Reorganizations Under the CCAA

be a Canadian incorporated company or foreign incorporated company with assets in Canada or conducting business in Canada (certain regulated bodies such as banks and insurance companies are not eligible to file under the CCAA or BIA but instead may seek relief from creditors under the Winding-Up and Restructuring Act);

be insolvent on a cash flow or balance sheet test. The Ontario Superior Court of Justice has held that in determining whether a debtor is insolvent, courts should use a “contextual and purposive approach”. Accordingly, a debtor may be considered insolvent if the debtor faces a “looming liquidity crisis” or is in the “proximity” of insolvency even if it is currently meeting its obligations as they become due; and

have in excess of C$5-million in debt or an aggregate in excess of C$5-million in debt for a filing corporate family.

2.2 How does a company commence proceedings under the CCAA?

Unlike Chapter 11, the CCAA does not allow a debtor company to make an electronic filing to obtain a skeletal stay of proceedings and then subsequently obtain “first day” relief. Instead, a debtor company seeks the granting of a single omnibus initial order that provides the debtor with a comprehensive stay of proceedings and other relief. Proceedings under the CCAA are commenced by an initial application to the superior court of the relevant province and not a federal bankruptcy court as in the U.S. In some jurisdictions like Ontario, there are specialized commercial branches of the provincial superior courts before which these applications may be brought. In virtually every instance, the application is made by the debtor company itself (creditors may initiate the process, but this is uncommon).

2.3 What relief can the court provide?

The initial order granted by the court usually provides for the following key elements:

Stay of Proceedings. Initial orders grant a comprehensive stay of proceedings that will apply to both secured and unsecured creditors, and a stay against termination of contracts with the debtor. Unlike Chapter 11, the stay is not automatic; however, the court will typically exercise its discretion to issue an initial stay for up to a maximum of 30 days. An application to the court is required for any extensions. Other than the initial 30-day stay, there is no statutory limit on the duration or length of extensions.

The Monitor. As part of the initial order, the court appoints a monitor to supervise the steps taken by the company while in CCAA proceedings, on behalf of all creditors, as an officer of the court. As a result of the 2009 amendments, the monitor must be a licensed trustee in bankruptcy, although that had also been the practice prior to the amendments. The monitor’s basic duties are set out in the CCAA, but can be expanded by court order. Generally, the debtor’s management will remain in control of the company throughout the proceedings, however, the monitor will assist management in dealing with the restructuring and other issues that arise. As part of the monitor’s supervisory role, it will file periodic reports with the court and creditors, including reports on any proposed disposition of assets or in connection with any proposed DIP financing (discussed below). There are no statutorily mandated creditor committees in Canada although they have sometimes been formed on an ad hoc basis. There is no equivalent in Canada to the U.S. Trustee, which provides government oversight in Chapter 11 cases. However, the monitor fulfils certain of the functions that the U.S. Trustee and creditor committees would fulfil in Chapter 11 cases. The 2009 amendments also introduce a certain level of government supervision and participation in CCAA proceedings by creating a more active role for the Superintendent of Bankruptcy, including general oversight powers.

DIP Financing. In many cases, the court will authorize DIP financing to the debtor and grant super priority charges over the assets of the debtor in favour of the DIP lender, if the court is of the view that additional financing during the restructuring is critical to the continued operations of the business. This may be done in the initial order at the time of the first application, or subsequently, typically by way of an amendment to the initial order. Canada has not adopted the U.S. concept of “adequate protection”, which is intended to protect existing lien holders who have become subject to super-priority charges, although Canadian courts may provide protective relief in orders to address prejudice to other creditors. Canadian courts also do not need to authorize “replacement liens” because a pre-filing secured creditor’s security, if granted over after-acquired property (as typically would be the case), continues to apply and automatically extends to post-filing assets acquired by the debtor.

The 2009 amendments to the CCAA codify the court’s ability to grant DIP financing and corresponding priority charges. The amendments require courts to take into account, among other things, whether such financing and charges will materially prejudice any of the debtor’s other creditors before granting it. The DIP charge ordered under the amendments cannot secure pre-filing obligations owed by the debtor. Recent case law in Ontario has established a test to determine when it is appropriate to authorize a CCAA debtor to guarantee the obligations of another party, in connection with a DIP facility. A concern had been expressed in a number of cross-border cases that collateral value could be used to satisfy the obligations of a foreign debtor, and unduly prejudice the collateral position of Canadian unsecured creditors. In considering whether to approve a DIP guarantee, courts are directed to focus on the need for DIP financing, the availability of any alternatives not requiring a guarantee and a careful weighing of the benefits of the DIP financing against any potential prejudice that might be caused by the guarantee.

Priority Charges. Initial orders also routinely include the authorization of priority charges, such as an administrative charge to secure payment of the fees and disbursements of the monitor and the monitor’s and debtor’s legal counsel, and a directors’ charge to secure the debtor’s indemnity to the directors against post-filing claims. Along with the DIP charge, these priority charges will typically rank ahead of claims of pre-filing secured creditors. The 2009 amendments contain prohibitions on the use of post-filing court-ordered charges to secure pre-filing debt.

Treatment of Contracts. Prior to the amendments, the debtors were typically granted the authority to repudiate certain contracts and leases in the initial order. In considering whether to permit the repudiation, courts considered a balancing of interests between the affected parties. The 2009 amendments to the CCAA codify the practice for disclaimer or resiliation of agreements. The debtor is not required to elect to accept or reject certain “executory contracts” (other than aircraft leases) or real property leases, as is the case with Chapter 11. Generally, the debtor must fulfil its post-filing obligations under all agreements unless the debtor disclaims the agreement in accordance with the process now set out in the CCAA. Any steps by counterparties to assert damage claims in respect of agreements that are repudiated by the debtor are stayed by the initial order. Counterparties to disclaimed agreements can assert a claim for damages on an unsecured basis and will be entitled to share in any distribution of proceeds on a pro rata basis along with other unsecured creditors. The 2009 amendments add a level of objectivity by requiring the monitor or the court to approve such disclaimer after taking into account whether the disclaimer of the contract will cause the debtor’s counterparty significant financial hardship. All disclaimers approved by the monitor are subject to review by the court if the counterparty objects. The 2009 amendments provide protections for licensees of intellectual property, analogous to s. 365(n) of the U.S. Code. The 2009 amendments also provide a process for the assignment of contracts, with court approval, despite contractual restrictions on assignment.

Post-filing Supply of Goods and Services. The initial order typically stays a party to any contract or agreement for the supply of goods or services from terminating the agreement as a result of the debtor’s CCAA proceedings. The initial order and the terms of the CCAA protect these suppliers by providing that no party is required to continue to supply goods or services on credit, or to otherwise advance money or credit – a supplier cannot terminate its agreement on the grounds of the CCAA proceedings, but it is not obligated to honour its obligations to supply post-filing unless it is paid for those post-filing obligations. Unlike Chapter 11, which provides for an “administrative priority claim” for post-petition suppliers, if the supplier to a CCAA debtor elects to provide goods or services on credit, there is no priority given under the CCAA for post-filing suppliers. Accordingly, it is important for post-filing suppliers to ensure that they receive COD payments or are otherwise fully protected by a court-ordered charge or some other form of security such as a deposit for payments or a letter of credit issued by a third party.

Plans of Arrangement or Compromise. Initial orders in CCAA proceedings typically also authorize the debtor to file a plan of arrangement or compromise with its creditors.

2.4 Can critical vendors be paid their pre-filing claims?

Initial orders occasionally include an authorization allowing the debtor to pay certain vendors some or all of their pre-filing claims (notwithstanding the general prohibition on payment of pre-filing claims) where such vendors were considered vital to the ongoing operation of the business, and where those vendors were in a position to discontinue supply or service if their pre-filing claims were not satisfied.

The 2009 amendments to the CCAA have introduced a new approach to the treatment of these critical suppliers. In the amended CCAA, where a vendor provides supplies or services that are considered critical to the ongoing operation of the debtor, the court may declare the vendor a “critical supplier” and order the vendor to continue to provide supplies or services on terms set by the court that are consistent with the existing supply relationship, or that are otherwise considered appropriate by the court. As part of the order, the court is required to grant a charge over all or any part of the debtor’s property to secure the value of the goods or services supplied under the terms of the order, which charge can be given priority over any secured creditor of the debtor. Any creditors likely to be prejudiced by the court-ordered charge must be given notice of the application to declare a vendor a critical supplier.

A recent decision in Ontario held that the 2009 amendments have not displaced the court’s authority to authorize pre-filing payments to critical suppliers.

2.5 What is a plan of arrangement?

Essentially, the plan of arrangement or compromise is a proposal to the debtor’s creditors that is designed to allow it to compromise its obligations and continue to carry on business, although the nature and/or scope of the business might be altered dramatically. Plans can, among other things, provide for a conversion of debt into equity of the restructured debtor (which may require a concurrent plan of arrangement under the applicable business corporations statute) or a newly created corporate entity designed to be a successor to the debtor’s business; the creation of a pool of funds to be distributed to the creditors of the debtor; a proposed payment scheme whereby some or all the outstanding debt will be paid over an extended period; or some combination of the three.

Plans may offer different distributions to different classes of creditors (discussed below). However, the plan must treat members within a class equally.

2.5.1 How do creditors prove their claims?

There is no mandatory time-frame in the CCAA in which affected creditors must prove their claim. If it is anticipated that a distribution will be made to unsecured creditors in a plan or following a sale of assets, the debtor will typically seek the issuance of a claims procedure order which establishes a process to determine creditor claims and a “claims bar date”, after which further claims may not be submitted. The claims procedure order also establishes a process to determine disputed claims. The monitor typically administers the claims process.

2.5.2 How does the plan get approved by creditors?

Creditors are separated into different classes based on the principle of commonality of interest. Although unsecured creditors will typically be placed in a single class, certain unsecured creditors, such as landlords, may be classified in a separate class. The plan must be passed by a special resolution, supported by a double majority in each class of creditors: 50% plus one of the total number of creditors voting in the class and 66-2/3% of the total value of claims voting in each class. Note that, unlike under Chapter 11 in the U.S., there is no concept of “cram-down” in Canada. Cram-down allows for the passing of a plan of arrangement in certain circumstances, even though the plan has been rejected by a subordinate class of creditors. In Canada, each class of creditors to which the plan is proposed must approve the plan by the requisite majorities.

2.5.3 What if the plan is not approved by creditors?

If the plan is not approved by the creditors, the debtor does not automatically become bankrupt (i.e., have a trustee in bankruptcy appointed over its assets). It is possible for the debtor to submit a new or amended plan. In the event the plan is not accepted, however, it is likely that the debtor’s significant secured creditors or unsecured creditors will seek to lift the stay to exercise the remedies against the debtor that are otherwise available to them.

2.5.4 How does the plan get approved by the court?

Once the plan is approved by the creditors, it must then be submitted to the court for approval. This proceeding is known as the sanction or the fairness hearing, and is the equivalent of the confirmation hearing under Chapter 11. The court is not required to sanction a plan even if it has been approved by the creditors. However, creditor approval will be a significant factor in determining whether the plan is “fair and reasonable”, and thus deserving of the court’s approval.

2.5.5 Who is bound by the plan and how is it implemented?

Once the court sanctions the plan, it is binding on all creditors whose claims are compromised by the plan. Although all necessary court approvals might have been obtained, the plan may not become effective until a number of subsequent conditions are met, such as the negotiation of definitive documentation, the completion of exit financing or the obtaining of regulatory approvals. Once all conditions are satisfied, the plan can be implemented. The day on which the plan is implemented is commonly referred to as the “implementation date” and is evidenced by a certificate filed with the court by the monitor, confirming that all conditions to the implementation of the plan have been satisfied. At this point, the debtor officially emerges from the restructuring.

2.6 Can the debtor void certain pre-filing transactions?

Prior to the 2009 amendments, the CCAA contained no provisions for the avoidance of pre-filing transactions.

The 2009 amendments to the CCAA add a right to review transactions, including preferences and “transfers at under value” (as discussed below in section 3.1.6), by importing into the CCAA avoidance concepts from the BIA that were previously only available in bankruptcies (i.e., in Chapter 7-type proceedings). In summary, the amendments enable the monitor in CCAA proceedings to challenge preferential payments or dispositions of property by the debtor for conspicuously less consideration than fair market value, unless a plan of arrangement provides otherwise.

2.7 What is the difference between CCAA reorganizations and BIA reorganizations?

Insolvent debtors may also seek to restructure their affairs under the BIA. The essential difference between a restructuring under the CCAA and one conducted under the BIA is that a BIA procedure is primarily a statutory process with strict timeframes, rules and guidelines as set out in the BIA. A CCAA proceeding is more discretionary and judicially driven. Although the proposal process under the BIA provides for an automatic statutory stay of proceedings without a court application (including a stay against secured creditors), the CCAA remains the statute of choice for restructurings of any complexity for debtors that satisfy the minimum C$5-million debt threshold. Debtor companies and other key stakeholders that may support the restructuring process typically prefer the flexibility afforded by the CCAA over the more rigid regime of the BIA.