the disposition of cultural property; in particular, in its responsibility for determining value for the purpose of issuing cultural property certificates under the Income Tax Act.

Disputes over valuation of cultural property have been the focus of the debate amongst the stakeholders and in the courts – this is where this tax expenditure has been tested and recent decisions have determined its limits.

Read the full article in Vol. 85, No. 3 of the Canadian Bar Review (requires CBA member number)