Canada: Out-of-Court Restructurings

Copyright 2010, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Restructuring & Insolvency, November 2010

In the last couple of years, we have seen an increased use of out-of-court restructurings or "workouts" as an alternative to a formal insolvency proceeding under the Companies' Creditors Arrangement Act (Canada) (CCAA) or its equivalent in the United States, Chapter 11 of the U.S. Bankruptcy Code. There appears to be two principal reasons for this.

First, the global economic recession and uncertain valuations have raised significant concerns about collateral realization values, resulting in lenders being more reluctant to "pull the trigger" on troubled investments, particularly where there is a risk of a net negative recovery. In these market conditions, lenders are demonstrating a willingness to "kick the can down the road" and take a "wait and see" strategy in hopes of better recovery prospects in the future when market conditions are expected to improve and valuations are expected to stabilize.

Second, there has been heightened sensitivity to the costs and stigma associated with a formal insolvency filing. In tight credit markets, companies seeking to restructure have faced significant challenges in being able to access debtor-in-possession (DIP) financing that may be required to fund increased liquidity needs during a formal restructuring process. As access to credit markets have improved significantly in the last six months, this issue appears to have largely dissipated. Companies and their stakeholders are also extremely concerned about the risks that an insolvency filing would further erode value and put an increasing strain on already fragile relationships with key customers and suppliers, both already having been significantly and negatively impacted by the global recession.

Increasingly, even when restructurings are being implemented under formal insolvency processes, most or all of the negotiations occur prior to the filing, with an increased number of pre-packaged insolvency filings designed to minimize the time that a company is under court protection. This approach minimizes ongoing court and administrative costs and the stigma associated with traditional insolvency filings. In these cases, the required stakeholder support is lined up prior to the filing, usually in the form of support or lock-up agreements.

Similar forms of support or lock-up agreements can be used for out-of-court restructurings. These support or lock-up agreements are entered into by the company with certain of its creditors, usually with holders of at least two-thirds of the amount of the affected debt, to ensure that sufficient statutory majorities are met if a formal process is necessary to implement the restructuring.

The agreements can also contain an agreement on the terms, conditions and circumstances pursuant to which the consenting creditors and other affected stakeholders will support a formal process if the desired level of support to implement the restructuring out-of-court is not obtained by a specified deadline. This technique commits these parties to the implementation of the proposed restructuring through a formal process if an out-of-court solution cannot be achieved. As discussed later in this article, this technique also serves to motivate affected parties who have not consented to co-operate as it demonstrates to them that the proposed restructuring can and will be implemented through a formal process even if the dissenting creditors continue to refuse to consent to the restructuring.

"Amend and extend" or "amend and pretend" arrangements – which reflect the "wait and see" approach referenced earlier – have become an increasingly popular mechanism to restructure a company's balance sheet out-of-court. These amend and extend arrangements are generally considered to have contributed to pushing out the start of the so-called "maturity wall" – the trillion plus dollars of corporate debt that will need to be repaid in the next five years. Even with today's improved access to credit markets, these arrangements continue to be popular because of the limited supply of good credits and because many over-leveraged companies still have difficulty accessing credit for refinancing.

Amend and extend arrangements can be implemented through a variety of structures and often contain some kind of de-leveraging mechanism, either by way of a lump sum principal repayment, increased amortization and/or a partial debt to equity conversion, by direct conversion or convertible instrument.

The biggest challenge in implementing a restructuring out-of-court is trying to obtain a consensus among creditors and other affected parties without thediscipline of a court-supervised process or the ability to cram down dissenting members within an affected creditor class. This process involves a delicate exercise of balancing very different and often conflicting stakeholder interests and has become increasingly challenging given the complex capital structures that exist today. The ability to successfully navigate a consensual out-of-court restructuring will largely be dictated by the dynamics between and within the relevant creditor constituencies.

Given the complex financial and legal issues and creditor dynamics involved in a consensual restructuring, successfully implementing a restructuring out-ofcourt can be a challenging undertaking. However, there are techniques and tools available to assist in overcoming some of those challenges towards achieving a consensual solution and avoiding an insolvency proceeding.

Where unanimous participation is not required by the proposed restructuring, exchange offers can be used by issuers of debt securities to reduce outstanding debt and/or to extend the maturity of outstanding debt obligations, subject to compliance with applicable securities law requirements and subject to restrictions contained in existing debt documents. In an exchange offer, a company makes an offer to holders of certain outstanding securities to exchange the existing debt securities for new debt securities or equity securities or for a combination of debt and equity securities. Holdouts who choose not to participate in the exchange offer will continue to hold existing notes on the same existing economic terms. However, they may lose some or all of their covenant protections if these are stripped from the debt securities because the company also obtains, in conjunction with the exchange offer, the required level of consents under the applicable trust indentures to effect such amendments. Debt exchange offers may also be conditional on a minimum tender percentage which is quite high to ensure that only a limited number of holdouts or freeloaders are able to obtain the benefits of the restructured balance sheet which results from the implementation of the exchange offer.

An example of this structure is found in the recently announced debt-for-equity exchange offer by Angiotech Pharmaceuticals where holders of $250‑million of senior subordinated notes are being offered approximately 90% of the new shares in the company in exchange for their existing notes. As a result of the proposed recapitalization, existing shareholders will see their equity significantly diluted to 2.5% of the equity, plus warrants to acquire additional equity, subject to shareholder approval or an exemption order. In addition, holders of $325-million floating rate notes are being offered new floating rate notes in exchange for their existing notes. The Angiotech exchange offer also provides for the removal of all restrictive covenants and events of default from the senior subordinated notes and from the floating rate notes, as may be permitted under the terms of the applicable trust indentures with the noteholders' consents.

The threat of an insolvency filing forms the backdrop of every out-of-court restructuring because creditors, shareholders and other stakeholders are forced to evaluate whether an out-of-court restructuring gives them a more favourable result than an insolvency filing. In a consensual process, these parties hold significant negotiating leverage to negotiate better terms for themselves. In an insolvency proceeding, these parties will generally lose some of their bargaining leverage since a court-supervised process such as the CCAA can impose the restructuring on them regardless of their dissent, provided that the minimum statutory approval thresholds are met. Therefore, the threat of an insolvency filing by the company is a common strategy used in out-of-court negotiations to motivate parties towards a consensual solution.

In the Angiotech exchange offering, if the desired minimum exchange offer threshold (98% of the principal amount of senior subordinated notes) is not, or cannot be reasonably expected to be, met by the prescribed deadline, the support agreement entered into by the company with more than two-thirds in value of its senior subordinated notes provides for the recapitalization to be effected pursuant to a plan of arrangement under the Canada Business Corporations Act (CBCA), a corporate statute governing federally incorporated companies, or, alternatively, pursuant to a plan of compromise or arrangement under the CCAA, if shareholder approval proved to be an issue. As the Angiotech exchange offering illustrates, where the CBCA arrangement mechanism is available to a company, the company can now replace the threat of a CCAA filing with the threat of a CBCA arrangement process to implement a restructuringwhere the required or desired consensus (unanimity or otherwise) cannot be achieved out-of-court without a process that can bind dissenting parties. This is an important development because the threat of the CBCA arrangement mechanism can be a more effective tool than the threat of a CCAA filing to motivate dissenting holders to co-operate with an out-of-court restructuring. This is because the CBCA arrangement process is generally a quicker and less expensive mechanism to bind dissenting lenders than the CCAA process, management remains in control throughout the CBCA arrangement process and existing equity is more likely to able to preserve some value in a CBCA arrangement, albeit in significantly diluted form, than in an insolvency proceeding where existing equity is at risk of being wiped out entirely. Perhaps more importantly, the CBCA arrangement process generally carries with it less stigma than a CCAA filing because the restructuring under the CBCA process is being effected under a corporate statute and the CBCA arrangement process itself contains a solvency requirement. For these reasons, from a debtor company's standpoint, the CBCA arrangement process can be a more palatable alternative than a CCAA filing and therefore may be viewed as a more credible threat by dissenting creditors who are seeking to leverage their co-operation in an out-of-court restructuring.

It is important to note that there are limitations on the use of the CBCA arrangement process, both in terms of jurisdiction, the types of liabilities that it can be used to restructure and the scope of the stay of proceedings that the court may be prepared to order under the CBCA. Consequently, the CBCA arrangement process may not be available in every case as a viable alternative to the threat of a CCAA filing where an out-of-court restructuring is not achievable.

We have also seen – in connection with exchange offers and also in a number of CBCA arrangements – the use of cash and/or equity sweeteners available to those who tender or consent early as a technique to incentivize affected creditors to support the proposed restructuring or to participate in the new money financing as part of the proposed restructuring. For example, in the Angiotech exchange offer, senior subordinated noteholders are being offered an additional 3.5% equity sweetener if they consent to the terms of the support agreement by the earlier deadline.

Market conditions will continue to cause distressed and over-leveraged companies, their stakeholders and their respective advisors to look to out-of-court solutions to restructure their balance sheets. As such, these parties will be motivated to continue to develop innovative structures, techniques and tools to make the out-ofcourt restructuring mechanism an even more desirable alternative to a formal insolvency proceeding.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
1 Nov 2016, Seminar, Toronto, Canada

What is the emotional culture of your organization?

Every organization and workplace has an emotional culture that can have an impact on everything from employee performance to customer or client satisfaction.

3 Nov 2016, Seminar, Toronto, Canada

Join leading lawyers from the Blakes Pensions, Benefits & Executive Compensation group as they discuss recent updates and legal developments in pension and employee benefits law as well as strategies to identify and minimize common risks.

3 Nov 2016, Other, Vancouver, Canada

“Risk” is the new black. It’s on the lips of every CEO, CFO, GC and board member — as it should be. Can you spot it? How do you analyze it? Are you equipped to manage it?

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.