Contributed By Brauti Thorning Zibarras LLP
In Canada in 2017 insolvency markets have followed the cooling trend of 2016, which is reflected by the significant decrease in insolvency. Notwithstanding this, certain industries remain affected by distressed conditions, with construction, the retail trade and real estate markets leading the way in Companies’ Creditors Arrangement Act (“CCAA”) filings (with three filings each). The retail trade insolvency market has been particularly active, with Sears and Toys “R” Us proceedings making headlines this year. The two sectors that registered the biggest decrease in the number of insolvencies were: (i) administrative and support, waste management and remediation services; and (ii) mining and oil extraction.
Large claims which exceed CAD5 million in claims against a corporation proceed under the CCAA, which makes them an apt indicator of the state of the restructuring market. In the one-year period ending on 30 September 2017, there were 21 CCAA filings, compared to 42 in the previous year. Ontario managed to stay reasonably consistent with the previous year's, accounting for 11 of the 21 filings. Alberta on the other hand, saw the biggest decline in filings, recording only three filings as opposed to 14 in the previous year.
The Canadian restructuring and insolvency market has not experienced significant changes in financing, refinancing or restructuring strategies, or changes in distressed debt investing, debt trading and distressed M&A. 2017 was a challenging year for the retail trade market with Sears Canada – an iconic Canadian company – announcing bankruptcy after a failed restructuring attempt. Difficult market conditions in certain sectors have resulted in a higher number of unsuccessful realisation strategies. This development comes as a warning to security holders, sale and bondholders to continually reassess their strategy on commencing insolvency proceedings.
The four key insolvency statutes in Canada are as follows.
Companies’ Creditors Arrangement Act (“CCAA”)
The CCAA is a federal statute with application in every province and territory in Canada. It is the main instrument for the reorganisation of large insolvent corporations that have over CAD5 million of claims against it, or for corporations that are part of an affiliated group of companies that have more than CAD5 million of claims in the aggregate.
Bankruptcy and Insolvency Act (“BIA”)
The BIA is another federal statute with provisions that facilitate liquidation and reorganisation of insolvent debtors. The reorganisation provisions under the BIA (known as the “proposal process”) are frequently used for smaller, less complex reorganisations than those that take place under the CCAA, because the BIA proposal provisions have more stringent timelines and provide less flexibility than the CCAA. BIA’s liquidation provisions provide for the appointment of a trustee-in-bankruptcy over the assets of an insolvent debtor. The BIA also provides for the appointment of an interim receiver to protect and preserve assets where there is evidence that the debtor’s assets are in jeopardy and the appointment is necessary for the protection of the debtor’s estate.
Personal Property Security Act (“PPSA”)
The PPSA is a provincial statute that governs the priorities, rights and obligations of secured creditors in Ontario. Each province and territory in Canada except Quebec (which is governed by the Civil Code) has enacted a version of the PPSA.
Rules of Court
All provinces, except Quebec, allow the sale of an insolvent business through liquidation or going-concern sale, through a court-appointed receiver. Every province, except Quebec, has enacted Rules of Court similar to Ontario’s Court of Justice Act, which enables the court to appoint a receiver when it is “just and convenient” to do so. Through a court order, a receiver can be granted the right to take possession of, and sell, the assets subject to the receivership. Receivership is available in Quebec under the BIA.
There are eight types of formal bankruptcy and insolvency proceedings in Canada:
Typically, restructuring proceedings in Canada are voluntary, although involuntary restructuring is possible. Receiverships, on the other hand, are typically involuntary; however, corporate debtors are often co-operative and do not resist the application. Bankruptcy, liquidation and winding-up may be either voluntary or involuntary.
In Canada, companies are not obligated to voluntarily commence formal insolvency proceedings within a specified time. However, the company’s directors are compelled by their duties of care to the company and the shareholders not to trade while insolvent.
As discussed above in 2.3 Obligation to Commence Formal Insolvency Proceedings, there are no express obligations to commence proceedings. However, where a company elects to proceed with voluntary insolvency, the board of the company is given complete discretion over the type of the proceedings that will best suit the interests of the company and its shareholders.
There are no express provisions in the key Canadian insolvency statutes that address liabilities, penalties or other implications for a company and its officers, directors and owners for failing to commence proceedings. That being said, directors of a company may be found liable for declaring dividends when the corporation is insolvent. Directors of a company in distressed circumstances also face civil liability under corporate statutes for employee wage arrears, worker’s compensation premiums, various tax obligations and severance pay. Finally, both common law and Canadian corporate statutes impose a fiduciary duty of care on directors to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
Foregoing exposure is usually mitigated by contractual indemnities, indemnities in the company’s constating documents, and directors’ and officers’ liability insurance. Since many statutory liabilities are subject to the defence of due diligence, directors may also mitigate their exposure by obtaining advice from financial and legal advisors with expertise in the field.
Both secured and unsecured creditors may commence an involuntary restructuring of a debtor under the BIA by way of receivership or bankruptcy proceedings. A secured creditor may initiate involuntary restructuring where there has been a default or an unpaid obligation by the debtor and the secured creditor has made a demand for payment and provided the debtor a reasonable period of time to respond to the demand. For an unsecured creditor to initiate involuntary restructuring proceedings, it needs to first obtain a judgment through a court process. Where such a judgment is unsatisfied by the debtor, the unsecured creditor may commence insolvency proceedings with a view to satisfy such judgment.
Both the BIA and the CCAA require that insolvency be established in order to commence voluntary proceedings against the debtor.
The BIA defines an “insolvent person” as someone:
The CCAA does not define “insolvency” or an “insolvent person”; however, it is generally accepted that the definition listed in the BIA also applies in CCAA applications.
The Winding Up and Restructuring Act (“WURA”) is a federal statute which covers restructuring and insolvency for a number of specific entities. The WURA is obligatory for certain companies and to that effect contains specific provisions not found in the BIA or the CCAA. Liquidation provisions under the WURA apply to federal and foreign banks, provincial or foreign insurance corporations carrying on operation in Canada, federal or provincial loan and trust companies, building societies, and incorporated trading societies.
It is common in Canada for distressed companies to seek less formal consensual resolutions prior to commencing formal court proceedings. Informal proceedings are not mandatory and, other than trying to minimise costs, there is no apparent preference for non-judicial or other informal restructuring to the statutory process among restructuring market participants and professionals.
Informal options usually include partial sale of the debtor’s property, financing and refinancing option, and a bilateral negotiation between key stakeholders (eg, a forbearance from a key bank lender; lease concessions from a landlord; and concessions from bondholders such as extending maturity or rolling existing debts into a new instrument).
In out-of-court restructurings INSOL Principles are seldom referenced; however, in practice, out-of-court restructurings are often conducted in a manner consistent with such principles. While banks and other lenders are usually supportive of informal initiatives by distressed companies, it should be kept in mind that a lender is unlikely to jeopardise its own position on recovery. To that effect, larger banks are more likely to be supportive in such circumstances in assisting the debtor continuing as a going-concern
For corporate entities, informal work-out proceedings and timelines depend fully on the circumstances of each case.
Generally, newly injected money obtained by a distressed debtor through an informal process is provided by the existing secured lenders or is in the amount to repay the existing lenders in full.
Super-priority for new financing is difficult to obtain in out-of-court proceedings. In rare circumstances, it is done by introducing a provision for priority new financing under the terms of existing inter-creditor agreements.
Various restructuring transactions may be subject to legal requirements.
No response provided.
Secured creditors may take a security interest in real or personal property held by a corporate debtor. As mentioned above in 2.1 Overview of the Laws and Statutory Regimes, every Canadian province (except Quebec, which is governed by its Civil Code) has enacted a statute that governs the priorities, rights and obligations of secured creditors.
Aside from provincial legislation, common law applies in all provinces except Quebec, where civil law applies.
Rights and remedies for secured creditors are predominantly governed by contract.
The timeline for enforcement of a secured claim depends on the circumstances of the loan and security agreements.
Foreign secured creditors in Canada enjoy the same rights as domestic secured creditors.
No response provided.
Claims against the debtor may be ranked as follows:
In CCAA proceedings, BIA proceedings or a receivership, priority claims are claims imposed by the court which include DIP lenders, directors and officers of the debtor, and super-priority charges. There are no priority claims in bankruptcy. The ranking of priority claims is prescribed by court order. Secured claims are created in accordance with federal and provincial law and rank in accordance with their respective priority entitlements. Preferred claims, which include claims for employee wage arrears and landlord claims for accelerated rent are stipulated in the BIA. All other unsecured claims are ranked pari passu.
In a distressed situation, unsecured trade creditors are seldom kept whole and in certain circumstances do not recover at all.
Secured creditors are granted a variety of rights and remedies depending on the context of the insolvency proceedings and its governing statute.
Pre-judgment attachments may be available outside of insolvency; however, they are very rare in circumstances where a formal insolvency proceeding has commenced.
It is difficult to approximate a timeline for enforcing an unsecured claim as unsecured creditors are generally required to obtain a judgment against the debtor. The timeline therefore depends on the level of the opposition by the debtor and could last several months, sometimes even years.
Landlords have available a number of rights and remedies flowing from provincial and laws and federal insolvency legislation. Landlords exercise rights of distraint outside of insolvency proceedings under provincial law. In an insolvency proceeding, landlords may have a preferred unsecured claim or a specific statutory formula for the calculation of claims.
Foreign secured creditors in Canada enjoy the same rights as domestic secured creditors. In some cases, the notice requirements under certain applicable provincial laws may require foreign creditors receive a longer period of notice than their domestic counterparts.
See above, 5.1 Differing Rights and Priorities Among Classes of Secured and Unsecured Creditors.
Priority claims tend to vary based on the insolvency proceeding. Priority claims include:
Priority claims typically have priority over secured creditor claims.
A debtor may restructure its debts through a BIA proposal, a CCAA proceeding or an arrangement transaction under its governing statute. Restructuring proceedings are nearly always voluntary, although there is precedent for involuntary restructuring.
Generally, the proposal procedure under the BIA is less costly and more expeditious than a CCAA proceeding. The rules and deadlines under BIA proposals are more rigid and the courts have less discretion compared to the CCAA which has very few procedural requirements and is guided by common law precedents and court orders.
A restructuring under the BIA requires the insolvent debtor to file a proposal to its creditors, the terms of which are listed in Part III of the BIA. A proposal trustee is appointed to oversee the process and assist the debtor in preparing and overseeing the proposal. A proposal trustee does not take possession or control of the debtor’s assets, and has a statutory duty to report on the debtor’s cash flow and advise the court of any adverse material change.
Due to its flexibility, the CCAA is the preferred statute for large corporate restructurings. Although the duration, costs and the discretionary nature of CCAA proceedings may be disadvantageous to secured creditors, they provide an advantage in situations where an extensive stay of proceedings is needed and creative restructurings are needed to reach a favourable outcome. A court-appointed monitor (who must be a licensed trustee) is appointed to oversee the debtor’s restructuring under the CCAA; the monitor has a duty to report to the court on the debtor’s cash flow and restructuring and to assist the debtor. In addition, a court-appointed monitor is required to advise the court of any material adverse change in the debtor’s financial condition.
In a BIA proposal, an application may be made by: (i) an insolvent person; (ii) a receiver in respect of an insolvent person’s property; and (iii) a bankrupt or a trustee of the estate of the bankrupt. Most frequently, it is the insolvent person who makes the proposal to reach a compromise with the creditors and avoid bankruptcy. A proposal must be made to all unsecured creditors and may also be made to secured creditors. To initiate a BIA proposal, an insolvent person needs to either file a notice of intention (NOI) to make a proposal or file the proposal itself. The filing of the NOI effects a 30-day stay of proceedings against all unsecured creditors without the necessity of a court order, with further stay extensions – not to exceed 45 days at a time – available, to a maximum of six months (at which time, if a proposal has not been filed, bankruptcy of the debtor occurs automatically). The stay of proceedings does not give stay to a secured creditor who has given notice under Section 244 to enforce security more than ten days before the NOI was filed. For the insolvent person to obtain a stay extension, it must satisfy the court that: (i) the insolvent person has acted and is acting in good faith and with due diligence; (ii) the insolvent person would likely be able to make a viable proposal if the extension being applied for were granted; and (iii) no creditor would be materially prejudiced if the extension being applied for were granted.
To commence a CCAA proceeding, the first step in invoking the CCAA is for the debtor company to make a court application and meet the minimal statutory requirement discussed in 2.1 Overview of the Laws and Statutory Regimes, above. The initial stay of proceedings is 30 days, with extensions available at the court’s discretion (typically 60 to 90 days), with no limit on the total duration of the proceedings. For the debtor company to obtain a stay extension, it must satisfy the court that circumstances exist that make the order appropriate, and that the applicant has acted, and is acting, in good faith and with due diligence.
Restructuring proceedings are heavily court-supervised/driven, and typically consist of distressed asset sales and/or restructuring plans/proposals. In limited cases, a liquidation may be effected under restructuring statutes, typically the CCAA but not the BIA. There are statutory limitations on the scope of restructuring actions that may be undertaken – eg, protections for eligible financial contracts (EFCs); restrictions on disclaiming or rejecting certain contracts, such as collective agreements; compromising limited Crown, pension and employee claims, etc.
In the case of a company (typically solvent, but also possible where insolvent) that desires to restructure its debt (ie, a debt-to-equity conversion), a corporate plan of arrangement under the arrangement provisions of the applicable provincial or federal corporations law statute can be used to restructure its balance sheet. Such a plan requires that, in addition to receiving court approval, the security holders whose rights are being affected hold a meeting, vote on and approve the corporate plan of arrangement.
Proceedings under both the BIA and the CCAA trigger a stay of proceedings. Under the BIA, the stay is automatic upon the commencement of the proceedings; under the CCAA the court-ordered stay comes into effect upon the granting of the application by the court. Once the stay of proceedings is in effect, the company continues to operate as a going-concern, with the existing board and management retaining full control over the company and its business. Court officers are appointed under both the BIA and the CCAA; their duties consist of mainly monitoring activities.
Before voting, information is publicly disclosed, including a copy of the proposal (in complex cases there is often a full information circular mailed or publicly available). Under both the BIA and the CCAA proceedings, voting by creditors takes place on a class basis. For a plan to be binding on a given class, it must be approved by a two-thirds majority of the creditors in dollar value in that class. Where such majority is obtained, the vote binds all creditors in the class. The creditors are classified by the debtor at first instance, but may be challenged and determined by the courts. The classes must possess commonality of interests to avoid fragmentation. Creditors related to the debtor are allowed to vote against a plan, but not in favour of one. Court approval of a plan or proposal is required after each class of creditors has voted in favour of the plan; the court must be satisfied that the plan is fair regardless of the fact that it was voted in by the requisite majority. Neither the CCAA nor the BIA contain cram-down provisions for dissenting creditors.
In proposals under the BIA and plan of arrangement or compromise under the CCAA, voting by creditors takes place on a class basis. Creditors receive information regarding the status of the restructuring as part of the debtor and interested parties bringing motions before the court and through the reports provided by the appointed court officers (proposal trustee or monitor).
Creditors with significant interests are often represented by legal counsel. In some rare instances, ad hoc orformal committees are formed and are usually paid by the debtor. All of the relevant public information and court documents are available online.
See 6.3 The Roles of Creditors During Procedures, above.
Trading of claims typically occurs through contractual arrangements between creditors and purchasers. Persons with insider information who are trading their claims are subject to stringent legal requirements and in some cases are precluded from participating in the process.
Procedural consolidation where a single filing includes a number of affiliated entities is common. It is also common to file a proposal of a plan that includes elements of substantive consolidation; however, substantive consolidation is rare, especially in the context of liquidations.
An insolvent company is generally not permitted to dispose of its assets without court approval. Statutorily, assets may be transferred subject to contractual consent requirements without the need to obtain court consent.
The sale of assets by debtors is common in Canadian restructuring proceedings. Under both the BIA and the CCAA, the court is presented with a list of factors that it considers before approving a sale. The focus is generally on the procedural elements of the sale as opposed to substantial considerations. Additional requirements are imposed where the proposed sale is to a party not at arm’s-length to the insolvent seller.
Credit bids by secured creditors to purchase assets using the release of debt as consideration are permitted, provided the claims being bid are first-ranking or that any prior-ranking bids are assumed and paid, or that there is also cash purchase price sufficient to pay prior-ranking claims.
Stalking horse transactions are permitted where the rules and procedures are proposed by the debtor company and subsequently approved by the court. Such rules may expressly permit credit bidding.
Where sales are completed, it is customary for the transaction to have minimal representations and warranties and for the purchaser to obtain a sale approval and a vesting order pursuant to which the purchaser will obtain the title “free and clear” of any encumbrances, liens, claims, and charges.
See 6.8Asset Disposition and Related Procedures, above.
See 6.8Asset Disposition and Related Procedures,above.
Any restructuring process that has a vote of creditors and a distribution customarily includes a court-approved process for the determination of claims. However, disputed claims are most commonly resolved through litigation.
See 6.11 Statutory Process for Determining the Value of Claims, above.
The debtor must give notice, the length of which is prescribed statutorily. Counterparties may object to the proposed disclaimer at which point the matter will be referred to the court to determine whether to permit the rejection. Limited protections are available in some cases, including protection for licensees of intellectual property upon the disclaimer of a licence by a licensor.
It is permissible to grant broad third-party releases to non-insolvent persons as part of a restructuring plan or a proposal. In some cases, such releases are incorporated into corporate plans of arrangement. Generally, a third party obtaining such a release has facilitated or contributed in some material way to the restructuring. In Canada, however, the court has recently restricted third-party release contribution to the proceeding in a material way.
Both the BIA and the CCAA contain clauses allowing creditors to exercise their rights of set-off. There are also further protections for set-off/netting involving Eligible Financial Contracts (EFCs).
Under the BIA, a failure to observe the terms of a proposal results in a notice of default and the annulment of the proposal by the court. Where a proposal is annulled for failure to observe the terms of an agreed restructuring plan, there is an automatic bankruptcy of the insolvent debtor. The CCAA, on the other hand, is silent on this topic. In practice, a return to the court for advice and directions is likely.
It is possible in a restructuring for the existing shareholders to retain the debtor’s equity. It is also possible that the assets will be sold to a new owner, or that the existing shareholders would be diluted or their shares cancelled. In a liquidation conducted under a restructuring process, existing equity owners would recover any remaining value in the unlikely event that proceeds were sufficient to repay all debts in full.
The two common ways to liquidate an insolvent company in Canada are either in bankruptcy under the BIA, or by way of an appointment of a receiver. A less common option exists under the CCAA which is led by the debtor in possession under the watch of a court-appointed monitor, in most cases, without the support and co-operation of the debtor’s main secured creditors.
The legal process of bankruptcy may be voluntary or involuntary and is commenced in one of three ways:
Firstly: voluntarily, the process is commenced by the debtor making an assignment in bankruptcy for the general benefit of its creditors. The assignment is filed with the Official Receiver at which point the debtor is considered bankrupt. A debtor who has made a voluntary assignment is in the same position as a debtor who has been adjudged bankrupt pursuant to a bankruptcy order.
Secondly: involuntarily, the process is commenced by filing an application by one or more of the debtor’s creditors seeking a bankruptcy order against the debtor company. The creditor must be owed at least CAD1,000 by the debtor and must allege in the application that the debtor has committed an act of bankruptcy within the six months preceding the application.
Thirdly: on the failure of a BIA proposal by the debtor to its creditors for either defaulting under the proposal or as a result of the rejection of the proposal by the creditors or the court.
Liquidation proceedings trigger a stay of proceedings. In bankruptcy, the stay of proceedings is statutory. In receivership and CCAA proceedings, the stay of proceedings is engaged pursuant to a court order.
The general rule is that liquidation proceedings result in the removal of the board which is replaced by a trustee in bankruptcy who takes control of the company’s business and assets. The sole exception to the rule exists in CCAA liquidations where the board and management of the debtor remain in place, under the supervision of the court-appointed monitor.
The rejection of contracts is guided by common law in bankruptcy and receivership. A trustee and receiver are given a period of time in which to determine whether to accept or reject contracts, and there is no obligation to accept or perform a contract. Some contracts are terminated automatically upon bankruptcy. Where contracts are rejected, the counterparty would have a claim for damages that would be permitted to be proven in the proceedings.
There are no time limits on the duration of a bankruptcy or receivership proceedings. Claims trading is permitted and is contractual and subject to “record dates” established ahead of voting or distribution.
Rights of set-off are available to creditors under the CCAA and the BIA.
The information available to creditors as part of statutory proceedings include reports of court officers, public information available on the website and regular court materials.
Liquidation proceedings typically conclude with an application for the discharge of the court officer, which includes approval of activities and the passing of accounts, and an order of discharge.
Sale transactions proceed much as set out above with respect to distressed sales in restructuring proceedings. In simpler instances, a trustee in bankruptcy has statutory authority to convey assets with the approval of inspectors, and a court order may not be necessary. However, any sale to a related party by a trustee in bankruptcy requires court approval. Pre-negotiated sale transactions may be approved, and are most common in receivership proceedings. However, such transactions are subject to heightened judicial scrutiny to ensure that they maximise recoveries and are in the best interests of creditors generally.
Typically, there are no liquidation plans in bankruptcy or receivership proceedings; however, if such plan is in place, see above for consequences of breaching a plan.
A trustee or receiver may borrow funds, but such borrowing is typically less formal and less significant than in restructuring cases. Where such borrowings occur, they may be given a priority status; however, in bankruptcy a trustee is subject to prior ranking secured claims, and any borrowings would typically be lower in priority than existing secured claims. As a result, borrowings are rare or are done only with the secured lender’s consent.
Insolvency proceedings to liquidate a corporate group are common in Canada. There is often procedural consolidation but rarely substantive consolidation.
Creditors with significant interest in the proceedings are usually represented by legal counsel, with groups of creditors often being represented by a single counsel. The sharing of legal costs are governed by contract. In rare instances, ad hoc or formal committee of creditors may be established, with such legal fees often paid by the debtor company.
A trustee in bankruptcy is statutorily authorised to sell assets with inspector approval. Where the sale is to a party related to the bankrupt, a court approval is required.
A receiver draws its authority to sell assets from common law and the order pursuant to which the receiver was appointed. For more significant sale transactions, subsequent court approval is customary.
Recognition of foreign restructuring and insolvency proceedings requires that there be a “foreign proceeding” and a “foreign representative”, as well as a unified determination of the COMI, in order to categorise the foreign proceedings as “main” or “non-main”. Both the BIA and the CCAA allow for recognition of foreign insolvency proceedings in Canada under this structure. The structure itself is predicated on the UNCITRAL cross-border insolvency model law.
Courts often enter into cross-border protocols that seek to co-ordinate foreign and domestic proceedings. Cross-border co-operation is particularly strong between Canada and the USA, where courts conduct joint hearings and adopt shared protocols and guidelines to streamline the large number of shared cases (see Guidelines Applicable to Court-to-Court Communications in Cross-Border Cases, published by the American Law Institute).
There are rules, standards, and practices which guide the determination of which jurisdiction’s laws are paramount in a conflict situation. These rules are governed predominantly by common law rules of private international law, accompanied by legislation based on the UNCITRAL model law on cross-border insolvency.
As a general rule, procedural matters are administered according to the laws of the local jurisdiction, and substantive matters are administered by the court with plenary jurisdiction. However, this general rule is not absolute. It may be contracted out of by parties ex ante, or the parties may attorn to the jurisdiction of another court ex post. Where courts have adopted cross-border protocols they can help define rules and procedures with respect to such conflicts of law.
There are only minor differences in how the courts treat foreign versus domestic creditors. Notably, in many cases, a foreign creditor may be entitled to longer notice periods, and they may be subject to the added requirement that they provide security for costs.
There are a number of roles and court officers who may be appointed to assist in corporate insolvency proceedings, namely:
The roles of trustees are largely statutory, and are governed by the BIA and the common law. However, receivers and monitors are court-appointed, and the breadth and scope of their roles are defined by orders of the court. Information officers are a creation of common law.
Court officers are independent parties with fiduciary duties. These officers report directly to the court, and are expected to make regular reports. Such reports, when they are not deemed to be confidential, will be relayed to the stakeholders in the proceedings.
The applicant in the insolvency proceeding has the initial responsibility of selecting the court officers. Typically, the court officers chosen will have experience as financial advisers to the applicant. The officers may be removed by the court, although it is a rare occurrence unless real or perceived misconduct or a conflict of interest have occurred.
In voluntary proceedings, it is usually the insolvent debtor that selects the court officer. By contrast, in involuntary proceedings, it is usually the secured creditor that makes the selection.
The interactions between court officers and company management varies widely, and depends on the type of proceedings. In restructurings, for example, the court officers will work closely with the insolvent companies on their strategies, budgeting, legal plans, etc. Often this will include the court officer lending their experience and assistance in dealing with stakeholder management and communication.
However, in bankruptcy and receivership proceedings, there is less interaction between the parties because the court officers take on much of the responsibility formerly held by the company’s directors and officers.
In Canada, only insolvency practitioners, duly licensed through the Office of the Superintendent of Bankruptcy, may be appointed as court officers. Candidates must satisfy the requirements of insolvency regulations with respect to education, practical training, and experience in the insolvency field. These roles are typically filled by accounting and professional advisory firms.
The BIA and the CCAA require the court officer be independent of the creditors and the debtor. The Acts also restrict a company from acting as a court officer if it also acts as the insolvent company’s auditor.
Commercial insolvency proceedings often feature accountants and professional advisory firms as court officers. Investment bankers and financial advisers are also routinely involved, often to take a lead on conducting distressed sale processes. A Chief Restructuring Officer (CRO) is appointed in circumstances where the directors and management are unable to perform the duties of restructuring. On occasions of heavily contested litigation, experts may be brought on to assist in the insolvency proceedings.
Legal representation is also critically important in the corporate insolvency field. The proceedings are often complex and technical, and the court-driven structure requires an understanding of the judicial system.
An insolvent debtor seeking to hire professional advisors (other than legal counsel), will conventionally be required to obtain court approval. However, a formal retention application is not required, and fee approvals are only loosely regulated. The court will often secure the fees and disbursements of professional advisors by way of an administrative charge on the assets of the insolvent debtor. Court officers will also typically pass their accounts with the court, although this is not required of a debtor-in-possession.
Lawyers will assist, advise, and represent a company in out-of-court restructurings and in in-court bankruptcy cases. In both circumstances, the company’s attorneys provide advice and represent the company through the negotiation and restructuring process.
Restructuring professionals will give advice and assist in negotiation and litigation concerns. This includes accountants, investment bankers, and other financial and business professionals.
An investment banker typically assists in evaluating the company’s structure and how it might be impacted by the intended strategy. They may help facilitate the sale of assets or the company as a whole. They also provide valuations where needed, and help to adjust credit agreements and obtain financing for the company.
Accountants and other financial advisors typically help to prepare reports, schedules, and to determine whether the company’s financial statements require auditing. They may also advise on business plans, liquidity, and financial matters.
Although they are not mandatory, arbitration and mediation proceedings are often used to help resolve particularly complex disputes and claims. When they are utilised, courts may compel participation by stakeholders.
Mediation and arbitration are not frequently employed in the course of restructuring. However, it is fairly common for parties to mediate their disputes in insolvency proceedings. Arbitration is rarer in both contexts.
Mediation and arbitration are not mandatory in insolvency proceedings. However, the court does have powers to compel the parties to participate in such procedures.
Pre-insolvency agreements to submit to mediation or arbitration may not be enforceable once insolvency proceedings have begun. Particularly where the insolvency process is overseen by the courts, a contractual provision that differs from the court’s chosen approach will not be upheld.
Mediation and arbitration in insolvency proceedings is governed by a number of statutes, including the federal Commercial Arbitration Actand the provincial Arbitration Act.
Parties may either obtain court approval of a mediation or arbitration plan or stick to a pre-existing contractual arrangement governing the mediation or arbitration procedure.
The actions of officers and directors are regulated by federal and provincial legislation, as well as common law decisions. The duties imposed by these authorities are generally applicable, regardless of whether or not the company is financially troubled.
Pursuant to corporate governance law, directors and officers owe a fiduciary duty to the company to which they are appointed. That duty includes a duty of loyalty and a duty of care. The commencement of insolvency proceedings does not alter that duty. The recipient of the duty remains the company itself, not the creditors. While there is an element of duty to the stakeholders included in the fiduciary duty, it does not arise as a function of the insolvency.
There is no liability in Canada for “deepening” the insolvency of the company. However, corporate governance legislation does impose liability on individual directors and officers for, among other things, breach of obligations under securities, environmental, tax, and employment law. Directors and officers are typically not charged with a criminal offence unless there is evidence of fraud or criminal conduct.
Generally, creditors do not have standing to bring direct claims for a director or officer’s breach of fiduciary duty. However, creditors may still have standing to bring a derivative action against the directors on behalf of the company. Derivative claims are not exclusive to creditors, but rather are proceedings to enforce the fiduciary duty owed to the company itself.
A CRO may be appointed in notably complex insolvency cases, particularly where the management have either resigned or lack the experience to perform the restructuring. A CRO may also be appointed where the stakeholders do not have confidence in management to act in the company’s best interests.
The appointment of a CRO will typically be subject to court approval. Once appointed, the reporting requirements are case-specific, but typically the CRO reports directly to the board of directors.
A shadow director is a person whose instructions and wishes the directors of the company are accustomed to act on. The concept of shadow directorship is not recognised in Canadian law.
Liability for shareholders in Canada is restricted to the value of the interest in their shares. Generally, shareholders cannot be held liable for the liabilities of a company. However, there are statutory exceptions to this rule; for example, where a shareholder is found to have been in control of a company’s business that is found to have violated environmental obligations. There are also exceptions when the corporate veil may be pierced, including for shareholder wrongdoing such as fraud.
Historical transactions that precede the insolvency process may be set aside according to the provisions in the BIA and the WURA. Such transactions may include preferences, undervalued transfers, share redemptions, and the payment of dividends. Transactions may also be challenged by way of oppression remedy and tort law claims.
A look-back period is the length of time that a claimant can look back in time to challenge a transaction. Depending on how the transaction is being challenged, there are several potential look-back and limitations periods. Look-back periods are defined under the BIA. Preferences have a three-month look-back period, or 12 months if the parties to the transaction were not at arm’s-length. Undervalued transfers have a look-back period of 12 months, or five years if the parties were not at arm’s-length. Share redemptions and dividend payments have a one-year look-back period.
The limitation period for civil actions in Ontario is two years from the date of discoverability.
As a general rule, any creditor may have standing to challenge transactions. Depending on the avenue of the challenge, the creditor’s standing as a complainant may be challenged by the company. Court officers may also have standing to challenge a transaction, particularly in bankruptcy and receivership proceedings.
The law of set-off is applicable to intercompany claims under the BIA and CCAA, and these claims may be netted together. However, where intercompany claims are valid, they may be asserted without reduction.
Where valid, unsecured intercompany claims will be prioritised side-by-side with other unsecured claims. On the other hand, secured intercompany claims are given relative priority, as are all secured claims.
As a general rule, there is no subordination in intercompany claims. Where subordination does occur, it is usually because the claims are determined to not be debt claims, but are properly “equity claims”.
There are numerous circumstances in which a parent may be accountable for the liabilities of the parents:
Creditors are not typically permitted to ignore legal decisions and to assert their claims against affiliates of an insolvent company. However, there are cases where exceptions may be made. For example, in an environmental claim, a parent may be held responsible for the actions of the subsidiary where there is a requisite level of control. In employment law, a parent may be held liable where they are alleged to be a joint or common employer.
The status of a subsidiary as insolvent does not impose any direct obligations on the parent, beyond what is already required by statute or contract.
It is common for a parent company to retain control of the subsidiary through the insolvency process.
Despite the fact that financial markets are heavily regulated, there are largely no relevant limitations on non-banks or foreign institutions holding loans or bonds for Canadian borrowers. Financial institutions such as insurance companies, banks, and credit unions operating in Canada are subject to substantial legal requirements.
The practice of debt trading has been subject to very little formal regulation in Canada; in some cases, however, securities laws may be applicable. It is usually carried out in an impromptu manner and documentation is tailored towards the involved parties. Traditional forms of assignment documentation are generally employed for trading of bond and bank debt. Where unsecured claims are traded in Canada, the buyer of claims is frequently a US-based entity. This is due to the fact that the market for the trading of unsecured claims is not very well established in Canada.
The loan trading market in Canada has not been adequately established enough for appropriate loan market guidelines to have developed.
No response provided.
Conventional credit documentation allows for lenders to transfer their debt and security interests without first receiving the consent of borrowers and guarantors.
Due to the lack of transfer restrictions, trusts and other synthetic structures or transactional strategies such as total-return-swaps are seldom used.
Typically, value is determined by market forces, making formal valuations uncommon in the restructuring and insolvency market. Valuations are offered in some circumstances, including when a fairness opinion is required to help facilitate the arrangement process. They may also be required under securities law or where a sale is proposed to a non-arm’s-length party. Partial valuations are also seen in sale processes that feature earn-outs, working capital adjustments, or similar features.
When valuation does occur, the onus is almost always on the debtor to commence the process. From a practical standpoint, it would be difficult for a non-debtor to gain access to the necessary records and assets of the company to have a proper valuation conducted.
Legal issues concerning valuations are most likely to arise in the context of corporate plans of arrangement and in certain sale transactions, particularly where they involve non-arm’s-length parties. However, such issues relating to valuation have not been substantially litigated in Canada.