6.1 Statutory process for a financial restructuring/reorganisation
CCAA and proposal proceedings are the main Canadian restructuring proceedings. An alternative to these proceedings, in certain circumstances, are the arrangement provisions contained in the Canada Business Corporations Act and equivalent provincial corporate statutes.
The principal objective of the CCAA is to enable a debtor to formulate a plan of compromise or arrangement (the "plan") in respect of the obligations it owes its creditors, to be voted on by the creditors, and if approved by the requisite majorities in each class of creditors, sanctioned by the court.
In many CCAA proceedings, the debtor will not file a plan but will rather use the proceedings as a mechanism to effect a sale of all or part of its business, property or assets, through either the implementation of a sale process, or a pre-packaged sale transaction that was formulated prior to, but is consummated as part of, the CCAA proceedings.
Either a creditor or the debtor can initiate CCAA proceedings by application to the court.
To proceed under the CCAA, the debtor must:
- be insolvent, meaning that the debtor is unable to meet its liabilities as they fall due (cash flow test), or the debtor's assets are less than its liabilities (balance sheet test); and
- have debts in excess of CAD5 million (including any affiliate companies' debts).
The court will exercise its discretion to grant protection if:
- a reorganisation, or orderly sale or liquidation of the debtor's business would be beneficial to the debtor's stakeholders;
- the debtor does not have an improper motive for making the application; and
- the relief being sought pursuant to the initial order under the CCAA (the "initial order") is limited to that which is reasonably necessary for the continued operation of the debtor in the ordinary course of business during the initial ten-day stay period.
Provided the applicant establishes that the debtor meets the CCAA requirements, the burden will be on any opposing creditors to show why the court should not grant the relief requested.
The court will appoint a monitor that is a licensed insolvency trustee (LIT), to oversee the proceedings, report on the debtor's business and financial affairs, and assist the debtor in formulating its plan.
The debtor remains in control of its business and property; however, it remains subject to the monitor's scrutiny. If a transaction is outside the ordinary course of business or does not comply with any court order, the monitor will report such activities to the court.
The court will issue an initial order prohibiting all persons from taking any further steps to pursue claims against the debtor and its directors and officers, without the prior consent of the debtor and monitor, or leave of the court.
CCAA proceedings do not have a prescribed time limit. The initial order grants the debtor up to ten days of protection from its creditors. Before the expiry of that period, the debtor must return to court to request an extension. There is no limit on the length or number of extensions that a debtor may seek from the court, provided the applicant shows that circumstances exist that make the order appropriate and that it has acted and is acting in good faith and with due diligence.
For a plan to be accepted by creditors, a meeting must be held for voting on the plan, and a majority in number of each class of creditors holding two-thirds in value of the total debt represented by that class must vote in favour of the plan. Once the requisite majorities of creditors in each class approve the plan, the court must sanction it before it becomes binding on all creditors.
After the implementation of the plan and the conclusion of the proceedings, the debtor can resume its normal business operations.
The objective of proposal proceedings is to enable a debtor to reach a compromise with its creditors through a restructuring of its obligations pursuant to a proposal. The debtor may also use proposal proceedings to effect a sale of all or part of its business or assets.
An insolvent person, a receiver, a liquidator, a bankrupt or a trustee may make a proposal. There is no minimum debt requirement for companies to be eligible to make proposals. A proposal is initiated by filing a proposal or a notice of intention to make a proposal (NOI).
To proceed with a proposal, the debtor must:
- be insolvent under the cash flow or balance sheet test;
- have at least CAD1,000 in unsecured indebtedness.
The Office of the Superintendent of Bankruptcy (OSB) will appoint a trustee to supervise the proposal. Its role is to monitor the debtor's actions, assist it in developing the proposal, and advise the court if any material adverse changes occur.
The debtor remains in control of its property; the trustee does not control the debtor's affairs.
Once a proposal or NOI has been filed, no creditors can bring or continue any proceedings against the debtor. The stay of proceedings prohibits creditors from exercising any remedy against the debtor or its property, or commencing or continuing any action, execution or other proceeding for the recovery of a claim provable in bankruptcy without leave of the court granted on motion on notice to the debtor and the proposal trustee.
Secured creditors may enforce their security only if they have a 244 Notice and the statutory ten-day notice period has lapsed or been waived by the debtor. All other creditors are stayed for an initial period of 30 days. The time for filing a proposal (and the stay period) can be extended by the court for a maximum period of six months (including the initial 30-day stay), in 45-day intervals.
BIA proposal proceedings proceed on defined time limits. On the filing of an NOI, all creditors are stayed for an initial period of 30 days. The time for filing a proposal (and the stay period) can be extended by the court for a maximum period of six months (including the initial 30-day stay), in 45-day intervals.
Both the debtor's creditors and the court must approve a BIA proposal pursuant to the BIA. At least two-thirds in value and a majority in number of the creditors, including secured creditors to whom the proposal was made, must approve of the proposal. Following the creditors' approval, the court will approve the proposal if it is for the general benefit of the creditors. To this extent, evidence must be adduced to show that the debtor's creditors will be better off under the terms of the proposal than they would be if the debtor were liquidated pursuant to bankruptcy proceedings.
Once the debtor has fulfilled all of its obligations as set out in the BIA proposal, the trustee will issue a certificate confirming the debtor's full compliance with its obligations under the proposal. Once the trustee's certificate is issued, the debtor is considered to have completed its restructuring and may resume its normal business operations. However, if the debtor defaults on its obligations to its creditors under the proposal, as approved by its creditors and the court, its proposal may be annulled. Similarly, if a debtor's proposal is rejected by creditors by a majority in number or one-third by value, the debtor will be deemed to be bankrupt.
6.2 Position of the company
Proceedings under the BIA and CCAA result in the debtor obtaining a stay of proceedings, whether automatically by statute or by order of the court.
A debtor subject to CCAA or proposal proceedings may obtain DIP financing (see 3.3 New Money).
6.3 Roles of Creditors
For the purposes of voting on proposals or plans under the CCAA, creditors are placed in classes. The voting requirements in proposals and plans (a majority in number and two-thirds by value of the creditors present and voting at a properly constituted meeting) apply on a class-by-class basis. Proposals must be made to all unsecured creditors, classed as is appropriate, and may be made to secured creditors.
Creditors are organised into classes based on their commonality of interest.
There is no statutory basis for creditors' committees in Canada and they are not common. Creditors form ad hoc committees in some cases.
The BIA and CCAA contain disclosure requirements. These include duties on court officers and debtors such as:
- filing of debtor's statements of affairs;
- delivery by debtor of cash-flow projections, together with reports on their reasonability by court officers;
- material adverse change reports by court officers;
- reports in respect of proposals and plans; and
- creditor notices and lists of creditors.
Receivers and trustees also have disclosure requirements which include creditor notices, creditor lists and discharge reporting.
The CCAA also permits "interested persons" to apply for orders requiring a creditor to disclose any aspect of its economic interest in the debtor.
6.4 Claims of dissenting creditors
There is no provision permitting an inter-class "cram-down". Proposals and plans will be binding on dissenting creditor minorities within a class if approved at a properly constituted meeting by the requisite majorities and subsequently sanctioned by the court. If court approval is not granted for a proposal or plan, it will not be binding on an affected class.
6.5 Trading of claims against a company
There are no general restrictions on trading the debt of a company undergoing a formal restructuring. Such claims may be recognised as provable claims. Trading of such claims can be structured as either assignments or outright sales. There is no strict time limit on when any claims may be traded. Claims purchasers need to be mindful of claims bar dates and claims procedures implemented in insolvency proceedings.
6.6 Use of a restructuring procedure to reorganise a corporate group
Multiple debtors within a corporate group can commence insolvency proceedings. Procedural (or administrative) consolidation can avoid unnecessary multiplicity of proceedings. Under procedural consolidation, estates of related debtors are jointly administered but each debtor's assets and liabilities are kept separate.
It is rare for a court to allow "substantive consolidation", ie, a consolidation of the assets and liabilities of multiple debtors. The situations where such relief is granted are limited given the prejudice it may have on creditors.
6.7 Restrictions on a company's use of its assets
As a general principle, a debtor will seek court approval prior to the sale of assets that are non-de minimis in value.
In CCAA and receivership proceedings, the initial order and appointment order set out a dollar threshold at which court approval must be obtained prior to consummating a sale transaction.
In determining whether a transaction should be approved, a court will consider, among other things:
- whether sufficient effort has been made to maximise the purchase price;
- the interest of all stakeholders in the transaction;
- the efficacy and integrity of the process by which the assets were marketed; and
- whether there has been unfairness in the marketing process.
6.8 Asset disposition and related procedures
The structure and process for disposal of assets or sale of a going concern business in an insolvency context depend on which insolvency legislation is being used to transact the sale.
With limited exceptions, the debtor runs the process for assets and going concern sales. Following negotiations with its primary creditors, the debtor will often seek approval of the court for an order that prescribes a sales and investment solicitation process (SISP) that involves varying degrees of involvement of, and supervision by, the monitor. Where the board of directors or management of the debtor is unwilling to be involved in the SISP, is not resourced sufficiently to run it or is in a conflict of interest (ie, debtor management/shareholders are potential buyers) the court may order the monitor to have a much higher degree of control over the SISP. DIP lenders and secured creditors (often but not always the same or related entities) may also be granted rights to information and input into a SISP. The court may permit or even mandate the hiring of a "sales agent" to run the SISP.
Going concern sales and sales of assets in bulk or by lot of "material" assets will require approval of the court. In such circumstances, the debtor will apply to the court for an approval and vesting order. This order will approve the sale transaction and also provide for a vesting out of all pre-existing secured and unsecured claims against the purchased assets such that the buyer acquires the debtor's title free and clear of claims and liabilities asserted against those assets.
It is also possible to use a formal CCAA compromise or plan of arrangement to have a plan sponsor acquire the equity of the debtor (extinguishing all pre-plan equity) and have a plan approved by the affected creditors which would permit the acquisition in return for a payment of a compromised amount of the liabilities to the creditors. The funding of that compromise payment would form part of the plan and would be made by the plan sponsor upon successful plan implementation. The plan sponsor would then acquire the business subject only to uncompromised liabilities it has agreed to assume.
The board of directors and management of the debtor generally run any sale process. Like the CCAA context, there may be a SISP. The proposal trustee appointed under the BIA to help the debtor will generally be involved in any sale process and will help board of directors and management of the debtor consummate a sale. If that sale process does not result in a transaction, it is likely that the court will be asked by creditors to convert the BIA proposal process into a receivership or a bankruptcy.
Acquirers in a BIA proposal sale process will also have the benefit of an approval and vesting order.
In a court-appointed receivership, the receiver will either sell the assets of the business in bulk or in lots. Where the receiver is operating the business as a going concern, it may attempt to sell the business as a going concern; however, the sale will still take the form of an asset sale. The receiver is an officer of the court who must act in the interest of all creditors; however, in conducting a sale process, the receiver will usually consult creditors who are likely to be impacted by the transaction, typically secured creditors since few receiverships result in payments to unsecured creditors.
Acquirers in a court-appointed receivership proceeding will also have the benefit of an approval and vesting order.
If a debtor is adjudged a bankrupt or assigns itself into bankruptcy, the sale of assets will be run by the bankruptcy trustee for the benefit of the unsecured creditors. A bankruptcy trustee can only sell the assets of the debtor not encumbered by security unless the secured creditor consents to the trustee's sale or the secured creditor seeks the appointment of the trustee also as a court-appointed receiver of the bankrupt debtor.
Secured creditors can, and frequently do, credit-bid in CCAA, BIA proposal and receivership proceedings, and these can be structured as stalking horse bids. Sales under these regimes are all court-supervised as noted above, and as such there are no special rules for them beyond the test of the prudency of the sale used by court in that context.
Unsecured credit bids are uncommon given the propensity of Canadian secured creditors to take "blanket security" and given the significant shortfalls suffered by unsecured creditors.
Pre-negotiated or pre-packaged sales processes are not uncommon. Most often, a pre-packaged sale process follows an informal SISP run prior to the proceeding which lends credibility to an abbreviated process post-filing. The debtor enters the proceeding with the bird in hand being either a stalking horse bid requiring an abbreviated post-filing SISP process or a sale to be approved immediately following filing with compelling evidence to support the abridgement or complete avoidance of a post-filing sale process. Pre-packaged sales require either a significant pre-filing SISP process or some existential threat to the value of the business necessitating an expedited sale approval. It is common in such circumstances for the key stakeholders who might object to the abbreviated or eliminated post-filing sale process to be supporting the application for an expedited process.
6.9 Secured creditor liens and security arrangements
It is common as part of any sale approved by the court that all secured claims and liens that are attached to the assets being sold be vested out by order of the court so that the purchaser obtains clear and free title to the assets.
6.10 Priority new money
Additional financing can be obtained by the debtor subject to insolvency proceedings. This financing is called interim financing or DIP financing and is available in CCAA proceedings and BIA proposals; see 3.3 New Money.
6.11 Determining the value of claims and creditors
The BIA requires creditors to formally prove their claim against the insolvent debtor in order to vote on and participate in proposals. The BIA provides prescribed forms and procedures for proving claims. Claims are adjudicated in the first instance by the proposal trustee, subject to rights of appeal to the court. Claims not proven in advance of a creditors meeting cannot be voted. Claims not proven prior to the implementation of a proposal cannot participate.
Under the CCAA, the supervising court commonly makes orders prescribing the procedure for proving and determining claims and establishing dates after which they will be barred as against the insolvent debtor if not proven. Generally, monitors appointed in CCAA proceedings administer these claims processes.
6.12 Restructuring or reorganisation agreement
Proposals under the BIA and plans of compromise or arrangement under the CCAA are not binding unless approved by the supervising court, even if approved by the requisite creditor double majorities. Before approving a proposal or plan, the court must be satisfied that the proposal or plan is fair and reasonable and that the provisions of the applicable insolvency statute and any prior court orders have been strictly complied with. In determining the fairness and reasonability of a proposal or plan, courts will compare the treatment of creditors under the proposal or plan with the treatment that they would receive in bankruptcy or liquidation.
Insolvent debtors restructuring under the BIA or the CCAA are specifically empowered to disclaim executory contracts, with certain exceptions. In order to disclaim a contract, debtors must obtain the approval of the applicable court officer and provide notice in the prescribed form to the contract counterparty. Contract counterparties may object to the disclaimer of their contracts within 15 days of the giving of notice and apply to the court for an order giving effect to their objection. A court will consider whether the proposed disclaimer is approved by the court officer, whether it will enhance the prospect of a viable proposal or plan being made and whether it is likely to cause significant hardship to the contract counterparty. The following contracts are not subject to disclaimer:
- eligible financial contracts;
- collective agreements;
- financing agreements if the debtor is the borrower; and
- leases of real property if the debtor is the lessor.
In addition to the above-named exceptions, Canadian courts have also found that an option to purchase land is a proprietary interest that cannot be disclaimed under the BIA nor vested off pursuant to a vesting order.
6.13 Non-debtor parties
A court supervising restructuring proceedings may make an order releasing claims against parties other than the debtor provided that the court is satisfied that the releases are reasonably connected to the restructuring. The court will consider:
- whether the parties to be released are necessary and essential to the restructuring;
- whether the claims to be released are rationally connected to the purpose of the plan;
- whether the plan can succeed without the releases;
- whether the parties being released are contributing to the plan;
- whether the releases benefit the debtors as well as the creditors generally;
- whether the creditors voting on the plan have knowledge of the nature and the effect of the releases; and
- whether the releases are fair, reasonable and not overly-broad.
Third-party releases have included professionals involved in the restructuring, secured creditors, and affiliates of the debtor. Third-party releases have also been included in corporate plans of arrangement though they have been met with some reluctance by the courts.
6.14 Rights of set-off
During insolvency, a right of set-off can arise by law, in equity or by contract.
Legal set-off. There are two requirements that must be met for the claim of legal set-off to be made:
- the cross-claims must be liquidated, enforceable and mature; and
- the claims must have arisen between the same parties acting in the same capacity (the claims must be mutual).
Equitable set-off. When determining whether equitable set-off is available, the courts will inquire into the connection between the claims and examine the general equities between the parties. Equitable set-off is available where it would be manifestly unjust to allow one claim to be enforced without taking the other claim into account.
Contractual set-off. The remedy of contractual set-off is the recognition of the entitlement of parties to explicitly contract to allow for setting-off obligations owing between them. A party with a contractual entitlement to set-off is not required to meet the threshold for legal or equitable set-off.
6.15 Failure to observe the terms of agreements
Under the BIA, where there is default in the performance of a proposal, the proposal trustee must give notice of default to the creditors and the government insolvency regulator. Following default, or where it is determined that the proposal cannot continue without injustice or undue delay, the court is empowered to order that the proposal be annulled. The court may also annul proposals obtained by fraud. If a proposal is annulled, the debtor will be deemed to have made an assignment in bankruptcy and a trustee will be appointed.
Under the CCAA, where there is default in the performance of a plan, upon application by a creditor or the monitor, the court is empowered to make whatever order is just in the circumstances, including an order adjudging the debtor to be bankrupt.
6.16 Existing equity owners
Equity claimants may not vote at a meeting of creditors unless the court orders otherwise. Proposals and plans cannot provide for the payment of equity claims unless all other claims are paid in full.