Sandra Abitan, Audrey DeMarsico
June 14, 2010
On March 22, 2010, the Superior Court of Quebec approved a
plan of arrangement under the Canada Business Corporations Act (the
CBCA) that allowed a corporation, MEGA Brands Inc., to achieve a worldwide
restructuring of its business under a corporate statute, rather than a more
typical insolvency and restructuring statute like the Companies Creditors’
The arrangement compromised the claims of
secured lenders under a credit agreement and two swap agreements as well as the
claims of convertible debenture holders.
The arrangement also effected a significant dilution of shareholders,
but preserved an equity stake in the continuing company for these shareholders. The Court granted a temporary stay of
proceedings against the applicant corporations as well as impleaded parties in
the United States, Europe, and Mexico.
On March 23, 2010, the United States Bankruptcy Court for the
District of Delaware granted an order enforcing the arrangement in the United
States, under Chapter 15 of the U.S. Bankruptcy Code.
These orders confirm that the CBCA arrangement provision can
provide a practical option for a quick and effective restructuring of a
company’s debt securities where stakeholders support the outcome and the Court
is able to conclude that the transaction is fair and reasonable. This result was of critical importance to
MEGA Brands, given that it operates in the toy industry and its concern that
proceeding under an alternative statutory framework such as the Companies Creditors Arrangement Act and
Chapter 11 under the U.S. Bankruptcy Code, could result in substantial harm to
its relations with suppliers and customers, and substantial erosion
of value to the business and stakeholder interests.
It is the first time an arrangement of this nature has been
implemented in Canada. Although certain companies, such as Abitibi-Consolidated
Inc., have previously tried to restructure under the CBCA, they have not been
able to successfully complete their restructuring under this corporate statute
as MEGA Brands managed to do.
MEGA Brands is a corporation governed by
the CBCA, with its head office and senior management in Montreal. The arrangement involved a transaction
between MEGA Brands and a number of related corporations and direct and
indirect subsidiaries in Canada, the United States, Luxembourg, and Mexico.
Shareholders and lenders voted
overwhelmingly in favour of the arrangement.
In written reasons for issuing the interim
order, Castonguay J. confirmed that restructuring debt is an appropriate use of
the CBCA arrangement provision. He based
this decision on a small line of precedents involving the companies Tembec
Arrangement Inc., Trizec Corporation Ltd., and Abitibi-Consolidated Inc. In the case of MEGA Brands, this included
secured bank debt outstanding under a credit agreement with a number of banks
and other lenders, secured debt under two swap agreements and unsecured notes
issued under a trust indenture.
To be able to avail itself of the CBCA arrangement provisions,
a corporation must be able to demonstrate both that it is not insolvent and
that it is impracticable for the corporation to effect a fundamental change in
the nature of an arrangement under any other provision of the Act. Castonguay J. found that MEGA Brands met the
first of these requirements because at least two of the applicant corporations
were solvent and because MEGA Brands continued to meet its obligations as they
became due and would become solvent upon completion of the transaction. He also found that it was not practicable to
proceed other than by way of arrangement when viewing the transaction as a
complete package, in part because the arrangement contemplated the issuing of
new shares by a company subject to American law. In reaching this conclusion, he preferred the
English version of the arrangement provision over the French, which would
translate literally to “practically impossible” rather than “not
practicable.” He found that the Policy
Statement of Industry Canada concerning CBCA arrangements was consistent with
the more permissive language in the English version. With respect to the stay of proceedings, he
noted that MEGA Brands was party to a number of contracts that could be
interpreted to stipulate events of default if MEGA Brands availed itself of the
CBCA arrangement provision. He noted
that the objectives of the arrangement were legitimate and contemplated by the
statute and that the stay of proceedings was necessary to give effect to these
objectives. He also noted that the stay
was temporary and would only affect a limited number of creditors. For these reasons, he granted a stay of
proceedings relating to any default as a result of the arrangement until the
hearing of the application for a final order approving the arrangement.
Gascon J. did not issue reasons in conjunction with his final
order approving the arrangement. He did,
however, write a preamble to the order noting that the arrangement was fair and
reasonable. In the final order itself,
he gave effect to the mutual releases and discharges contemplated in the plan
of arrangement and declared that the applicants and impleaded parties were
authorized to take all steps and actions necessary or appropriate to implement
the arrangement and the transactions contemplated thereby. He also granted a stay of proceedings
relating to the arrangement until the earlier of May 15, 2010 or the date at
which the arrangement was fully implemented.
He declined to grant a permanent stay of proceedings such as Pepall J.
granted in the Tembec arrangement.
In the U.S. proceeding, Sontchi
J. granted an order recognizing the Canadian proceeding under Chapter 15 of the
U.S. Bankruptcy Code.
Specifically, he found that the Canadian arrangement
proceeding was a “foreign main proceeding” for the Canadian entities involved
and that it was a “foreign nonmain proceeding” for the U.S. entities involved
in the arrangement for purposes of §§ 1515 and 1517 of the U.S. Bankruptcy
Code. He also recognized MEGA Brands’
Chief Financial Officer as the foreign representative of the entities involved
in the arrangement pursuant to § 101(24) of the Bankruptcy Code. Finally, he granted an order giving full
force and effect to the arrangement in the United States.
In particular, Sontchi J. gave effect to the mutual releases
and discharges contemplated in the plan of arrangement; authorized the entities
involved in the Canadian proceeding to take actions in the U.S. necessary or
appropriate to implement the Arrangement and the transactions contemplated thereby;
and gave effect to the stay of proceedings contemplated in the order of Gascon
J. He also authorized the foreign
representative to take all actions necessary to effectuate the relief granted
in the U.S. order.
The orders described above confirm that the
arrangement provision provided in Section 192 of the CBCA can be an effective
mechanism for a company to restructure its debt securities by exchanging them
for cash, equity, new debt, or a combination thereof.
Unlike the CCAA, the CBCA allows the
arranged entities to remain in control of the restructuring process and does
not call for a trustee or court-appointed monitor to oversee the
transaction. Thus, in circumstances
where compromising trade creditors is not an important aspect of the
restructuring, a CBCA arrangement may provide a more efficient and flexible
alternative for corporations that choose to restructure debt. In addition, the CBCA process is faster and
less costly than the CCAA, and there may be a business benefit to not
undertaking insolvency proceedings.
At the same time, it remains an open question as to the scope
of circumstances in which the Court will endorse the CBCA as an appropriate
statutory framework for balance sheet restructuring, particularly where secured
bank debt, non-CBCA companies or broad stays of proceedings are involved.