Overview of the Companies' Creditors Arrangement Act - 2025

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 an out-of-court 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.

As referenced above, partnerships and solvent entities do not qualify as "applicants" under the CCAA and cannot file plans of arrangement or compromise under the CCAA. Nonetheless, Canadian courts have routinely extended the stay of proceedings and other relief granted to the qualifying insolvent applicants, to related partnerships (where corporate partners themselves have filed) and even solvent entities affiliated with the applicants, where there is a finding that it is appropriate to do so in the circumstances. For example, relief has been extended to partnerships where the business of the partnership is inextricably entwined with the business of the applicants and granting certain relief to the partnership is required for an effective reorganization of the qualifying applicants.

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 subsequently obtain "first day" relief. Instead, an initial order must be obtained that provides the debtor with a comprehensive stay of proceedings and other necessary relief. In most instances, the application for the initial order is made by the debtor company itself (creditors or other qualifying stakeholders may initiate the process, but this is less common).

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 certain provinces, there are recognized model orders that establish the accepted framework for an initial order, subject in all cases to modifications that may be appropriate in the circumstances and granted by the court.

An order granted with respect to 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 an initial 10-day stay period. This is because 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 debtor then typically returns to court during the initial 10-day period on a comeback hearing to seek an extension of the stay and any further relief reasonably necessary to facilitate its restructuring. The burden of justifying the relief sought rests with the debtor company at any comeback hearing.

All applications to commence CCAA proceedings must include:

• Weekly cash-flow projections for the weeks to which the initial stay of proceedings will apply;
• A report containing certain representations of the debtor regarding the preparation of cash-flow projections; and
• Copies of all financial statements of the debtor, audited or unaudited, prepared during the year before the application.

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. The purpose of the stay is to provide for an orderly process by preventing precipitous creditor action and prohibiting any single creditor or group of creditors from achieving an unfair advantage over other creditors. The stay is designed to maintain the status quo and allow the debtor company sufficient breathing room to seek a solution to its financial difficulties. 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 provided for in the initial order is limited to a duration of 10 days but can be further extended by an appropriate length at a subsequent "comeback hearing" on notice to all affected stakeholders.

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 are subject to the stay, as well as administrative orders framed in regulatory terms that are in substance monetary claims.
• 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.
• Other than in respect of parties deemed critical suppliers (discussed below), nothing in the stay can have the effect of requiring the further advance of money or credit to the debtor company
• As noted above, while partnerships do not technically qualify to apply for protection under the CCAA, there is case law that provides that the stay may be extended to partnerships, where the filing corporate partners or affiliates themselves obtained CCAA protection and the protection is required to facilitate the proposed restructuring.

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.

With respect to aircraft objects, Canada has implemented the Convention on International Interests in Mobile Equipment (known as the Cape Town Convention) and the associated Protocol to the Convention on Matters Specific to Aircraft Equipment (the Protocol). Canada adopted "Alternative A" of the Protocol, which is an enhanced version of section 1110 of the U.S. Code. Alternative A contains a 60-day stay limitation for aircraft objects during which period the debtor must cure all defaults and agree to perform all current and future contractual obligations or the aircraft objects must be returned to the secured creditor. Alternative A also requires the aircraft operator to maintain the aircraft objects pursuant to its contract and preserve the value of the aircraft objects as a condition of the continuing stay.

2.6 Set-Off

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. The right of a debtor company to set off pre-filing obligations against post-filing obligations, however, 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, typically an accounting or financial advisory firm with licensed insolvency professionals. 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 proceeding. 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, 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.

Generally, the debtor's management will remain in control of the company throughout the CCAA proceedings; however, in its advisory role, the monitor will assist management in dealing with the restructuring and other issues that arise and liaise with creditors as an independent 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.

2.8 Chief Restructuring Officers

Initial or subsequent orders may also approve the retention of a chief restructuring officer with an extensive mandate to manage the debtor company or a more limited mandate to assist management in the restructuring.

2.9 Unsecured Creditor Representation

There are no statutorily mandated unsecured creditor committees in Canada as there are in the U.S., although such committees have sometimes been formed by court order on an ad hoc basis. In certain cases, the supervising CCAA court may find it appropriate to appoint representative counsel in respect of a vulnerable creditor group, such as employees, pensioners or tort claimants, to represent their interests collectively in the CCAA case. There is no equivalent in Canada to the U.S. Trustee, which provides government oversight in Chapter 11 cases. However, the monitor fulfils certain of the functions that the U.S. Trustee and unsecured creditor committees would fulfil in Chapter 11 cases. The Superintendent of Bankruptcy, a federal government official, has some general oversight powers as well.

2.10 DIP Financing and DIP Charge

DIP financing refers to the interim financing required by the debtor company to fund its working capital needs while under CCAA protection. In many cases, the court will authorize the debtor to obtain DIP financing and grant super-priority charges over the assets of the debtor in favour of the DIP lender, if the court is of the view that additional financing is appropriate in the circumstances. This may be done in the initial order at the time of the first application or, more commonly, by way of a subsequent order at the first comeback hearing or at a later date. Notice must be given to all secured creditors that are likely to be affected by the priority of the DIP charge.

In determining whether to approve DIP financing, the CCAA requires courts to take into account, among other things:

• The expected duration of proceedings
• How the debtor's business and financial affairs are to be managed during the proceedings
• Whether the debtor's management has the confidence of major creditors
• Whether the DIP loan would enhance prospects of a viable plan of arrangement or compromise
• The nature and value of the debtor's property
• Whether any creditor would be "materially prejudiced" as a result of the DIP charge
• The monitor's report on the cash-flow forecast

In addition to the above, where DIP financing is sought under an initial order, the court must also be satisfied that the terms of the proposed DIP loan are limited to what is reasonably necessary for the continued operations of the debtor company in the ordinary course of business during the initial 10-day stay period. DIP financing (i.e., with increased availability) is then typically considered at the comeback hearing.

The CCAA expressly prohibits the securing of pre-filing obligations with the DIP charge. However, "creeping roll-up DIPs," whereby post-filing cash receipts are used to repay a pre-filing credit facility while new advances are made under the DIP facility, have been permitted in certain circumstances where affected creditors consent or the court is satisfied stakeholders will not be prejudiced. Full roll-ups or partial roll-ups, where the DIP loan itself is used to repay the DIP lender's pre-filing credit facility, are not permitted on the basis that they constitute prohibited cross-collateralization.

At the DIP approval hearing, the debtor company will submit a DIP term sheet or credit agreement for approval, together with projected cash flows and the monitor's report on those cash flows. The monitor will also typically advise the court of its view as to the appropriateness of the DIP (both with respect to quantum and terms).

2.11 Disclosure of Economic Interest

Any interested person in a CCAA proceeding may request the court to order any other interested person to disclose any aspect of their economic interest in respect of the debtor. "Economic interest" is defined to include any security interest or the consideration paid for any right or interest. In deciding to make such an order, the court must consider, among other things, whether (i) the monitor approves the proposed disclosure, (ii) the disclosed information would enhance the prospects of a viable plan being made, and (iii) any interested person would be materially prejudiced as a result of the disclosure.

2.12 Adequate Protection

Canada has not adopted the U.S. concept of "adequate protection," which is intended to protect existing lien holders who have become subject to super-priority charges. Canadian courts may, however, order protective relief to address prejudice to other creditors (e.g., payment of interest, payment of professional fees, etc.). Canadian courts also do not need to grant "replacement liens." A pre-filing secured creditor's security, if granted over after-acquired property (as is typically the case), continues to apply and automatically extends to post-filing assets acquired by the debtor, such as inventory and receivables, since, as noted above, a CCAA filing does not create a separate legal estate.

2.13 Other Priority Charges Granted in the Initial Order

Initial orders routinely grant priority charges over existing lien holders. For example, an administration charge secures payment of the fees and disbursements of the monitor and the monitor's and debtor's legal counsel. A directors' and officers' charge secures the debtor's indemnity to the directors and officers against post-filing claims and provides such directors and officers with the protection and assurance necessary to secure their continued involvement throughout the CCAA proceedings. The charge in favour of directors and officers is only available to the extent that these individuals do not have (or if the debtor cannot obtain) adequate insurance at a reasonable cost to cover such liabilities. Accordingly, a practice has developed of providing in the initial order that the secured indemnity can only be called upon to the extent the directors and officers do not have the required insurance coverage. Along with the DIP charge, these priority charges will typically rank ahead of claims of pre-filing secured creditors, provided that notice is given to any such secured creditors likely to be affected by the priority charges.

2.14 Disclaimers

The CCAA permits the disclaimer or resiliation (the equivalent of disclaimer under civil law in Quebec) of agreements. A disclaimer is akin to a contract rejection under Chapter 11. However, the debtor is not required to elect to either accept or reject certain "executory contracts" (other than aircraft leases) or real property leases, as is the case under Chapter 11.

Any steps by counterparties to assert damage claims in respect of agreements that are disclaimed by the debtor are stayed by the initial order. As with rejected contracts under Chapter 11, counterparties to disclaimed agreements can assert a claim for damages on an unsecured basis and will be entitled to share in any distribution on a pro-rata basis along with other unsecured creditors.

The monitor's or the court's approval is required to disclaim a contract. All disclaimers approved by the monitor are subject to review by the court if the counterparty objects. In deciding whether to approve a disclaimer, the court will take into account a number of factors, including whether the disclaimer of the contract would enhance the prospects of a viable plan and whether it would likely cause the debtor's counterparty significant financial hardship. Certain types of contracts cannot be disclaimed by a debtor, including eligible financial contracts, collective agreements, financing agreements (if the company is the borrower), and leases of real property and immovables (if the company is the lessor).

2.15 Treatment of Intellectual Property Licences

In addition to the above-noted contracts not subject to disclaimer, the CCAA provides protections for licensees of intellectual property, including trademarks, analogous to section 365(n) of the U.S. Code. Accordingly, a disclaimer or disposition does not affect a licensee's right to use intellectual property — including any right of exclusivity — during the term of the licence, as long as the licensee continues to perform its obligations in relation to the licensed intellectual property. Intellectual property sold in CCAA proceedings must be sold subject to existing licence rights.

2.16 Assignments

The CCAA also provides a process for the assignment of certain contracts, with court approval, despite contractual restrictions on assignment. However, a condition of any such forced assignment is that pre-filing monetary defaults are cured. The same types of contracts that cannot be disclaimed by a debtor also cannot be assigned by a debtor.

2.17 Post-Filing Supply of Goods

The initial order typically stays a party to any contract or agreement for the supply of goods or services from terminating the agreement. The initial order and the terms of the CCAA protect these suppliers by providing that no party is required to continue to supply goods or services on credit or otherwise advance money or credit to a debtor. Accordingly, although a supplier cannot terminate its agreement as a result of the CCAA stay of proceedings, the supplier is not required to honour its obligations to supply post-filing unless it has reached acceptable arrangements with the debtor (which may include it being provided with a deposit), receives pay in advance or at the time of delivery, or is designated a critical supplier (discussed below). Unlike Chapter 11, which provides for an "administrative priority claim" for post-petition suppliers, if the supplier to a CCAA debtor elects to provide goods or services on credit and does not have the benefit of a critical supplier's charge, that supplier is afforded no specific priority under the CCAA for its post-filing supply. Accordingly, it is important for post-filing suppliers to ensure that they receive cash in advance or cash on delivery payments or are otherwise fully protected by a court-ordered charge or some other form of financial assurance, such as a security deposit or a letter of credit issued by a third party.

2.18 Critical Suppliers

Where a vendor provides goods or services that are considered critical to the ongoing operation of the debtor, the court may declare the vendor a "critical supplier" and order the vendor to continue to provide goods or services on terms set by the court that are consistent with the existing supply relationship or that are otherwise considered appropriate by the court. As part of such critical supplier order, the court is required to grant a charge over all or any part of the debtor's property to secure the value of the goods or services supplied under the terms of the order. Such charge can be given priority over any secured creditor of the debtor. Any creditors likely to be prejudiced by the court-ordered charge must be given notice of the application to declare a vendor a critical supplier.

Although there are provisions in the CCAA that can compel supply without a debtor paying outstanding pre-filing amounts, decisions in Ontario have authorized pre-filing payments to critical suppliers when continued supply could not be guaranteed without such authorized payments.

2.19 Avoidance Transactions

The CCAA contains provisions for the review of certain pre-filing transactions, including preferences, "transfers at undervalue" and certain types of payments made by a corporation to its creditors or its equity holders by incorporating by reference into the CCAA the avoidance concepts from the BIA that were previously available only in bankruptcies (i.e., Chapter 7-type proceedings). The monitor in CCAA proceedings (but not the debtor) is empowered to challenge preferential payments or dispositions of property made by the debtor for consideration that was "conspicuously less than fair market value," unless a plan of arrangement provides otherwise.

A "transfer at undervalue" is a disposition of property or provision of services by the debtor company for which no consideration was received by the debtor company or for which the consideration received by the debtor company was conspicuously less than the fair market value of the consideration given by the debtor. If the parties are dealing at arm's length, the monitor must establish that the transfer at undervalue took place within one year of the initial bankruptcy event, when the debtor company was insolvent and where the debtor company intended to defraud, defeat or delay a creditor. When the transferee and the debtor company are not at arm's length, the relevant period of review is five years prior to the initial bankruptcy event.

If a court determines that a transaction was a transfer at undervalue, the transaction may be voided or the monitor may seek judgment for the difference between the value of consideration received by the debtor company (if any) and the value of consideration given by the debtor company.

A preference is a payment made to a pre-filing creditor that meets certain criteria. Where the creditor is dealing at arm's length with the debtor company, the monitor must establish that the impugned transaction took place within three months prior to the initial bankruptcy event and that the debtor company had a view to giving that creditor a preference over another creditor. Where the creditor is not dealing at arm's length with the insolvent person, the monitor must establish that the impugned transaction took place within one year prior to the initial bankruptcy event and that the debtor company had a view to giving that creditor a preference over another creditor. If the transaction had the effect of giving a preference, there is a rebuttable presumption that it was made with a view to giving the creditor a preference. If a court determines that a transaction was a preference, such transaction may be voided.

In respect of payments made to equity holders, the court may find the directors and managers of the debtor company jointly and severally liable for transactions that include (a) the payment of a dividend (other than a stock dividend) or the redemption or purchase for cancellation of shares of the capital stock of the corporation, and (b) the payment of termination pay, severance pay or incentive benefits or other benefits to a director, an officer or any management of the corporation, within the year prior to the initial bankruptcy event. To establish liability, the court must find that any of the aforementioned transactions rendered the debtor corporation insolvent or occurred at a time when the corporation was insolvent. In respect of executive compensation, the court must also find that the payment was conspicuously over the fair market value of the consideration received by the corporation and was made outside the ordinary course of business. The directors may avoid liability for these reviewable transactions by establishing that (a) they did not have reasonable grounds to believe any of the aforementioned occurred, or (b) they objected to the making of such payments.

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