Copyright 2010, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Restructuring & Insolvency, November 2010
Restructurings involving insolvent companies have typically been carried out under the Companies' Creditors Arrangement Act (CCAA). Recently, however, there have been a number of prominent cases where apparently insolvent companies have filed plans of arrangement pursuant to the Canada Business Corporations Act (CBCA) rather than under the CCAA.
This article briefly outlines the arrangement provisions of the CBCA. While this article focuses on the CBCA, the various provincial business corporation statutes have similar, although not identical, provisions and procedures.
Until recently, plans of arrangement under the CBCA were reserved for restructuring equity. The CBCA was rarely used to restructure debt and not at all used if the company was insolvent. This expanded use of the CBCA is not a predictable development given section 192 of the CBCA. Section 192(3) states that "a corporation that is not insolvent" may make an application under the CBCA.
Notwithstanding that implied exclusion of insolvent companies, the CBCA has been recently utilized to restructure insolvent companies. The basis for the court accepting jurisdiction relates the structure of the arrangement and whether there is more than one corporation involved in the arrangement. Section 192(3) has been held to be satisfied as long as one of the applicant companies is solvent, even if that applicant company is a corporation newly established to take part in the plan and the principal company is insolvent. Examples include plans related to Tembec Inc., Ainsworth Lumber Co. Ltd., Gateway Casinos and the intended plan in respect to Abitibi-Consolidated Inc. which commenced as a CBCA proceeding by way of an interim order but eventually was reorganized pursuant to the provisions of the CCAA.
A CBCA arrangement application is initiated after the plan to be proposed has been defined by the company normally after negotiations with its "security holders" (a term under the CBCA that includes both creditors and shareholders).
Prior to the application, the applicant will draft an Information Circular outlining the terms of the plan and relevant process information. That circular is usually the result of security holder input and, as discussed below, is reviewed by the Director under the CBCA prior to filing.
The CBCA process is commenced by a filing in court which outlines the background facts relevant to the corporation, the conditions that relate to the proposed plan, details of the plan, a copy of the circular and information concerning the various stakeholders of the corporation.
The process is governed by an "Interim Order" which sets out certain procedural requirements. The Order typically provides for the service of the information circular, sets meetings of security holders for the purposes of voting on the plan, defines the classes of security holders for the vote and sets a date for the final hearing to approve the plan if the vote succeeds. The hearing for the Interim Order is held on a without notice basis. None of the security holders of the corporation will receive formal notice of the hearing, although, typically, due to the fact that there are negotiations in respect to the plan in advance of the filing of the Petition, those security holders who have been involved in those discussions often attend the hearing on an informal basis.
The Interim Order only tentatively confirms the classes in which security holders will vote. The principles relating to voting classification of security holders under the CBCA are substantially similar to the classification of creditor principles under the CCAA. Because the hearing for the Interim Order is without notice, the court will later entertain any objections to any aspect of the Interim Order and will be at liberty to vary or set asideits Interim Order. Thus, although the court will usually approve the proposed voting classes in the Interim Order, parties will not be prevented from subsequently objecting to the voting classes and the court may accede to their objections. This injects some uncertainty into the process.
There is no specific voting approval threshold defined by the CBCA. Precedent establishes that approval requires 66-2/3% support in each class but in the absence of a statutorily mandated threshold, the court has a broad discretion to approve plans of arrangement even if the 66-2/3% threshold is not met.
The court must order final approval of the plan and declare that it is fair and reasonable. That Final Order hearing will normally be scheduled for a day or two following the vote.
Assuming that the Final Order is granted, the closing of the transaction will take place immediately subsequent to the Final Order, on the timetable described in the information circular and after satisfaction of any conditions to plan implementation.
The entire process can take as little as 30 days from filing to the final hearing.
Pursuant to the provisions of the CBCA, the Director, a regulator established by the statute, has the status to make submissions at any hearing. Accordingly, the Director becomes involved in the process even before the filing of the application. It is usual that, at least five business days before the Interim Order hearing date, notice is given to the Director and such notice is accompanied by drafts of the material which will be submitted to court, including a draft of the information circular and financial statements for the applicant corporations. The Director will consider whether the statutory requirements for the arrangement have been complied with. Additional documentation may be requested and may be required. The Director has published a policy with respect to plans of arrangement. That policy establishes the minimum requirement for an arrangement involving debt, including notice to those voting on the plan, entitlement to vote, separate class voting for classes of security holders who do not have commonality of interest; and the usual requirement of an opinion of an independent financial adviser stating that the proposed arrangement is fair and reasonable to security holders.
Because CBCA proceedings often involve a compromise of equity rights as well as the rights of creditors, the Director typically requires that dissent rights be provided in all plans of arrangement and, if they are not, the applicant must justify why they are not provided. Dissent rights involve the ability of an equity holder to dissent from the proceedings, refrain from voting upon the plan and instead engage a process whereby his equity is valued and surrendered in return for the valued consideration of that equity.
The issues that arise on a final approval hearing relate to whether or not the statutory prerequisites to an arrangement have been met, whether creditors have been properly classified for the vote and whether the plan is fair and reasonable. The fairness issue requires the court to consider whether there will be a positive value to the corporation to offset the fact that rights are being altered. An important factor will be whether the arrangement is necessary to the continued operations of the corporation. The higher the level of necessity, the greater the court's willingness to accept prejudice to some security holders. Additionally, the court must consider whether the arrangement strikes a fair balance having regard to the interest of the corporation and the circumstances of the case. A positive vote by security holders is an important factor in the analysis, but the outcome of such a vote is not determinative of whether the arrangement will be approved.
A stay of proceedings in favour of the debtor as against creditors is central to CCAA Orders. Under a typical CCAA Order, the debtor company is protected by way of a court Order stay of proceedings so that it may negotiate a plan of arrangement with its creditors and others without the threat of creditors taking action to realize upon the debt or otherwise impair the functioning of the corporation or impair its ability to pursue reorganization efforts. The stay of proceeding as against creditors is specifically referenced in the statute and the case law has established that the stay of proceedings associated with the CCAA is an expansive, widely applied stay that effectively prevents creditors from taking any realization proceedings as against the debtor company.
The CBCA contains no express provision respecting a stay of proceedings. Section 192(4) is arguably wide enough to entitle the court to issue a stay of proceedings in a plan of arrangement process. That provision states "in connection with an application out of this section, the court may make any interim or final order it thinks fit, including ...". That has been the jurisdictional basis upon which parties have relied to establish the court's ability to issue a stay of proceedings in CBCA matters. There are several examples where a stay order has been made in an interim order under the CBCA. In Abitibi-Consolidated Inc. and Tembec Inc., the interim orders contained stays of proceeding. However, neither of those interim orders were challenged. Certainly, if the CCAA experience is any precedent, the courts may interpret section 192(4) expansively in order to effect the statutory purpose of the arrangement provisions and the court will issue a stay of proceedings in relevant circumstances in CBCA proceedings. However, it cannot be categorically stated that a stay of proceeding is certainly available in all CBCA proceedings.
Most applications pursuant to the CBCA do not need to test the limits of section 192(4) and do not contain any provision effecting a stay of proceedings as against the applicant company or companies. This partially reflects the fact that, in most CBCA plans of arrangements, there is no need for a stay of proceedings. The applicants are either not insolvent or are not particular creditors who are able to proceed against the debtor as part of the pre-application discussions and have already agreed to support the application process and restrain from any realization proceedings.
The above is a brief outline of the arrangement provisions of the CBCA. It is now clear that the CBCA arrangement process has become a viable and effective restructuring option to the CCAA in appropriate circumstances.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.