Companies doing business in Canada must be aware of and understand the consequences when they, or the companies with which they are dealing, encounter financial difficulties. There are important differences between the restructuring and insolvency laws of Canada and those of other countries. A brief overview of applicable Canadian legislation, including key departures from the U.S. regime, is provided below.
Restructuring and insolvency laws in Canada include:
bankruptcy under the Bankruptcy and Insolvency Act (BIA);
receivership by court appointment or by private appointment;
restructuring under the Companies’ Creditors Arrangement Act (CCAA);
restructuring under the BIA; and
liquidation or restructuring under the Winding-up and Restructuring Act (WURA).
The first two categories largely focus on the liquidation of a company’s assets and the distribution of the proceeds to creditors. The next two categories provide an opportunity for a company to restructure its balance sheet and/or operations. Since the WURA process is typically used only by government-regulated financial institutions, it is not discussed further below.
The term bankruptcy in Canada is a narrowly defined legal term (essentially, a legal status conferred under the BIA), distinguishable from a receivership or a restructuring. The closest U.S. parallel is a Chapter 7 proceeding. A company may become bankrupt under the BIA if: (i) it makes a voluntary assignment into bankruptcy; (ii) creditors apply to the court to have it adjudged bankrupt; or (iii) it is the subject of a failed restructuring proposal under the BIA (discussed below).
Upon bankruptcy, all of the bankrupt’s property vests in the trustee in bankruptcy for the general benefit of the bankrupt’s creditors, but subject to the rights of secured creditors. The BIA also imposes a broad statutory stay of proceedings in respect of the bankrupt and its property that precludes unsecured creditors from commencing or continuing any proceeding for the recovery of a claim against the bankrupt.
To the extent that the liquidation of the debtor’s assets generates monies in excess of that which is required to pay “super-priority” amounts (mostly relating to employee obligations), secured creditors and certain statutorily preferred creditors, the net proceeds are ultimately distributed pro rata to the bankrupt’s unsecured creditors.
A receiver may be appointed by court order or by a private instrument (much less common today) under the terms of a security agreement. A court-appointed receiver is an officer of the court who operates under the guidance and direction of the court and who is accountable to all of the debtor’s creditors. The order appointing the receiver may confer very broad powers upon the receiver and almost invariably contains a stay of proceedings with respect to rights against the debtor’s assets and the receiver.
Alternatively, a secured creditor may privately appoint a receiver where the security documents so permit. The private receiver’s duties, rights and obligations are governed by the applicable security document and the relevant law, and the receivership is not backed by a court order. This used to be a fairly common remedy; however, today, far more receivers are court appointed.
In either case, the debtor typically loses possession or control of the specified assets and those assets are often sold to pay creditors in order of priority.
Under the CCAA (the functional parallel of U.S. Chapter 11, but a somewhat more flexible process), a debtor may effect a financial and/or operational restructuring. To qualify, the debtor company (including affiliates) must owe a minimum of $5 million to its creditors and must be insolvent. Although other stakeholders may do so, the debtor is typically the one to initiate the application.
Unlike in Chapter 11 proceedings, the granting of CCAA protection and a stay of proceedings is not automatic upon filing; rather, the Court must grant it. The scope and terms are within the Court’s discretion. The initial stay period is a maximum of 30 days, but the debtor can (and almost always does) seek extensions. There is no maximum duration to the length of the stay; however, CCAA restructurings tend to be completed more quickly and cheaply than comparable Chapter 11 restructurings.
The debtor remains in possession of its property and can continue to carry on business largely in the ordinary course. However, a court-appointed officer (the monitor) oversees the process and reports to the court and the creditors on the debtor’s financial affairs. As an officer of the court, the monitor has a duty to be impartial as between the debtor and creditors.
The debtor must submit a plan containing the terms of the deal being put to its creditors. To be approved, a plan requires the double majority (two-thirds in value and a majority in number) of each class of creditors (typically only one or two classes in CCAA proceedings) to vote in favour of the plan. A plan which does not receive the requisite number of votes from a class of creditors will not bind such class. Unlike in Chapter 11, there is no formal cram-down process. Once the necessary classes of creditors approve the plan, it must be court-sanctioned (akin to confirmation of a Chapter 11 plan) before it becomes binding. If a plan is rejected by the creditors or the court, bankruptcy is not automatic.
Restructuring under the BIA is often the choice for smaller companies (and the only restructuring choice for individuals) as it is generally a cheaper and more expeditious process than that under the CCAA. The proposal is commenced by filing either a Notice of Intention to Make a Proposal (NOI) or the proposal itself.
Unlike the CCAA, but similar to Chapter 11 proceedings, a stay of proceedings is automatic upon filing. The initial stay (and proposal filing) period is a maximum of 30 days, and extensions are limited to 45-day increments, not to extend beyond a total of six months, during which time the debtor must file its proposal. The six-month maximum means that BIA proposal proceedings are usually faster than CCAA proceedings.
The debtor remains in possession of its property and may carry on its business in the ordinary course. However, a proposal trustee is appointed to oversee the business and financial affairs of the debtor and to report to the court and creditors.
The proposal sets out the terms of the deal being put to creditors. If the proposal is not filed within the required time period or if it does not receive the requisite number of votes from any individual class of creditors (double-majority requirement as in the CCAA), the proposal will not be binding on that class (again, there is no formal cram-down in Canada). Once the necessary class(es) of creditors approve the proposal, it must be court-approved before it becomes binding. If a proposal fails to obtain the requisite approvals from the unsecured creditors or the court, or if it is not filed before a required deadline, the debtor is deemed to have made a voluntary assignment into bankruptcy.
Although Canadian restructuring and insolvency laws have many similarities to other systems and, in particular, the U.S. regime, the differences can be significant. Accordingly, if one is doing business in Canada and encounters financial difficulties, it is critical to seek advice from experienced Canadian counsel to help navigate what can be dangerous waters.
Bennett Jones’ Restructuring & Insolvency Group
Bennett Jones has one of the most experienced and active restructuring, insolvency and bankruptcy practices in Canada. We cover the entire range of restructuring and insolvency issues, acting for creditors, debtors and estate fiduciaries, including monitors and trustees. Our lawyers have played a significant role in most major Canadian restructurings over the past several years and we have one of the most active cross-border practices in Canada, particularly involving international restructurings across the United States, the United Kingdom, continental Europe and Central America. We have been and continue to be the most sought-after and busiest Canadian counsel representing bondholders in particular, but also other major creditor groups (primarily non-Canadian creditors) and certain court officers. We are known as the Canadian go-to firm for non-Canadian creditors in particular.