Sandra Abitan, Tracy Sandler
Canada’s insolvency and restructuring regime consists primarily of two separate statutes that have been substantially amended in recent years to align their restructuring provisions. Despite some similarities with its U.S. counterpart, the Canadian regime remains distinct. The following chapter introduces the Acts that govern corporate restructurings in Canada and some notable differences between insolvency and restructuring law in Canada and the United States.
Corporate restructurings in Canada are generally governed by either the Companies’ Creditors Arrangement Act (CCAA) or the proposal provisions of the Bankruptcy & Insolvency Act (BIA), both of which are broadly akin to Chapter 11 of the U.S. Bankruptcy Code. The CCAA provides tremendous flexibility to the supervising court and the debtor in conducting restructuring proceedings, but the CCAA is only available to debtors with total debts of over $5 million. In contrast, the BIA proposal provisions are available to all corporate debtors and provide a much more structured set of rules and regulations. Nonetheless, both statutes provide for a stay of creditors’ rights and remedies; the filing of a plan or proposal to compromise the debtor’s debts; meeting(s) of affected classes of creditors for voting on the debtor’s plan or proposal; followed by court sanction. It is also possible for a debtor to seek court approval of a sale of some or all of its assets as an alternative to a plan. In both cases, a court appointed officer, called the “monitor” in CCAA proceedings and the “proposal trustee” in BIA proposal proceedings, is engaged to monitor the debtor’s affairs and to report to the court and the creditors with respect to the proceedings.
In certain circumstances, other statutes could be used by a Canadian company seeking to restructure. For example, Canadian corporate statutes (such as the Canada Business Corporations Act) contain provisions that may be used to effect certain fundamental changes in corporate structure through a court approved plan of arrangement, which can include a compromise of bond debt.
A corporation’s circumstances, its goals and its relationships with its creditors will determine which statute is the most appropriate tool for its restructuring.
Liquidations are generally conducted under the bankruptcy provisions of the BIA, which is broadly akin to Chapter 7 of the U.S. Bankruptcy Code. Upon bankruptcy, all of the assets of the bankrupt debtor vest with a trustee in bankruptcy who is responsible for realizing upon the assets of the debtor and administering a claims process to distribute value to creditors. The trustee’s rights are generally subject to the interests of secured creditors, who can continue to exercise their rights and remedies against secured assets. Typically, secured creditors seek the appointment of a receiver (or receiver and manager) through application to court under the BIA or under provincial law in most provinces, or, less frequently, through private appointment under the applicable security agreement. A receiver will proceed to sell the debtor’s assets, manage the debtor’s business or otherwise realize upon the collateral, with the proceeds from its activities payable in accordance with the established priorities.
Treatment of Certain Claims
The Canadian insolvency regime (in conjunction with certain other federal and provincial law) establishes a hierarchy of priorities for certain claims against the insolvent debtor. Among other things, Canadian law provides super-priority status to certain claims, such as payroll deductions relating to employee income taxes, government operated pension plans and employment insurance, as well as for certain private pension contributions (if any), unpaid wages and employee disbursements and, in some circumstances, collected and unremitted Goods and Services Tax and Harmonized Sales Tax. These super-priority status claims are secured on certain assets of the debtor and such security may rank in priority to the security interests of existing secured creditors.
In addition, it is not unusual for a court to grant super-priority security interests or charges (which could be in priority to the security interests of existing secured creditors) on the assets of a debtor company to secure the payment of certain amounts, including amounts to be borrowed under an interim financing agreement (often called debtor-in-possession or DIP financing) entered into facilitate the restructuring, any amounts owing for the fees and costs of professionals involved in the restructuring (including the fees of the court appointed monitor in CCAA proceedings or of the court appointed receiver) and certain obligations of directors of the company with respect to their statutory liabilities.
Recognition of Foreign Insolvency Proceedings
In a cross-border insolvency, Canadian courts generally encourage coordination among the various proceedings in all jurisdictions so that the restructuring or liquidation can proceed in a fair and orderly manner. Part IV of the CCAA and Part XIII of the BIA facilitate coordination of cross-border insolvencies by permitting Canadian courts to recognize certain orders made in foreign insolvency proceedings. These provisions of the CCAA and BIA embody certain essential features of the United Nations Commission on International Trade Law’s Model Law on Cross-Border Insolvency, and are broadly akin to Chapter 15 of the U.S. Bankruptcy Code.
Where a primary insolvency proceeding is taking place outside of Canada, a foreign representative from those proceedings can appear in a Canadian court and obtain recognition of the relevant foreign court order(s), a stay of proceedings in respect of the exercise of rights and remedies against the debtor or the debtor’s property in Canada and other appropriate relief. Canadian courts have also authorized numerous court-to-court protocols to facilitate cases with complicated cross-border aspects.
Despite certain similarities with the U.S. Bankruptcy Code, there are still many notable differences between insolvency and restructuring law in Canada and the United States. For instance, unlike the United States, neither the CCAA nor the BIA authorizes a court to consolidate the assets or liabilities of different entities; however, Canadian courts have exercised their equitable authority under both statutes to consolidate the estates of related debtors. In addition, while the doctrine of equitable subordination is an accepted and codified feature of the U.S. legal landscape, it may not be applicable in Canada.