Commercial Restructuring under the Companies’ Creditors Arrangement Act (CCAA)
Companies’ Creditors Arrangement Act (CCAA)
CCAA is an act that applies to Canadian corporations that are insolvent and have at least five million dollars worth of liabilities. When filed in the court, the law gives the financially troubled company short-term protection from its creditors so that the company can reorganize its operations, financial transactions and commercial dealings and then continue to operate. In essence, it gives the insolvent company an opportunity to rehab.
In order to use and evoke CCAA, corporation must have at least $5mn in liabilities thus restricting the use to only larger Canadian or foreign corporations carrying on business or having assets in Canada. If liabilities fall under the threshold set by CCAA a company can choose to use restructure under Division I Proposal under the BIA as long as it owes $1,000.
Pursuant to most CCAA Court Orders, generally all payments to creditors owed monies, as of the date of the CCAA filing, are stayed pending the creditors' vote on the Debtor's proposed plan of arrangement and compromise called the "Plan".
Post CCAA filing, a creditor need not continue to supply credit to the Debtor. Most CCAA Court Orders provide that the Debtor will carry on business in the normal course and pay for post-CCAA filing for goods and services on normal credit terms. It is however advisable to read and legally review the Court Order under CCAA before choosing to stop of credit terms for the debtor company under CCAA protection.
In order to reorganize under CCAA a company has to begin the process by applying to the Court system in Canada. The Court may issue a ‘Court Order’ giving the company 30 days of protection (often referred to as the "Stay") from its creditors to allow for the preparation of the ‘Plan of Arrangement’. The Stay is not automatic as under the Proposal in BIA. The appointing Court Order and any subsequent Court Orders sets out the conditions under which the Debtor can continue operations and the restrictions imposed on the action of creditors.
The Court can extend the initial Stay of 30 days against the creditors upon further application to the Court by the company. As long as the extension of the Stay is not prejudicial to the creditors, the Court may continue the protection beyond the initial 30-day period if the company can demonstrate that it is likely that it will file a Plan of Arrangement. There is no time limit on how long the Stay can be extended. Statistically, according to a report submitted to the Senate Committee on Banking and Trade in 2003 a typical CCAA restructuring Stay in Canada averages around 14 months. The Air Canada Stay under CCAA lasted for approximately 18 months.
During the Stay period, the debtor company will often stay in control of the operations know as Debtor-in-Possession (DIP) and commence restructuring activities at any time.
Amendments to the act now require that a Monitor be appointed in restructuring under CCAA. Generally the debtor company's auditors end up as Monitors, which might be viewed as conflict as interest and a paradox. Also, BIA has a system of administrative supervision of bankruptcy proceedings under the Office of the Superintendent of Bankruptcy but no comparable system of administration exists under the CCAA.
The appointment of a Monitor is by the Court and broadly includes the following duties:
- Monitoring the business
- Assisting the company in the preparation of the Plan of Arrangement, notifying the creditors (and shareholders) of any meetings. A ‘Plan of Arrangement’ is the proposal that the company is presenting to its creditors on how it intends to deal with debt it owes at the time of the initial filing with the Court
- Report on the Plan of Arrangement that is usually included in the mailing of the Plan.
- Tabulating the votes at such meetings.
- Reporting to the Court on any major events that might impact the viability of the company,
In due course of the granted ‘Stay’ the company files its ‘Plan of Arrangement’ with the court and forwards a copy it to the creditors. CCAA also allows a company, if it so chooses, to address its shareholders in addition to its creditors. When the shareholders of the company are impacted by the Plan of Arrangement under CCAA, they are often given the copy of the Plan of Arrangement and an opportunity to vote on the restructuring Plan.
A meeting of the creditors and shareholders, if applicable, is called upon to vote on the Plan. In order to be able to vote on the Plan and receive any distribution under it, a creditor must file a Proof of Claim with the Monitor. The Proof of Claim sets out what is owed to the creditor and is reviewed by the Monitor and the company.
For the Plan to be binding on each class of creditors, a majority of the proven creditors in that class, by number i.e. 51%, together with 66.66% of the proven creditors in that class, by dollar value, must approve of the Plan presented to them.
If a class of creditors approves the Plan, it is binding on all creditors within the class, subject to the Court's approval of the Plan.
As a final step the court must approve the Plan when all of the classes of creditors and shareholders, if applicable, approve of it.
Upon the approval of the Court, the company continues to operate as outlined under the Plan until it has satisfied the requirements of the Plan.
If a class of creditors or the Court does not approve the Plan, the company is not automatically placed into bankruptcy but instead the Stay is lifted. However upon the Stay being removed the normal creditor’s remedies are reinstated, which might then force the company into receivership or bankruptcy.
Note that as a supplier, you may not be able repossess your goods and or inventory after a customer has filed for protection under CCAA, pursuant to Section 81.1 of the Bankruptcy and Insolvency Act. This is because a number of recent Court decisions have ruled in favor of the debtor company under CCAA protection.
In terms of the priorities that exist for post-insolvency financing or Debtor-in-possession (DIP) financing, neither the BIA nor the CCAA deal with the issue. In the context of CCAA reorganizations Courts have, however, on occasion provided lenders with super-priority security for financing the operations of the debtor during the reorganization period.
Canada has had companies like Eatons, Stelco and Air Canada evoke CCAA to restructure. CCAA was amended as recently as 1997 to harmonize it with the BIA. BIA on the other hand allows for reorganizing under Part III of the act under Proposals and has more rigid rules for presentment their reorganizing plans to the creditors with stipulated time frames. If a reorganization plan fails under BIA bankruptcy follows but under CCAA bankruptcy could follow. The case of Bankruptcy following a CCAA is Jetsgo Corp.
Some significant entities are excluded from the operation from the BIA and the CCAA. These primarily include banks, insurance companies and trust companies which are liquidated under the provisions of the federal Winding-Up and Restructuring Act. Also excluded from the operation of the BIA are railways, savings banks and loan companies. In addition, provincial corporate legislation provides for dissolutions but these provisions are of limited practical applicability.
Successful reorganization provides better return to creditors than if they ended up into bankruptcy. It helps in returning businesses into becoming profitable again thus preserving jobs and contributing to the economy.