The CCAA is the Companies’ Creditors Arrangement Act which is a federal law that governs insolvent businesses that have debts in excess of $5 million.
When a corporation restructures their business under the CCAA they will receive short term protection from their creditors to give the business a chance to restructure their financial affairs so the business can become profitable again and be saved from insolvency.
As such, the main purpose of the Companies’ Creditors Arrangement Act (CCAA) is to allow companies struggling with staying financially viable to avoid bankruptcy, seizure of assets or other collection actions while preserving the company’s value and the jobs of its employees while also maximizing returns for the creditors of the company.
When a company goes through the CCAA, the proceedings under the CCAA will be carried out with court supervision.
What Are The Requirements of Filing Under The CCAA?
The process of a business going through the Companies Creditors Arrangement Act starts when the struggling company makes an “initial application” to the court for CCAA protection.
The application will be made to the court in the province or territory where the businesses’ head office or place of business is located.
Along with the initial application for the protection of the CCAA the company must send the court a projected statement on cash flow for the business along with copies of the financial statements for the 12 months prior to the application is made to the court.
The most recent statements must be made available if no financial statements were made in the previous year.
A senior official will be required to provide an affidavit listing the history of the company, reasoning for the financial challenges of the company, the assets and liabilities of the company, and a list of the creditors and classification of said creditors.
In order for the court to accept the application for the company to receive protection under the Companies Creditors Arrangement Act the court must be satisfied that the company can make a viable restructuring plan and prove to the court that the company intends to act in good faith.
After The Application Is Accepted
Once the application has been accepted by the court the court will issue an order to the company to give them 30 days of protection from its creditors, which is known as a “Stay.”
During the “stay” the company will be required to form a Plan of Compromise or a Plan of Arrangement.
The 30 day period can be extended by asking the court to grant an extension if the company needs more than 30 days to prepare the Plan.
During the stay the business will remain operational and will be protected from any creditor taking action against them.
Making a Plan of Compromise / Plan of Arrangement
When the company comes up with this Plan they will be making a proposal to their creditors that outlines how they will deal with the debts they have existing at the time of the date of the filing, including an explanation of how the business intends to restructure its business operations.
Certain arrangements that can be arrived at during the Plan include:
• Downsizing the company;
• Offering to pay the creditors some percentage of the debt owed;
• Offering to sell assets to raise funds to distribute to the creditors;
• Finding an injection of capital;
• Extending time to repay the debt;
• Transferring of the business to a new company that is controlled by the business’s secured creditors.
Role of the Licensed Insolvency Trustee (LIT)
When a company makes an application under the CCAA a Licensed Insolvency Trustee will be assigned by the court to monitor the process.
Since the LIT is an officer of the court the Trustee will oversee the company’s business and financial affairs to make sure that the business follows the law, terms of the Plan and any court orders.
The LIT might also work with the company and their directors to help them prepare the Plan, reports to the court, and provide information to the creditors.
The LIT will also oversee the creditors’ meeting and the voting that occurs at these meetings to determine if the Plan will be accepted.
How Does The CCAA Process Impact The Companies’ Employees?
When a company enters into the CCAA process, all of their agreements with its employees are kept in place unless the collective agreements are amended in the Plan with the agreement of all of the parties involved.
Source deductions (income tax withholdings for employees, Pension Plan contributions and EI premiums) must have a provision in the plan to be paid within 6 months of the court approving the Plan.
Meeting of Creditors
Once the LIT and the company have prepared a Plan to present to their creditors under the CCAA the creditors will have a chance to review the Plan.
If the creditors call for a meeting of creditors the meeting will be held at the Trustee’s office and the creditors will vote to accept the proposal.
While the company does not automatically become bankrupt if the Plan is not accepted the “stay” which provides the protection from creditors is likely to be lifted.
Classes of Creditors
For a CCAA Plan to be accepted it must be voted on by the majority of the creditors in each class to be accepted.
The creditors voting must also represent 2/3rds of the value of the claims of the creditors.
Distribution Of Payment If The Plan Is Accepted
Once the Plan has been voted to be accepted the company will apply within days to the court for the court to grant its approval of the Plan, which is known as a “Sanction.”
The court must deem that the Plan is fair to the creditors and the company, meets the requirements of the CCAA and deals with any previous court orders in order to sanction the plan.
The court can determine that the Plan is not viable and will not agree to sanction the Plan.
Do You Have Questions?
To learn more about the CCAA you can contact one of our LITs to review how taking advantage of the CCAA can help your company.