Most of us at sometime in our life have experienced setbacks that put us in…
When a large company finds itself in the red, it can consider applying for the Companies’ Creditors Arrangement Act (CCAA) as an alternative to Bankruptcy. This article will outline what the CCAA is, who can apply, how it works, and what happens if a CCAA application is denied.
What Is the Companies’ Creditors Arrangement Act (CCAA)?
The Companies’ Creditors Arrangement Act (CCAA) is a federal law that allows insolvent companies that owe their creditors more than $5 million to restructure their business and financial affairs. CCAA proceedings are carried out under the supervision of the Court and allow more flexibility than is permitted in the more rule-based Bankruptcy and Insolvency Act (BIA).
What is the purpose of the CCAA?
The purpose of the CCAA is to help the company avoid Bankruptcy, where possible, and continue operating. The CCAA permits the company to keep functioning while trying to work out an arrangement with its creditors. The overall goal is to come out of CCAA protection as a viable business.
Who can apply for CCAA?
The CCAA is for larger corporations that owe more than $5 million to their creditors. However, banks, railways or telegraph companies, insurance companies, and trust and loan companies are not eligible to apply. Corporations that don’t meet the $5 million thresholds can use the Division I Proposal under the Bankruptcy and Insolvency Act.
How Does the CCAA Filing Work?
There are several steps in the CCAA filing process.
Initial application. The CCAA process begins when a company makes an “initial application” to the Court looking for protection under the CCAA. At this time, the debtor company is required to file a projected cash-flow statement as well as companies of its financial statements for the year before the application.
Initial order. If the application is accepted, the Court issues what is called an “initial order.” The initial order provides the company with protection from its creditors – this is referred to as the “Stay of Proceedings”.
Stay of Proceedings. During the stay, the company is typically protected from collection proceedings and it gives the company some time to prepare a Plan of Compromise or Arrangement.
Plan of Compromise. The Plan of Compromise or Arrangement is a negotiation that occurs between the company and its creditors and stakeholders. It is basically a proposal that the company presents to its creditors outlining how it intends to deal with the financial issues it is facing.
In the Plan of Compromise or Arrangement, the company may take a variety of actions including:
- Terminate or assign unwanted contracts
- Lay off employees
- Sell assets
- Negotiate new credit terms
- Change its corporate structure
It is up to the Court to approve any major action that is taken.
Claims process. In order to be able to vote on the Plan of Compromise, a creditor must file a Proof of Claim with the plan monitor. The Proof of Claim outlines what is claimed to be owing to the creditor and must be accompanied by supporting documents.
The Plan monitor. The CCAA process involves a court-appointed Plan Monitor. The monitor is a Licensed Insolvency Trustee (LIT) who is appointed by the Court during the initial order. It is the job of the monitor to oversee and monitor the companies business and financial affairs to ensure compliance with the law. The monitor may also help with the following:
- Assist debtor company in preparing the Plan
- Prepare written reports to the Court
- Provide information to creditors regarding the claims process
- Oversees voting at meetings
Plan approval. If negotiations of the Plan are successful, the debtor company or credit can reach out to the Court to request a formal vote. Creditors are divided into different classes. For instance, secured creditors, unsecured creditors, and shareholders make up different classes. For the Plan to be accepted, it must receive a majority vote by the creditors in each of the different classes. Creditors voting to accept the Plan must make up at least two-thirds of the total vote of the creditors’ claims.
Court approval. Finally, it is up to the Court to determine if the Plan is reasonable and if it complies with all statutory requirements. If the Court deems the Plan reasonable, it will be accepted. If the Court determines it is not feasible, it can refuse to approve the plan even if the majority of creditors have accepted it.
How Long Does the CCAA Process Take?
The length of a CCAA process will vary. The maximum amount of time that can be granted for a Stay of Proceedings is 30 days. However, the stay can be extended to provide more time to complete the restructuring plan. There is no limit to how many extensions can be requested. Each extension must be approved by the Court.
Which Creditors Get Paid First in CCAA?
There is a priority order in terms of which creditors get paid first in a CCAA. Secured creditors will come before unsecured creditors and shareholders. In CCAA proceedings, administrative expenses which include the cost of the insolvency proceedings are usually paid first. Secured creditors will then be paid from the proceeds of any sales from the insolvency proceeding. If there is any surplus, this will then go to unsecured creditors.
What if a CCAA Application Is Denied?
If a CCAA application is denied or the company and its creditors fail to negotiate a Plan, then the company will lose the protection of the CCAA. At this point, it is likely the company will enter into receivership or business Bankruptcy.
What Is the Difference Between CCAA and Bankruptcy?
When a large company becomes insolvent there are two main options available. First, it can file for Bankruptcy and liquidate all of the company’s assets to pay off its creditors. The second option is to file for CCAA and attempt to restructure the company in an effort to continue operation and avoid Bankruptcy. The CAA tends to offer more flexibility when it comes to dealing with the complexity of restructuring a large company than is available under the Bankruptcy and Insolvency Act.
Reach Out to a Licensed Insolvency Trustee (LIT)
If you have questions about the Companies’ Creditors Arrangement Act, reach out to a LIT today. LITs are intimately familiar with the CCAA and can help you to understand the entire process. At Adamson and Associates, you can schedule a free consultation with a LIT to discuss the various financial supports that are available. Contact a LIT today at 519-310-JOHN (5646), or contact us online.