Canadian Restructuring Proceedings
July 23, 2009
In Canada, there is more than one insolvency regime available to an insolvent company that wishes to restructure its debts and operations. However, the most commonly used regime for large companies ― and sometimes for smaller companies, because it is the most flexible ― is the Companies’ Creditors Arrangement Act (Canada) (CCAA). The most commonly used regime for smaller companies or less complicated restructurings is proposal proceedings under the Bankruptcy and Insolvency Act (Canada) (BIA).
To qualify to use the CCAA, a company must be insolvent and must have outstanding liabilities of $5 million or more. To initiate the proceedings, the company brings an initial application to court for an order imposing a stay of proceedings on creditors (i.e., a freeze on the payment of indebtedness) and authorizing the company to prepare a plan of arrangement to compromise its indebtedness with some or all of its creditors.
The materials presented to the court include a proposed form of initial court order and an affidavit prepared by the company describing its background, its financial difficulties and the reasons it is seeking the protection of a court order made under the CCAA. After reviewing the materials and hearing submissions from counsel, the judge exercises his or her discretion as to whether to make an initial order, and the terms. Usually, the initial order is made in the form of the order requested by the company, with little or no input from creditors and other stakeholders. However, affected parties have the right to apply to court to vary the initial order after it is made.
Typically, an initial court order does the following things:
- authorizes the company to prepare a plan of arrangement to put to its creditors;
- authorizes the company to stay in possession of its assets and to carry on business in a manner consistent with the preservation of its assets and business;
- prohibits the company from making payments in respect of past debts (other than specific exceptions, such as amounts owing to employees) and imposes a stay of proceedings (i) preventing creditors and suppliers from taking action in respect of debts and payables owing as at the filing date, and (ii) prohibiting the termination of contracts by counterparties;
- authorizes the company, if necessary, to obtain additional financing to ensure it can fund its operations during the proceedings, including setting limits on the aggregate funding and the priority of the security; and
- authorizes the company to terminate unfavourable contracts, leases and other arrangements, as well as to shut down facilities and to make provision for the consequences (i.e., damage claims) in the plan of arrangement.
The CCAA provides that an initial order may only impose a stay of proceedings for a period not exceeding 30 days. Once an initial order has been made, the company may apply for a further order or orders extending the stay of proceedings. The intention is to have the stay of proceedings continue until the company’s plan of arrangement has been presented to the creditors and approved by the court. As a general matter, the duration of proceedings under the CCAA usually ranges between six to 18 months from the commencement of proceedings to the sanctioning of a plan of arrangement. The court may terminate the proceedings under the CCAA upon application of an interested party if it believes the achievement of a consensual arrangement is unlikely. However, such orders are rare, at least at the initial stages of the restructuring.
In recent years, the CCAA has also been used as a means by which a sale of particular assets of the company, or the entire company, is conducted. The sale process runs on a parallel, alternate track to the restructuring process with a view to maximizing value for the stakeholders. In some cases, a sale has been permitted prior to the formulation of a plan and vote by creditors. In such circumstances, approval of the sale is sought from the court in a process similar to a court receivership sale.
When the plan formulation stage is reached, a CCAA plan of arrangement ordinarily will divide the creditors into classes and will provide for the treatment of each class (which can be substantially different). A creditor that is dissatisfied with its classification may apply to court to seek a different classification. In this regard, the CCAA does not provide any specific rules for determining the classes of creditors. However, the guiding legal principle applied by the courts in considering classification issues is whether there is a commonality of interest among the creditors in the class.
For a plan of arrangement to be approved by the creditors, a majority in number of the creditors representing two-thirds in value of the claims of each class, present and voting (either in person or by proxy) at the meeting or meetings of creditors, must vote in favour of the plan of arrangement. If the plan is approved by the creditors, it must then be approved by the court. In doing so, the court must determine that the plan of arrangement is "fair and reasonable." Upon approval by both the creditors and the court, the plan of arrangement is binding on all of the creditors of each class affected by the plan. If a class of creditors does not approve the plan, the plan is not binding on the creditors within that class.
Additionally, if a debt restructuring involves a reorganization of the share capital of a company and the company is governed by the Canada Business Corporations Act (or similar provincial legislation with equivalent, relevant provisions), it is possible to reorganize the share capital of the company by way of the CCAA court sanction order without a shareholder vote. In recent years, this device has been used, in effect, to extinguish the existing share capital and issue new shares to creditors in satisfaction of their claims.
If a sale of the assets occurs before the filing of a plan and meeting of creditors, consideration would be given to the benefits of proceeding toward a plan (presumably, to distribute the proceeds of the sale) as opposed to terminating the CCAA proceedings — for example, by commencing bankruptcy liquidation proceedings.
BIA Proposal — Comparison to CCAA
As an alternative to the CCAA, an insolvent corporation may obtain a stay of proceedings under the provisions of the BIA simply by filing a notice of intention to make a proposal under the BIA. This is a statutory form, and its filing automatically results in a stay of proceedings on the exercise of remedies by secured and unsecured creditors (subject to some exceptions) for a period of 30 days. The insolvent debtor must then file a proposal to its creditors unless it obtains an extension of time from the court. The extensions may be given in 45-day increments for a total period of no more than six months.
Under the BIA, a proposal may be made to classes of creditors in similar fashion to that permitted under the CCAA, but the proposal must address the claims of all unsecured creditors. The requisite majority under both the BIA and the CCAA for approval of a proposal or a plan to restructure debts is a majority in number of each class of creditors representing two-thirds of the value of such claims.1
The stay of proceedings under the BIA is more limited than the stay of proceedings usually found in orders made under the CCAA. Upon the filing of a notice of intention to make a proposal or the filing of the proposal itself, the BIA imposes a stay of proceedings against the exercise of remedies by creditors against the debtor’s property or the continuation of legal proceedings to recover claims provable in bankruptcy. Provisions in security agreements provide that, upon insolvency, default, or the filing of a notice of intention to make a proposal under the BIA, the debtor ceases to have rights to use or deal with the collateral. The BIA also provides that, upon the filing of a notice of intention to make a proposal or the filing of a proposal, no person may terminate or amend any agreement with the insolvent person or claim an accelerated payment under any agreement with the insolvent person by reason only that the person is insolvent or the person has filed a notice of intention or a proposal. Where the agreement in question is a lease or a licence agreement, the prohibition against terminating, amending or accelerating extends to situations in which the insolvent person has not paid rent or royalties prior to filing.
The stay provisions under the BIA can be contrasted to orders made under the CCAA where the initial order is designed by the debtor company to meet its needs. Contracting parties are generally restrained from exercising any contractual remedy provided that the insolvent company continues to make immediate payment or on such other terms as are acceptable to the other party. While contracting parties may apply to court to vary the stay of proceedings made pursuant to the CCAA, the courts will generally enforce the stay if it is necessary to maintain the debtor’s business and the creditor is not being unreasonably prejudiced by the stay.
The terms of a proposal under the BIA or a debt restructuring plan under the CCAA are inevitably the result of negotiations between the debtor company and the classes of creditors who are affected by it. The creditor or group of creditors who can control a class has considerable power.
The foregoing is a very preliminary description of restructuring proceedings under the CCAA and the BIA. By its nature, this is a general commentary and does not address exceptions to the general principles or any of the other provisions of the statutes not mentioned above.
1 Neither the CCAA nor the restructuring provisions of the BIA contain "cramdown" provisions of the nature that we understand exist under Chapter 11, in which a plan of reorganization may be declared binding on junior ranking claimants if senior ranking but impaired creditors vote in favour of the plan of reorganization. Under the CCAA and the BIA, the plan must be approved by all classes of creditors for it to be binding upon all creditors in such cases.