Government senator, Norman Grant, has proposed a provision in the Companies Act to accommodate judicial flexibility for companies facing difficulties similar to the provisions of the United States’ Chapter 11 and Canada’s Companies Creditors Arrangement Act (CCAA).

Speaking last Thursday in the debate in the Senate on the Act to repeal and replace the Companies Act, Senator Grant noted that similar provisions were also provided in Canada under the Bankruptcy Insolvency Act (BIA).

“These seek to give companies that are insolvent a compromise, or an arrangement with their creditors,” Senator Grant said. “The company can apply to the court for protection to get itself time to restructure.”

He said that the CCAA was commonly used for large corporate restructuring in Canada, and is frequently compared to the US Chaper 11 provisions. However, unlike the Chapter 11, “the CCAA is not an exhaustive code that enumerates the rights and responsibilities of the debtor and other participants in the corporate reorganisation”.

Indicating a preference for the Canadian legislation, Senator Grant said that it primarily set out general principles and standards, as opposed to detailed rules and procedures allowing courts to take the view that they not only had the authority, but also a responsibility to fill any gaps in the legislation through the exercise of their inherent jurisdiction.

He said it gave the debtor an opportunity to find a way out of financial difficulties short of bankruptcy, foreclosure or the seizure of assets through receivership proceedings. It also allowed the debtor to find a plan that would enable him to meet the demands of his creditors through refinancing with new lending, equity financing or the sale of the business as a going concern – an alternative which could give creditors of all classes a larger return and protect jobs of the company’s employees.

“I admit that this is of utmost importance, as a number of companies facing difficulties only sit and wait for the inevitable to happen, and receivership is normally what happens next,” Grant said. “I am strongly advocating that this area be examined post-haste, either for an amendment to the Bill, or… the appropriate legislation to deal with this most important Act.”

He said that the new act simplified the rules for the preparation of a company’s accounts.

The senator added that it was obvious that the Government recognised that international accounting and auditing rules might place undue burden on small, unsophisticated companies. The result, he said, could be that the accounting procedures outweigh the benefits for an owner who does not rely on formal accounting and auditing to gauge the health of the company.

He said that the decision to exempt small companies from accounting rigours and mandatory audits underpinned the Government’s thrust to support and encourage small businesses.

“This move must be commended and I will hasten to say that for companies that wish to borrow, an internal audit is most important, and small companies should not take this as a passport not to keep proper books,” he added.

He said that he also welcomed provisions imposing an objective and subjective test on whether a director had performed his/her duties satisfactorily.

“Directors have a fiduciary duty to act honestly and in good faith with a view to the best interest of the company, and a general duty of an agent to exercise due care, skill and diligence that a reasonably prudent person would exercise in comparable circumstances,” Senator Grant said. “The knowledge, skill and experience of the director concerned will be taken into consideration in determining whether, in the circumstances, the director has acted with care, skill and diligence.”

– Balford Henry