There are three main insolvency statutes in Canada:

• the Bankruptcy and Insolvency Act (BIA);
• the Companies’ Creditors Arrangement Act (CCAA); and
• the Winding-up and Restructuring Act (WURA).

The BIA governs proposals (a restructuring regime for individuals and companies (typically smaller to mid-sized companies)), receiverships and bankruptcies (both personal and corporate).

The CCAA provides a restructuring regime for larger corporations.

The WURA is a liquidation statute designed to deal with, among other things, the formal liquidation of certain regulated entities, including financial institutions and insurance companies.

Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receiverships

There are five main insolvency processes in Canada:

• bankruptcy proceedings under the BIA;
• proposal proceedings under the BIA;
• proceedings under the CCAA;
• receiverships; and
• winding-up proceedings under the WURA.

Voluntary Proceedings

A debtor may initiate voluntary bankruptcy proceedings by filing an assignment in bankruptcy for the general benefit of its creditors. To make an assignment in bankruptcy, the debtor must be an “insolvent person” within the meaning of the BIA and file certain prescribed forms with the Office of the Superintendent of Bankruptcy (OSB).

Debtors may also initiate proposal proceedings under the BIA or reorganisation proceedings under the CCAA.

Involuntary Proceedings

Involuntary proceedings may be commenced by creditors under four of the five insolvency and restructuring regimes summarised above.

Creditors can apply for:

• the appointment of receivers under the BIA or provincial statutes;
• bankruptcy orders under the BIA when debtors have committed acts of bankruptcy within the preceding six months, and provided the applicant creditor has an unsecured liquidated claim in excess of CAD1,000; and
• initial orders under the CCAA.

Involuntary proceedings can be commenced in respect of entities to which WURA applies by:

• creditors in respect of certain types of companies;
• shareholders; and
• the Attorney General of Canada (AG) in respect of financial institutions over which the Office of the Superintendent of Financial Institutions (OSFI) has taken control.

Specific Statutory Restructuring and Insolvency Regimes

The restructuring and insolvency regime applicable to banks regulated under Canadian law is governed by both the Bank Act and the WURA. Generally, following the exercise of control over a bank by OSFI under the Bank Act, the AG, at the request of OSFI, will seek the appointment of a liquidator and the making of a winding-up order under the WURA.

Other financial institutions such as credit unions, insurance companies, loan and trust companies and related businesses are subject to the WURA and their home statutes (eg, the Insurance Companies Act, the Trust and Loan Companies Act, and the Cooperative Credit Associations Act) with respect to substantive or regulatory matters relevant to winding up under the WURA.

Part XII of the BIA applies to the insolvency of “securities firms”.

Historically, railway companies have been subject to specific restructuring and insolvency regimes prescribed under their statutes of incorporation; however, in limited circumstances, they can apply under the CCAA.

One of the hallmarks of Canadian bankruptcy and insolvency proceedings is the requirement that a licensed insolvency trustee (LIT) be involved in a supervisory or advisory role, depending on the proceedings.

LITs are insolvency specialists licensed by the OSB.

Types of Officers

Trustees in bankruptcy

In a bankruptcy proceeding, the debtor’s property vests in a trustee in bankruptcy, subject to the rights of secured creditors, and the debtor ceases to have control over its affairs. The trustee replaces the management of the corporation and assumes control over the debtor’s assets.

Trustees are licensed by the OSB to carry out the administration of all aspects of a bankruptcy proceeding. The trustee administers the estate for the benefit of the bankrupt’s unsecured creditors. Secured creditors retain their right to enforce on their security.

As a court officer, the trustee must act fairly, equitably and impartially. Trustees are court officers and act as fiduciaries for the benefit of the bankrupt’s creditors. The BIA imposes numerous statutory duties on trustees, many of which are administrative in nature. The BIA also confers broad powers that a trustee can exercise with the permission of the inspectors appointed in the bankruptcy.

Monitors

A monitor oversees CCAA proceedings, reports to the court on the debtor’s business and financial affairs, and assists the debtor with the formulation of its plan, if any. The monitor does not displace the debtor, which continues to be in control of its property.

The monitor also has many duties that are administrative in nature, such as publishing orders and reports and filing prescribed documents with the OSB. In addition, the monitor has duties that are substantive in nature such as reviewing the debtor’s cash-flow statements filed with the court and commenting on them, advising on the reasonableness and fairness of a proposed plan, if any, and reporting to the court on developments or changes in the proceedings.

The CCAA imposes an obligation on the monitor to act honestly and in good faith.

In addition to statutory obligations, the CCAA initial order and ensuing orders may require the monitor to perform additional obligations. For example, they may empower the monitor to monitor the debtor’s receipts and disbursements and assist the debtor in dealings with its creditors and in preparing the required cash-flow statements.

No LIT may be appointed as monitor if, within the two years preceding the commencement of the proceedings, the LIT was a director, officer or employee of the debtor, or the auditor, accountant or legal counsel of the debtor, or if the LIT is related to the debtor, or any director or officer of the debtor.

Court-appointed receivers

The BIA provides for the enforcement of security by a secured creditor and the appointment of a receiver on a national basis over all or part of a debtor’s property that is subject to the security. A receiver has broad power to market and sell a debtor’s assets with the oversight of the court. The receiver’s duties include:

• giving notice of its appointment to all creditors;
• issuing reports on a regular basis outlining the status of the receivership; and
• preparing a final report and statement of receipts and disbursements when the appointment is completed or terminated.

A court-appointed receiver is an officer of the court, subject to the court’s authority and direction and accountable to the court. A court-appointed receiver has a fiduciary duty to act in the best interest of all interested parties, including the debtor. A court-appointed receiver takes instruction from neither security holder nor debtor, and generally retains independent counsel.

A receiver must exercise prudence and reasonable care in the conduct of the receivership and in dealings with the receivership property.

The BIA imposes the following statutory duties on receivers:

• to disclose and account for their conduct of the receivership;
• to act honestly and in good faith; and
• to deal with the property of the debtor in a commercially reasonable manner.

Proposal trustees

The role of a proposal trustee is like that of a monitor. A proposal trustee is an independent third party appointed by the OSB to assist the debtor with the filing of its proposal and to monitor the debtor’s ongoing operations during the proceedings. A proposal trustee must be an LIT. During proposal proceedings, the debtor continues to be in possession of its assets; the assets do not vest in the proposal trustee.

The duties of a proposal trustee include monitoring the business’s ongoing financial activities, reporting to the court on events that might affect the viability of the debtor, assisting the debtor in the preparation of its proposal, notifying the creditors of meetings of creditors and tabulating the votes at these meetings. The proposal trustee will also prepare a report on the proposal that is included in the mailing of the proposal to creditors.

Proposal trustees must report on the reasonability of the cash flows filed by the debtor, on material adverse changes in the debtor’s affairs and on any proposal presented by the debtor.

The proposal trustee must advise the court on the terms of the proposal and the conduct of the debtor. The proposal trustee’s recommendation on the proposal will typically include a statement advising that the proposal offers more to a debtor’s creditors than they would receive in a bankruptcy. If the proposal trustee cannot make this statement, it is likely that a court will refuse to approve the proposal.

Inspectors

In bankruptcy proceedings, unsecured creditors appoint inspectors whose role is to oversee the bankruptcy proceedings and approve certain actions of the trustee in bankruptcy, including the sale of most assets. Inspectors supervise the trustee in bankruptcy on behalf of creditors and instruct the trustee in bankruptcy to act in a manner that is appropriate in order to protect the interests of creditors and the bankrupt estate.

Appointing an inspector is mandatory in corporate bankruptcy proceedings. Inspectors represent the interests of the creditors; they do not need to be LITs.

Inspectors may also be appointed in proposal proceedings; however, this is optional and infrequent.

Selection of Officers

In voluntary proceedings, the debtor will usually select the LIT firm that it recommends be appointed as court officer. If a creditor initiates the proceeding, that creditor will usually put forward its choice of LIT firm. The appointment of a monitor or court-appointed receiver is not official until the court issues an order confirming the appointment.

With the exception of inspectors in bankruptcy proceedings, statutory officers are restructuring professionals with business and accounting qualifications who assist the debtor’s employees in managing operations during an insolvency proceeding, as well as evaluating and making recommendations to the court (and in proposal and CCAA proceedings, the debtor’s board of directors) on restructuring alternatives available to the debtor. Trustees in bankruptcy and receivers displace the directors of the debtor. They may decide to continue to work with existing management. The debtor’s employees are not employees of the court-appointed officers, although they work under their supervision and many of the decisions to be taken in a proceeding will require the court-appointed officer’s consent.

Only an LIT may act as a trustee in bankruptcy, proposal trustee, monitor or court-appointed receiver.

Organisation of Creditors’ Committees

Although permitted, there is no requirement under the CCAA or the BIA for the formation of creditors’ committees. Creditors’ committees have been recognised by courts in limited circumstances and granted court-approved funding.

In an insolvency proceeding, creditors’ claims generally rank as follows:

• super-priority claims, including:
1. valid trust claims;
2. realty property taxes;
3. certain deemed trusts;
4. claims for specified amounts and periods for wages and pension contributions;
5. qualified unpaid supplier or “30-day good” claims;
6. unremitted payroll deductions; and
7. court-ordered charges in CCAA, proposal and receivership proceedings;
• secured claims;
• preferred unsecured claims, including:
1. limited landlords’ claims;
2. amounts that would have been paid to a secured creditor but for the payment of wage and pension claims; and
3. certain workers’ compensation claims; and
• general unsecured claims.

Super-priority and secured claims are paid out of the proceeds from sales during the insolvency proceedings in accordance with their respective priority. Where there is a surplus following satisfaction of super-priority and secured claims, the surplus is distributed to preferred unsecured claims and then rateably among general unsecured creditors.

Claims of creditors have priority over equity claims.

The BIA and CCAA provide the court overseeing the CCAA, proposal and receivership proceedings jurisdiction to make orders granting super-priority charges that will rank ahead of existing secured creditors, to the extent that such creditors have received notice of the proposed charges. The charges may include the following:

• an administration charge securing the fees and disbursements of the debtor’s and court officer’s legal and financial advisers;
• an interim financing charge securing debtor-in-possession financing;
• a directors’ and officers’ charge securing the indemnity provided by the debtor to its directors and officers for liabilities that they might incur in their capacity as directors and officers during the course of the proceedings. This applies in CCAA and proposal proceedings only; and
• a critical supplier charge – in both CCAA and proposal proceedings, the court has the authority to order a critical supplier to continue to supply following the commencement of the proceedings, provided that the court also issues an order securing the post-filing payment obligations to that supplier.

The BIA also contains statutory provisions granting priority charges against current assets protecting employees’ claims for unpaid wages and vacation pay for the six-month period preceding the commencement of the proceedings, up to CAD2,000 per employee. A priority charge against all assets of the debtor protects certain prescribed unremitted pension contributions. The CCAA contains analogous protections for these claims and provides that a court may not approve a CCAA plan unless it is satisfied that an employer’s unremitted source deductions that were outstanding at the commencement of the proceedings will be paid during the six-month period following implementation of the CCAA plan.

Liens/Security

In the common law provinces of Canada, security over personal property (both tangible and intangible) is usually taken under a general security agreement granting a security interest in all property, undertakings and assets of a debtor. To be enforceable against third parties, a security interest in the debtor’s personal property must be both attached and perfected. Perfection of a security interest can be achieved in several different ways. Most commonly, perfection of a security interest is achieved by registration under the personal property security act of the relevant jurisdiction in the applicable electronic registration system. Alternatively, perfection can be achieved by possession of the secured asset by the secured party, or control over the secured asset by the secured party.

Real property can be charged by way of a mortgage registered on title.

In addition, a lender may wish to take specific types of security against specialised personal property such as shares pursuant to a supplementary share pledge. Debenture security may also be taken over real and personal property. Banks licensed in Canada can take specialised types of security under the Bank Act.

In Quebec, the only civil law jurisdiction in Canada, security is obtained by way of hypothecs that can charge both movable and immovable property.

Rights and Remedies

Outside of an insolvency process, secured creditors may exercise their contractual rights and avail themselves of the sale and foreclosure regimes prescribed by real and personal property legislation of the Civil Code of Quebec.

These regimes prescribe statutory notice periods. Where a creditor is seeking to enforce on all or substantially all a debtor’s property, it is also required under Section 244 of the BIA to provide ten days’ notice of its intention to enforce its security (a “244 Notice”).

Unsecured creditors have the right to commence an action to recover their debt and apply to the court for an order adjudging the debtor bankrupt. These remedies are stayed when insolvency proceedings begin. Unsecured creditors can prove their claim in a proceeding and receive a dividend based on the pro rata value of their claims relative to the claims of all other unsecured creditors.

Pre-judgment attachment is available to creditors in appropriate circumstances under laws of general application and those specific to restructuring and insolvency.

Remedies under laws of general application include court orders providing for injunctive relief, prohibiting certain acts by debtors or prescribed dealings with assets. In addition, Mareva injunctions can prohibit debtors from dissipating or concealing assets or transferring assets out of the jurisdiction.

In certain situations, required regulatory approvals and critical contractual relationships mitigate in favour of out-of-court workouts, to avoid triggers or terminating events affecting these relationships. Where possible, consensual workouts can save transaction costs and preserve stakeholder value.

There are no formal or mandatory requirements for debtors and creditors to pursue consensual, out-of-court contractual arrangements to restructure before commencing court-supervised proceedings. However, significant out-of-court work may be done before invoking the authority of the courts to complete this work.

Forbearance arrangements allowing financing parties to develop a highly informed picture of their borrower’s situation are preferable, although not suitable in every case. These agreements provide borrowers with contractual breathing space subject to enhanced credit agreement protections and milestones specific to the financial circumstances of the borrower. The terms of these arrangements vary widely and are context-specific; however, informational requirements in relation to consensual restructurings are common, and often additional to those provided for in existing credit documentation.

There is no “cram-down” in an out-of-court restructuring or workout. Where the landscape of stakeholders is complex and a compromise is required from each, an out-of-court agreement may be elusive. Accordingly, out-of-court solutions are normally achieved where a small number of stakeholders are in a position to negotiate a compromise that does not require agreement from a wider group.

Large syndicated credits may include provisions permitting a majority (or supermajority) of lenders to bind dissenting lenders. The presence or absence of such provisions and the threshold for the contractual cram-down are a matter of negotiation. Syndicate co-operation in the face of debtor restructurings is the norm, and conflict is less common because the syndicate members value stable relations across many credits over winning a single syndicate battle.

Creditors’ committees may play a role in consensual restructurings, depending on how widely the debt obligations of a business are held. First lien financings (controlled by syndicates governed by their own internal rules) and bilateral financings (between one financing party and a borrower) are common in Canada, making creditors’ committees less important.

A distressed investor may decide to acquire the secured debt as part of an acquisition transaction arising from an informal restructuring to retain that secured creditor’s leverage in negotiations with remaining stakeholders after an acquisition is consummated. The implied threat of a formal restructuring, with its declining returns to stakeholders and associated costs of recovery, often facilitates a post-acquisition negotiated solution among rational economic actors.

Priorities tend to be preserved in relative terms during informal restructurings.

Distressed Disposals

Distressed sales of assets or businesses can occur outside of insolvency court proceedings. However, such “self-help” or “consensual” sales processes:

• must be transactions requiring consensual arrangements between the debtor and its secured creditors where the creditors are not recovering all their secured debt from the proceeds of such sale transactions; or
• require notice of sale or notice of foreclosure to be issued by a secured creditor under applicable provincial personal property security legislation and mortgage legislation.

The statutory distribution schemes for proceeds of sale flowing from any such notices of sale are prescribed by legislation and cannot be altered except by consensual arrangements made with secured creditors that otherwise have the protection of the priority scheme thereunder.

If the sale transaction is consensual, the purchaser contractually confirms the release of security with the secured creditors. If the transaction is under provincial enforcement regimes, to obtain clear title free of secured claims, the enforcing creditor must be a first-ranking creditor thereunder. Otherwise, prior-ranking security is not impacted by the notice of a subordinate-ranking secured creditor. Court approval and vesting orders provide the highest degree of certainty where priority in the debtor’s collateral is in dispute.

Credit bids generally occur in the context of a court-supervised proceeding. However, it is possible to structure debt-to-equity conversions or debt forgiveness transactions where a secured creditor acquires equity in the debtor by private agreement and generally as part of a recapitalisation of the debtor outside of formal proceedings.

Out-of-court restructurings are structured as contractual arrangements between parties.

The effectiveness of consensual out-of-court workouts and restructuring in Canada varies depending on the specific circumstances and business context of the debtor. Financing parties in Canada often use professional financial advisers to obtain detailed assessments of their borrower’s position and, in appropriate circumstances, will enter into out-of-court restructuring or support arrangements.

Statutory Process for a Financial Restructuring/Reorganisation

CCAA and proposal proceedings are the main Canadian restructuring proceedings. An alternative to these proceedings, in certain circumstances, are the arrangement provisions contained in the Canada Business Corporations Act and equivalent provincial corporate statutes.

CCAA proceedings

The principal objective of the CCAA is to enable a debtor to formulate a plan of compromise or arrangement (“CCAA Plan”) in respect of the obligations it owes its creditors, to be voted on by the creditors and, if approved by the requisite majorities in each class of creditors, sanctioned by the court.

In many CCAA proceedings, the debtor will not file a CCAA Plan but will rather use the proceedings as a mechanism to effect a sale of all or part of its business, property or assets, through either the implementation of a sale process, or a pre-packaged sale transaction that was formulated prior to, but is consummated as part of, the CCAA proceedings.

Either a creditor or the debtor can initiate CCAA proceedings by application to the court.

The CCAA applies to a debtor “Company” including corporations incorporated within Canada, corporations incorporated outside of Canada that have assets or do business in Canada, and income trusts.

To proceed under the CCAA, the debtor must:

• be insolvent, meaning that the debtor is unable to meet its liabilities as they fall due (“cash flow test”), or the debtor’s assets are less than its liabilities (“balance sheet test”). Courts have also expanded the definition of “insolvent” to include a debtor facing a “looming liquidity crisis”; and
• have debts exceeding CAD5 million (including any affiliate companies’ debts). The court will exercise its discretion to grant protection if:
1. a reorganisation, or orderly sale or liquidation, of the debtor’s business would be beneficial to the debtor’s stakeholders;
2. the debtor does not have an improper motive for making the application; and
3. the relief being sought pursuant to the initial order under the CCAA is limited to that which is reasonably necessary for the continued operation of the debtor in the ordinary course of business during an initial ten-day stay period.

Provided the applicant establishes that the debtor meets the CCAA requirements, the burden will be on any opposing creditors to show why the court should not grant the relief requested.

BIA proposal

The objective of proposal proceedings is to enable a debtor to reach a compromise with its creditors through a restructuring of its obligations pursuant to a proposal. The debtor may also use proposal proceedings to effect a sale of all or part of its business or assets.

An insolvent person, a receiver, a liquidator, a bankrupt or a trustee in bankruptcy may make a proposal in respect of an insolvent person. A proposal is initiated by filing a proposal or a notice of intention (NOI) to make a proposal.

To proceed with proposal proceedings, the debtor must:

• be insolvent on a cash flow or balance sheet basis; and
• have at least CAD1,000 in unsecured indebtedness.

Use of a Restructuring Procedure to Reorganise a Corporate Group

Multiple debtors within a corporate group can commence insolvency proceedings. Procedural (or administrative) consolidation can avoid unnecessary multiplicity of proceedings. Under procedural consolidation, estates of related debtors are jointly administered but each debtor’s assets and liabilities are kept separate.

It is rare for a court to allow “substantive consolidation”, that is, a consolidation of the assets and liabilities of multiple debtors. The situations where such relief is granted are limited given the prejudice it may have on creditors. When faced with substantive consolidation requests, courts will consider whether (i) the elements of consolidation are present, (ii) the benefits of granting consolidation outweigh the prejudice caused to creditors by such an order, and (iii) consolidation would be fair and reasonable.

Claims that can be Restructured

Under a CCAA Plan or BIA proposal, and subject to court approval, the claims of secured creditors, unsecured creditors and certain pre-filing claims against the directors of the applicant debtor may be compromised.

The CCAA and BIA each enumerate certain payments that must be included in a plan or proposal for it to be sanctioned by the court:

• the payment of all deemed trust claims in favour of the Crown for employee source deductions with respect to income tax, employment insurance or Canada Pension Plan contributions (unless otherwise agreed to by the Crown);
• the payment to employees and former employees of (i) amounts at least equal to the compensation they would have been entitled to as a secured creditor in bankruptcy; and (ii) all compensation for services rendered by employees post-filing;

• payment of all pension contributions that were deducted from employees’ pay and placed into a prescribed pension plan; and
• the payment of all claims of creditors in full prior to any payment of an equity claim.

Preventive Restructuring Measures and Timelines

CCAA proceedings

As noted, the court will appoint a monitor that is an LIT to oversee the CCAA proceedings, report on the debtor’s business and financial affairs, and assist the debtor in formulating its plan.

The debtor remains in control of its business and property; however, it remains subject to the monitor’s scrutiny. For example, if a transaction is outside the ordinary course of business or does not comply with any court order, the monitor will report such activities to the court.

At the commencement of the proceedings, the court will issue an initial order prohibiting all persons from commencing or continuing any claims against the debtor and its directors and officers, without the prior consent of the debtor and monitor, or leave of the court.

The initial order grants the debtor up to ten days’ protection from its creditors. Before the expiry of that period, the debtor must return to court to request an extension. There is no limit on the length or number of extensions that a debtor may seek from the court, provided the debtor shows that circumstances exist that make the order appropriate and that it has acted and is acting in good faith and with due diligence.

BIA proposals

The OSB will appoint a proposal trustee to supervise the proposal. Its role is to monitor the debtor’s actions, assist it in developing the proposal, and advise the court if any material adverse changes occur.

The debtor remains in control of its property; the proposal trustee does not control the debtor’s affairs.

Once a proposal or NOI has been filed, no creditors can bring or continue any proceedings against the debtor. The stay of proceedings prohibits creditors from exercising any remedy against the debtor or its property, or commencing or continuing any action, execution or other proceeding for the recovery of a claim provable in bankruptcy without leave of the court granted on motion on notice to the debtor and the proposal trustee.

Secured creditors may enforce their security only if they have delivered a 244 Notice and the statutory ten-day notice period has lapsed or been waived by the debtor. All other creditors are stayed for an initial period of 30 days. The time for filing a proposal (and the stay period) can be extended by the court for a maximum period of six months (including the initial 30-day stay), in 45-day intervals.

Classification of Claims

In both CCAA and BIA proposal proceedings, creditors are classified based on their commonality of interest.

Creditors are divided into classes of claims based on:

• the nature of the debts giving rise to the claims;
• the nature and rank of any security in connection with the claims;
• the remedies that would be available to creditors in the absence of a plan of arrangement or proposal and the extent that those creditors would be able to recover on those claims; and
• the treatment of the claims (under a BIA proposal), and the extent the claims would be paid under a proposal.

Determining the Value of Claims and Creditors

The BIA provides prescribed forms and procedures for creditors to formally prove their claim against the insolvent debtor in order to vote on and participate in proposals. Claims are adjudicated in the first instance by the proposal trustee, subject to rights of appeal to the court. A vote cannot be taken on claims not proven in advance of a creditors’ meeting. Claims not proven prior to the implementation of a proposal cannot be included.

Under the CCAA, the court commonly makes orders prescribing the procedure for proving and determining claims and establishing dates after which they will be barred as against the insolvent debtor if not proven. Generally, monitors appointed in CCAA proceedings administer these claims processes.

New Money

A debtor subject to CCAA or BIA proposal proceedings may obtain interim financing, referred to as debtor-in-possession (DIP) financing.

DIP financing must be approved by the court. The court will consider the following factors, among others, in determining whether to grant an order approving DIP financing:

• the period during which the debtor is expected to be subject to the proceedings;
• how the debtor’s business and financial affairs are being managed during the proceedings;

• whether the debtor’s management has the confidence of its major creditors;
• whether the loan would enhance the prospects of a viable compromise or arrangement being made in respect of the debtor (or preserve the value of the debtor’s enterprise for the benefit of stakeholders);
• the nature and value of the debtor’s property;
• whether any creditor would be materially prejudiced as a result of the security or charge; and
• the monitor’s or trustee’s report, if any.

Where an order is granted approving DIP financing, a DIP lender may be granted a corresponding priority charge over the debtor’s property and assets, and in priority over existing secured creditor claims.

Where a debtor’s application for interim financing is made at the same time as the initial application for protection under the CCAA, the court must be satisfied that the terms of the loan are limited to what is reasonably necessary for the continued operation of the debtor in the ordinary course of business during the ten-day “come-back” period after the granting of the initial order.

Note on Asset Dispositions and Related Procedures

As noted, a debtor can also use CCAA or BIA proposal proceedings as a mechanism to effect a sale of all or part of its business, property or assets through either the implementation of a sales process, or a pre-packaged sale transaction that was formulated prior to, but is consummated as part of, the proceedings.

The CCAA

With limited exceptions, the debtor runs the process for assets and going-concern sales. Following negotiations with its primary creditors, the debtor will often seek court approval for an order that prescribes a sales and investment solicitation process (SISP) that involves varying degrees of involvement of, and supervision by, the monitor. A court may order the monitor to have a much higher degree of control over a SISP where the debtor’s directors/management are unwilling to be involved, lack sufficient resources to run the process, or are in a conflict of interest. DIP lenders and secured creditors may also be granted rights to information and input into a SISP. The court may permit or even mandate the hiring of a “sales agent” to run the SISP.

Recently, share acquisition transactions through the use of a “reverse vesting” structure have been employed in situations such as where a debtor entity holds valuable assets such as licences, or favourable tax attributes that a purchaser entity wishes to preserve, that cannot be transferred out of a debtor company’s existing corporate structure. In a reverse vesting transaction, a debtor will seek the court’s approval of a reverse vesting order, whereby the unwanted assets and liabilities of a debtor entity are transferred out of the debtor company and into a related “residual co”, expunging the corporate structure of the debtor entity from assets and liabilities the purchaser does not want to acquire. As a result, the debtor entity successfully emerges from its CCAA proceedings (albeit under new ownership) and the residual co, holding the unwanted liabilities and assets of the CCAA debtor, will be liquidated and placed into bankruptcy.

BIA proposal

The board of directors and management of the debtor generally run any sale process. As in the CCAA context, there may be a SISP. The proposal trustee appointed under the BIA to help the debtor will generally be involved in any sale process and will help the board of directors and management of the debtor consummate a sale. If that sale process does not result in a transaction, it is likely that the court will be asked by creditors to convert the BIA proposal process into a receivership or a bankruptcy.

Credit bids

Secured creditors can, and frequently do, credit-bid in CCAA, BIA proposal and receivership proceedings. These can be structured as stalking horse bids. Sales under these regimes are all court-supervised, and as such there are no special rules for them beyond the test of the prudency of the sale used by court in that context.

Unsecured credit bids are uncommon given the propensity of Canadian secured creditors to take “blanket security” and given the significant shortfalls suffered by unsecured creditors.

Pre-packs

Pre-negotiated or pre-packaged sale processes are not uncommon. Most often, a pre-packaged sale process follows an informal SISP run prior to the proceeding which lends credibility to an abbreviated process post-filing. The debtor enters the proceeding with either a stalking horse bid (requiring an abbreviated post-filing SISP process) or a sale to be approved immediately following filing with compelling evidence to support the abridgement or complete avoidance of a post-filing sale process. Pre-packaged sales require either a significant pre-filing SISP process or some existential threat to the value of the business necessitating an expedited sale approval.

Creditor Approval of a Plan or Proposal

CCAA proceedings – plan of compromise or arrangement

As noted, the principal objective of the CCAA is to enable a debtor to formulate a plan of compromise or arrangement in respect of the obligations it owes its creditors.

For a plan to be accepted by creditors, a meeting must be held for voting on the plan, and a majority in number of each class of creditors holding two-thirds in value of the total debt represented by that class must vote in favour of the plan.

Once the requisite majorities of creditors in each class approve the plan, the court must sanction it before it becomes binding on all creditors.

After the implementation of the plan and the conclusion of the CCAA proceedings, the debtor can resume its normal business operations.

BIA proposal proceedings – proposal

Both the debtor’s creditors and the court must approve a BIA proposal pursuant to the BIA. At least two-thirds in value and a majority in number of the creditors, including secured creditors to which the proposal was made, must approve the proposal. If a debtor’s proposal is rejected by the requisite majority of creditors, the debtor will be deemed to be bankrupt.

Following the creditors’ approval, the court will approve the proposal if it is for the general benefit of the creditors. To this end, evidence must be adduced to show that the debtor’s creditors will be better off under the terms of the proposal than they would be if the debtor were liquidated pursuant to bankruptcy proceedings.

When the debtor has fulfilled all of its obligations as set out in a BIA proposal, the trustee will issue a certificate confirming the debtor’s full compliance. Once this is issued, the debtor is considered to have completed its restructuring and may resume its normal business operations.

Court Approval of a Plan or Proposal

Proposals under the BIA and plans of compromise or arrangement under the CCAA are not binding unless approved by the court, even if approved by the requisite creditor double majorities. Before approving a proposal or plan, the court must be satisfied that the proposal or plan is fair and reasonable and that the provisions of the applicable insolvency statute and any prior court orders have been strictly complied with. In determining the fairness and reasonability of a proposal or plan, the courts will compare the treatment of creditors under the proposal or plan with the treatment that they would receive in bankruptcy or liquidation.

Failure to Observe the Terms of Agreements

Proposals under the BIA

Where there is default in the performance of a proposal, the proposal trustee must give notice of default to the creditors and the government insolvency regulator. Following default, or where it is determined that the proposal cannot continue without injustice or undue delay, the court is empowered to order that the proposal be annulled. The court may also annul proposals obtained by fraud. If a proposal is annulled, the debtor will be deemed to have made an assignment in bankruptcy and a trustee will be appointed.

Plans under the CCAA

Where there is default in the performance of a plan, upon application by a creditor or the monitor, the court is empowered to make whatever order is just in the circumstances, including an order adjudging the debtor to be bankrupt.

Sale of all or part of the debtor’s business through CCAA proceedings or BIA proposal proceedings

Sales of all or substantially all of a debtor’s assets require court approval. For standard asset transactions, the debtor will apply to the court for an approval and vesting order, approving the sale transaction and vesting out of all pre-existing secured and unsecured claims against the purchased assets, such that the buyer acquires the debtor’s title free and clear of claims and liabilities asserted against those assets.

Reverse vesting transactions must also be approved by the court pursuant to the terms of an approval and reverse vesting order. When considering whether to grant an approval and reverse vesting order, courts will consider, among other things: (i) whether the reverse vesting order is necessary in the circumstances; (ii) whether the reverse vesting structure would produce an economic result at least as favourable as any other viable alternative; (iii) whether any stakeholder would be worse off under the reserve vesting structure than they would be under any other viable alternative; and (iv) whether the consideration to be paid for the debtor’s business reflects the importance and value of the non-transferrable assets (ex. the licence, permit or other intangible asset) being preserved under the reverse vesting structure. Overall, courts have stressed the importance of fairness and a strong evidentiary record demonstrating why a reverse vesting order is superior to other options.

Position of the Company

As noted, in debtor-initiated CCAA and BIA proposal proceedings, the debtor company remains in possession of its property and the debtor company’s management is entitled to continue to conduct its business, subject to oversight by the CCAA monitor or proposal trustee.

In certain circumstances, or in creditor-initiated restructuring proceedings, the applicant creditor may and often will appoint a chief restructuring officer to replace management of the debtor and operate the debtor corporation throughout the restructuring proceedings.

Restrictions on a Company’s Use of Its Assets

As a general principle, a debtor will seek court approval prior to the sale of assets that are non de minimis in value.

In CCAA and receivership proceedings, the initial order and appointment order set out a dollar threshold at which court approval must be obtained prior to consummating a sale transaction.

In determining whether a transaction should be approved, a court will consider, among other things:

• whether sufficient effort has been made to maximise the purchase price;
• the interest of all stakeholders in the transaction;
• the efficacy and integrity of the process by which the assets were marketed; and
• whether there has been unfairness in the marketing process.

New Money

A debtor subject to CCAA or BIA proposal proceedings may obtain interim financing, referred to as debtor-in-possession (DIP) financing. For a discussion on DIP financing, see 4.2 Statutory Restructuring, Rehabilitation and Reorganisation Procedure.

See 1.3 Statutory Officers.

Stay of Proceedings

In CCAA and BIA proposal proceedings, creditors are subject to the stay of proceedings, subject to limited exceptions. For instance, if the ten-day notice period indicated in a pre-filing 244 Notice has elapsed, a secured creditor will not be subject to the stay of proceedings in a proposal proceeding.

The stay of proceedings restricts counterparties from terminating or amending any agreement, including a security agreement, with the debtor, or claiming accelerated payment or forfeiture of the terms of the agreement by reason only that the debtor is insolvent or has initiated restructuring proceedings.

Certain exceptions apply to the operation of the stay of proceedings under statute or by the terms of the court order effecting the stay. For example, counterparties in respect of an eligible financial contract may deal with or otherwise realise on financial collateral held under the terms of the eligible financial contract notwithstanding the stay of proceedings. In addition, counterparties may terminate agreements for other valid reasons or breaches (ie, apart from the debtor being insolvent or commencing restructuring proceedings) that may arise, subject to obtaining a lift of the stay of proceedings to proceed.

Roles of Creditors

For the purposes of voting on proposals or plans under the CCAA, creditors are placed in classes. The voting requirements in proposals and plans (a majority in number and two-thirds by value of the creditors present and voting at a properly constituted meeting) apply on a class-by-class basis.

Proposals must be made to all unsecured creditors, classed as is appropriate, and may be made to secured creditors. As noted, creditors are organised into classes based on their commonality of interest (see 4.2 Statutory Restructuring, Rehabilitation and Reorganisation Procedure).

There is no statutory basis for creditors’ committees in Canada and they are not common. However, creditors do form ad hoc committees in some cases.

Claims of Dissenting Creditors

There is no provision permitting an inter-class “cram-down”. BIA proposals and CCAA Plans will be binding on dissenting creditor minorities within a class if approved at a properly constituted meeting by the requisite majorities and subsequently sanctioned by the court. If court approval is not granted for a proposal or plan, it will not be binding on an affected class.

Existing Equity Owners

Equity claimants may not vote at a meeting of creditors unless the court orders otherwise. Proposals and plans cannot provide for the payment of equity claims unless all other claims are paid in full.

Disclaimer of Contracts by the Debtor

Insolvent debtors restructuring under the BIA or the CCAA are specifically empowered to disclaim executory contracts, with certain exceptions. To disclaim a contract, debtors must obtain the approval of the applicable court officer and provide notice in the prescribed form to the contract counterparty.

Contract counterparties may object to the disclaimer of their contracts within 15 days of the giving of notice, and apply to the court for an order giving effect to their objection. A court will consider whether the proposed disclaimer is approved by the court officer, whether it will enhance the prospect of a viable proposal or plan being made, and whether it is likely to cause significant hardship to the contract counterparty.

The following contracts are not subject to disclaimer:

• eligible financial contracts;
• collective agreements;
• financing agreements if the debtor is the borrower; and
• leases of real property if the debtor is the lessor.

Rights of Set-Off

Claims for set-off can be asserted in both CCAA and BIA proposal proceedings where the legal requirements of set-off have been met. During insolvency, a right of set-off can arise by law, in equity or by contract.

Legal set-off: There are two requirements that must be met for the claim of legal set-off to be made:

• the cross-claims must be liquidated, enforceable and mature; and
• the claims must have arisen between the same parties acting in the same capacity (the claims must be mutual).

Equitable set-off: Equitable set-off is available where it would be manifestly unjust to allow one claim to be enforced without taking the other claim into account. Courts will inquire into the connection between the claims and examine the general equities between the parties.

Contractual set-off: Contractual set-off is the recognition of the entitlement of parties to explicitly contract to allow for setting-off obligations owing between them.

Set-off is only applicable to enforce debts or claims so long as the claim is not triggered by an insolvency event.

Bankruptcy

The formal liquidation of an insolvent debtor is most commonly carried out through bankruptcy proceedings pursuant to the BIA. In the context of liquidation, bankruptcy is intended to provide for the fair distribution of the debtor’s unencumbered assets among its unsecured creditors.

The pre-bankruptcy remedies of a debtor’s unsecured creditors are replaced with the right to file a claim and receive a dividend in the distribution of proceeds resulting from the liquidation of the bankrupt debtor’s unencumbered assets. However, secured creditors of a bankrupt debtor can also enforce their security outside of the administration of bankruptcy.

Under the BIA, a debtor is considered bankrupt when it:

• has debts of at least CAD1,000 owing to its creditors; and
• has committed an act of bankruptcy within the six months before the application for a bankruptcy order (which may include having become insolvent and unable to meet its financial obligations generally as they become due).

A bankruptcy can be initiated in three ways where the debtor is insolvent:

• voluntary assignment into bankruptcy where proceedings are commenced by the trustee selected by the debtor filing certain prescribed forms (including an assignment for the general benefit of creditors) by the debtor with the OSB;
• involuntary bankruptcy by order of the court on application by one or more creditors; or
• bankruptcy as a result of the failure of proposal proceedings under the BIA.

For a corporate debtor, voluntary initiation also requires the company’s board of directors to pass a resolution before the company can assign itself into bankruptcy.

Receivership

The BIA provides for the enforcement of security and the appointment of a receiver on a national basis. A 244 Notice must be delivered prior to a secured creditor enforcing its security on all, or substantially all, of the property and assets of an insolvent debtor. Once the 244 Notice period has lapsed (or if the debtor has consented to an earlier enforcement at the time of the delivery of the 244 Notice), a secured creditor may apply for the appointment of a receiver.

The jurisdiction for the court appointment of a receiver is found in the applicable provincial judicature acts, the rules for court proceedings, under Section 243 of the BIA, and under certain specific statutes (eg, securities legislation).

The court appointment of a receiver typically commences by a secured creditor bringing an action or application against the debtor. The receiver is then appointed in a summary proceeding within that action or application.

Restructuring Proceedings

Both CCAA and proposal proceedings under the BIA can be used to effect a sale of all or part of a debtor’s business. For a discussion of sales through these restructuring proceedings see 4.2 Statutory Restructuring, Rehabilitation and Reorganisation Procedure and 4.3 The End of the Restructuring, Rehabilitation and Reorganisation Procedure.

Bankruptcy

Once the bankruptcy is effective, all the debtor’s property and assets vest in the trustee (subject to the rights of secured creditors) and the debtor ceases to have any control over its affairs. In a corporate bankruptcy, the trustee replaces the management of the corporation and assumes full control over all the debtor’s assets and property. On bankruptcy, the trustee proceeds to administer the estate for the benefit of the bankrupt’s unsecured creditors. Secured creditors retain their right to enforce on their security, provided they do so in a commercially reasonable manner.

If a debtor is adjudged a bankrupt or assigns itself into bankruptcy, the sale of assets will be run by the bankruptcy trustee for the benefit of the unsecured creditors. A bankruptcy trustee can only sell the assets of the debtor not encumbered by security unless the secured creditor consents to the trustee’s sale or the secured creditor seeks the appointment of the trustee also as a court-appointed receiver of the bankrupt debtor.

Receivership

A court order appointing a receiver typically:

• stays proceedings against the receiver and debtor;
• provides the receiver with control over the property and assets of the debtor;
• authorises the receiver to carry on the debtor’s business and to borrow money on the security of the assets;
• ultimately authorises the receiver to sell the debtor’s property and assets with court approval; and
• authorises the receiver to commence and defend litigation in the debtor’s name.

The appointment of a receiver does not operate to remove or terminate the debtor’s directors or management. However, the terms of the appointment order provide that the receiver’s powers granted under the terms of the appointment order are exclusive to the receiver, and accordingly supplant the powers of the debtor and its management.

Unlike privately appointed receivers, whose duty is primarily to the appointing secured creditor (subject to a general duty to act in a commercially reasonable manner), a court-appointed receiver is an officer of the court and has a duty to protect the interests of all the debtor’s creditors.

Once the receiver is appointed, the receiver’s duties include:

• giving notice of its appointment to all creditors;
• issuing reports on a regular basis outlining the status of the receivership; and
• preparing a final report and statement of receipts and disbursements when the appointment is completed or terminated.

Bankruptcy

In order to participate in any distribution of the bankrupt’s estate, a creditor must file a proof of claim with the trustee in the manner and form prescribed under the BIA. Where such a claim is allowed, said creditor will, in accordance with the priority regime set out under the BIA, be eligible to potentially share in the recovery from any realisation on the property of the bankrupt debtor. Creditors whose claims are disallowed by the trustee may appeal the trustee’s decision to the court.

The debtor’s assets are distributed to unsecured creditors on a pro rata basis in accordance with the creditors’ proven claims. Such distributions are made only after secured creditors have realised their security and after super-priority and preferred creditors have been paid.

A bankrupt corporation is not eligible to obtain a discharge from bankruptcy unless it has satisfied the claims of creditors in full. There is no specified timeline for corporate bankruptcy proceedings.

Once the trustee has administered the estate for the benefit of the bankrupt’s unsecured creditors, the trustee applies to the court for a discharge from its duties.

Receivership

In a court-appointed receivership, the receiver will either sell the assets of the business in bulk or in lots. Where the receiver is operating the business as a going concern, it may attempt to sell the business as a going concern. Sales in receivership proceedings may also be structured as “reverse vesting” share acquisition transactions.

The receiver is an officer of the court who must act in the interest of all creditors; however, in conducting a sale process, the receiver will usually consult creditors that are likely to be impacted by the transaction, typically secured creditors, since few receiverships result in payments to unsecured creditors.

In receivership proceedings, the appointment order sets out a dollar threshold at which court approval must be obtained prior to consummating a sale transaction.

In determining whether a transaction should be approved, a court will consider, among other things:

• whether sufficient effort has been made to maximise the purchase price;
• the interest of all stakeholders in the transaction;
• the efficacy and integrity of the process by which the assets were marketed; and
• whether there has been unfairness in the marketing process.

Acquirers in a court-appointed receivership proceeding will have the benefit of an approval and vesting order (or reverse vesting order).

With respect to the distribution of assets, receivership proceedings do not generally include a claims process, and such process will typically only be established where funds are available for distribution after payment to all secured creditors in accordance with their relative priorities.

Following the administration of a receivership process and distribution of all assets of the estate, the receiver will apply to the court for its discharge. This often takes place through a multi-step process whereby the receiver first obtains a discharge order from the court, setting out any remaining duties of the receiver and proving that the receiver will be discharged on the filing of a certificate confirming completion of all remaining duties. Once these remaining duties have been completed, the receiver will file the certificate with the court and serve the certificate on all interested parties, making the receiver’s discharge effective.

In connection with its motion for a discharge order, the receiver will file a final report to the court, describing the actions and activities taken by the receiver throughout the proceedings. The receiver will also seek approval of its own and its counsel’s fees and disbursements.

Bankruptcy

Once bankruptcy has commenced, the BIA provides for an automatic stay of proceedings, preventing the debtor’s unsecured creditors from exercising any remedy against the debtor or its property, or commencing or continuing any action, execution or other proceeding for the recovery of a claim provable in bankruptcy.

The bankruptcy stay of proceedings does not, however, affect secured creditors, which retain their right to enforce on their security, provided they do so in a commercially reasonable manner. Trustees in bankruptcy retain the right to require that a secured creditor prove its claim before releasing or redeeming any collateral pledged in favour of such secured party.

As noted, creditors of the bankrupt may nominate and appoint inspectors to represent their various interests. Inspectors may instruct the bankruptcy trustee to act in a manner that protects the interests of creditors.

Unsecured creditors receive a distribution at the end of a bankruptcy proceeding on a pro rata basis in accordance with their proven claims. Such distributions are only made after all secured creditors have realised on their security, and all priority and preferred creditors have been paid. To the extent secured creditors suffer a shortfall after realising on their security, such secured creditors may submit a proof of claim for the difference as an ordinary unsecured creditor.

Receivership

A critical feature of court-appointed receivership proceedings is the stay of proceedings arising from the terms of the receiver appointment order. The stay of proceedings restricts all creditors from exercising any rights or remedies against the debtor without prior leave of the court. The stay of proceedings accordingly operates to bring all creditors under a single proceeding.

Like in CCAA proceedings and BIA proposal proceedings, the terms of a receiver appointment order typically contain exceptions as to the application of the stay of proceedings. In this regard, the stay of proceedings typically does not apply to eligible financial contracts, the filing of registrations to perfect or preserve a security interest, the registration of a claim for a lien, or certain enumerated governmental proceedings.

Both the CCAA and BIA contain provisions allowing for recognition of and co-ordination with foreign proceedings as either a foreign main proceeding or a foreign non-main proceeding.

A foreign proceeding will be recognised as a foreign main proceeding in Canada where the debtor’s centre of main interest (COMI) is located in the foreign jurisdiction. A court will determine a debtor’s COMI by looking to, among other things, the location of the debtor’s management and headquarters, and the location that significant creditors recognise as being the centre of the debtor’s operations.

The definition of a “foreign non-main proceeding” in Canada is derived from the UNCITRAL Model Law on Cross-Border Insolvency 1997 and refers to any foreign proceeding other than a foreign main proceeding.

Whether the proceeding is determined to be a foreign main or non-main proceeding by a Canadian court has important implications on the treatment of that proceeding and the debtor in Canada. If the proceeding is determined by the Canadian court to be a foreign main proceeding, the debtor is entitled to certain automatic relief by the Canadian court.

The recognition provisions of the BIA and CCAA are largely modelled on the UNCITRAL Model Law on Cross-Border Insolvency 1997. Canada passed legislation adopting the treaty in 2005.

Canadian courts may recognise foreign judgments. In recognising a foreign judgment, Canadian courts will consider:

• whether the judgment was granted by a court of “competent jurisdiction”;
• whether it is final and conclusive; and
• whether it is sufficiently clear and specific.

There are a number of defences to recognising a foreign judgment, including on public policy grounds. Once recognised, however, a foreign judgment can be enforced in a manner similar to a domestic judgment.

In limited circumstances, Canadian courts have entered into protocols with foreign courts to co-ordinate cross-border proceedings.

Foreign creditors are dealt with in the same manner as domestic creditors. That being said, in the absence of a recognition order in their local jurisdiction, foreign creditors will not be subject to the stay of proceedings in their home jurisdiction.

Corporate directors in Canada are subject to statutory and common law duties. Two general obligations that are imposed on directors are:

• a fiduciary duty to act honestly, in good faith, and with a view to the best interests of the corporation; and
• a duty of care to exercise the care, diligence and skill of a reasonably prudent person in similar circumstances.

A director’s fiduciary duty is owed to the corporation alone, although the interests of stakeholders such as shareholders, employees or creditors, amongst others, may be taken into account in considering what is in the best interest of the corporation.

There are no express obligations imposed on the directors of a debtor to initiate bankruptcy or restructuring proceedings. However, directors may consider it prudent to commence insolvency proceedings to avoid or minimise statutory liabilities for which the directors may be personally liable by reason of being a director of an insolvent company.

Directors may also consider that an insolvency filing is required to avoid any potential claims that the debtor traded while “knowingly insolvent”, or that the debtor conducted its affairs in a manner that was oppressive to its stakeholders.

Corporate directors can attract personal liability under a number of provincial and federal statutes including laws governing business corporations, taxation, employment, environmental protection and securities.

For example, with respect to labour relations, personal liability is imposed on directors for unpaid wages, accrued vacation pay and, in certain cases, pension plan contributions that are due but unpaid.

Directors are personally liable for payroll remittances for amounts deducted from employees’ wages on account of income taxes, contributions to the Canada (or Quebec, as applicable) Pension Plan, and employment insurance premiums.

Directors will not be held personally liable for the above to the extent they can show that they were duly diligent, or that the failure to remit the amounts required in a timely manner was due to circumstances beyond their control.

Furthermore, directors may also be held personally liable for a corporation’s default in payment of its goods and services tax or harmonised sales tax (HST) obligations.

Corporate directors may also be held personally liable if they are found to have acted improperly so as to cause a loss to the company’s creditors.

Generally speaking, the authority and powers of an officer to manage the business of a corporation are derived from being appointed by the board of directors.

Senior officers may attract common law liability and be subject to the same fiduciary obligations as a corporation’s directors. Furthermore, officers are subject to the same statutory duty of care as directors.

Claims in negligence can be brought against officers of a corporation for a breach of the statutory duty of care. Officers will not be in breach of their duty of care if they can show that they acted prudently and on a reasonably informed basis. These claims are also subject to the rebuttable presumption that directors and officers act on an informed basis, in good faith and in the best interests of the corporation (the business judgement rule).

It is common in Canada for directors and officers of a corporation to be indemnified by the corporation for costs or expenses incurred due to proceedings that result from such director or officer’s relationship with the corporation. This indemnity is permitted under the provisions of Canadian business corporations statutes.

Director and officer liability insurance is common to protect directors and officers against risks arising from discharging their duties to the corporation.

Preference

A preferential transaction occurs where one creditor receives payment over another creditor before the initial bankruptcy event, or the date the CCAA proceedings were commenced, with the effect of the debtor preferring one creditor over another.

One of the following circumstances must exist:

• if the debtor and creditor are not related, the payment must have been made within three months of the initial bankruptcy event; or
• if the parties are related, the payment must have been made within 12 months of the initial bankruptcy event.

A preferential transaction is void and will be set aside by the court.

Transaction at Undervalue

A transaction at undervalue (TUV) occurs where the debtor was insolvent at the time the transaction occurred, or became insolvent as a result of the transaction, and the intent of the debtor was to defeat, delay or defraud its creditors.

For a transaction to constitute a TUV, it must have occurred:

• if the parties are not related, within one year of the commencement of the bankruptcy and while the debtor was insolvent, with intent to defeat creditors; or
• if the parties are related, within:
1. one year of the commencement of the bankruptcy, without proof of insolvency at the time of the transaction and without demonstrating intent to defeat creditors; or
2. five years of the commencement of the bankruptcy if the debtor was insolvent at the time of the transaction or the transaction was intended to defeat creditors.

Where a TUV occurs, a court can set aside the transaction, or order the recipient of the payment to pay the difference between what it paid for the property and the actual fair market value of that property.

Improper Payments by the Bankrupt Corporation

Under the BIA, a court may inquire into whether the following payments made by a debtor were made at the time when the corporation was insolvent (or such payment rendered the corporation insolvent):

• the payment of a dividend (other than a stock dividend) or redemption or purchase for cancellation of any of the shares of the capital stock of the corporation; and
• the payment of termination, severance or incentive pay, or other benefits to a director, officer or manager of the corporation.

If a court finds that such payments have been made improperly, judgment may be made against the directors of the debtor requiring repayment of such amounts.

These provisions place a reverse onus on the directors to prove that any of the aforementioned payments were:

• made in the ordinary course of business;
• not conspicuously over the fair market value of the consideration received by the corporation; and
• made at a time when the corporation was not insolvent, or that the transaction did not render the corporation insolvent (or that the directors had reasonable grounds to believe the foregoing).

Directors who objected to the corporation making payments of such benefits are exonerated from liability.

Both the BIA and CCAA allow proceedings to challenge a transaction as a preference or TUV. These proceedings can be initiated by a trustee or monitor.

For the results of these claims, see 8.1 Circumstances for Setting Aside a Transaction or Transfer.