Canada: The Expanded Use Of The CBCA In Debt Restructurings

I. — INTRODUCTION

Section 192, the plan of arrangement provision in the Canada Business Corporations Act (CBCA),¹ is an increasingly popular means of facilitating corporate debt restructurings and recapitalizations. The attraction to the CBCA is in part due to the flexible interpretation ascribed to section 192 and the broad discretion granted to courts thereunder, which has allowed stressed and distressed companies to effect significant debt restructurings outside of insolvency statutes. While this was likely not the initial intention of the CBCA arrangement provision, it has now become a common occurrence. And, within these debt restructurings, companies are incorporating novel insolvency-type relief and utilizing the provisions in circumstances previously thought to be reserved for insolvency statutes.

This article explores certain recent CBCA debt restructuring approaches taken by parties that continue to expand the boundaries of the section 192 arrangement provision. First, a brief history of the section 192 arrangement provision and its statutory elements is considered. Second, we discuss the use of section 192 to effect debt restructurings. Third, a brief overview of a few recent cases serves to illustrate the use of section 192 in this manner. Finally, the article will consider six areas in which section 192 has expanded: (1) the meaning of the solvency requirement; (2) the use of preliminary interim orders; (3) the inclusion of non-CBCA entities as applicants; (4) the potential lack of a fairness opinion; (5) the use of shareholders' resolutions in lieu of a vote; and (6) the limiting and streaming of equity claims.

As this article will demonstrate, the flexibility and discretion of section 192 has allowed the use of innovative and novel orders to effect debt restructurings under the CBCA, and there is every indication that companies will continue to push such boundaries.

II. — BACKGROUND OF CBCA ARRANGEMENT PROVISION

The thrust of section 192 originated from the 1923 Companies Act Amending Act. ² The operative provisions of that Act provided that:

These provisions applied equally to compromises or arrangements proposed under the Winding-up Act ⁴ and The Bankruptcy Act. ⁵

The aim of the Companies Act was to respond to the need to alter shareholders' rights while still providing protection to shareholders.⁶ However, the arrangement provision was removed from federal legislation in 1974 amidst concerns that "it was superfluous and that it could be invoked to squeeze-out minority shareholders unfairly".⁷ As a result, when the CBCA came into force in 1975, it was absent the arrangement provision. Therefore, corporations seeking to restructure were solely reliant on insolvency statutes, such as the Companies' Creditors Arrangement Act (CCAA),⁸ which became more widely used in the 1980s.⁹

Recognizing the need for a corporate arrangement provision to effect complex transactions, section 192 was introduced into the CBCA in 1978.¹⁰ The inclusion of section 192 was premised on the Minister of Consumer and Corporate Affairs' Report entitled, "Detailed background paper for an act to amend the Canada Business Corporations Act".¹¹ The objective of the arrangement provision, proposed as section 185.1 of the CBCA, was to provide "management and majority shareholders great flexibility to manage a corporation's internal affairs, and, at the same time [...] protect the interests of minority shareholders".¹² Section 185.1 authorized courts to approve a fundamental change by way of an arrangement where it was not practical to implement the change otherwise.¹³

The various provincial corporate statutes in Canada contain similar, although not identical, corporate arrangement provisions. However, the majority of corporate arrangements, and the relevant case law, is under the CBCA, which tends to provide more flexibility than its provincial counterparts.

BCE Inc v 1976 Debentureholders¹⁴ presented the first opportunity for the Supreme Court of Canada to consider section 192 of the CBCA. Drawing on the report of the Minister of Consumer and Corporate Affairs, the Court held that the purpose of section 192 "is to permit changes in corporate structure to be made, while ensuring that individuals and groups whose rights may be affected are treated fairly".¹⁵ BCE remains the leading authority on the elements of section 192 and the general test thereunder. However, as we will see below, the scope of section 192, and in particular the features of section 192 arrangements, have evolved and expanded since the Supreme Court's consideration in 2008.

III. — SECTION 192'S PROCEDURE & REQUIREMENTS

The mechanics of approving a plan of arrangement under section 192 are well established. First, the corporation must apply for an interim order, which sets the wheels in motion with the calling of meetings, and second, the corporation must seek a final order approving the arrangement. When applying for an interim or final order, the corporation must establish that:

1. the statutory procedures have been met;
2. the application has been put forward in good faith; and
3. the arrangement is fair and reasonable.¹⁶

When seeking an interim order, courts focus on the first two elements.¹⁷ Significant consideration as to whether the proposed arrangement is fair and reasonable is typically reserved for the final order hearing.

1. — The Statutory Requirements

The first consideration for an interim or final order is whether the statutory procedures or requirements have been met. Section 192 of the CBCA establishes several requirements that must be satisfied by an applicant corporation. Namely, subsections 192(3) and (5) provide that:

Read together, section 192 sets out four main statutory requirements: (1) notice must be provided to the CBCA director; (2) the proposed arrangement must constitute an "arrangement" under section 192 of the CBCA; (3) it is not practicable to effect the proposed arrangement under any other provision of the CBCA; and (4) the applicant is not "insolvent". The case law suggests that the statutory requirements are rarely a significant hurdle to applicants. i. — Provision of notice

The provision of notice to the CBCA director is uncontroversial. Section 192 requires that applicants provide notice to the director for both the interim and final order application. Where appropriate, the Director's Policy Statement ("Director's Policy") advises that notice for each stage should be accompanied by application materials, including any affidavits filed with the court and drafts of the orders sought.¹⁹ As a practical matter, the CBCA director is generally given an opportunity to comment on drafts of all materials, including affidavits.

ii. — The proposed plan constitutes an arrangement

The broad and inclusive definition ascribed to an "arrangement" under the CBCA sets a low bar, which is advantageous for applicants. Pursuant to subsection 192(1) of the CBCA, an arrangement includes:

1. an amendment to the articles of a corporation;
2. an amalgamation of two or more corporations;
3. an amalgamation of a body corporate with a corporation that results in an amalgamated corporation subject to this Act;
4. a division of the business carried on by a corporation;
5. a transfer of all or substantially all the property of a corporation to another body corporate in exchange for property, money or securities of the body corporate;
6. an exchange of securities of a corporation for property, money or other securities of the corporation or property, money or securities of another body corporate; [...]
7. a liquidation and dissolution of a corporation; and
8. any combination of the foregoing.²⁰

The Director's Policy adds that the arrangement provision is facilitative and should not be interpreted narrowly.²¹ Likewise, Canadian courts have taken a very expansive view of arrangements. In Re Fairmont Hotels & Resorts, Farley J held that it would be an error in principle "to forget the very flexibility of the arrangement provision was designed to allow the solution of difficult and awkward situations".²² Affirming Farley J's approach, Pepall J, in Re Acadian Timber Income Fund, held that "the word 'arrangement' is to be given its widest character, limited only by the corporation's own by-laws or general legislation".²³ Courts continue to confirm the expansive interpretation of "arrangement", stating that it "is not limited to the transactions listed in section 192(1)" and it "is a flexible statutory provision capable of 'incorporating whatever tools and mechanisms of corporate law the ingenuity of their creators bring to the particular problem at hand'".²⁴

Essentially, so long as one aspect of the arrangement falls within the transactions listed above, courts appear to accept that it satisfies the definition of "arrangement".

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Footnotes

1 Canada Business Corporations Act, RSC 1985, c C-44 [CBCA].

2 Companies Act Amending Act, RSC 1923, c 39, s 4 [Companies Act]. BCE Inc v 1976 Debentureholders, [2008] 3 SCR 560 at para 123 [BCE].

3 Companies Act, ibid.

4 Winding-up Act, RSC 1906, c 144, as it appeared in 1906.

5 The Bankruptcy Act, RSC 1919, c 36, as it appeared in 1919.

6 BCE, supra note 2 at para 123. See also Martin McGregor and Paul Case, "CBCA Section 192 Restructurings: A Streamlined Restructuring Tool or a Statutory Loophole?", in Janis P Sarra and the Honourable Barbara E Romaine, eds, Annual Review of Insolvency Law 2013 (Toronto: Carswell, 2014) at 698 ["CBCA Section 192"].

7 Canadian Department of Consumer and Corporate Affairs, Detailed Background Paper for an Act to Amend the Canada Business Corporations Act (1977), Consumer and Corporate Affairs Background Paper at 5 ["Detailed Background Paper"].

8 Companies' Creditors Arrangement Act, RSC 1985, c C-36 [CCAA]; Companies' Creditors Arrangement Act, RSC 1970, c C-25, as it appeared in 1975.

9 See Alexis Teasdale, "Blurred Lines: The Sharpening of the Solvency Requirement and the Bounds of Judicial Power in Section 192 Arrangements under the Canada Business Corporations Act in Connacher", in Janis P Sarra and the Honourable Barbara E Romaine, eds, Annual Review of Insolvency Law 2015 (Toronto: Carswell, 2016) at 374 ["Blurred Lines"].

10 Ibid; Detailed Background Paper, supra note 7 at 5. See also BCE, supra note 2 at para 123.

11 Detailed Background Paper, supra note 7.

12 Ibid at 5.

13 Ibid at 17.

14 BCE, supra note 2.

15 Ibid at para 128.

16 Ibid at para 137; Re Trizec Corp, [1994] 10 WWR 127 (Alta QB) at para 13 [Trizec].

17 Re Essar Steel Canada Inc (2014), 243 ACWS (3d) 604 (Ont SCJ) at para 26 [Essar Steel]; Re 8440522 Canada Inc (2013), 16 BLR (5th) 33 (Ont SCJ) at para 41 [Mobilicity]; Re Tervita Corp, [2017] AWLD 399, 2016 ABQB 662 (Alta QB) at para 22 [Tervita]; Re Concordia (2017), 285 ACWS (3d) 78 (Ont SCJ) at para 24 [Concordia]; Re RGL Reservoir Management Inc (2017), 286 ACWS (3d) 469 (Ont SCJ) at para 23 [RGL].

18 CBCA, supra note 1.

19 See Industry Canada, Policy on Arrangements-Canada Business Corporations Act, section 192 (Ottawa: IC, 8 January 2014) at s 3.03-3.04 ["Director's Policy"].

20 CBCA, supra note 1.

21 Director's Policy, supra note 19 at s 1.02.

22 Re Fairmont Hotels & Resorts Inc, 2006 CanLII 57092 (Ont SCJ [Commercial List]) at para 1 [Fairmont].

23 Re Acadian Timber Income Fund, 2009 CanLII 72057 (Ont SCJ [Commercial List]) at para 8.

24 Concordia, supra note 17 at para 27, citing Re Masonite International Inc (2009), 56 CBR (5th) 42 (Ont SCJ [Commercial List]) at para 20 [Masonite], and Fairmont, supra note 22 at paras 1, 5.

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