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A General Overview of Canadian Bankruptcy, Insolvency and Restructuring Law

By Fraser Milner Casgrain LLP

Overview
Reorganizations under the CCAA
Cross-Border Insolvency Regime
Receiverships
Liquidations under the BIA
Conclusion
Additional Resources

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Overview

While U.S. and Canadian insolvency proceedings enjoy similarities, Canadian insolvency procedures are unique in many ways. Below is an overview of the Canadian insolvency regimes that are most typically utilized.

Canada is a federal dominion of ten provinces and three territories. Constitutionally, areas of responsibility are allocated between the national federal government and the local provincial governments. Canadian bankruptcy and insolvency law is under the jurisdiction of the federal government. The two primary pieces of insolvency related legislation in Canada are the Companies’ Creditors Arrangement Act (the “CCAA”) and the Bankruptcy and Insolvency Act (the “BIA”). Provincial legislative jurisdiction covers property and civil rights, and therefore affects various insolvency-related matters (e.g. the rights of secured creditors or landlords).

The BIA is the principal federal legislation in Canada applicable to bankruptcies and insolvencies. It governs both voluntary and involuntary bankruptcy liquidations as well as debtor reorganizations. The CCAA is specialized companion legislation designed to assist larger corporations to reorganize their affairs through a debtor-in-possession process similar in concept to Chapter 11 of the U.S. Bankruptcy Code.

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Reorganizations under the CCAA

Rather than liquidate, a debtor company may attempt to reorganize or restructure its business and operations under the CCAA. Whereas the proposal sections of the BIA are generally used for smaller businesses, the CCAA is intended to facilitate the restructuring of large companies. To seek protection under the CCAA, the debtor company (or companies) must be insolvent on either a liquidity or a balance sheet basis and must have indebtedness of at least $5 million.

Once proceedings begin under the CCAA, the debtor company retains possession and control of its property and assets in accordance with the Initial CCAA Order granted by the court. The debtor company is subject to the supervision of the court and the oversight of a court appointed “monitor”. The monitor supervises the business and affairs of the debtor company during its restructuring and reports to the court as to the status of various issues that arise during the course of the debtor company’s restructuring. The CCAA further stipulates that a monitor must be a licensed trustee who is not or who has not been affiliated with the debtor company in certain capacities, including having acted as its auditor, within 2 years preceding the CCAA proceedings. In granting the Initial CCAA Order, the court has the discretion to determine whether or not to grant a general stay of the proceedings and the nature and duration of such stay. Typically, the court grants a stay for not more than 30 days pursuant to which the debtor company’s creditors are prevented from: (a) taking any steps to enforce their claims against the debt or company and its property and assets; and (b) commencing or continuing any proceedings against the debtor company or its property and assets. Thereafter, the debtor must return to court, on notice to all stakeholders, to obtain extensions of the stay. The CCAA contains no restrictions on the number of extensions that may be granted by the court or the maximum time permitted in order for the debtor company to complete its restructuring. However, at each extension application, the debtor company must confirm that it is proceeding in good faith and with due diligence in respect of proposing a restructuring plan to its stakeholders.

In addition to the granting of an initial stay of proceedings by the court, the CCAA also specifically provides that no party can terminate, forfeit, amend, or claim for accelerated payment under any agreement, including a security agreement, with a debtor company, by reason only that proceedings have been commenced under the CCAA.

Prior to 2009, the CCAA did specifically provide that a debtor company was able to sell its property and assets during its restructuring, although the case law that had developed under the CCAA established a precedent for the sale by the debtor company of its property and assets out of the ordinary course of business and outside the context of the filing of a restructuring plan. Pursuant to certain amendments to the CCAA that came into force in 2009, asset sales under the CCAA became codified.

The 2009 amendments to the CCAA also codified the court’s authority to:

• Grant charges over the debtor company’s property and assets in CCAA proceedings in order to secure amounts that may be owing in respect of administrative, director and officer, interim financing and critical supplier claims;
• Order the assignment of agreements by the debtor company,in certain circumstances, without the required consent of the counter party to the agreement(eligible financial contracts and collective agreements may not be assigned); and
• Order the disclaimer of agreements by the debtor company, in certain circumstances(eligible financial contracts, collective agreements, financing agreements if debtor company is the borrower and leases of real property or an immovable if the debtor company is the lessor may not be disclaimed).

In order for the debtor company’s restructuring plan under the CCAA to be implemented it must:

• Include a provision for the payment of certain wage and pension related amounts, if applicable;
• Be approved by a majority in number of the creditors, representing two thirds in value of the creditors, or the class of creditors, as the case may be; and
• Be sanctioned by the court.

Once sanctioned by the court, the plan becomes binding on all creditors to whom the restructuring plan was made. There is no “exclusivity” period under which the debtor company is required to propose a plan of restructuring to its creditors.

Under the CCAA, if a restructuring plan is not accepted by a majority of creditors holding the requisite amount of debt, or is not sanctioned by the court, the debtor company is not automatically deemed to be bankrupt (as is the case under a BIA proposal); although an unsuccessful restructuring under the CCAA generally results in a liquidation by way of bankruptcy or receivership proceedings subsequently initiated by a stakeholder of the debtor company.

*Smaller companies seeking to restructure are able to utilize the proposal provisions under the BIA, which are conceptually similar to the provisions of the CCAA.

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Cross-Border Insolvency Regime

Prior to the 2009 amendments to the CCAA and BIA, the cross-border insolvency provisions of the CCAA and BIA aimed at addressing international insolvencies and recognizing comity of law and international coordination were very limited. The 2009 amendments to the CCAA and BIA repealed the prior cross-border insolvency provisions and replaced them with what are now Part IV of the CCAA and Part XIII of the BIA - a modified version of the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency.

Although the intent of the amendments was to codify the principles of comity and cooperation in the context of the CCAA and BIA, the effect of the amendments was to provide the Canadian courts with the authority and considerable discretion and flexibility to make orders and grant such other relief as the court considers appropriate. The amendments to Part IV of the CCAA and Part XIII of the BIA have provided a much more comprehensive framework for the coordination of cross-border insolvency proceedings in Canada.

The new provisions provide a complete code for the recognition of foreign insolvency proceedings in Canada. Certain of the key elements of the new provisions are as follows:

1. An application to the Canadian court for the recognition of a foreign proceeding may be brought by a “foreign representative” and must be accompanied by various documents evidencing the existence of the foreign proceeding and the authority of the foreign representative to bring the application.
2. Once the Canadian court is satisfied that the recognition proceeding relates to a foreign proceeding and that the applicant has been duly appointed as the “foreign representative” in that proceeding the Canadian court essentially has no discretion, but to recognize that foreign proceeding.
3. In recognizing a foreign proceeding the Canadian court must specify whether the proceeding is a foreign “main” or “non-main” proceeding. If recognized as a foreign “main’ proceeding the Canadian court is required to grant certain specific relief under section 48 of the CCAA, including a stay of proceeding.
4. Once a foreign proceeding has been recognized by the Canadian court, the court is vested with a high level of discretion in recognizing post-recognition orders made in the foreign proceeding, or in granting supplemental relief in the Canadian recognition proceedings, provided that the court is satisfied that the orders to be recognized or the relief to be granted, is for the protection of the debtor company’s property or the interests of creditors.
5. Once a foreign proceeding has been recognized by the Canadian court, the foreign representative has certain specific statutory duties, including:
6. • Informing the Canadian court as to any substantial change in the status of the foreign proceeding;
   • Its authority to act as foreign representative in that proceeding; and
   • Publishing a notice in one or more Canadian newspapers of certain prescribed information about the foreign proceeding.
7. A foreign representative’s application to the Canadian court for a recognition order will not cause the foreign representative to have attorned to the jurisdiction of the Canadian court for any other purpose other than for costs related to the recognition proceeding.
8. Although not required by the CCAA, it is common practice in Canadian recognition proceedings for the Canadian court to appoint an Information Officer (similar in nature to a monitor) for the primary purpose of providing “objective” information to the Canadian court and interested Canadian creditors. The Information Officer performs many of the duties statutorily imposed on the foreign representative, including the duties under #5 above.

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Receiverships

It is a common practice in Canada for a secured lender to appoint a receiver, or a receiver-manager (collectively, the “Receiver”) over the property and assets of the debtor company in order to realize on the lender’s collateral.

Although privately appointed Receivers may be appointed pursuant to the lender’s security agreements, it is a far more common practice for the secured lender to apply to the court and have a Receiver appointed by court order. A “court-appointed receiver” will then have the mandate and specific powers as set out in the order appointing the Receiver—most typically to take possession and control of the property and assets of the debtor company, with the authority to market and sell them in a commercially reasonable manner (whether as a going concern, en-bloc, or otherwise) under the supervision of the court and upon further order of the court, to distribute the proceeds thereof to the stakeholders in accordance with their legal entitlement.

The 2009 amendments to the BIA introduced the concept of a “national” Receiver and provide a statutory framework for a Receiver to carry out its mandate on a national basis, rather than relying on the various provincial statutes for its authority. Accordingly, on the application of a secured creditor, a court may now appoint a national Receiver to take control of the property, assets, business and affairs of a debtor company, wherever situate in Canada and take any other action that the court considers advisable.

In many of Canada's provinces the process of appointing a Receiver has been standardized in that judges with insolvency experience are typically assigned to supervise the case and orders appointing Receivers are generally fairly standardized in most provinces.

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Liquidations under the BIA

In Canada, a corporation will become bankrupt where:

• The corporation makes a voluntary assignment into bankruptcy;
• One or more of the corporation’s creditors obtain a Bankruptcy Order against the corporation; or
• The corporation seeks to reorganize under the proposal provisions of the BIA and the reorganization fails.

Upon a bankruptcy occurring, a trustee in bankruptcy (“Trustee”) is appointed and all of the insolvent’s property on the date of the bankruptcy (as well as any property the bankrupt acquires after the date of the bankruptcy) vests in the Trustee. The Trustee’s principal mandate is to liquidate the property of the estate and distribute the proceeds thereof to the creditors of the estate in accordance with the prescribed statutory scheme of distribution as set out in the BIA.

A creditor’s role in the administration of the bankruptcy estate is generally limited to filing a proof of claim with the Trustee in the form prescribed by the BIA. The Trustee then evaluates the proof of claim and either allows, or disallows the creditor’s claim. If the claim is disallowed, the affected creditor may appeal the Trustee’s decision to the court. If the claim is allowed, the creditor will share in the recovery from any realization on the property of the bankrupt in accordance with the priorities as prescribed under the BIA. Generally, under the scheme of distribution, certain specified amounts owing for wages and pension claims have a statutory priority, followed by amounts owing to various government authorities for specific statutory trusts (e.g. Canada Revenue Agency), then secured creditors, then certain classes of preferred creditors and, lastly, to unsecured creditors generally.

It is important to note that secured creditors are generally unaffected by a Bankruptcy Order .A secured creditor is entitled to realize on its security and to the extent that it incurs a deficiency upon completing its realization, it will be entitled to prove the balance of its claim as an unsecured creditor in the bankruptcy. A secured creditor may also elect to surrender all, or a portion, of its security to the Trustee and prove the surrendered portion of its claim in the bankruptcy as an unsecured creditor.

The 2009 amendments to the BIA also replaced the former “settlement” and “reviewable transaction provisions” of the BIA with a new remedy described as “Transfers at Undervalue.” The new sections provide an effects-based test for non-arm's length transfers of a debtor company’s property and assets. The CCAA also adopted the amended and expanded preferences section in the BIA to make the two statutes consistent regarding attacking preferences and transfers at undervalue.

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Conclusion

This overview provides a general summary of commonly used Canadian insolvency and restructuring regimes. Specific applications will vary according to the facts of each case and according to what region of Canada is involved. Advice should be sought in respect of specific incidents and sought promptly since many remedies - like supplier recovery rights - are time sensitive.

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Additional Resources

ACC Resources

• ACC QuickCounsel (2010): Cross-border Comparisons: Canada and Its Legal Framework
• ACC Article (2010): Insolvency Proceedings in Canada
• ACC Top Ten (2009): Top Ten Things to Consider When Doing a Deal in Canada
• ACC Article (2009): Doing Business in Canada: Practical Considerations for Investors
• ACC Docket Article (2006): Tips & Insights on Cross-border Relations

Web Resources

• Insolvency Institute of Canada (2011)
• Insolvency and Restructuring Group (Fraser Milner Casgrain LLP, 2011)
• Office of the Superintendent of Bankruptcy Canada (2011)
• Industry Canada (Government of Canada, 2011)

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Published November 30, 2009 (Updated September 14, 2011)

Reprinted with permission from the Association of Corporate Counsel
2010 All Rights Reserved
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