A Generalized Duty of Good Faith in Insolvency Proceedings: Effective or Meaningless?
25 Pages Posted: 21 Dec 2020
Date Written: June 10, 2020
On November 1, 2019, Section 152 of the Budget Implementation Act, 2019, No. 1 (Bill C-97), came into force, implementing a generalized duty of good faith in the Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act. The amendments dictate that, “[a]ny interested person in any proceedings under [each] Act shall act in good faith with respect to [either] proceeding[…]”. The amendments also give courts the power, upon the application of any interested person, to make any order they consider appropriate in the circumstances if an interested person fails to act in good faith. The duty of good faith is not defined in the amendments, or in the legislation, nor is its application limited to particular parties or circumstances. That is, the legislative provisions fail to identify the party that needs to act in good faith, the parties to whom the obligation is owed, and the underlying duty being performed. It is thereby a generalized, free-standing, and abstract duty.
This paper challenges the effectiveness of such an approach. It argues that the new statutory duty of good faith – being general, free-standing, and abstract – is unworkable and devoid of meaning. It contends that the legislation requires redrafting to expressly identify who owes a duty of good faith, to whom, and in which circumstances. In other words, to have meaning, the duty must be anchored to the parties and their underlying substantive obligations, as that context determines the content of the duty and the standards of behavior required in particular situations. Such context would provide the framework in which courts and parties could determine how to discharge the good faith duty. The concepts used to describe good faith, including fairness, community standards, decency, reasonableness, and honesty, are all sound ideals, but they are also too vague to be effectual without further elucidation and do little to clarify the good faith duty.
It may well be that insolvency legislation is in need of an additional duty of good faith. It may, for example, be effective – as some have argued – to impose such a duty on creditors. The addition of this generalized duty is, however, neither useful nor desirable.
Keywords: bankruptcy, insolvency, good faith, CCAA, BIA, c-97, duty, generalized, free-standing, Bluberi, improper purpose, creditors, self interest, Century Services, Callidus
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