The economic landscape is dynamic, with businesses constantly grappling with financial uncertainties. In such scenarios, Restructuring & Insolvency Laws & Regulations Canada play a crucial role by providing a legal framework to manage and minimize financial distress. This article offers a comprehensive understanding of these regulations, highlighting their application, influence, and potential future amendments.
1. Understanding the Jurisdiction: Canada
1.1 Debtor-friendly Landscape
Canada swings towards a debtor-friendly spectrum. The insolvency legislation in the country provides broad rights and protections to both creditors and stakeholders while allowing distressed debtors to retain their assets and restructure their affairs under court supervision. The primary goal of Canadian insolvency legislation is to facilitate reorganizations, thereby averting the dire social and economic consequences of bankruptcy or liquidation.
1.2 Insolvency Legislation in Canada
Insolvency is under federal jurisdiction in Canada, encompassing two distinct processes: bankruptcy (a piecemeal liquidation of the debtor’s assets) and restructuring (a reorganization through an agreement between the debtor and its creditors or a sale of the debtor’s business or assets). Restructurings can be executed under three main regimes: the Companies’ Creditors Arrangement Act (Canada) (the “CCAA”), the Bankruptcy and Insolvency Act (Canada) (“BIA”) proposal provisions, and the plan of arrangement provisions of federal or provincial corporate legislation.
1.3 Informal Work-outs and Formal Restructuring
Apart from formal restructuring and insolvency proceedings, Canada also permits out-of-court (or informal) restructurings. These are often carried out against the backdrop of potential court-supervised proceedings. However, achieving consensus among diverse creditors can be challenging without a court process. In such cases, companies may resort to a CBCA restructuring without formal insolvency proceedings.
2. Key Considerations in Financial Difficulties
2.1 Duties and Liabilities of Directors/Managers
Canadian corporate legislation imposes two principal duties on directors and officers: a fiduciary duty and a duty of care. The fiduciary duty requires them to act honestly and in good faith with a view to the best interests of the corporation. The duty of care necessitates diligence in supervising and managing the corporation’s affairs. Although the interests of creditors may increase in relevance as a corporation’s finances deteriorate, directors’ and officers’ duties remain to act in the best interests of the corporation.
2.2 Stakeholder Influence and Restrictions
In a restructuring, the CCAA and the BIA’s proposal provisions permit debtors to obtain a broad stay of proceedings to prevent most creditor enforcement actions. Certain key stakeholders, such as secured creditors, landlords, government entities/regulatory bodies, employees, and suppliers/contract counterparties, can influence a decision on a restructuring path.
2.3 Challenging Transactions
Certain transactions may be challenged under the BIA by the trustee or under the CCAA by the court-appointed monitor if they took place within a certain period before a restructuring or bankruptcy proceeding. These include “preferences” (pre-filing transactions between an insolvent debtor and a creditor) and “transfers at undervalue” (a disposition of property or provision of services for which no consideration is received by the debtor or for which the consideration received by the debtor is conspicuously less than fair market value).
3. Exploring Restructuring Options
3.1 Informal Work-out
Out-of-court (or informal) restructurings are allowed in Canada and often involve forbearance agreements and implementation of some pre-emptive transaction, such as an equity injection, an asset sale, or new or refinanced debt.
3.2 Formal Restructuring Procedures
The CCAA is Canada’s principal restructuring tool for mid-sized and large companies in financial difficulty due to its flexibility to adapt procedures and relief to unique circumstances. The BIA’s proposal regime is a more rules-based restructuring framework that offers a more expedient and often less costly means of restructuring.
3.3 Debt-for-equity Swaps and Pre-packaged Sales
Debt-for-equity swaps are often used in plan or proposal processes. Additionally, creditors may credit bid the value of their debt in a sale scenario. There is no express prohibition in either the CCAA or BIA on pre-packaged sales.
3.4 Creditor and Shareholder Influence
Shareholders cannot block a sale transaction or a CCAA plan of arrangement or BIA proposal. Creditors have more leverage than shareholders in a restructuring, as a CCAA plan or a BIA proposal require approval by each class of affected creditors.
3.5 Criteria for Restructuring Procedures
The CCAA applies to a debtor company or a group of affiliated companies that has assets in Canada or carries on business in Canada and has total claims against such debtor company or group of affiliated companies exceeding CA$5 million. BIA proposal proceedings may only be commenced by an “insolvent person”. The CBCA’s arrangement provisions are available to solvent federally incorporated companies seeking court assistance to effect a “fundamental change” in the nature of an “arrangement” that could not otherwise be achieved under the CBCA.
3.6 Management and Court Involvement
The level of court involvement and oversight varies depending on the particular restructuring process. An initial CCAA order must appoint a “monitor” as a court-officer to supervise and report on the debtor company’s activities, liaise with creditors and assist in the debtor company’s restructuring efforts. Court approval is needed for most steps in a CCAA restructuring.
3.7 Impact on Existing Contracts
In CCAA and BIA restructurings, counterparties to existing contracts with the debtor are typically prohibited by the stay of proceedings from enforcing any claims they have as a creditor against the debtor or from exercising any other rights against the debtor or its property.
3.8 Funding Restructuring Process
Debtors restructuring under the CCAA and BIA commonly seek court approval of Debtor-in-Possession (“DIP”) financing to finance their business and restructuring efforts.
4. Insolvency Procedures
4.1 Key Insolvency Procedures
Most wind-ups are completed through a bankruptcy under the BIA. If a company does not have any assets, it can also be wound-up/dissolved under corporate law.
4.2 Grounds for Winding up Procedure
A debtor company may initiate bankruptcy proceedings under the BIA by filing an assignment for the benefit of its creditors in the prescribed form and a sworn statement of affairs with the Official Receiver.
4.3 Management of Winding up Process and Court Involvement
When a bankruptcy order is issued or an assignment in bankruptcy is filed, the bankrupt’s assets vest in the trustee in bankruptcy, who is appointed by the debtor in a voluntary assignment or by the creditor in a bankruptcy order application.
4.4 Creditor and Shareholder Influence
In a bankruptcy, the debtor’s unsecured creditors are prohibited pursuant to an automatic stay of proceedings from commencing any proceedings against the debtor to recover their debts or from exercising any rights against the debtor or its property.
4.5 Impact on Existing Contracts
In a bankruptcy or receivership, the debtor’s existing contracts are not automatically terminated (other than employment contracts in bankruptcy).
4.6 Ranking of Claims
The ranking of claims is codified under the BIA. The BIA’s priority scheme is expressly subject to the rights of secured creditors, who are generally entitled to enforce against their collateral for payment of their respective claims.
4.7 Company Revival
A company that is wound-up under the CBCA can be revived through the application of an interested person. Even though a bankrupt company may be revived under the BIA, such revival will not change its bankruptcy status.
5. Tax Implications
The commencement of restructuring or bankruptcy proceedings does not impose any significant incremental tax risks on debtor companies. However, there are certain tax implications that should be considered.
6. Employee Implications
A bankruptcy immediately terminates the employment of the debtor’s employees. Restructuring proceedings, on the other hand, do not have any automatic effect on the employment of the debtor’s employees.
7. Cross-Border Issues
7.1 Foreign Companies in Canadian Restructuring Procedures
The CCAA and BIA are available to foreign companies if certain conditions are met.
7.2 Recognition of Foreign Proceedings in Canada
The CCAA and BIA both provide a framework for recognising foreign insolvency and restructuring proceedings.
7.3 Canadian Companies in Foreign Proceedings
Subject to the laws of the proposed foreign jurisdiction, Canadian federally and provincially incorporated companies can enter insolvency proceedings in jurisdictions outside of Canada.
8. Treatment of Group Companies
There are multiple approaches to dealing with corporate groups upon the insolvency of one or more of its members.
9. Future Proposals
The Canadian government is considering a proposal to amend the BIA and CCAA in an effort to improve the protection of pension entitlements in insolvency proceedings. If passed as law, this proposal, titled Bill C-228, An Act to Amend the Bankruptcy and Insolvency Act, the Companies’ Creditors Arrangement Act and the Pension Benefits Standards Act, 1985, will give claims in respect of unfunded liabilities or solvency deficiencies of pension plans “super-priority”.
