A corporation facing financial difficulties in Canada, depending on its size, can utilize one of two federal statutes to reorganize and survive — either the Bankruptcy and Insolvency Act (BIA) or the Companies Creditors Arrangement Act (CCAA).
Both can be used to accomplish a corporate restructuring to move forward, with some differences, though the CCAA is reserved for businesses owing at least $5 million or more to creditors.
If your corporation is in need of restructuring to survive and thrive once again, and you’re operating in or around Toronto, Hamilton, London, or Ottawa, Canada, contact Matthew R. Harris Law P.C., to speak with a corporate insolvency lawyer with years of experience helping individuals and companies successfully navigate through both the BIA and CCAA.
When a business faces insolvency, federal laws allow it to restructure both its finances and its internal operations. The goal is to make debt servicing more manageable while streamlining operations through staffing changes, sale of assets, and a refocusing of the business itself, as necessary.
Both the BIA and the CCAA allow businesses, in this case, a corporation, to propose how they plan to restructure, subject to approval by creditors and the court overseeing the reorganization. The BIA restructuring process is more focused and constrained than the CCAA process, but both essentially operate in the same way, beginning with a proposal on how the business plans to restructure.
Unless a corporation’s debt rises above $5 million, it must use the Bankruptcy and Insolvency Act (BIA) to restructure. Once the corporation files a notice of intent (NOI) or a reorganization proposal itself, it will be granted an automatic 30-day stay, which will stop all creditor actions, including any repossessions or foreclosures. Under the BIA, the initial 30-day stay can be extended for up to six months but no longer.
The plan for reorganization is formally called a Division 1 Proposal, and it must be submitted to a Licensed Insolvency Trustee (LIT) for supervision. The proposal will generally ask creditors to accept either less money or better terms, or both, on the debt owed to them.
Creditors are grouped into classes, and each class of creditors will vote on the proposal. Two-thirds of each class, as established by dollar value, must approve of the proposal for it to proceed, but it must also represent a majority of the creditors. In other words, if there are 10 creditors in a class, and two out of the 10 hold two-thirds of the debt and they are the only ones voting to approve, the proposal will be rejected.
Creditors may be inclined to approve the proposal if it means they can realize more on their debt than they would through a straight liquidation of assets. If the proposal is approved, dissenting creditors are nonetheless bound by it. The final step is for the bankruptcy court to approve the plan.
During this entire time and following the approval of the proposal, the debtor continues to operate the company under the watchful eye of the LIT and court.
Other than the size of the debt load required to qualify, both the BIA and CCAA have similar requirements. The CCAA, however, allows the court to extend the stay of creditor actions for longer than six months, sometimes even for years in more complex cases. A BIA is generally wrapped up in four to six months, but a CCAA restructuring has no statutory time limit.
The debtor organization must still file a proposal to restructure and get debt under control. However, the CCAA does not rely on the services of a LIT. Instead, the court will appoint a monitor to oversee the entire process. The proposal is still subject to approval by creditors by what is called a “double majority,” that is, a majority of voters in each class representing at least two-thirds of the total value of debt held.
The debtor organization is generally allowed to continue to operate the business as a going concern as it fulfills its obligations under the approved proposal, again with the oversight of the monitor and the court itself. In CCAA proposals, the court tends to be much more involved than in a BIA proceeding.
The stay of proceedings prohibits contracting parties from terminating their agreements or ceasing to fulfill their contractual obligations. The debtor, however, has the right to disclaim most types of agreements by delivering a formal notice. The disclaimed party can then file for damages. The sale of assets, in contrast, must be approved by the court.
Financial institutions such as banks and insurance companies are subject to the Winding-Up and Restructuring Act and its requirements. In certain circumstances, Canadian corporations can restructure under the Canada Business Corporations Act (CBCA), which also requires court approval.
A CBCA proposal does not trigger an automatic stay, but courts will sometimes grant one anyway. The debtor remains in charge of operations, but there is no monitor appointed, nor is there supervision by the court. The CBCA is thus less costly than a CCAA filing and does not necessarily carry the stigma of bankruptcy with it, but it does rely on voluntary agreement by creditors, who may choose to push the matter into liquidation.
As you can see, the process of restructuring a corporation in Canada can be a complex and time-consuming process, with unforeseen legal and financial hiccups often making matters even more challenging. That’s why you need the counsel and guidance of a trained and experienced lawyer who understands corporate law and how to navigate the various complexities of corporate restructuring.
If you or someone you know is facing the prospect of corporate restructuring, don’t face these challenges on your own. Reach out to Matthew R Harris Lawyer P.C. today to receive reliable legal guidance that you can trust.
Matthew R. Harris Law P.C. helps clients with insolvency and reorganization issues throughout Toronto, Hamilton, London, and Ottawa, Ontario. If you’re facing corporate insolvency and need to restructure, call today for an initial consultation. We can discuss your options with you and help chart the best course of action that can help you and your business move forward.