Canada: Credit Bidding: The Basics

Copyright 2010, Blake, Cassels & Graydon LLP

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

Credit bidding allows a secured creditor to use its debt as currency in a competitive sales process. The traditional court-supervised sales process in proceedings under the Companies' Creditors Arrangement Act (CCAA) contemplated the solicitation of offers for a debtor's business, with all offers to be submitted by a court-prescribed deadline. The debtor and/or its court appointed monitor would then select the highest and best offer among those bidders that submitted offers by the deadline and otherwise complied with the terms of the sales process. The traditional sales process provided no opportunity for potential purchasers to submit overbids at a later date.

In recent years, the U.S. stalking horse method has been widely adopted in Canada, particularly in connection with cross-border sales. The stalking horse process contemplates that an agreement of purchase and sale will be executed at, or near, the commencement of the marketing process, and this stalking horse agreement will serve to establish a floor price, while higher and better offers are solicited. If other "qualifying offers" are received in accordance with court-approved bidding procedures, an auction is then held to determine the winner among the qualifying bidders. The stalking horse, as of right, is entitled to participate in any auction.

In September 2009, the CCAA was amended to expressly authorize a court to approve the sale of assets, outside the ordinary course of business. Prior to the enactment of new section 36 of the CCAA, the sales processes, described above, were approved by courts pursuant to their inherent jurisdiction and/or discretionary authority. Section 36 now codifies that authority and directs a court to consider a list of non exhaustive factors, prior to approving a sale. At the top of the list of factors is whether "the process leading to the proposed sale or disposition was reasonable in the circumstances". Accordingly, in the post-amendment world, the sales process and its integrity will remain at the forefront at the court's judicial mind.

If one of the bidders in any such process is a secured creditor of the seller, such creditor may seek to satisfy the purchase price by giving the seller a credit against the amounts that are owing to the creditor. Unlike Chapter 11 of the U.S. Bankruptcy Code, the CCAA does not expressly provide secured creditors the right to credit bid their debt in this manner. The practice, however, has been widely accepted in Canadian insolvency proceedings. The theory behind credit bidding is that if the secured creditor paid cash for the assets, the cash would then be distributed to the secured creditor to satisfy its secured claim. Instead of recycling funds in this manner, the secured creditor should be allowed to simply bid its debt, up to its face value. To the extent there are liens or charges that rank in priority to the credit bidder's security interest (or if there are any assets to be purchased not subject to the credit bidder's security), a cash component will have to be included in the bid. Cash payments would also have to be made to cover any accrued but unpaid post-filing payables or cure costs payable in connection with the forced assignment of contracts.

Creditors consider making a credit bid for three principal reasons:

  1. Creditors can put forward a credit bid as the culmination of a long-term "loan to own" strategy;
  2. Creditors can own and operate the business for an interim period of stabilization, outside of formal insolvency proceedings, with a view to selling the business for a higher recovery when market conditions improve; and
  3. Creditors can put forward a credit bid as a stalking horse or reserve bid, with a view to encouraging higher bids in an auction environment or to owning the business if no such higher value materializes.
  1. "Loan to own". A "loan to own" strategy involves the tactical deployment of capital with a view to converting debt into an equity position in a distressed company. The primary candidates to pursue this strategy are hedge funds, private equity sponsors and other providers of private capital which, in many spheres, have replaced traditional cash flow lenders as the principal providers of commercial capital. These funds are often able to acquire secured debt in the secondary market on a discounted basis and then bid the full face value of the debt as part of a credit bid. This strategy allows them to maximize the financial leverage in an economically efficient manner. Although there are obvious risks in acquiring debt that may never be repaid, these private equity investors have a far greater appetite for commercial risk in the pursuit of potentially lucrative acquisition opportunities, than their predecessors.
  2. Stabilization. Other credit bids develop not out of design from the outset of the loan or acquisition of the debt, but from a perceived necessity in the face of a distressed credit. Many corporate debtors have debt structures that were put in place at the height of the previous business cycle. Debtors fitting this profile often include the portfolio companies of private equity funds. Typically, the assets of the portfolio company itself were used to secure a substantial amount of the acquisition financing. Thus, these companies are carrying a heavy secured debt burden of acquisition financing in addition to traditional working capital loans. With the turn of the business cycle, asset values in many industries have collapsed and revenue has decreased significantly. Accordingly, a business, although viable and potentially profitable, might be distressed because of unsustainable secured debt levels.
  3. If such a business was sold to a third party in the current economic environment, the lender may be facing an immediate and unacceptable loss. The preferable alternative may be for the lender to acquire the assets of the business, rationalize its debt structure, hold for a period of stabilization and recovery, and then sell the business in a more favourable economic climate. In circumstances such as these, credit bidding can be used defensively, to protect and preserve value, if only for a finite amount of time.

  4. Reserve Bid. In yet other circumstances, a lender may have identified a level of recovery on the debt owed to it by a distressed debtor that represents an acceptable loss. Below that amount, however, the lender would prefer to adopt the strategy outlined above: hold the assets and sell at a later time. In light of the alternatives, a creditor may be willing to bid its debt, or some portion thereof, in order to establish a baseline value for the business in an auction process. This initial salvo may be necessary to give customers and other stakeholders of the distressed business confidence that the lender supports the business and will continue to operate the business if it is the successful bidder, while at the same time creating a competitive environment to encourage higher bids. In other words, credit bidding allows a lender to establish itself as a stalking horse and open the bidding by delineating a threshold value for the debtor's assets.

Whatever the motive of the creditor, the credit bid must be put forward in a process that is fair and transparent, and that demonstrates that the appropriate value has been given for the business and that the credit bidder did not assert any undue influence or control over a process through which it seeks to benefit.

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
26 Oct 2018, Other, Vancouver, Canada

Cybersecurity, including data privacy and security obligations, has become a critical chapter in every company’s risk management playbook.

30 Oct 2018, Other, Toronto, Canada

Please join us for discussions on recent updates and legal developments in pension and employee benefits as well as employment law issues.

12 Nov 2018, Other, Toronto, Canada

Stories aren’t falsehoods. Stories are the root of all effective human communications: they motivate, animate and clarify. If you aren’t telling stories, you probably aren’t getting your point across.

In association with
Related Topics
Related Articles
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions