In a corporate reorganization under the Companies’ Creditors Arrangement Act (the “CCAA”), the design of appropriate classes of creditors can be central to the success of the restructuring initiative. The requisite “double majority” for a plan of arrangement to be approved, being a majority in number and two thirds by value of support from creditors, is required per class in order to be binding on that class. The result is that much thought is given to the structuring of creditor classes, on the basis of promoting the aims of the CCAA and attempting to ensure the requisite majority of creditor support.
With the new CCAA amendments now in force, the Act provides, at section 22, several factors that a Court must now consider in approving a classification for purposes of voting on a proposed plan:
22. (1) A debtor company may divide its creditors into classes for the purpose of a meeting to be held under section 4 or 5 in respect of a compromise or arrangement relating to the company and, if it does so, it is to apply to the court for approval of the division before the meeting is held.
(2) For the purpose of subsection (1), creditors may be included in the same class if their interests or rights are sufficiently similar to give them a commonality of interest, taking into account
(i) the nature of the debts, liabilities or obligations giving rise to their claims;
(ii) the nature and rank of any security in respect of their claims;
(iii) the remedies available to the creditors in the absence of the compromise or arrangement being sanctioned, and the extent to which the creditors would recover their claims by exercising those remedies; and
(iv) any further criteria, consistent with those set out in paragraphs (a) to (c), that are prescribed.
In Re SemCanada Crude Co., 2009 ABQB 490 (“SemCanada”), the Court presided over a restructuring initiated under the pre-amendment provisions of the CCAA and was therefore not bound by this new provision. The Court canvassed the common law on creditor classification and stated that the new section 22 amendments do not materially change the common law factors that a Court must consider in approving a proposed classification.
The common law factors highlighted in SemCanada are then, presumably, the framework for interpretation of the new section 22 of the CCAA. It is interesting to note that, prior to these amendments, there was very little statutory guidance on proper creditor classification, so the law was largely created through contextual appropriateness in each case, as shaped by the overall purposes of the CCAA. Given that the debtor will be seeking to maximize support, and creditors will be seeking to enhance their bargaining power, the Court must consider these competing interests in light of the overarching aims of the CCAA in making its determination as to the appropriateness of a proposed classification.
The Court described six factors, briefly summarized below, which are seen as a guideline to the Court’s ultimately fact-driven determination:
1. Commonality of interests: the interests of creditors in each class should be sufficiently similar such that they can vote with common interest. The Courts have rejected the notion that these interests must be identical.
2. Legal interests: the interests of creditors to be considered by the Court are their legal interests as creditors of the debtor, i.e. their rights in respect of the debtor company, as opposed to their interests and rights as creditors in relation to each other. For a simplified example, a group of creditors may all be unsecured in relation to a debtor company, but may hold different debt instruments in relation to each other. There is also a line of cases suggesting that the Court should also consider the rights of the parties in a liquidation scenario.
3. Purposive approach: the commonality of interests of creditors to a class is to be considered in perspective of the aims of the CCAA, primarily being to facilitate successful restructurings.
4. Promotion of viable plans: in taking a purposive approach, Courts should be wary of classifications that would potentially jeopardize viable plans. Primarily, Courts should avoid the approval of classes where a minority group would be granted unwarranted power or influence over the process, in consideration of their status.
5. Creditor motivations are irrelevant: the motivations of creditors to approve or not approve a plan of arrangement are irrelevant. It is anticipated that creditors in the same class can and will have different financial or strategic interests, and the attempted alignment of classes on these grounds, as opposed to in accordance with their legal rights, would lead to inappropriate fragmentation and would potentially defeat the overall aims of the CCAA.
5. Ensuring proper consultation: the treatment of creditors before and after the implementation of a plan of arrangement will disclose the likelihood of those creditors to be able to effectively consult with each other as a group. For example, if a part of a proposed class will remain uncompromised by a plan, and another part will not, it is unlikely that these creditors will be able to engage in meaningful consultation as a result of the opposition of their legal interests.
To summarize, the six factors enumerated are interrelated and tend to require the Court to consider the effect of a reorganization process, and ultimately of a plan of arrangement, on the legal rights of creditors as they may be affected thereunder. These rights are juxtaposed with the rights of the debtor company and the policy aims of the CCAA to provide a viable restructuring opportunity for qualifying debtors. It is important not to confuse creditors’ motivations with their legal rights, and not to ignore potential conflicts of interest that could defeat effective consultation within a class. It should also be noted that no distinct minority should be afforded unwarranted strength of position, such that they could effectively veto an otherwise viable plan.