1.0 Introduction

The Companies' Creditors Arrangement Act (CCAA) is the principal statute for the reorganization of a large insolvent corporation. The CCAA can also facilitate the sale of an insolvent business. As a federal statute, the CCAA has application in every province and territory of Canada (and purports to have worldwide jurisdiction). The CCAA is generally analogous, in effect, to Chapter 11 of the U.S. Bankruptcy Code (U.S. Code), although there are a number of important technical differences.

2.0 CCAA Proceedings

2.1 Qualifying Entities

To qualify for relief under the CCAA, a debtor must:

  • Be a Canadian incorporated company or foreign incorporated company with assets in Canada or conducting business in Canada (certain regulated bodies such as banks and insurance companies are not eligible to file under the CCAA but instead may seek relief from creditors under the Winding-up and Restructuring Act). Partnerships cannot apply for protection from creditors under the CCAA, but relief has been extended to partnerships in certain circumstances where corporate partners have filed.

  • Be insolvent or have committed an "act of bankruptcy" within the meaning set out in the Bankruptcy and Insolvency Act (BIA). The CCAA does not contain a definition of insolvency. Courts, however, have referenced and applied the definition of insolvency under the BIA. Accordingly, a debtor company will qualify for relief under the CCAA if it is insolvent on a cash-flow basis (i.e., unable to meet its obligations generally as they become due) or on a balance-sheet test (i.e., has liabilities that exceed the value of its assets). Further, the Ontario Superior Court of Justice has held that a debtor may be considered insolvent if the debtor faces a "looming liquidity crisis" or is in the "proximity" of insolvency even if it is currently meeting its obligations as they become due. It is sufficient if the debtor reasonably anticipates that it will become unable to meet its obligations as they come due before the debtor could reasonably be expected to complete a restructuring of its debt.

  • Have in excess of C$5-million in debt or an aggregate in excess of C$5-million in debt if the debtor is part of a filing corporate family.

2.2 Duty of Good Faith

The CCAA requires all interested persons in CCAA proceedings to act in good faith. Where the court finds that an interested person failed to do so, it may make an order that it considers appropriate.

2.3 Commencing Proceedings

Unlike Chapter 11, no separate bankruptcy estate is created upon a CCAA filing, and the CCAA does not allow a debtor company to make an electronic filing to obtain a skeletal stay of proceedings and then subsequently obtain "first day" relief. Instead, a debtor company must seek the granting of a single omnibus initial order that provides the debtor with a comprehensive stay of proceedings and other relief. An order granted in respect of an initial application must be limited to relief that is reasonably necessary for the continued operations of the debtor company in the ordinary course of business during that initial 10-day stay period. The stay may be extended from time to time.

Proceedings under the CCAA are commenced by an initial application to the superior court of the relevant province and not a federal bankruptcy court as in the U.S. In some jurisdictions like Ontario, there are specialized commercial branches of the provincial superior courts before which these applications may be brought. In most instances, the application is made by the debtor company itself (creditors may initiate the process, but this is uncommon). Where the creditor does initiate the proceeding, it is usually with debtor consent.

The applications for an initial order are often brought on an ex parte basis or with limited notice to key stakeholders such as senior lenders or bondholders. Initial orders usually contain a "comeback" clause allowing stakeholders that did not receive notice an opportunity to seek to vary or amend the terms of the initial order. The burden of justifying the relief sought rests with the debtor company at any "comeback hearing."

2.4 Location of Proceedings

Applications for relief under the CCAA may be made to the court that has jurisdiction in the province within which the head office or chief place of business of the debtor company in Canada is situated or, if the debtor company has no place of business in Canada, in any province in which any assets of the company are located.

2.5 Stay of Proceedings

Initial orders typically grant a comprehensive stay of proceedings that will apply to both secured and unsecured creditors and a stay against amending or terminating contracts with the debtor. Stays are typically extended to directors of the debtor in order to encourage those individuals to remain in office and advance the restructuring process.

The stay is subject to certain prescribed limits. For example:

  • The stay cannot restrict the exercise of remedies under eligible financial contracts such as futures contracts, derivatives and hedging contracts.

  • The stay cannot prevent public regulatory bodies from taking regulatory action against the debtor, although monetary fines and administrative orders framed in regulatory terms but which are determined by a court to be monetary claims in substance can be stayed.

  • There are restrictions on the length of stays for "aircraft objects" — airframes, aircraft engines and helicopters.

  • No order granting a stay of proceedings can have the effect of prohibiting a person from requiring immediate payment for goods and services delivered after the filling date or payment for the use of leased property (pursuant to a true lease as opposed to financing lease) or licensed property.

Unlike Chapter 11, the stay of proceedings is not automatic and is a function of the court's discretion. The court, however, will typically exercise its discretion to issue an initial stay for up to a maximum of 10 days. An application to the court is required for any extensions. Before an extension can be granted, the court must conclude that circumstances exist that make the extension appropriate and that the debtor is acting with due diligence and in good faith. Unlike the initial 10-day stay, there is no statutory limit on the duration or number of extensions of the stay of proceedings.

2.6 Set-Of

The right of set-off is expressly preserved under the CCAA. Courts have interpreted this right of set-off to permit the right of a debtor company to set off pre-filing obligations against pre-filing obligations. However, the right of a debtor company to set off pre-filing obligations against post-filing obligations is subject to the stay routinely provided in initial orders commencing CCAA proceedings. It is within the discretion of the supervising judge to allow pre- versus post-filing set-off in exceptional circumstances.

2.7 The Monitor

As part of the initial order, the court appoints a monitor, a licensed insolvency professional typically from an accounting or financial advisory firm. The monitor's basic duties are set out in the CCAA but can be expanded by court order. Generally, the monitor plays both a supervisory and an advisory role in the proceedings. In its supervisory role, the monitor oversees the steps taken by the company while in CCAA proceedings, on behalf of all creditors, as an officer of the court. Further, the monitor will file periodic reports with the court and creditors, including reports setting out the views of the monitor as required by the CCAA in connection with any proposed disposition of assets or any proposed debtor-in-possession (DIP) financing.

In its advisory role, the monitor will assist management in dealing with the restructuring and other issues that arise and liaise with creditors as a neutral party. In certain cases, such as where the board of directors has resigned or creditors have otherwise lost confidence in management, the monitor's powers can be expanded. By court order, the monitor can be authorized to sell assets, subject to court approval, and direct certain corporate functions. Monitors assuming this role are colloquially referred to as "super monitors." The monitor has statutory authority to pursue fraudulent preferences and transfers at undervalue. Courts have also authorized monitors to pursue litigation against certain parties alleged to have caused harm to the debtor or the debtor's stakeholders. Such authorization can be granted where the courts, among other things, are satisfied that the monitor (rather than the debtor or any creditor) is best placed to pursue such litigation.

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