It is no secret that the mining sector is facing tough times. In recent boom years, mining companies took on unprecedented amounts of debt. Now that commodity prices have dropped and sources of refinancing have dried up, debt obligations have become overwhelming for many companies, posing a serious risk to their survival.
If negotiated business solutions with creditors are becoming unworkable, companies should consider seeking protection from creditors under insolvency legislation. Protection under the federal Companies' Creditors Arrangement Act (CCAA) is available to companies having assets or doing business in Canada, with more than $5 million in debt.
The CCAA allows a company to keep its creditors at bay while restructuring its affairs, all while maintaining control over its operations subject to some conditions. Companies—particularly those that do not reach the $5 million debt threshold—might also consider the proposal provisions under the federal Bankruptcy and Insolvency Act. In this article, we will discuss the process under the CCAA.
The first step under the CCAA is obtaining a court order staying the rights of creditors for an initial 30 days to allow the company to devise a restructuring plan. A company is not required to alert creditors before obtaining the initial stay order, although in many circumstances it may be advisable to do so.
The stay can be extended if the company can demonstrate that it will likely file a plan and the extension is not prejudicial to the creditors as a whole. When ordering a stay, the court will appoint an independent third party to monitor the business and financial affairs of the company while the order remains in effect. The monitor reports to the court on the conduct of the company's business, but does not manage or direct the company's business.
Debtor companies under the CCAA may have the ability to obtain interim financing secured by a court-ordered super-priority charge ahead of all secured creditors. The interim financing is often used to finance the restructuring efforts and to preserve the company's business during the CCAA process.
The CCAA has few restrictions on what a restructuring plan can include, so the company and its creditors have significant flexibility in negotiating the plan. Companies may offer to pay a percentage on the dollar of debt, convert debt into equity or repay debt over time. Companies may also deal with shareholders under the plan. A plan must be approved by a vote of creditors, and shareholders if affected, as well as by the court prior to it becoming effective.
In 2014, Jaguar Mining Inc., Huldra Silver Inc. and Stanfield Mining Group all had restructuring plans successfully implemented under the CCAA. Companies considering restructuring their debt should seek the advice of specialized legal counsel.
Mining companies incorporated in the U.K. can also take advantage of insolvency processes in that jurisdiction. Many companies list on a stock exchange in the U.K. to raise funds in Europe and beyond. Any insolvency process for such a company will almost certainly take place in the U.K., even if the trading subsidiaries are overseas companies. There are two 'rescue' processes in the U.K., neither of which directly equates to the CCAA process in Canada, but which can achieve the same result of keeping creditors at bay long enough to rehabilitate the business.
The first process is a company voluntary arrangement (CVA). A CVA is a process proposed by the company by which its unsecured (and potentially secured) creditors voluntarily agree to stay their rights except on terms defined in the CVA document. Typically a CVA will involve creditors accepting a percentage payment of the sums due to them from the company coupled with a grace period within which to pay. The directors retain control of the company but the company's compliance with the CVA is overseen by a licensed insolvency practitioner (an accountant with a specialist qualification). A CVA requires approval of 75% or more by value of unsecured creditors and, if passed, binds all unsecured creditors who could have voted, even if they did not vote or voted against the CVA. Where the creditor profile allows, a CVA can provide the necessary breathing space to restructure a business in a way which enables it to repay its debts and move forwards on a more stable footing.
The second process is administration. By contrast with a CVA, administration automatically creates a moratorium (or stay) preventing creditors and other parties from enforcing their rights action the company. Further, control of the company is handed over to the administrator (a licensed insolvency practitioner) whose primary role is to rescue the business, either by successfully restructuring the business and returning the company to solvency or, failing that, by selling the business and assets to another entity as a going concern. The administration process is more commonly used than CVAs. This is primarily because the administration process is very flexible (thanks in large part to the moratorium) and because the administration process can be commenced on very short notice by the directors or certain secured creditors simply making a filing at court.
It is critical to select the insolvency process which best suits the available restructuring options. Expert advice should always be obtained from solicitors and insolvency practitioners.
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.