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Commercial restructuring and insolvency law in Canada is not memorialized in any single statute. Canadian restructuring and insolvency law refers to the complex matrix of statutory, common law and equitable rules that govern the rights and responsibilities of creditors and debtors in situations where the debtors are in financial distress. Where these debtors are insolvent, they may become subject to a host of different formal or informal proceedings, with bankruptcy proceedings being only one such form of insolvency proceeding.
Bankruptcy and insolvency are oftentimes thought to be — by laypersons, the media and legal professionals not practising in the area — one and the same thing. An enterprise that ceases operations or cannot meet its obligations is commonly said to have “gone bankrupt.” A company that becomes subject to a court-supervised process as a result of some form of financial distress is often referred to as having become subject to “bankruptcy proceedings.” Despite their colloquial use as synonymous terms, the distinction between bankruptcy and insolvency in Canada is a critical one.
Bankruptcy is a legal status. Insolvency is a financial condition. An insolvent company is unable to meet its obligations generally as they become due or its liabilities exceed the value of its assets. When a commercial entity becomes bankrupt, on the other hand, it loses the legal capacity to deal with its assets and a trustee in bankruptcy is appointed over those assets with a mandate to, among other things, realize upon the assets and distribute the proceeds of disposition to creditors in accordance with their respective priorities.
In addition to bankruptcy, an insolvent business may be rehabilitated by a restructuring of the corporation and its debts under one or more statutes governing commercial insolvencies or arrangements. Such “debtor-in-possession” (DIP) proceedings may also result in the sale of some or all of the assets of the insolvent business and/or a balance sheet and capital restructuring.
Alternatively, the assets of a business may be liquidated or sold on a going-concern basis in creditor-initiated proceedings. Such proceedings may include the appointment of a receiver of the business (appointed privately or by a court), the exercise of other private remedies of a secured creditor under its security or some combination of the above.
Set out below is a summary of Canadian restructuring and insolvency law.
Canada has four key insolvency statutes:
The Companies’ Creditors Arrangement Act (CCAA) is the principal statute for the reorganization of a large insolvent corporation. The CCAA can also facilitate the sale of an insolvent business. As a federal statute, the CCAA has application in every province and territory of Canada (and purports to have worldwide jurisdiction). The CCAA is generally analogous, in effect, to Chapter 11 of the U.S. Bankruptcy Code (U.S. Code), although there are a number of important technical differences. As discussed below, the sale of a debtor’s business and assets in a CCAA proceeding is permitted even in the absence of a formal plan of reorganization.
The Bankruptcy and Insolvency Act (BIA). The BIA is also a federal statute that includes provisions to facilitate both the liquidation and reorganization of insolvent debtors. The liquidation provisions, which provide for the appointment of a trustee in bankruptcy over the assets of the insolvent debtor, are known as “bankruptcy” proceedings and are generally analogous to Chapter 7 of the U.S. Code, although there are a number of important technical differences. The reorganization provisions under the BIA, known as “proposal” proceedings, are more commonly used for reorganizations that are smaller and less complicated than those that take place under the CCAA because the BIA proposal provisions have more stringent timelines and provide less flexibility than the CCAA. The BIA also provides for the appointment of an interim receiver with national power and authority to protect and preserve assets and a receiver with national power and authority to take possession of and sell assets of a debtor where it is “just or convenient” to do so. A receiver appointed over all or substantially all of the assets of an insolvent company must be a licensed trustee in bankruptcy — typically the licensed insolvency professionals is an accounting or financial advisory firm.
Provincial Personal Property Security Acts (PPSAs). Each province of Canada except Quebec (which has its own unique Civil Code of Québec, modelled on the French Napoleonic Code) has enacted a version of the PPSA, which governs the priorities, rights and obligations of secured creditors, including a secured creditor’s right, following a default by the debtor, to enforce its security and dispose of assets subject to its security (including on a going-concern basis). The PPSAs are analogous to, and modelled on, the Uniform Commercial Code enacted in each U.S. state.
Provincial Rules of Court. Each province, other than Quebec, has “Rules of Court” similar to Ontario’s Courts of Justice Act, which also allow courts to appoint a receiver and/or receiver and manager over a debtor’s assets when it is “just or convenient” to do so. The receiver, by way of court order, can be granted the right to take possession of, and sell, the assets subject to the receivership. It is common to have dual receivership appointments under the BIA and Rules of Court. Receivership is available as a remedy in Quebec under the federal BIA.
Proceedings under the CCAA and BIA are subject to the oversight of the federal government office known as the Office of the Superintendent of Bankruptcy. The federal government also appoints Official Receivers to carry out statutory duties in each bankruptcy jurisdiction across Canada. The Official Receivers report to the Superintendent of Bankruptcy.
2.1 - Who qualifies for relief under the CCAA?
To qualify for relief under the CCAA, a debtor must:
(a) 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 but instead may seek relief from creditors under the Winding-up and Restructuring Act). Partnerships cannot apply for protection from creditors under the CCAA, but, as discussed below, relief has been extended to partnerships in certain circumstances where corporate partners have filed.
(b) Be insolvent or have committed an “act of bankruptcy” within the meaning set out in the BIA. The CCAA does not contain a definition of insolvency. Courts, however, have referenced and applied the definition of insolvency under the BIA. Accordingly, a debtor company will qualify for relief under the CCAA if it is insolvent on a cash-flow basis (i.e., unable to meet its obligations generally as they become due) or on a balance-sheet test (i.e., has liabilities that exceed the value of its assets). Further, the Ontario Superior Court of Justice has held that 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. It is sufficient if the debtor reasonably anticipates that it will become unable to meet its obligations as they come due before the debtor could reasonably be expected to complete a restructuring of its debt.
(c) Have in excess of C$5-million in debt or an aggregate in excess of C$5-million in debt if the debtor is part of a filing corporate family.
The CCAA requires all interested persons in CCAA proceedings to act in good faith. Where the court finds that an interested person failed to do so, it may make an order that it considers appropriate.
As referenced above, partnerships and solvent entities do not qualify as “applicants” under the CCAA and cannot file plans of arrangement or compromise under the CCAA. Nonetheless, Canadian courts have routinely extended the stay of proceedings and other relief granted to the qualifying insolvent applicants, to related partnerships (where corporate partners themselves have filed) and even solvent entities affiliated with the applicants, where there is a finding that it is appropriate to do so in the circumstances. For example, relief has been extended to partnerships where the business of the partnership is inextricably entwined with the business of the applicants and granting certain relief to the partnership is required for an effective reorganization of the qualifying applicants.
2.2 - How does a company commence proceedings under the CCAA?
Unlike Chapter 11, no separate bankruptcy estate is created upon a CCAA filing, and 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 must seek the granting of an initial order that provides the debtor with a comprehensive stay of proceedings and other relief for an initial 10 days. An order granted in respect of an initial application must be limited to relief that is reasonably necessary for the continued operations of the debtor company in the ordinary course of business during that initial 10-day stay period. The stay may be extended from time to time provided the debtor company meets the requisite test.
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 certain provinces, there are recognized model orders which establish the accepted framework for an initial order, subject in all cases to appropriate modifications that may be appropriate in the circumstances and granted by the court. In most instances, the application is made by the debtor company itself (creditors may initiate the process, but this is uncommon). Where the creditor does initiate the proceeding, it is usually with debtor consent.
The applications for an initial order are often brought on an ex parte basis or with limited notice to key stakeholders such as senior lenders or bondholders. Initial orders usually contain a “comeback” clause allowing stakeholders an opportunity to seek to vary or amend the terms of the initial order. The burden of justifying the relief sought rests with the debtor company at any “comeback hearing.” The first “comeback hearing” is scheduled within the initial 10-day stay period, where an extension of the stay is typically sought by the debtor company.
2.3 - Where must the application be brought?
Applications for relief under the CCAA may be made to the court that has jurisdiction in the province within which the head office or chief place of business of the debtor company in Canada is situated or, if the debtor company has no place of business in Canada, in any province in which any assets of the company are located.
2.4 - What must be included in the initial application?
All applications to commence CCAA proceedings must include:
Weekly cash-flow projections for the weeks to which the initial stay of proceedings will apply;
A report containing certain representations of the debtor regarding the preparation of cash-flow projections; and
Copies of all financial statements of the debtor, audited or unaudited, prepared during the year before the application.
2.5 - What relief can the court provide?
The initial order granted by the court usually provides for the following key elements:
(a) Stay of Proceedings. Initial orders typically grant a comprehensive stay of proceedings that will apply to both secured and unsecured creditors and a stay against amending or terminating contracts with the debtor. The purpose of the stay is to provide for an orderly process by preventing precipitous creditor action and prohibiting any single creditor or group of creditors from achieving an unfair advantage over other creditors. The stay is designed to maintain the status quo and allow the debtor company sufficient breathing room to seek a solution to its financial difficulties. Stays are typically extended to directors of the debtor in order to encourage those individuals to remain in office and advance the restructuring process. The stay provided for in the initial order is limited to a duration of 10-days but can be further extended by an appropriate length at a subsequent “comeback hearing” on notice to all affected stakeholders.
The stay is subject to certain prescribed limits. For example:
(i) The stay cannot restrict the exercise of remedies under eligible financial contracts such as futures contracts, derivatives and hedging contracts.
(ii) The stay cannot prevent public regulatory bodies from taking regulatory action against the debtor, although monetary fines are subject to the stay as well as administrative orders framed in regulatory terms but are in substance monetary claims.
(iii) There are restrictions on the length of stays for “aircraft objects” — airframes, aircraft engines and helicopters.
(iv) No order granting a stay of proceedings can have the effect of prohibiting a person from requiring immediate payment for goods and services delivered after the filling date or payment for the use of leased property (pursuant to a true lease as opposed to financing lease) or licensed property.
(v) Nothing in the stay can have the effect of requiring the further advance of money or credit to the debtor company.
(vi) As noted above, while partnerships do not technically qualify to apply for protection under the CCAA, there is case law that provides that the stay may be extended to partnerships, where the filing corporate partners or affiliates themselves obtained CCAA protection and the protection is required to facilitate the proposed restructuring.
Unlike Chapter 11, the stay of proceedings is not automatic and is a function of the court’s discretion. The court, however, will typically exercise its discretion to issue an initial stay for up to a maximum of 10 days. An application to the court is required for any extensions. Before an extension can be granted, the court must conclude that circumstances exist that make the extension appropriate and that the debtor is acting with due diligence and in good faith. Unlike the initial 10-day stay, there is no statutory limit on the duration or number of extensions of the stay of proceedings.
With respect to aircraft objects, Canada has implemented the Convention on International Interests in Mobile Equipment (known as the Cape Town Convention) and the associated Protocol to the Convention on Matters Specific to Aircraft Equipment (the Protocol). Canada adopted “Alternative A” of the Protocol, which is an enhanced version of section 1110 of the U.S. Code. Alternative A contains a 60-day stay limitation for aircraft objects during which period the debtor must cure all defaults and agree to perform all current and future contractual obligations or the aircraft objects must be returned to the secured creditor. Alternative A also requires the aircraft operator to maintain the aircraft objects pursuant to its contract and preserve the value of the aircraft objects as a condition of the continuing stay.
(b) The Monitor. As part of the initial order, the court appoints a monitor, typically an accounting or financial advisory firm with licensed insolvency professionals. The monitor’s basic duties are set out in the CCAA but can be expanded by court order. Generally, the monitor plays both a supervisory and an advisory role in the proceeding. In its supervisory role, the monitor oversees the steps taken by the company while in CCAA proceedings, on behalf of all creditors, as an officer of the court. Further, the monitor will file periodic reports with the court, including reports setting out the views of the monitor as required by the CCAA in connection with any proposed disposition of assets or any proposed debtor-in-possession (DIP) financing (see Section XVII.2.5(c), “DIP Financing and DIP Charge”).
Generally, the debtor’s management will remain in control of the company throughout the CCAA proceedings, however, in its advisory role, the monitor will assist management in dealing with the restructuring and other issues that arise and liaise with creditors as a neutral party. In certain cases, such as where the board of directors has resigned or creditors have otherwise lost confidence in management, the monitor’s powers can be expanded. By court order, the monitor can be authorized to sell assets, subject to court approval, and direct certain corporate functions. Monitors assuming this role are colloquially referred to as “super monitors.” The monitor has statutory authority to pursue fraudulent preferences and transfers at undervalue. Courts have also authorized monitors to pursue litigation against certain parties alleged to have caused harm to the debtor or the debtor’s stakeholders. Such authorization can be granted where the courts, among other things, are satisfied that the monitor (rather than the debtor or any creditor) is best placed to pursue such litigation. Initial or subsequent orders may also approve the retention of a Chief Restructuring Officer with an extensive mandate to manage the debtor company or a more limited mandate to assist management in the restructuring.
There are no statutorily mandated unsecured creditor committees in Canada as there are in the U.S., although such committees have sometimes been formed by court order 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 unsecured creditor committees would fulfil in Chapter 11 cases. The Superintendent of Bankruptcy, a federal government official, has some general oversight powers as well.
(c) DIP Financing and DIP Charge. DIP financing refers to the interim financing required by the debtor company to fund its working capital needs, while under CCAA protection. In many cases, the court will authorize the debtor to obtain DIP financing 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 is appropriate in the circumstances. This may be done in the initial order at the time of the first application or, more commonly, by way of a subsequent order at the first comeback hearing or at a later date. Notice must be given to all secured creditors that are likely to be affected by the priority of the DIP charge.
In determining whether to approve DIP financing, the CCAA requires courts to take into account, among other things:
The expected duration of proceedings
How the debtor’s business and financial affairs are to be managed during the proceedings
Whether the debtor’s management has the confidence of major creditors
Whether the DIP loan would enhance prospects of a viable plan of arrangement or compromise
The nature and value of the debtor’s property
Whether any creditor would be “materially prejudiced” as a result of the DIP charge
The monitor’s report on the cash-flow forecast
In addition to the above, where interim financing is sought under an initial order, the court must also be satisfied that the terms of the proposed DIP loan are limited to what is reasonably necessary for the continued operations of the debtor company in the ordinary course of business during the initial 10-day stay period.
The CCAA expressly prohibits the securing of pre-filing obligations with the DIP charge. However, “creeping roll-up DIPs,” whereby the DIP facility, in effect, refinances a pre-filing credit facility, have been permitted in certain circumstances where affected creditors consent or the court is satisfied stakeholders will not be prejudiced. At the DIP approval hearing, the debtor company will submit a DIP term sheet or credit agreement for approval, together with projected cash flows and the monitor’s report on those cash flows. The monitor will also typically advise the court of its view as to the appropriateness of the DIP (both with respect to quantum and terms).
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 order protective relief to address prejudice to other creditors (e.g., payment of interest, payment of professional fees, etc.). Canadian courts also do not need to grant “replacement liens.” A pre-filing secured creditor’s security, if granted over after-acquired property (as is typically the case), continues to apply and automatically extends to post-filing assets acquired by the debtor, such as inventory and receivables, since, as noted above, a CCAA filing does not create a separate legal estate.
(d) Other Priority Charges Granted in the Initial Order. Initial orders routinely grant priority charges over existing lien holders. For example, an administration charge secures payment of the fees and disbursements of the monitor and the monitor’s and debtor’s legal counsel. A directors’ and officers’ charge secures the debtor’s indemnity to the directors and officers against post-filing claims and provides such directors and officers with the protection and assurance necessary to secure their continued involvement throughout the CCAA proceedings. The charge in favour of directors and officers is only available to the extent that these individuals do not have (or if the debtor cannot obtain) adequate insurance at a reasonable cost to cover such liabilities. Accordingly, a practice has developed of providing in the initial order that the secured indemnity can only be called upon to the extent the directors and officers do not have insurance coverage. Along with the DIP charge, these priority charges will typically rank ahead of claims of pre-filing secured creditors, provided that notice is given to any such secured creditors likely to be affected by the priority charges.
(e) Treatment of Contracts (Disclaimers and Assignments). The CCAA permits the disclaimer or resiliation (the equivalent of disclaimer under civil law in Quebec) of agreements. A disclaimer is akin to a contract rejection under Chapter 11. However, the debtor is not required to elect to either accept or reject certain “executory contracts” (other than aircraft leases) or real property leases, as is the case under Chapter 11. Any steps by counterparties to assert damage claims in respect of agreements that are disclaimed by the debtor are stayed by the initial order. As with rejected contracts under Chapter 11, counterparties to disclaimed agreements can assert a claim for damages on an unsecured basis and will be entitled to share in any distribution on a pro rata basis along with other unsecured creditors.
The monitor’s or the court’s approval is required to disclaim a contract. All disclaimers approved by the monitor are subject to review by the court if the counterparty objects. In deciding whether to approve a disclaimer, the court will take into account a number of factors, including whether the disclaimer of the contract would enhance the prospects of a viable plan and whether it would likely cause the debtor’s counterparty significant financial hardship.
The CCAA provides a process for the assignment of contracts, with court approval, despite contractual restrictions on assignment. However, a condition of any such forced assignment is that pre-filing monetary defaults are cured.
(f) Treatment of Intellectual Property Licences. The CCAA provides protections for licensees of intellectual property, including trademarks, analogous to section 365(n) of the U.S. Code. Accordingly, a disclaimer or disposition does not affect a licensee’s right to use intellectual property — including any right of exclusivity — during the term of the licence, as long as the licensee continues to perform its obligations in relation to the licensed intellectual property.
(g) Post-filing Supply of Goods. The initial order typically stays a party to any contract or agreement for the supply of goods or services from terminating the agreement. 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 otherwise advance money or credit to a debtor. Accordingly, although a supplier cannot terminate its agreement as a result of the CCAA stay of proceedings, the supplier is not required to honour its obligations to supply post-filing unless it has reached acceptable arrangements with the debtor which may include it being provided with a deposit, is paid in advance or at the time of delivery or is designated a critical supplier (discussed below).
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 and does not have the benefit of a critical supplier’s charge, that supplier is afforded no specific priority under the CCAA for its post-filing supply. Accordingly, it is important for post-filing suppliers to ensure that they receive cash (in advance or COD) payments or are otherwise fully protected by a court-ordered charge or some other form of financial assurance as security, such as a deposit for payments or a letter of credit issued by a third party.
(h) Plans of Arrangement or Compromise. Initial orders in CCAA proceedings typically authorize the debtor to file a plan of arrangement or compromise with its creditors. See Section XVII.2.7, “What is a plan of arrangement?”
2.6 - How are critical suppliers treated?
Where a vendor provides goods 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 goods 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 such critical supplier 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.
Although there are provisions in the CCAA which can compel supply without a debtor paying outstanding pre-filing amounts, decisions in Ontario have authorized pre-filing payments to critical suppliers when continued supply could not be guaranteed without such authorized payments.
2.7 - What is a plan of arrangement?
Like their Chapter 11 counterparts, a plan of arrangement or compromise is a proposal made to the debtor’s creditors that is designed to provide creditors with greater value than they would receive in a liquidation under bankruptcy proceedings. The plan is typically designed to allow the debtor 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:
Payment of a percentage of the face value of a claim
Conversion of debt into equity of the restructured debtor that may require a concurrent plan of arrangement under the applicable federal or provincial business corporations statute (depending on the jurisdiction of the debtor’s incorporation) or a newly created corporate entity designed to be a successor to the debtor’s business
The creation of a pool of funds or securities to be distributed to the creditors of the debtor
A payment scheme whereby some or all the outstanding debt will be paid over an extended period, or
Some combination of the foregoing
Plans may offer different distributions to different classes of creditors (see Section XVII.2.7.4, “How does the plan get approved by creditors?”). However, the plan must treat all members within a class equally.
2.7.1 - Who may file a plan?
Plans may be filed by the debtor, any creditor, a trustee in bankruptcy or a liquidator of the debtor. As a matter of practice, plans are almost always filed by a debtor but can be filed by a creditor usually with the debtor’s consent. The CCAA does not provide for an “exclusivity” period in which only the debtor may file a plan, as is the case under Chapter 11.
Normally, the filing of a plan is considered to be a procedural step that is routinely granted by courts. However, courts have previously refused to allow the debtor applicants to file a plan which contravened prior orders of the court in the same proceedings on the basis that even if it obtained requisite creditor approval, the plan was not capable of being sanctioned by the court.
2.7.2 - Whose claims may be compromised?
The claims of both secured and unsecured creditors may be compromised in a plan. The CCAA requires approval of the Crown — the federal or applicable provincial government — of any plan that does not provide for the payment, within six months, of all amounts owed to the Crown in respect of employee source deductions. Plans must also provide for the payment of certain pension and wage claims (see Section XVII.4.3, “Priorities in liquidation”).
The CCAA also provides that plans can compromise claims against directors, subject to certain limitations. For example, claims that relate to contractual rights of one or more creditors and claims based on allegations of misrepresentations made by directors to creditors or wrongful or oppressive conduct by directors are not subject to compromise.
Courts have held that CCAA plans can provide for releases in favour of third parties being parties other than the CCAA debtor itself and its directors and officers. Third-party releases are available where, among other things, they are necessary and essential to the restructuring of the debtor, the claims to be released are rationally related to the purpose of the plan, the plan could not succeed without the releases and the parties that are the beneficiaries of the releases contribute in a tangible and realistic way to the plan. However, there has been judicial caution expressed that third-party releases are the exception, not the rule, and should not be granted as a matter of course. Releases often purport to bind the applicable creditor as well as its officers, directors, shareholders, affiliates and other parties that may not have received notice of the proceedings. Courts have also expressed some reservation as to the scope of these releases.
2.7.3 - How do creditors prove their claims?
There is no mandatory time frame in the CCAA in which affected creditors must prove their claims. 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 a claims procedure order that establishes a process to submit and determine creditor claims and a “claims bar date,” after which claims not submitted in the process will be barred and extinguished forever. There may be a separate bar date for “restructuring claims” arising from the disclaimer, breach or termination of contracts after the filing date. The claims procedure order also establishes a process to resolve disputed claims, often including the appointment of a claims officer, to address any disputes in an arbitration-style summary process. The monitor typically administers the claims process in consultation with the debtor.
The U.S. Code provides that interest that is unmatured as of the filing does not form part of either a secured or unsecured claim. Under the CCAA, however, post-filing interest accrues on secured claims, but it is generally accepted that that post- filing interest does not form part of unsecured claims unless all unsecured claims are paid in full.
2.7.4 - How does the plan get approved by creditors?
Creditors are separated into different classes based on the principle of “commonality of interest,” which is analogous to the requirement in the U.S. Code that claims in a particular class be “substantially similar.” Although unsecured creditors will typically be placed in a single class, certain unsecured creditors, such as landlords, may be classified in a separate class based on a different set of legal rights and entitlements than other unsecured creditors. 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.
A “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. Unlike under Chapter 11, there is no concept of cram-down of a plan of arrangement in Canada. Instead, each class of creditors to which the plan is proposed must approve the plan by the requisite majorities. Having said that, a more frequently utilized tool referred to as a “reverse vesting order” has been argued to achieve an outcome that is similar to a “cram-down” (see Section XVII.11, “What is a reverse vesting order?”).
2.7.5 - 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 or any party in interest 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 or unsecured creditors will move to lift the stay to exercise the remedies against the debtor that are otherwise available to them, which may include seeking to file a bankruptcy application against the debtor or appointing a receiver.
2.7.6 - 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 hearing and 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.
2.7.7 - 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 (and potentially releases contemplated thereby) may not become effective until a number of subsequent conditions are met, such as the negotiation of definitive documentation, the successful disposition of certain assets, the completion of exit financing, the obtaining of regulatory approvals or the expiry of appeal periods. 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.
2.8 - Can certain pre-filing transactions with the debtor be voided?
The CCAA contains provisions for the review of certain pre-filing transactions, including preferences and “transfers at undervalue” (see Section XVII.4.1.6, “Can the trustee void certain pre-bankruptcy transactions?”), by incorporating by reference the avoidance concepts from the BIA that were previously only available in bankruptcies (i.e., in Chapter 7 — type proceedings) into the CCAA.
Similar to the trustee in a bankruptcy proceeding (see Section XVII.4.1.6), the monitor in CCAA proceedings (but not the debtor) is empowered to challenge preferential payments or dispositions of property made by the debtor for consideration that was “conspicuously less than fair market value,” unless a plan of arrangement provides otherwise.
2.9 - How are secured creditors impacted in reorganizations under the CCAA?
The CCAA does not contain a priority scheme for the distribution of proceeds of realization. As noted above, security interests in sold collateral and the relative priority of those security interests are preserved in the proceeds of sale as a result of the sale approval and vesting order. There are, however, certain priority claims that rank in priority to secured creditors, in addition to the claims of the beneficiaries of the court ordered priority charges, discussed above.
For example, claims for unpaid wages and unpaid pension contributions effectively have super-priority against proceeds realized in a CCAA as they do under a BIA liquidation. That is, these claims have to be satisfied prior to any distribution of proceeds of a CCAA sale, and their payment has to be provided for in any CCAA plan. See Section XVII.4.3.1, “What are super-priority claims” for further details.
2.10 - How does the right of set-off apply under the CCAA?
The right of set-off is expressly preserved under the CCAA. Courts have interpreted this right of set-off to permit the right of a debtor company or third party to set off pre-filing obligations against pre-filing obligations. However, the right of a debtor company or third party to set off pre-filing obligations against post-filing obligations is subject to the stay routinely provided in initial orders commencing CCAA proceedings. It is within the discretion of the supervising judge to allow pre- versus post-filing set-off in exceptional circumstances.
2.11 - What is a reverse vesting order?
Instead of a traditional vesting order, if certain criteria are met, a CCAA court also has the authority to issue a “reverse vesting order” or RVO which allows for the transfer of liabilities and/ or unwanted assets out of the debtor company into a newly formed entity (ResidualCo) or existing subsidiary, prior to acquisition of the shares of the existing debtor company by a purchaser.
It is the “reverse” of a conventional vesting order because the desired assets stay in the debtor entity, and the unwanted liabilities and unwanted assets are vested out into another entity so that the debtor company (and its desired assets) can be acquired by a purchaser free and clear of the unwanted liabilities and unwanted assets. RVOs have been increasingly used to facilitate restructurings in situations where the debtor company possesses valuable attributes, such as governmental licenses and permits or tax losses, which would be difficult or impossible to transfer in a conventional asset sale.
2.12 - What are the requirements for the disclosure of economic interest?
Any interested person in a CCAA proceeding may request the court to order any other interested person to disclose any aspect of their economic interest in respect of the debtor. “Economic interest” is defined to include any security interest or the consideration paid for any right or interest. In deciding to make such an order, the court must consider, among other things, whether (i) the monitor approves the proposed disclosure; (ii) the disclosed information would enhance the prospects of a viable plan being made; and (iii) any interested person would be materially prejudiced as a result of the disclosure.
3.1 - What is the difference between CCAA reorganizations and BIA reorganizations?
Insolvent debtors may also seek to restructure their affairs under the BIA’s proposal provisions. There are a number of similarities between the BIA’s proposal provisions and the CCAA. The key elements of a proposal can be substantially the same as the key elements of a CCAA plan as both proposals and plans provide for the compromise and arrangement of claims against the debtor. The same basic restrictions and limitations that apply to CCAA plans, also apply to BIA proposals. Further, DIP financing, DIP charges, the assignment of contracts, the disclaimer of contracts, the granting of other priority charges and the ability to sell assets, free and clear of liens and encumbrances, are all available in BIA proposal proceedings.
The essential difference between a restructuring under the CCAA and one conducted under the BIA is that a BIA proposal process has more procedural steps set out with strict timeframes, rules and guidelines. A CCAA proceeding is, relative to BIA proposal proceedings, more discretionary and judicially driven. The CCAA remains the statute of choice for restructurings of any complexity for debtors that exceed 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. In addition, a BIA proposal must be made to, and approved by, unsecured creditors whereas the CCAA can be used to compromise secured creditor claims, while leaving unsecured claims unaffected.
3.2 - Who may make a proposal?
An insolvent person, a bankrupt, a receiver (in relation to an insolvent person), a liquidator of an insolvent person’s property or a trustee of the estate of a bankrupt may make a proposal. An insolvent person is a person who is not bankrupt and who is insolvent on a cash-flow or balance-sheet basis. Persons include corporations, partnerships and other legal entities.
3.3 - Where can a proposal be filed?
The proposal is filed with a licensed trustee and, in the case of a bankrupt, with the trustee of the estate and copies of the relevant documents must be filed with the official receiver in the locality of the debtor. Locality of the debtor means the principal place (a) where the debtor has carried on business during the year immediately preceding the initial bankruptcy event; (b) where the debtor has resided during the year immediately preceding the date of the initial bankruptcy event; or (c) in cases not coming within sections (a) or (b) above, where the greater portion of the property of the debtor is situated. The “initial bankruptcy event” is the earliest of the filing of the following: voluntary assignment in bankruptcy, a proposal, a notice of intention to file a proposal (NOI), a CCAA filing or the first application for a bankruptcy order made against the debtor.
3.4 - How are proposal proceedings commenced?
The proposal proceedings may be commenced by filing an NOI with the local office of the Official Receiver. Most debtors commence the proposal process with an NOI, which provides for an automatic stay of proceedings for an initial 30-day period (subject to extensions for additional periods of up to 45 days each, for an aggregate total of up to six months (within which time a proposal must be filed), upon a court determining that the debtor is acting in good faith and with due diligence). Once the proposal is filed, the stay continues until the meeting of creditors to vote on the proposal.
The stay applies to both unsecured and secured creditors (unless the secured creditor has delivered a notice of its intention to enforce security pursuant to section 244 of the BIA and the notice period provided for thereunder has expired or been waived by the debtor).
The purpose of the NOI is to allow the debtor a period of stability to negotiate a proposal with its creditors, with the assistance of a proposal trustee which is appointed at the time the NOI is filed. The NOI must also contain a list of creditors with claims of C$250 or more. Once the NOI is filed, the trustee must send a copy of the NOI to every known creditor within five days. Within 10 days, the debtor must prepare a projected cash-flow statement.
3.5 - What is the scope of the stay under an NOI?
The stay of proceedings under an NOI stays creditor action against the debtor and provides that no person may terminate an agreement because of the insolvency of the debtor or the filing of the NOI. Landlords cannot terminate leases because of pre-filing rental arrears. Creditors can apply to lift the stay on demonstration of “material prejudice” or can oppose an extension of the stay if they can demonstrate, among other things, the debtor is not acting in good faith or with due diligence. The stay is also subject to substantially the same limitations as those discussed above in connection with a stay under the CCAA.
3.6 - What if the stay extension is not granted?
If a stay extension is not granted, the debtor is deemed to have made an automatic assignment in bankruptcy.
3.7 - What is the role of the proposal trustee?
The proposal trustee, selected by the debtor, has a number of statutory duties. These duties include giving notice of the filing of the NOI to all known creditors, filing a projected cash-flow statement accompanied by a report from the trustee on its reasonableness, and calling a meeting of creditors. At the creditors’ meeting, the trustee is required to report on the financial situation of the debtor and the cause of its financial difficulties. The trustee must also make the final application to the bankruptcy court for approval of the proposal if it is accepted by creditors.
In addition to its statutory obligations, the trustee plays both a supervisory and advisory role and will assist the debtor in the development of the proposal and its negotiations with creditors and other key stakeholders.
3.8 - How do creditors prove their claims?
Pursuant to the terms of the BIA, all creditors must complete a statutory proof of claim form in order to prove their claim. Although there is no predetermined bar date, a creditor is not entitled to vote at a meeting of creditors to approve the proposal, or participate in distributions provided for under the proposal, if they have not submitted a proof of claim by the meeting time or prior to distributions.
3.9 - How does the proposal get approved by creditors?
Proposals are voted on at a meeting or meetings of the creditors called for that purpose. The meeting to consider the proposal must be called by the proposal trustee within 21 days of the filing of the proposal and at least 10 days’ notice must be given to each of the creditors.
Like a CCAA plan, in order to be binding on creditors, a proposal must be approved by a double majority of creditors (50% plus one in number of creditors, representing 66-2/3% in value of voting claims), in each class of creditors voting on a proposal; however, if the proposal is made to a class of secured creditors and rejected by that class, the proposal may still become effective provided that it is passed by the class or classes of unsecured creditors voting on the proposal. The proposal will not be binding on the dissenting class of secured creditors. These secured creditors would be entitled to enforce their security in accordance with the terms thereof.
3.10 - What if the proposal is not approved by unsecured creditors?
If the proposal is rejected by a class of unsecured creditors voting on the proposal, the debtor is deemed to have made an assignment in bankruptcy on the earliest of: (i) the date the debtor filed the NOI; (ii) the date of the earliest outstanding application for a bankruptcy order; and (iii) the date the debtor filed its proposal.
3.11 - How does the proposal get approved by the court?
In addition to creditor approval, the proposal must be approved by the court. Within five days of the acceptance of the proposal by the debtor’s creditors, the proposal trustee must apply for a court hearing to have the proposal approved. The proposal trustee must give 15 days’ notice to the debtor, the Official Receiver and each creditor who has proven its claim against the debtor. The trustee must file a report regarding the terms of the proposal and the conduct of the debtor at least two days before the date of the hearing.
3.12 - What if the proposal is not approved by the court?
If the proposal is not approved by the court, the debtor will be deemed to have made an assignment in bankruptcy on the earliest of: (i) the date the NOI was filed; (ii) the date the earliest application for a bankruptcy order was issued; and (iii) the date the debtor filed its proposal.
3.13 - Who is bound by the proposal and how is it implemented?
If the proposal is approved, it is binding on all unsecured creditors and on the classes of secured creditors included in the proposal that voted in favour of the proposal by the requisite majorities. A proposal may be implemented in substantially the same manner in which a CCAA plan is implemented. In instances where unsecured creditors vote in favour of a proposal and certain secured creditors do not vote in favour, a proposal may have technically passed but become frustrated if its terms and implementation thereof required that secured creditors be bound by it.
3.14 - What if a debtor defaults under the proposal?
If a debtor defaults under the terms of its proposal, and such default is not waived by inspectors (creditor representatives that may be appointed by creditors in certain cases) or the creditors themselves (if there are no inspectors), the proposal trustee must inform the creditors and the Official Receiver. In these circumstances, a motion may be brought to the court to annul the proposal. If such order is granted, the debtor is automatically bankrupt.
The two most common ways to liquidate an insolvent company in Canada are either through a bankruptcy proceeding under the BIA, or by way of an appointment of a receiver. The CCAA has also been (and is recently more commonly being) used as a process for the self-liquidation of a debtor, with or without a plan being filed and, in most cases, with the support and co-operation of the debtor’s main secured creditor(s).
4.1 - Bankruptcy
4.1.1 - How is a bankruptcy proceeding commenced?
The legal process of bankruptcy (generally analogous in effect to Chapter 7 of the U.S. Code) can be commenced in one of three ways:
- Involuntarily, by one (or more) of the debtor’s unsecured creditors filing a bankruptcy application against the debtor in the court having jurisdiction in the judicial district of the locality of the debtor (see Section XVII.3.3, “Where can a proposal be filed?”). To bring a bankruptcy application, a creditor must have in excess of C$1,000 of unsecured debt and allege that the debtor committed an “act of bankruptcy” within six months of the date of the filing of the application. The acts of bankruptcy are enumerated in the BIA, with the most commonly alleged act being that the debtor has ceased to meet its obligations generally as they become due — it is not sufficient that the creditor allege that the debtor has failed to pay the obligations owing to such creditor, only. The debtor has the right to object to the application, in which case, a determination will be made by the court as to whether the bankruptcy order should be issued.
- Voluntarily, by the debtor making an assignment in bankruptcy for the general benefit of its creditors to the Official Receiver in the locality of the debtor. To make a voluntary assignment, the debtor must be an “insolvent person” (i.e., insolvent on a cash-flow or balance-sheet basis). Companies, partnerships and income trusts are “persons” that may make an assignment if insolvent. To make an assignment a person must reside, carry on business or have property in Canada and have at least C$1,000 of debt.
- On the failure of a BIA proposal process by the debtor to its creditors, including as a result of the rejection of the proposal by a class of unsecured creditors or by the court, or default under the proposal and subsequent annulment, in which case an assignment is deemed to have occurred. See Section XVII.3.6, “What if the stay extension is not granted?”, Section XVII.3.10, “What if the proposal is not approved by unsecured creditors?”, Section XVII.3.12, “What if the proposal is not approved by the court?” and Section XVII.3.14, “What if a debtor defaults under the proposal?.”
4.1.2 - What is the effect of the commencement of the bankruptcy proceeding?
When a corporate debtor becomes bankrupt, the debtor ceases to have legal capacity to dispose of its assets or otherwise deal with its property, which vests in a trustee in bankruptcy (other than property held in trust, which does not form part of the assets of the debtor). Such appointment is expressly subject to the rights of secured creditors. Trustees in bankruptcy are licensed insolvency professionals who, in almost all cases, are chartered accountants (unlike the U.S. where trustees are typically lawyers). They are not government officials but they are licensed and regulated by the Office of the Superintendent of Bankruptcy. In a voluntary proceeding, the debtor itself selects the trustee, however, the selection is subject to confirmation by unsecured creditors at the first meeting of creditors. In an involuntary proceeding, the applying creditor selects the trustee, also subject to confirmation at the first creditors’ meeting. Unsecured creditors are to be provided with notice of the first meeting of creditors promptly after the trustee’s appointment.
4.1.3 - What are the trustee’s duties?
A trustee is an officer of the court and, accordingly, must represent the interests of unsecured creditors impartially. It is the trustee’s duty to collect the debtor’s property, realize upon it and distribute the proceeds of realization according to a priority scheme set out in the BIA (see Section XVII.4.3, “Priorities in liquidation”). The trustee is required to give notice of the bankruptcy to all known creditors of the bankrupt. The trustee must also convene a first meeting of the creditors of the bankrupt within 21 days of its appointment, unless extended for a limited period by the Official Receiver or otherwise extended or waived by the court.
At the first meeting of creditors, creditors with proven claims must confirm the trustee’s appointment. Proven creditors may also elect “inspectors” who will then act in a supervisory role and instruct the trustee. There are certain actions in which a trustee cannot engage without inspector approval, such as carrying on the business of the bankrupt or the sale or other disposition of any property of the bankrupt. A trustee must obtain court approval if it wishes to undertake these actions prior to or in the absence of the appointment of inspectors. At the first meeting, the creditors can vote to dispense with inspectors. If there are no inspectors appointed at the first meeting of creditors, the trustee can exercise all of its power on its own accord, except dispose of assets to a party related to the bankrupt. This action can only be taken with court approval.
4.1.4 - How does a creditor prove its claim?
Upon the commencement of bankruptcy proceedings, unsecured creditors are stayed from exercising any remedy against the bankrupt or the bankrupt’s property and may not commence or continue any action or proceeding for the recovery of a claim (unless the creditor is granted special permission by the court). Generally, secured creditors are not subject to this stay of proceedings (see Section XVI, 4.1.5, “How does bankruptcy affect the rights of secured creditors?”).
A creditor can assert its claim against the debtor by completing a statutorily prescribed proof of claim and submitting it to the trustee in bankruptcy. A proof of claim form is attached to the notice of bankruptcy sent by the trustee to all known creditors. The creditor must submit the completed form before the first meeting of creditors if it wishes to vote on the motion to affirm the appointment of the trustee or vote for and/or act as an inspector in the bankruptcy. Otherwise, the creditor need only submit its proof of claim before the distribution of proceeds by the trustee (known creditors will be provided notice before distribution) unless otherwise ordered by the court.
A trustee can disallow the quantum of the amount set out in a proof of claim or the entire claim itself. Disputed claims may be resolved through a judicial process if the parties are not able to reach a consensual resolution.
4.1.5 - How does bankruptcy affect the rights of secured creditors?
The rights of a trustee in bankruptcy are expressly subject to the rights of secured creditors. Generally, a bankruptcy does not affect the rights of secured creditors except to the extent necessary to allow the trustee to realize on any value in the collateral subject to the security, above and beyond what is owed to the secured creditor. The BIA provides the trustee with a number of tools in this regard. The trustee can: require the secured creditor to prove its security; cause the secured creditor to value its security; inspect the collateral subject to the security — generally for the purpose of valuing it; and, redeem the collateral subject to the security by paying the secured creditor the amount of the assessed value of the security. On redemption, the collateral subject to the security becomes an asset of the bankruptcy estate. In addition, the court may make an order staying a secured creditor from realizing on its security, but the maximum period of such stay is six months. Such stay orders are not commonly granted. They may, however, be made in situations where the trustee requires some time to value the collateral and determine if it should exercise its right of redemption.
To the extent that the amount of a secured creditor’s debt exceeds the value of the collateral subject to its security, a secured creditor may participate in the bankruptcy process and file a proof of claim in respect of the unsecured deficiency portion of its claim.
4.1.6 - Can the trustee void certain pre-bankruptcy transactions?
The BIA establishes two types of pre-bankruptcy transactions that are subject to review and challenge: “transfers at undervalue” and preferences. A “transfer at undervalue” is a disposition of property or provision of services by the bankrupt for which no consideration was received by the bankrupt or for which the consideration received by the bankrupt was conspicuously less than the fair market value of the consideration given by the debtor. If the parties are dealing at arm’s length, the trustee must establish that the transfer at undervalue took place within one year of the initial bankruptcy event, when the bankrupt was insolvent and where the bankrupt intended to defraud, defeat or delay a creditor. When the transferee and the bankrupt are not at arm’s length, the relevant period of review is five years prior to the initial bankruptcy event (see Section XVII.3.3, “Where can a proposal be filed?”), but, the criteria differs depending on when in the five year window the impugned transaction occurred. If the parties are not dealing at arm’s length and the transaction occurred within one year of the bankruptcy event, all the trustee must establish is the fact of the transaction and the inadequate consideration. The trustee does not have to establish any requisite intent. If the impugned transaction took place between years two and five, the trustee must meet the insolvency requirement and the requisite intention requirement and the requisite intention requirement.
If a court determines that a transaction was a transfer at undervalue, the transaction may be voided or the trustee may seek judgment for the difference between the value of consideration received by the bankrupt (if any) and the value of consideration given by the bankrupt.
A preference is a payment made to a pre-filing creditor that meets certain criteria. Where the creditor is dealing at arm’s length with the insolvent person, the trustee must establish that the applicable transaction took place within three months prior to the initial bankruptcy event and that the insolvent person had a view to giving that creditor a preference over another creditor. Where the creditor is not dealing at arm’s length with the insolvent person, the trustee must establish that the applicable transaction took place within one year prior to the initial bankruptcy event and that the insolvent person had a view to giving that creditor a preference over another creditor. If the transaction had the effect of giving a preference, there is a rebuttable presumption that it was made with a view to giving the creditor a preference. If a court determines that a transaction was a preference, such transaction may be voided.
The court may find the directors of the debtor company jointly and severally liable for transactions that include:
the payment of a dividend (other than a stock dividend), or the redemption or purchase for cancellation of shares of the capital stock of the corporation, and
the payment of termination pay, severance pay or incentive benefits or other benefits to a director, an officer or any manager of the business and affairs of the corporation, within the year prior to the initial bankruptcy event.
To establish liability, the court must find that any of the aforementioned transactions rendered the debtor corporation insolvent or occurred at a time when the corporation was insolvent. The directors do, however, have a due diligence defence available to them. In respect of executive compensation, the court must also find that the payment was conspicuously over the fair market value of the consideration received by the corporation and was made outside the ordinary course of business. The directors may avoid liability for these payments by establishing that the payments were not in contravention of the applicable statutes or that they protested against the making of such payments, in accordance with applicable law.
In addition to the above, various analogous provincial statutes provide mechanisms for challenging transactions that favour one creditor over others and/or are made while a company is insolvent.
Generally, Canadian trustees are much less aggressive in attacking pre-bankruptcy transactions than their U.S. counterparts and the technical requirements to void such transactions are more onerous in Canada than they are in the U.S. Where the trustee in bankruptcy refuses or neglects to pursue a preference claim or a transfer at undervalue, a creditor may seek a court order authorizing it to bring such an action. If the relief is granted, the creditor proceeds in its own name at its own expense and risk, although notice must be provided to other creditors, who may join the contemplated proceeding. Any benefit derived from a creditor-initiated proceeding belongs exclusively to the creditor(s) who instituted the proceeding and the surplus, if any, must be returned to the bankrupt’s estate.
4.1.7 - What repossession rights do unpaid suppliers have?
Suppliers have a limited right to recover inventory supplied to a bankrupt debtor or a debtor subject to a receivership. Unpaid suppliers have the right to repossess goods delivered 30 days before the date of bankruptcy or receivership. Written demand for repossession must be sent within 15 days of the purchaser becoming bankrupt or becoming subject to a receivership. The goods must be identifiable, in the same state as on delivery, still in the possession of the purchaser, trustee or receiver, and not subject to a subsequent arm’s-length sale. In practice, suppliers often find it difficult to satisfy these tracing requirements.
4.2 - Receiverships
4.2.1 - What is a receiver?
A receiver, or receiver and manager, may be granted the authority to deal with a debtor company’s assets, including authority to operate and manage the debtor’s business in place of the existing management. The receiver can also be granted authority to shut down the business if the receiver concludes the continued operations will likely erode the recoveries for creditors or there is insufficient funding to continue operations. The receiver does not become the owner of the debtor company’s assets; however, the receiver may have been granted the right (but not the obligation) in the instrument appointing it to take possession and custody of the assets and to sell them.
4.2.2 - How is a receiver appointed?
A receiver may be appointed (i) privately by a secured creditor pursuant to the terms of a security agreement or (ii) by court order.
(a) Privately Appointed Receiver: A secured creditor may have the right to appoint a receiver under its security agreement. The receiver’s duties are primarily to the secured creditor that appointed it. It also has a general duty to act honestly, in good faith and in a commercially reasonable manner and abide by statutory notice requirements in provincial PPSAs.
The secured creditor is mandated by section 244 of the BIA to provide a statutory 10-day notice of its intention to enforce its security and appoint a receiver, if such receiver is to be appointed over all or substantially all of the inventory, accounts receivable or other property of an insolvent debtor, to the extent acquired for, or used in the business carried on by the insolvent debtor. As a matter of practice, secured lenders typically issue a “section 244 notice” whenever enforcing security, out of an abundance of caution. A receiver appointed over all or substantially all of the assets in the categories set out in section 244 of the BIA must be a licensed trustee in bankruptcy who, as noted above, is typically an accountant. As discussed below, an interim receiver may be appointed prior to the expiry of the 10-day notice period. Privately appointed receivers are not available in Quebec.
(b) Court-Appointed Receiver: In the case of a court-appointed receiver, the receiver is appointed pursuant to a court order, typically on application by a secured creditor under the Rules of Court of the province where the debtor’s business is based. Certain regulatory authorities such as the Ontario Securities Commission or the Alberta Energy Regulator have also sought and obtained the court appointment of receivers of certain regulated entities, where the circumstances warrant. Generally, the courts in the common law provinces (i.e., all provinces other than Quebec) have the authority to appoint a receiver when the court is satisfied that it is “just or convenient” to do so. Courts also have the authority to appoint receivers under the BIA, with authority across Canada (the BIA being a federal statute) as opposed to in a particular province, as is the case with receivers appointed under provincial Rules of Court. Court appointments usually occur in more complex cases, especially where there are disputes among creditors or between the creditor and the debtor or in cases where it appears likely from the outset that the assistance of the court will be required on an ongoing basis. The court appointment of a receiver is typically accompanied by a comprehensive stay of proceedings restraining creditor action against the debtor, the debtor’s property and the receiver, and providing a more stable platform for the realization to occur (see Section XVII.4.2.4, “How do creditors assert their claims in a receivership?”).
A receiver appointed by the court derives its powers from the court order and any specific legislation governing its powers. The receiver is an officer of the court and has duties to all creditors of the debtor. It takes directions and instructions from the court, not the creditor that first sought its appointment. In most cases, the court order appointing the receiver gives the receiver broad powers similar to those normally granted to a privately appointed receiver under a security agreement, although certain actions, such as major asset sales, usually require specific court approval. The court-appointed receiver is also typically permitted to borrow on a super-priority basis, akin to DIP financing in a CCAA case.
(c) Interim Receiver: An “interim receiver” may be appointed by the court during the 10-day window after a section 244 notice is issued, with a temporary and restricted mandate. The court may direct an interim receiver to take possession of all or part of the debtor’s property, exercise such control over the property and the debtor’s business as the court considers advisable, take conservatory measures, and summarily dispose of property. Interim receivers, however, are not authorized to borrow funds.
The appointment of the interim receiver expires on the earlier of: (a) the taking of possession by a receiver or a trustee in bankruptcy of the debtor’s property, and (b) the expiry of 30 days following the day on which the interim receiver was appointed or any period specified by the court, or in the case where an interim receivership coincides with a proposal, upon court approval of the proposal.
4.2.3 - What reporting requirements does a receiver have?
Both privately and court-appointed receivers have certain obligations mandated by their appointment. The receiver must provide notice of its appointment to all known creditors and, at various stages of administration of the receivership, prepare and distribute interim and final reports concerning the receivership. These reports are filed with the Office of the Superintendent of Bankruptcy and may be made available to all creditors. A court-appointed receiver must also report to the court, at such times and intervals as may be required, while carrying out its mandate.
4.2.4 - How do creditors assert their claims in a receivership?
Where a receiver is court-appointed, the court will typically issue a stay of proceedings restricting creditors from exercising any rights or remedies without first obtaining permission from the court. This stay is generally analogous to the comprehensive stay of proceedings found in CCAA proceedings and it is much broader than the statutory stay of proceedings when a company becomes bankrupt.
Typically, once a receiver has realized on the assets of the debtor, it will seek to distribute proceeds to creditors in accordance with their entitlements and priority, following court approval. If the only recovery is to secured creditors, there may be no need for a claims process. If there are any surplus funds after satisfying all secured claims, the receiver may run a court-sanctioned claims process or seek the court’s approval to assign the debtor into bankruptcy and have unsecured claims dealt with through bankruptcy proceedings (see Section XVII.4.1, “Bankruptcy”).
4.3 - Priorities in liquidation
4.3.1 - What are the super-priority claims?
Secured creditors rank in priority to unsecured creditors in a liquidation; however, there are certain statutorily prescribed super-priority claims that will rank ahead of secured creditors.
Wages: The BIA provides a priority for certain workers (the priority does not apply to officers or directors of the debtor company), up to a maximum of C$2,000 per employee, for unpaid wages (including vacation pay but not including severance and termination pay) earned up to six months before the appointment of a receiver or initial bankruptcy event. The priority is secured by a charge over the debtor company’s current assets that are essentially inventory and receivables. To the extent that a receiver or trustee pays the worker’s claim, the secured claim is reduced accordingly. The obligation to pay accrued but unpaid wages effectively has the same priority against proceeds realized in a CCAA sale or a CCAA plan, as any plan must provide that these priority claims are satisfied.
WEPPA: The Wage Earner Protection Program Act establishes a program run by the federal government through which employees entitled to claim a priority for unpaid wages are compensated directly by the government, to a maximum of approximately C$8,278.83 as of 2023. The government is subrogated to the rights of the unpaid employee for amounts paid under this program and receives a priority claim against the current assets of the debtor company in the amount of the compensation actually paid out, to a maximum amount of C$2,000 per employee. Any balance that exceeds this amount does not have priority over secured creditors.
Pension Claims: The BIA provides a priority for amounts deducted and not remitted and for unpaid regularly scheduled contributions (i.e., not special contributions or the underfunded liability itself) to a pension plan by creating a priority charge, equal to the amount owing, over all of the debtor company’s assets. As with the case with unpaid wages, the obligation to fund unpaid regularly scheduled pension contributions has a priority against proceeds in a CCAA sale, and any plan must provide for the payment of these priority claims.
Unpaid wages and unpaid pension contributions effectively have the same priority against proceeds realized in a CCAA sale or sale pursuant to the proposal provisions of the BIA, as any proposal or plan of arrangement must provide that such priority claims are satisfied.
If a pension plan has been wound up and is not continuing and the wind up triggers a wind-up deficit, the obligation to fund the deficit may, pursuant to certain provincial legislation, have priority over certain types of secured creditor claims in certain circumstances.
Payroll Taxes: Before distributions are made to creditors in a CCAA proceeding, certain other statutorily mandated priority claims, such as employee source deductions or “payroll taxes” (i.e., income tax withholdings, unemployment insurance premiums and Canada Pension Plan premiums) must also be paid.
Other Matters: In addition to those listed above, there are also a number of other federal and provincial statutory liens and deemed trusts that have priority over secured creditors outside of bankruptcy, but which are treated as ordinary unsecured claims following bankruptcy (e.g., liens for unremitted federal and provincial sales tax). CCAA liquidations and receivership proceedings are often converted into bankruptcy proceedings, in part to achieve a reversal of these priorities.
4.3.2 - What is the priority scheme after the super-priorities and secured creditors are satisfied?
Once the statutory super-priority claims and secured creditor claims are satisfied, the BIA sets out the priority scheme for distribution to unsecured creditors, primarily as follows:
- The costs of administration of the bankruptcy
- A Superintendent of Bankruptcy’s levy on all payments made by the trustee to creditors (which is currently 5% on the first C$1-million of distributions, and a sliding scale on amounts in excess of C$1-million)
- Preferred claims, which include wage claims in excess of the statutory C$2,000 charge, secured creditors’ claims in the amount equal to the difference between what they received and what they would have received but for the operation of the wage and pension super-priorities, and landlords’ claims up to the maximum amounts prescribed by statute
- Ordinary unsecured claims on a pro rata basis
- Going-Concern Sales
4.4 - Can an insolvent business be sold as a going-concern?
Although a going-concern sale can be affected by a trustee in bankruptcy or a privately appointed receiver, a sale of an insolvent business on a going-concern basis will typically be conducted by a court-appointed receiver or through the CCAA or BIA proposal process.
4.5 - What is involved in a receivership sales process?
To sell a business on a going-concern basis, a court-appointed receiver will typically request that the court approve a detailed marketing process for the assets of the company, which approval may be retroactive in respect of a marketing process that was conducted prior to filing. The requirements for and timelines of the marketing process will vary depending on the nature of the business, the value of the assets, the rate at which the assets will depreciate in value through a sales process, the available operating financing and the realistic pool of potential purchasers. The court-appointed receiver will select the bidder with the best offer, taking into account value offered, conditions of closing, timing of closing, the purchaser’s ability to close and any potential purchase price adjustments, among other factors.
While there is no statutory requirement for a stalking-horse process in Canada, Canadian courts routinely establish a stalking-horse process by court order and stalking-horse sales are commonplace in Canada. However, unless specifically authorized by the court, the agreement of purchase and sale with the winning bidder will not be subject to overbids as is the case in the Chapter 11 stalking-horse process.
The receiver, on notice to interested persons, will then request that the court approve the agreement of purchase and sale and vest the assets in the purchaser free and clear of all liens and encumbrances. Liens and encumbrances that exist in the purchased assets will be preserved in the proceeds of sale with the same rank and priority as they had in the purchased assets. Net sale proceeds are typically held by the receiver pending the issuance of a “distribution order” of the court authorizing the receiver to disburse the funds to creditors in accordance with their entitlements. All interested parties are required to receive notice of the motion for the distribution order and disputes between creditors as to priority and allocation of funds are usually addressed at the distribution motion, rather than at the sale approval stage.
4.6 - What is involved in a CCAA sales process?
Like sales conducted pursuant to section 363 of the U.S. Code, the CCAA permits the sale of a business by the debtor with court approval. Sale approval and vesting orders are available to give the purchaser the necessary comfort that it will acquire the purchased assets free and clear of any liens and encumbrances.
The CCAA sales process is similar to the receivership process, except that the debtor itself controls the process (under the supervision of the monitor), is the vendor, and is the party requesting the court’s approval of the process and eventually the sale itself. Generally, the sales process is approved by the court on recommendation of the Monitor with the support of key stakeholders, including DIP lenders, who have significant influence over the debtor’s sales process. The debtor will also require the support of its monitor. Courts also frequently approve the retainer of a financial adviser, investment bank or broker to conduct the sales process on behalf of the debtor.
The court must be satisfied, among other things, that the sales process is fair and reasonable in light of all the circumstances. The CCAA provides factors that a court is to consider in determining whether to approve a sale outside of the debtor’s ordinary course of business. These factors include:
Whether the sales process was reasonable in the circumstances
Whether the monitor approved the sales process and the sale, and determined that the sale would be more beneficial to creditors than a sale through a bankruptcy proceeding
The extent to which creditors were consulted
The effects of the proposed sale on creditors and other affected stakeholders
Whether the consideration to be received for the assets is fair and reasonable, taking into account their market value
If the sale is to a related party, whether good faith efforts were made to sell the assets to unrelated parties and whether the consideration to be received is superior to any other offer that would be received under the sales process
The proceeds of the sale may be held by the monitor. As is the case with sales by court-appointed receivers, a sale approval and vesting order will provide that creditors will have the same priority against the proceeds that they had against the assets prior to the sale. Following court approval of the sale and closing, the court will authorize the distribution of the net proceeds to creditors in accordance with their priorities (discussed below). If there are surplus funds available for unsecured creditors following payment to secured creditors, it is common to seek leave of the court to bankrupt the debtor and have any surplus proceeds distributed by a trustee in bankruptcy in accordance with the priorities set out in the BIA, (see Section XVII.4.3, “Priorities in liquidation”). The debtor company may also elect to file a plan of arrangement or compromise that provides for the distribution of proceeds of sale to secured and unsecured creditors.
4.7 - Quick Flip or Pre-Pack Sales
It is also possible for a company to run a sales process that would be typically run in an insolvency proceeding and actually identify a successful bidder or stalking-horse bidder, before such proceedings commence. In these circumstances, the primary purpose of such insolvency proceeding (whether a receivership, CCAA or proposal proceeding) would be to obtain court approval of the transaction or commence an abbreviated sales process to determine if there are any overbids, in the case of a stalking horse, and then distribute proceeds pursuant to a court order or plan. Prior to approval, the court will require assurance that the proposed, receiver, monitor or proposal trustee had an oversight or supervisory role in the pre-proceeding sales process or has otherwise reviewed the process and is satisfied that it is reasonable. The proposed receiver, monitor or proposal trustee would have to proffer evidence that the sales process was consistent with what is typically approved by courts in such cases. These “quick flip” proceedings often appeal to debtor companies, purchasers and lenders because they can save expense and time. As the purpose of the proceeding is to implement a going-concern solution (rather than to identify one), the stigma and potential disruption associated with formal insolvency proceedings can also be reduced.
4.8 - Can a secured creditor credit bid in Canada?
There is no BIA or CCAA equivalent to section 363(k) of the U.S. Code, which expressly authorizes a secured creditor to credit bid its debt. However, courts have routinely authorized credit bids in Canada. Unlike in the U.S., there is no case law in Canada addressing a collateral or administrative agent’s contractual right to credit bid on behalf of a syndicate of lenders and bind dissenting lenders. However, it is anticipated that a court would look to the provisions of the agency agreement and security documents to determine the scope of an agent’s security.
Like Chapter 11, the CCAA provides for the coordination of cross-border insolvencies. The CCAA and BIA contain comprehensive provisions for the recognition of foreign insolvency proceedings. These provisions, incorporated into both the CCAA and BIA, are based on the UNCITRAL Model Law on Cross-Border Insolvency, similar to Chapter 15 of the U.S. Code. The majority of co-ordinated cross-border proceedings for large commercial insolvencies are conducted under the cross-border provisions of the CCAA rather than the BIA. Accordingly, the CCAA provisions are summarized below.
5.1 - What is the purpose of the Model Law?
The purpose of the Model Law, as adopted in the CCAA, is to promote:
Co-operation between the courts and other competent authorities in Canada with those of foreign jurisdictions in cases of cross-border insolvencies
Greater legal certainty for trade and investment
The fair and efficient administration of cross-border insolvencies that protects the interests of creditors and other interested persons, and those of debtor companies
The protection and maximization of the value of a debtor company’s property
The rescue of financially troubled businesses to protect investment and preserve employment
5.2 - Who may commence a recognition proceeding?
A foreign representative may apply to a Canadian court for recognition of a foreign proceeding in respect of which he or she is a foreign representative. Prior to such appointment, a proposed foreign representative may seek an interim order that provides for a stay of proceedings to protect the assets of the debtor company for the period of time between the commencement of a foreign proceeding and the date on which a foreign representative is appointed by the foreign court, after which it may seek full recognition of the foreign proceedings.
5.3 - What is a foreign representative?
A foreign representative is a person or body, including one appointed on an interim basis, who is authorized in a foreign proceeding in respect of a debtor company to (a) monitor the debtor company’s business and financial affairs for the purpose of reorganization or (b) act as a representative in respect of the foreign proceeding.
As a result of the second criteria, a debtor company itself can be a foreign representative, provided it has been duly authorized to act as such. Among other things, a foreign representative is required to inform the Canadian court of any substantial change in the status of the recognized foreign proceeding and any substantial change in the foreign representative’s authority to act.
5.4 - What is a foreign proceeding?
A foreign proceeding is a judicial or an administrative proceeding held in a jurisdiction outside Canada that deals with creditors’ collective interests generally under any law relating to bankruptcy or insolvency in which a debtor company’s business and financial affairs are subject to control or supervision by a foreign court for the purpose of reorganization or liquidation. Chapter 11 proceedings qualify as foreign proceedings.
5.5 - What evidence needs to be before the Canadian court in a recognition proceeding?
In connection with application for recognition, there are certain basic documentary requirements: (a) a certified copy of the instrument that commenced the foreign proceeding — typically a court order; (b) a certified copy of the instrument authorizing the foreign representative to act as foreign representative — typically a court order; and (c) a statement identifying all foreign proceedings in respect of the debtor company that are known to the foreign representative. In the absence of the evidence described above, the court has discretion to accept other evidence satisfactory to it.
5.6 - What discretion does the Canadian court have in recognizing the foreign proceeding?
If the court is satisfied that the application for the recognition of a foreign proceeding relates to a foreign proceeding and the applicant is a foreign representative in respect of that foreign proceeding, the court shall make an order recognizing the foreign proceeding. There is no discretion in this regard. However, the court does have discretion as to what relief is granted in connection with the recognized proceedings (see Section XVII.5.9, “What obligations does the Canadian court have once recognition has been granted?”). In addition, the order granting recognition will specify whether the proceeding is a “foreign main proceeding” or a “foreign non-main proceeding.”
5.7 - What is a foreign main proceeding?
A foreign proceeding will be a “main” proceeding if it is taking place in the jurisdiction that is the debtor’s centre of main interest (COMI). There is a rebuttable presumption that the debtor company’s registered office is its COMI. In recognizing a foreign main proceeding the court shall make an order (a) granting a stay of proceedings until otherwise ordered by the court and (b) restraining the debtor company from selling assets in Canada outside the ordinary course of business. The recognition order, however, shall be subject to any terms the court sees fit. Such recognition orders must also be consistent with any order that may be made under the CCAA.
5.8 - What is a foreign non-main proceeding?
A foreign “non-main” proceeding is defined in the negative: a foreign non-main proceeding is a foreign proceeding that is not a foreign main proceeding. Unlike chapter 15, there is no requirement that a debtor company have an “establishment” in the foreign jurisdiction for the proceeding to qualify as a “non-main” proceeding. If the court recognizes the foreign proceeding as a non-main proceeding, the stay is not automatic. However, the court may, at its discretion, order a stay if it is necessary for the protection of the debtor’s property or the interests of creditors.
5.9 - What obligations does the Canadian court have once recognition has been granted?
If an order recognizing a foreign proceeding is made, the court is required to cooperate, to the maximum extent possible, with the foreign representative and the foreign court involved in the foreign proceeding.
Forms of cooperation include, among other things, the appointment of a person to act at the direction of the court — typically referred to as an “information officer” having similar reporting obligations as a monitor in a CCAA case — and the coordination of concurrent proceedings regarding the same debtor company.
5.10 - What rules can the court apply?
Nothing in the CCAA prevents the court, on application of a foreign representative or any other interested person, from applying any legal or equitable rules governing the recognition of foreign insolvency orders and assisting foreign representatives that are not inconsistent with the provisions of the CCAA.
Also, nothing in the CCAA prevents the Canadian court from refusing to do something that would be contrary to public policy. For example, in certain circumstances, Canadian courts have recognized “roll-up DIPs” approved by U.S. courts in recognition proceedings, even though they would not be permitted in plenary CCAA proceedings. Under Chapter 15 of the U.S. Code, the analogous provision refers to anything that is “manifestly” contrary to public policy. This suggests that the U.S. courts are directed to be even more accommodating than their Canadian counterparts when called upon to determine what is contrary to public policy.