Insolvency in Canada: An Introduction

Canada offers an array of options and tools that enable insolvent companies to restructure. Canadian insolvency legislation provides for flexibility, which fosters creativity and promotes efficiency as companies navigate through insolvency and restructuring proceedings. The frameworks, features and tools that make Canadian insolvency proceedings unique are summarised below.

Core restructuring regimes

In Canada, there are various forms of insolvency proceedings, but most reorganisations occur under the two legislative regimes.

• The Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36 (CCAA) permits insolvent companies with debts over CAD5 million to reorganise their business and financial dealings. The CCAA is a debtor-in-possession restructuring framework that allows debtor companies to continue operations while alleviating some of the pressure from creditors as the debtor company attempts to restructure its affairs. Proceedings under the CCAA are court supervised and overseen by a court-appointed monitor. The monitor is a licensed insolvency professional, and supervises the debtor company’s business and financial dealings during the CCAA proceeding. The monitor is tasked with reporting to the court and the debtor’s creditors on the activities of the debtor and the status of the proceedings. A successful restructuring under the CCAA may provide a greater recovery for creditors than they would otherwise receive in a liquidation.
• The Bankruptcy and Insolvency Act, R.S.C., 1985, c. B-3 (BIA) provides Canada’s bankruptcy regime for individuals and also for the liquidation of businesses, including receiverships (described below). For restructurings, the BIA provides for proposal proceedings, which are a form of debtor-in-possession restructuring that allows debtor companies to reach compromises with their creditors so they can continue with business operations. Generally, proposals are used for smaller and less complex restructurings. BIA proposals must be filed within six months of the initiation of the proceeding. Proposal proceedings are typically more straightforward than those under the CCAA. BIA proposal proceedings are sometimes converted into CCAA proceedings if the restructuring becomes complex.

Insolvency proceedings may also lead to the appointment of private or, more typically, court-appointed receivers.

A receivership is a remedy available to secured creditors to recover amounts outstanding under a secured loan in the event the company defaults on its loan. While receiverships are rooted in the common law, they have now been enshrined in the BIA. Receivers are usually licensed professionals in accounting or financial advisory firms. A receiver may be privately appointed by a secured creditor with a security interest in the debtor company’s assets, or may be appointed by the court on application by a secured creditor or other stakeholder. The BIA permits the receiver to take possession or control of all or substantially all of the inventory, accounts receivables or other property of the debtor company used in respect of the business. The BIA also contemplates the appointment of interim receivers to protect and preserve the debtor company’s assets on a temporary basis under particular circumstances.

Trends in insolvencies

Commercial insolvencies are on the rise in Canada, with the monthly year-over-year rate of commercial insolvencies in Canada increasing for the past two and half years.

Accommodation and food services, construction and warehousing are the industries that recorded the most significant increases in the number of insolvencies in the 12-month period ending 30 June 2024. The construction industry alone represented 15.1% of all insolvencies filed in the second quarter of 2024 in Canada. This may be welcome news for international businesses looking to acquire construction companies or assets at a discounted rate in Canada.

Canadian construction companies filed at least 226 BIA proposals in the year ending 30 June 2024, more than any other industry (Government of Canada, “Insolvency Statistics in Canada – Second Quarter of 2024 (Part 7)”, Table 4). However, the most bankruptcies occurred in the accommodation and food services industry, in which at least 757 companies filed for bankruptcy. Canadian manufacturing companies commenced more CCAA proceedings than any other sector last year, with 36 in the year ending 30 June 2024 (ibid, Table 11). Manufacturing companies are on track for the most CCAA proceedings again this year, with 12 proceedings in the second quarter of 2024 alone. Other industries seeing an increase in insolvencies include real estate, retail and cannabis.

Among Canada’s provinces, Ontario had the highest number of companies that filed CCAA proceedings in 2024. In the 12-month period ending 30 June 2024, there were 30 CCAA insolvency proceedings for debtors with head offices in Ontario, 14 in Quebec, 13 in British Columbia, and ten in Alberta (ibid, Table 10). Quebec corporations filed the largest number of BIA proposals and bankruptcies in the 12-month period ending 30 June 2024, with a total of 3,246 BIA proceedings, which included 2,772 bankruptcies and 424 BIA proposals. Ontario was the runner-up, with 1,336 BIA proceedings filed in the same period, which constituted 1,163 bankruptcies and 173 proposals (Government of Canada, “Insolvency Statistics in Canada – Second Quarter of 2024 (Part 1)”, Table 3a).

Insolvency proceedings before the court

In Canada, there is no independent bankruptcy court as there is in the United States. Instead, each province’s Superior Court is vested with bankruptcy and insolvency jurisdiction, pursuant to the BIA and the CCAA.

Proceedings under these federal acts are administratively overseen by the Office of the Superintendent of Bankruptcy (the OSB), an agency of the federal government. The OSB has a number of duties, including:

• licensing and regulating the insolvency profession;
• supervising the administration of estates in bankruptcy, commercial reorganisations, consumer proposals and receiverships;
• keeping a public record of BIA and CCAA filings;
• recording and investigating complaints from debtors and creditors in respect of insolvency proceedings; and
• mandating compliance through the maintenance and enforcement of the regulatory regimes (Office of the Superintendent of Bankruptcy Canada, Government of Canada, online at ised-isde.canada.ca).

In addition, the federal government appoints Official Receivers to undertake these statutory administrative duties in each bankruptcy jurisdiction across Canada.

Under the CCAA, when an order is made on a debtor company’s initial application, the court will appoint a monitor to supervise the business and financial operations of the company (Section 11.7(1) of the CCAA). Monitors are court officers and are subject to the supervision of the OSB. Monitors must be licensed by the OSB as licensed insolvency trustees (LITs).

Under the BIA, proposal trustees, selected by the debtor, fulfil a similar role to the monitor in CCAA proceedings. Proposal trustees are also LITs and they oversee and advise the debtor in the development of the debtor’s cash flows and proposal. In addition to aiding in the development of the proposal, the proposal trustee is also responsible for:

• communicating with creditors on the content of the proposal;
• acting as an impartial court officer and not as an agent for the debtor;
• monitoring the debtor’s business and financial dealings throughout the period beginning on the filing of the notice of intention to make a proposal;
• sending information to the creditors;
• administering the claims process; and
• voting on a proposal, among other things.

Commercial list

Courts in certain jurisdictions across Canada, including Ontario and Alberta, have a “commercial list”, which is of benefit to stakeholders. These specialised courts have been designed to expedite the resolution of commercial insolvency matters and other complex commercial matters. Cases on the commercial list are overseen by judges with expertise in insolvency and other commercial law, which ensures that these proceedings are handled efficiently and with a deep understanding of the relevant legal principles. Procedural issues on the commercial list are often streamlined and more flexible than the traditional matters, which allows for proceedings to be heard before a court in an expedited manner.

Useful tools in the insolvency toolbox

Insolvency proceedings in Canada encourage innovative strategies to maximise value for the greatest number of stakeholders, including creditors, customers, suppliers, government agencies and shareholders. Canadian insolvency proceedings have seen an increased utilisation of Reverse Vesting Orders (RVOs) and restructurings under corporate statutes of late, as opposed to the insolvency statutes and handy tools in practitioners' toolkits for restructuring financially distressed businesses.

Reverse Vesting Orders

Two years ago, RVOs were a unique and controversial transaction method in Canadian insolvency proceedings, reserved for transactions involving assets, such as government licences, that could not be purchased from a debtor company. RVOs have become an increasingly popular tool in commercial insolvency and restructuring proceedings in Canada.

In an RVO, an insolvent debtor company applies to the court to transfer the debtor company’s unwanted liabilities, which may include unfavourable contracts, into a new company. By doing so, the debtor company is “cleansed” of some of the financial burdens that have contributed to its insolvency. A purchaser then buys the shares in the “cleansed” debtor company, and the debtor exits the insolvency proceedings and operates as a going concern. The new company that holds the discarded liabilities is typically thereafter assigned into bankruptcy.

RVOs can be useful if the debtor company operates in a highly regulated industry, such as cannabis, tobacco, alcohol or food. These companies often require permits or licences from various government entities to operate. The permits and licences in highly regulated industries may be financially valuable, but are often non-transferrable. This means that a purchaser interested in a permit or licence held by an insolvent debtor company would not be able to simply purchase the permit or licence as an asset from the debtor company.

If a purchaser wanted the valuable permit or licence, it would need to purchase shares in the debtor company so that the company holding the permit or licence would remain intact. However, a purchaser will not want to inherit an insolvent company’s liabilities when purchasing its shares. RVOs are a creative way to strip an insolvent company of its liabilities to make it more attractive to potential purchasers, who will then continue to operate the company, with permits and licences intact, as a going concern.

RVOs may also be valuable in cases in which creditors would not be expected to approve a plan of arrangement. Creditors vote on plans of arrangement, and the proposed plan will only proceed if a “double majority” of more than 50% in number and 66.67% in value of creditors in each creditor class approve it at the vote. RVOs do not require a creditor meeting or a vote, which makes them an attractive option in cases where a debtor company suspects creditors would not approve a plan of arrangement.

While RVOs are becoming increasing popular, Canadian courts still warn that RVOs are only meant to be used in “unusual or extraordinary” cases. The fact that an RVO may be convenient for the debtor company or a purchaser may not be sufficient justification for its use. A court will scrutinise and examine the circumstances surrounding an RVO in depth to determine if its use is appropriate and fair, considering the following factors:

• whether the process leading to the proposed sale or disposition was reasonable in the circumstances;
• whether the court officer approved the process leading to the sale or disposition;
• whether the court officer filed a report with the court stating that, in its opinion, the sale or disposition would be more beneficial to the creditors than a sale or disposition under a bankruptcy;
• the extent to which creditors were consulted;
• the effects of the proposed sale or disposition on the creditors and other interested parties; and
• whether the consideration to be received for the assets is reasonable and fair, taking into account their market value.

CBCA plans of arrangement

Increasingly, corporations are turning to Canadian corporate legislation, such as the Canada Business Corporations Act, R.S.C., 1985, c. C-44 (CBCA) and its provincial equivalent statutes to restructure debt under the plan of arrangement provisions. A corporate plan of arrangement allows businesses to restructure their balance sheets, including arranging rights of debtholders. Within these CBCA debt restructurings, companies are incorporating novel insolvency-type relief, previously thought to be reserved for insolvency statutes.

Section 192 of the CBCA is applicable where it is not practicable for a corporation to effect a fundamental change in the nature of an arrangement under any other provision of the CBCA. In such a case, the corporation may apply to a court for an order approving an arrangement proposed by the corporation.

To effect an arrangement under Section 192 of the CBCA, a corporation must fulfil three requirements. First, the corporation must meet the following statutory requirements:

• notice must be provided to the CBCA Director;
• the proposed arrangement must constitute an “arrangement” under Section 192 of the CBCA;
• it is not practicable to effect the proposed arrangement under any other provision of the CBCA; and
• the applicant is not insolvent.

Relevant jurisprudence suggests that the statutory requirements are relatively easy to fulfil. Section 192 of the CBCA is broadly worded and accounts for several arrangement structures. If the corporation’s arrangement falls into one of the categories enumerated in the provision, the court is likely to be satisfied. Regarding practicability, the Director endorses the view that it means something “less than impossible”, which can be established by demonstrating it would be inconvenient and less advantageous to the corporation to proceed under other provisions of the CBCA. Finally, while Section 192 necessitates a solvent applicant, case law suggests that courts will approve the arrangement if at least one of the applicants is solvent, or will be solvent following a successful arrangement.

The second requirement for court approval under Section 192 of the CBCA is that the corporation put forth an arrangement in good faith. Courts have found that this requirement is established where the applicant has demonstrated it has a valid business purpose for the arrangement (12178711 Canada Inc, Re [2021] AWLD 3280 at 46). For a valid business purpose to exist, there must be a positive value to the corporation to offset the fact that rights are being altered (912178711 Canada Inc, Re [2021] AWLD 3280 at 64).

The third requirement is that the arrangement is fair and reasonable. Here, the court will consider whether the arrangement has a valid business purpose and whether the objections of those whose rights are being arranged are being resolved in a fair and honest way (12178711 Canada Inc, Re [2021] AWLD 3280 at 63).

CBCA restructurings in the right circumstances may be appealing as they may be more expeditious and cost efficient compared to a restructuring under the CCAA, and they avoid the stigma associated with being “insolvent”.