There are a number of similarities between restructuring legislation in Canada and the United States. Each of Canada and the United States have adopted a form of the UNCITRAL Model Law Cross-Border Insolvency in order to facilitate cooperation and efficient administration of cases with an international component. In Canada this has occurred through implementation of both Part XIII of the Bankruptcy and Insolvency Act (Canada) and Part IV of the Companies’ Creditors Arrangement Act (Canada) while in the United States Chapter 15 of the Bankruptcy Code(United States) is used in cases involving foreign recognition. The CCAA and Chapter 11 of the Code both offer certain advantages for debtors undergoing complex reorganization proceedings with multiple stakeholder groups in that each permits the debtor to remain in possession of its assets, affords the debtor a stay of proceedings, segregates affected creditors into classes and provides for the compromise and extinguishment of claims as part of the implementation of a restructuring plan.
While the overlap of some aspects of the legislation as between Canada and the United States creates a basic comfort level for professionals operating on either side of the border, there are a number of legislative differences in reorganizations occurring under theCCAA and Chapter 11 of the Code. This post will explore the ability of a Canadian court to grant a priority charge for debtor in possession financing without providing “adequate protection” to an existing secured creditor, which is one of the differences in the operation between the CCAA and Chapter 11 of the Code.
It is common for debtor companies that obtain CCAA protection to also require an immediate infusion of credit to meet post-filing obligations. Section 11.2(1) of the CCAAallows for a court to grant a charge (generally referred to as a priming lien under the Code) on the property of a debtor company for the purposes of obtaining what is referred to as interim financing under the CCAA. The application must be made on notice to affected secured creditors and the quantum of the charge is capped at an amount determined to be appropriate by the court. Section 11.2(2) of the CCAA expressly allows the court to order that the charge rank in priority to the claims of existing secured creditors of the debtor company and there is no requirement in Canada of “adequate protection” for existing secured creditors of the company.
The CCAA does offer a form of protection to existing secured creditors in that section 11.2(1) of the CCAA provides the court with a broad discretion to consider any relevant factors on an application for a priority financing charge. In making the assessment the court is required to expressly consider both (i) the nature and value of the property subject to the charge (11.2(4)(e)) and (ii) whether any creditor would be materially prejudiced as a result of the security or charge (11.2(4)(f)). This engages a consideration of whether there is equity in the collateral beyond the secured indebtedness owed to the creditor and, in the event there is such equity, whether the equity value is likely to be maintained over the course of the proceedings. While the court retains the broad jurisdiction under the CCAAto approve the interim financing and grant a priority charge, a debtor under the CCAA must give consideration of the potential detrimental impact of debtor in possession financing on existing secured creditors under the statutory test. The requirement is framed as the absence of “material prejudice” and not the existence of “adequate protection” but there is a parallel policy rationale as between the statutes on this issue. Debtors who contemplate the need for debtor in possession financing as part of a CCAA filing can of course avoid potential opposition from a secured lender by negotiating arrangements whereby the existing lender provides the financing (often with a higher interest rate than that provided on the current credit facility) and obtains the benefit of the charge on the post-filing advances.