Business Bankruptcy in Canada is primarily governed by the Bankruptcy and Insolvency Act (BIA), a…
The Parliament of Canada allows insolvent companies to restructure their finances through the Companies’ Creditors Arrangement Act (CCAA). The act allows a troubled corporation to potentially avoid the consequences of bankruptcy. Not only is it in the best interest of the company to remain solvent, it is also beneficial to shareholders, employees, creditors and the community.
CCAA provides the best opportunity for creditors to recoup some of the money owed to them by the company. Although there are, in fact, many similarities between CCAA and the Bankruptcy and Insolvency Act (BIA), the CCAA is not as restrictive. The BIA includes strict timelines, rules and guidelines that must be closely followed. CCAA, on the other hand, permits discretion and flexibility, thereby allowing the corporation to rectify the situation and reach a compromise to the extent possible. Under such an arrangement, the corporation may continue its operations.
Another key difference is that the BIA offers a proposal to unsecured creditors. The CCAA, on the other hand, is used to reach a compromise with secured creditors and may leave unsecured claims unaffected.
Who is Covered by the CCAA?
The CCAA is limited to corporations owing in excess of $5 million and is well-suited to deal with the complexities of such a company. The Act, however, excludes:
- Insurance companies
- Trust and loan companies
- Rail and telegraph companies
It also excludes the following:
- Corporations that are already bankrupt or insolvent
- Corporations that have begun the process of bankruptcy or been determined insolvent under the Winding-up and Restructuring Act, whether or not bankruptcy proceedings have been initiated
- Corporations that have committed an act of bankruptcy, including, but not limited to, assigning assets to a trustee for the benefit of the corporation’s creditor
For more information, refer to the complete list of Acts of Bankruptcy.
Companies that do not meet the $5 million debt threshold are governed by the Bankruptcy and Insolvency Act.
The Process of CCAA
To initiate the process, the corporation must apply to the court for CCAA protection. The court then issues an order that provides a 30-day stay. The stay protects the corporation from further creditor action and allows it to prepare its next steps. This stay may be extended beyond the initial 30 days and, in fact, there is no limitation to these extensions.
The company must, however, demonstrate that it is working in good faith toward filing a Plan of Compromise or Arrangement. The Plan of Compromise or Arrangement includes the measures the company will attempt to either pay off or reach a compromise with its creditors.
The Plan of Compromise or Arrangement
There are no real legal restrictions on what the Plan must contain or how it should be structured. For example, the corporation could suggest:
- Downsizing the company
- Creating a new ownership structure
- Creating a new company and transferring the ownership so that the new entity is controlled by the major creditors
- Reducing the amount repaid by a percentage and making payments over time or in a lump sum
- Extending repayment terms
- Selling assets or divisions of the corporation
- Infusing cash from a third party investor
Any solution that treats all of the creditors fairly can be considered as part of the plan.
The Plan Monitor
Upon application for the CCAA, the court appoints an independent third-party monitor. The monitor is a Licensed Insolvency Trustee firm in accordance with the BIA. It is the monitor’s job to help the company prepare the Plan of Arrangement or Compromise. The monitor also attends to the process of filing and gaining approval for the plan. Further, the monitor tracks the corporation’s ongoing business and financial operations and reports to the court any occurrences that may impact its sustained viability.
The monitor may advise the court on actions needed, as well as ensure that the corporation is following court orders. If needed, the monitor executes actions directed by the court. They also notify creditors and shareholders of meetings and it is the monitor’s responsibility to tabulate the votes.
How Debt Gets Paid
The monitor distributes a Proof of Claim to the creditors, who must file with the monitor by the due date. The filing of the claim ensures the creditor’s voting rights and its ability to receive a distribution. It is the creditor’s responsibility to prove the claim and provide supporting documents as needed. If a creditor fails to file by the due date, the voting rights may be forfeited.
However, the creditor may still receive payments according to the distribution provisions of the plan. Although the monitor reviews claims and forms an independent opinion, the monitor is unable to offer creditors assurance that their claims will be paid.
The Proof of Claim indicates the amount owed and is verified by the monitor and a company representative. The company is responsible for investigating any discrepancies and also must deal with disputes according to procedures outlined in the plan.
Voting on the Plan
Once the company files its Plan of Arrangement or Compromise with the court, it is then sent to the creditors and, if they exist, the shareholders. The monitor calls a meeting to vote on the plan. The stakeholders are divided into classes. For example, unsecured creditors and shareholders each comprise a class.
Approval requires a two-thirds majority by number and also a two-thirds majority by dollar value for each class. If the threshold for approval is met, the entire class must accept the plan. If all classes of creditors and the stakeholder approve, the plan goes to the court. When the court approves the plan, the company continues its operation under the provisions of the plan until all of the requirements have been met.
In an instance where a class of creditors does not approve of the plan, or the court does not approve, the stay is lifted. The court can disapprove if they feel that the plan is not a good-faith effort to resolve the situation. Although the company can continue to operate, it is no longer protected by CCAA. Most likely, the company will then go into receivership or bankruptcy.
For More Information
If you have additional questions about CCAA, bankruptcy or receivership, and would like to better understand these options, contact a Licensed Insolvency Trustee at Adamson & Associates for a no-obligation consultation. Call (519) 310-JOHN (5646).