Commentary: Restructuring alternatives for Canadian companies

As terms such as “proposal”, “CCAA” and “bankruptcy” are mentioned frequently in Canadian business news these days, it’s important to understand what they actually mean, and when and how they may be of use to fiscally-challenged companies. What follows is a primer of the common formal restructuring options available in Canada.

Division 1 Proposal

The filing of a “Division 1 Proposal” under the Bankruptcy & Insolvency Act (BIA) is in effect an attempt by a company to seek the support of its creditors for time to restructure the company with the promise of providing a greater return to them than they would receive if the company were bankrupt.

The company stays in control of its operations, and is granted a stay from its unsecured creditors and possibly secured creditors as well, while it restructures the company.

The Division 1 Proposal is best for companies when the restructuring is not complex and it can be completed within a relatively short period of time. In many commercial situations, the filing of a Proposal is preceded by the filing of a “Notice of Intention to File a Proposal” (NOI) which effectively gives the company an extended period of time within which to craft its restructuring.

The filing of a NOI provides the company with an automatic 30-day stay of proceedings as against its creditors which stay can be extended incrementally for up to six months upon application to court.

The automatic stay is one of the salient features of the Division 1 Proposal. The intention of this restructuring tool is to bring all of the company’s stakeholders to the table and obtain agreement on an offer to the company’s creditors that will provide a more attractive return than if the company filed for bankruptcy, thus allowing the company to continue operations. Proposals are limited only by the skill of the drafter and can include offering creditors a portion of the company’s future profits to offering shares of the company.

CCAA

A Division 1 Proposal may not be suitable for all companies, especially when the 6-month timeframe to file a Proposal is too short and greater flexibility is required for the restructuring.

Similar to a Division 1 Proposal, in a Companies’ Creditors Arrangement Act (CCAA) proceeding the company stays in control of its business throughout the process, but a monitor is appointed through the courts to assist the company in preparing its plan of arrangement and provide periodic reports on the restructuring to the court and creditors. The CCAA is available as a restructuring alternative only to companies which have total liabilities greater than $5 million.

The benefit of filing under the CCAA is that it offers the company more flexibility and no firm deadline to complete its restructuring. It also allows for the restructuring of multiple related companies within the same proceedings and is more effective in dealing with internationally related companies or subsidiaries than through a Division 1 Proposal. In addition, during this process the court has the authority to designate “Critical Suppliers” which mandates that certain suppliers may be required to continue supplying to the company during the CCAA process, even on credit, as supplies or services from these creditors are deemed critical to the ongoing operations of the company.

Companies that seek proceedings through the BIA or CCAA to restructure their company often seek interim financing, which is colloquially referred to as “Debtor-in-Possession” (DIP) financing. This interim financing provides immediate funds for the company which allows it to continue operations during the formal restructuring proceedings, including continuing production and exploration activities.

Lenders therefore are more inclined to advance funds through DIP financing than they might otherwise, as they are usually given security over the company’s assets ahead of all other creditors as collateral for the funds advanced. This type of financing is usually provided from the current lenders or investors of the company. 

Bankruptcy

Filing an assignment into bankruptcy is generally the last option when all other options are no longer deemed viable. By filing an assignment into bankruptcy, the company divests itself of all its assets to a Trustee-in-Bankruptcy. The business immediately shuts down, which means all employees of the company are effectively terminated. The Trustee, through direction from the creditors, will then administer the bankrupt estate — a duty which includes chairing meetings, selling assets, preparing notices and reviewing creditors’ claims.

While the bankrupt company has effectively shut down, it may still offer value to third parties, which may be interested in acquiring the company’s assets. The Trustee may sell assets such as equipment, mining rights, and shares to interested parties.

Alternatively, the Trustee can, subject to appropriate funding, continue to operate and sell the company as a going-concern. This is rare in the context of a bankruptcy.  Proceeds from the sale of the assets are then distributed to the creditors based upon the priority prescribed by the BIA.

Sometimes the individual assets of a company may offer more value than the sum of its parts. Reasons for this could be the company’s poor capital structure, unfavourable agreements, or large trade creditor liabilities, all of which make it difficult for obtaining new financing or finding an en bloc purchaser.

Using the formal restructuring options available in Canada to address these common areas of concern may help achieve results which otherwise could not be possible.

Deciding when these options may be appropriate can be a difficult decision for any company to determine on its own. The timing of these decisions is critical as waiting too long can often seal the fate of the enterprise at risk.

— Bryan Litvack, CPA, CA, CIRP is a Trustee-in-Bankruptcy with msi Spergel Inc. in Toronto, whose practice focuses on corporate restructuring and insolvency. He can be reached at 416-498-4312 or blitvack@spergel.ca. See www.spergel.ca for more information.