This article has been contributed to the blog by David Rosenblat and Justine Erickson. David Rosenblat is an associate in the insolvency and restructuring group of Osler, Hoskin & Harcourt LLP an Justine Erickson is a summer student at Osler, Hoskin & Harcourt LLP.
As part of a public consultation process on insolvency law reform, Industry Canada published a discussion paper seeking submissions on a number of topics, including the use of arrangement provisions in the Canada Business Corporations Act (the “CBCA”) as a mechanism for restructuring (this consultation process was described in a recent article). This article provides a high level comparison of the current legal and legislative framework for restructuring under the Companies’ Creditors Arrangement Act (the “CCAA”) and the CBCA (collectively, the “Acts”).
The CCAA and the CBCA provide corporations with two unique avenues for pursuing a restructuring. The Bankruptcy and Insolvency Act (the “BIA”) is an alternative insolvency statute that can be used to effect restructurings, but the tendency for larger and more complex restructurings is to use the CCAA.
Each option provides a distinct pool of benefits and involves different procedural considerations. Typically, a corporation’s circumstances and goals will determine which of the Acts is a more appropriate tool for its restructuring.
The CCAA can be used to rearrange a debtor’s affairs and affect a broad range of claims, including inter-company debts, supplier claims and damage claims, by way of a plan of compromise or arrangement (a “CCAA Plan”). Accordingly, the CCAA permits a debtor to undertake both operational and financial restructuring initiatives.
The CCAA can be used by debtor companies where their debts, and the debts of affiliated debtor companies, exceed $5 million. CCAA proceedings typically provide for a broad stay of proceedings and other relief in respect of the debtor. CCAA proceedings will often occur over a period of four to eight months (or longer, depending on the complexity of the circumstances). The length and expense of a CCAA restructuring can be reduced through use of a “pre-pack” approach, where appropriate, which can occur over a period of two to three months (or longer, depending on the complexity of the circumstances).
The CBCA has emerged as a restructuring tool for corporations in financial difficulty. Corporations can use the CBCA to effect certain fundamental changes in the nature of a plan of arrangement. In the financial restructuring context, CBCA plans of arrangement can be used to effect the exchange of securities of a corporation for other securities or the extinguishment of securities. CBCA plans of arrangement can also be used in the financial restructuring context to affect claims of “security holders”, being holders of shares or bond debt obligations of a corporation. It has typically not been used to deal with traditional secured “bank” debt or matters relating to operational restructuring initiatives. Typically, such CBCA plans of arrangement substantially impair the percentage of equity held by existing equity holders prior to the implementation of the plan.
Though applicant corporations must be solvent to effect a CBCA plan of arrangement, insolvent corporations have found multiple ways of satisfying the solvency requirement, including through the creation of a solvent shell company which has served as an applicant. A typical CBCA proceeding will often occur over a period of two to four months (or longer, depending on the complexity of the circumstances).
The viability of restructuring under the CCAA versus the CBCA will depend on a corporation’s circumstances and goals. The following provides an overview of some of the key differences between restructuring under each of these Acts which ought to be considered by corporations deciding between a CCAA process and a CBCA process.
- Approvals: CCAA Plans must receive double-majority creditor approval and Court approval but do not require shareholder approval. Double-majority creditor approval requires that a majority in number of creditors in each class and two-thirds of the majority in value of the proven claims held by such creditors in each class must vote in favour of a resolution to approve a CCAA Plan. CBCA plans of arrangement are not subject to the double-majority creditor approval requirement, and the Courts have the power to determine whether any vote is required for approval. Corporations must also obtain Court approval at a “fairness” hearing in order to implement a CBCA plan of arrangement.
- Monitor: Courts must appoint an officer of the Court, referred to as the “Monitor”, to watch over the business and financial affairs of a company restructuring under the CCAA. There is no mandatory appointment of a Court officer in a CBCA proceeding.
- Court-Ordered Stay of Proceedings:During CCAA proceedings, creditors are generally prevented from taking steps or proceeding against debtors. During CBCA proceedings, Courts have used their inherent jurisdiction under the CBCA to extend a stay of proceedings. However, such a stay of proceedings is typically less broad than those granted under the CCAA.
- Reputational Risk: Restructurings under insolvency statutes such as the CCAA or the BIA are typically associated with a degree of stigma. Debtors that utilize the CCAA must formally admit their insolvency. As such, consideration must be given to the impact of such an admission on a debtor’s other obligations and assets, as well as those of its subsidiaries and affiliates, if any. This stigma may be avoided by restructuring under the CBCA, when appropriate.
- Impact on Financing and DIP Financing:Under the CCAA, debtors are typically prevented from paying pre-filing trade claims. During CCAA proceedings there will likely be a retraction in trade credit and a need for increased liquidity as suppliers move to cash on delivery. In addition, the admission of insolvency that is required when commencing a CCAA proceeding is likely to cross default financial and other contracts, which will be stayed. DIP financing is available through a discretionary order of the Court.Under the CBCA, debtors are not typically prevented from paying pre-filing trade claims. As such, a CBCA proceeding is less likely to cause retraction in trade credit and a need for increased liquidity. In addition, as no admission of insolvency is required in a CBCA proceeding, it is less likely to cross default financial and other contracts. To date, DIP financing has not been made available in CBCA arrangement proceedings.
- Secured Debt: Debtors can compromise traditional secured bank debt within a CCAA Plan. The CBCA allows Courts to consider proposed arrangements that alter debtholder rights. As such, CBCA restructurings have historically been limited to affecting capital structure participant “security holders”, being holders of shares or bond debt obligations of a corporation, but not traditional secured bank debt or claims resulting from operational restructuring initiatives. Currently, it is unclear when other debt may be compromised in a CBCA proceeding, particularly in the absence of stakeholder support.
- Suppliers, Customers and Licensors: Orders that are granted at the commencement of CCAA proceedings (“Initial Orders”) typically contain broad injunctive language that prohibits counterparties from terminating or breaching contracts during the stay period. Stays against these parties may be available in CBCA proceedings but are generally not as broad as those granted in CCAA proceedings.
- Contractual Obligations:An Initial Order typically provides debtors with broad discretion to terminate, breach or assign certain contracts. Courts supervising CBCA arrangement proceedings can and have made orders abrogating certain contractual rights but the provisions have not been typically used to terminate or assign contracts.
- Court-Ordered Charges: The CCAA provides Courts with discretion to order charges that may have priority over pre-existing security interests, whereas the CBCA arrangement provisions do not provide for any such charges and they have not been typically sought in CBCA proceedings.
- Employees: Under both CCAA and CBCA restructuring proceedings, debtors typically continue making employee-related payments in the ordinary course of business. These amounts may be compromised under a CCAA Plan, subject to certain limitations, but are not typically compromised under a CBCA plan.
- Litigation: Proceedings cannot be continued or enforced against a debtor during a stay under the CCAA, subject to certain exceptions, and can be compromised in a CCAA Plan. In contrast, litigation parties are typically not prohibited from pursuing actions against a debtor during a CBCA proceeding and such claims are not typically compromised.
- Director Stays and Liability: Proceedings and claims against directors can be stayed under the CCAA and may be compromised, subject to certain exceptions. The CBCA arrangement provisions do not explicitly provide for a compromise of claims against directors, but may provide for a release of certain of these claims in appropriate circumstances.
In general, a CBCA restructuring is faster and less costly than a CCAA restructuring but typically does not allow for operational restructuring. The lack of stigma and Court officer oversight of a company’s operations may contribute to the increased usage of CBCA arrangements. The complexity of the restructuring required and other contextual considerations will determine which Act parties decide to use.
David Rosenblat and Justine Erickson.