Canada seeks to block universities from filing for bankruptcy

Canadian lawmakers are looking to make clear that public post-secondary institutions do not have the right to file for bankruptcy protection, but they remain unsure about a workable alternative for a sector stung by the lingering crisis at Laurentian University.

A measure pending in Canada’s upper legislative chamber would forbid public colleges and universities from using the nation’s standard bankruptcy processes and instead promises them a to-be-developed option specifically for academia.

Among the enthusiastic supporters of the proposed the Post-Secondary Institutions Bankruptcy Protection Act is the Canadian Association of University Teachers, whose members feel scarred by Laurentian’s unexpected and historically unique decision to file for creditor protection in 2021 and then proceed to slash faculty, staff, courses and students.

“It was an unnecessary, inappropriate, costly and destructive decision by the university’s administration,” said David Robinson, the executive director of CAUT, which represents 72,000 staff at 125 Canadian campuses.

But some outside experts have been urging federal lawmakers to be cautious, saying it was not obvious what better options might ultimately be provided to university leaders who fear that the financial health of their institution is rapidly collapsing – and warning that private institutions should not be swept up in the process.

The Companies’ Creditors Arrangement Act – the statute used by Laurentian, which allows insolvent corporations to restructure their operations – does appear to be a poor fit for public higher education, said one of the experts advising lawmakers, Virginia Torrie, an associate professor of law at the University of Manitoba.

That’s because universities largely have non-financial missions, have collegial governance structures and – especially in the case of public institutions – owe transparency to taxpayers, Dr Torrie said.

The Laurentian situation has been widely recognised as a mess to be avoided. It was the first publicly funded university in Canada to use the bankruptcy law, amid controversy over whether that should even have been permitted. Laurentian’s tactic led to it firing 200 academics and other staff, and losing about half of its 9,000 students and more than a third of its academic programmes.

Ontario’s auditor general, Bonnie Lysyk, led an investigation that concluded that the university did not need to make those cuts because the provincial government had offered it aid. She blamed the crisis on a decade-long campaign of campus expansion that was based on a misjudgement of student demand.

The legislative sponsor of the pending proposal is Lucie Moncion, a banker nominated to the Canadian Senate by the prime minister, Justin Trudeau. She, too, has warned about the tendency of bankruptcy filings to foreclose the possibility broader solutions. “It shuts down a lot of the negotiations that could go on [for] the province to work with the university to solve some of the situations,” Ms Moncion told colleagues at a recent hearing.

While it is unknown how the government ultimately will solve the special needs of universities in financial distress, Dr Torrie said, the Moncion plan at least makes clear the need to address that before the underlying prohibition on bankruptcy filings takes effect. “There is an opportunity here to really provide predictability and certainty, which is lacking for any university that’s struggling right now,” she said.

Another area needing clarity, said Emmanuel Phaneuf, a Montreal lawyer specialising in corporate restructuring, was the boundary between public and private institutions. The right to bankruptcy protections absolutely must remain in place for private institutions, as creditors otherwise would have no realistic recourse if their bills were not paid. Yet the measure set forth by Ms Moncion, he said, appears to offer a blurry definition, as it says the ban on the use of bankruptcy protections would apply to any post-secondary educational institution that receives government money for its operations.

paul.basken@timeshighereducation.com