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Chapter 11 and CCAA
A Cross-Border Comparison
This guide highlights the key differences between Chapter 11 of the U.S. Bankruptcy Code and Canada’s Companies’ Creditors Arrangement Act.
| Chapter 11 | Concept | CCAA Equivalent |
| A debtor need not be “insolvent” to file a voluntary Chapter 11 petition. Generally, however, the filing must be made in good faith and genuine financial distress is required. | Insolvency Prerequisite |
A debtor may make a voluntary application for relief under the Companies’ Creditors Arrangement Act (CCAA) and, to be granted such relief, the debtor must, among other things:
In certain circumstances, a debtor may be able to satisfy the insolvency requirement by showing it is facing a “looming liquidity crisis.” Although less common, a creditor (secured or unsecured), or certain other interested parties can initiate an involuntary CCAA proceeding. |
| The Bankruptcy Code is a federal statute with national application, which purports to have worldwide jurisdiction. Enforcement and recognition of this worldwide jurisdiction depend on principles of comity and local law. | Jurisdiction | The CCAA is a federal statute with national application, which purports to have worldwide jurisdiction. Enforcement and recognition of this worldwide jurisdiction depend on principles of comity and local law. |
| Chapter 11 cases are brought before United States Bankruptcy Courts, units of the District Courts with subject matter jurisdiction over bankruptcy cases. | Court System | CCAA cases are brought before the Superior Court of the applicable province. Some provinces have specialized commercial branches of the court where CCAA applications may be brought. |
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Chapter 11 protection is obtained by the filing of a petition with the appropriate Bankruptcy Court. Generally, within 24-72 hours after filing the petition, the Bankruptcy Court holds a hearing on the debtor’s “first day” motions, which typically seek interim relief to allow the debtor to continue operating with Chapter 11 protection. Although unusual, unsecured creditors with liquidated, noncontingent claims that are not subject to a bona fide dispute can initiate an involuntary Chapter 11 proceeding. There is no advance notice period to creditors for the filing of the petition. |
Commencing Proceedings |
CCAA protection is obtained when an initial order is granted by the Superior Court of a Province with jurisdiction over the debtor pursuant to an application (generally made by the debtor), which can be on a “no notice” basis. The application is usually made in the province where the debtor’s head office or principal place of business is located and can be made on a “no notice” basis. In practice, very short notice is generally given to secured lenders and major stakeholders (although they are usually consulted in advance). An initial order is limited to relief that is reasonably necessary for the continued operations of the debtor company in the ordinary course of business for no longer than an initial 10-day stay period. Debtors can then “come back” within 10 days on notice to seek more robust relief on more complete notice. Initial orders routinely include a clause allowing interested parties to seek to amend or vary the terms of the initial order or seek other appropriate relief. |
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With limited exceptions, a broad, immediate and automatic stay is granted upon the filing of the petition, which includes a stay of enforcement actions and contractual remedies. Although there is no time limit on the stay, which generally continues throughout the pendency of the Chapter 11 proceeding, parties may move to lift the stay for cause. |
Stay of Proceedings |
Although the stay of proceedings is not automatic, courts typically exercise their discretion and issue orders on the initial hearing, providing a broad initial stay up to a maximum of 10 days. The scope of the stay is ultimately within the court’s discretion, but enforcement actions and contractual remedies are typically stayed. The initial stay is typically extended by way of a stay extension motion by the debtor. To obtain an extension of the stay, the debtor must demonstrate that it is acting in good faith and with due diligence. There is no prescribed limit to any stay extension or the number of extensions that may be sought. Parties may move to lift the stay for cause. |
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Generally, the debtor’s existing management remains in control of the business and coordinates the reorganization effort. A chief restructuring officer may also be appointed to carry out certain of the debtor’s management functions. A Chapter 11 trustee may be appointed upon request of a party in interest in extraordinary cases. If appointed, a trustee operates (or liquidates) the estate in the debtor’s place. An examiner may also be appointed by the Bankruptcy Court to investigate, among other things, certain allegations of fraud, dishonesty, incompetence, misconduct, mismanagement, or irregularity in the management of the debtor’s affairs. |
Supervision of the Debtor |
Generally, the debtor’s existing management remains in control of the business and coordinates the reorganization effort. A chief restructuring officer may be appointed to carry out certain of the debtor’s management functions. A licensed insolvency trustee is appointed as “Monitor” by the Court to supervise the debtor, periodically report to the Court and stakeholders on the debtor’s business and affairs, and assist with the restructuring. In some CCAA proceedings, the Monitor is authorized by the Court to direct certain of the debtor’s corporate functions (known colloquially as a “Super Monitor”). |
| The U.S. Trustee, a division of the Department of Justice, is the “watchdog” of the U.S. bankruptcy system and acts to prevent fraud, dishonesty and overreach. It also conducts the meeting of creditors, monitors the debtor-in-possession’s operation of the business and reviews operating reports and professional fees. The U.S. Trustee also imposes certain requirements on the debtor with respect to reporting its monthly income and operating expenses, and paying current employee withholding and other taxes. | Government Oversight |
The CCAA does not have a direct equivalent to the U.S. Trustee, although the Monitor and Office of the Superintendent of Bankruptcy (OSB) (a department of the federal government) perform some of the same oversight functions. The OSB licenses insolvency trustees that act as monitors, supervises the administration of insolvencies in Canada, maintains a public record of bankruptcy and insolvency proceedings and has certain investigative powers. |
| The filing of a Chapter 11 petition creates a separate legal bankruptcy estate. The estate contains all legal or equitable interests of the debtor in property as of the commencement of the case. | Creation of a Separate Legal Bankruptcy Estate | A CCAA filing does not create a separate legal estate. |
| Although setoff rights that exist under applicable non-bankruptcy law are preserved, creditors are generally prohibited from setting off pre-petition claims against post-petition obligations (or vice versa). By contrast, the debtor may assert pre- and post-petition set-off rights defensively to the extent such rights arise under the relevant state law and are not otherwise limited by the Bankruptcy Code. | Set-off | Although the right to set-off pre-filing obligations against pre-filing obligations is expressly preserved under the CCAA, the right 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, however, to allow pre/post set off in exceptional circumstances. |
| The Bankruptcy Code provides that interest that is unmatured as of the petition date generally does not form part of either a secured or an unsecured claim. | Interest on Claims | Post-filing interest accrues on secured claims. Generally, interest stops accruing on unsecured claims at the filing date, but may, in certain circumstances, accrue on and form part of unsecured claims where pre-filing unsecured claims are paid in full. |
| The Bankruptcy Code provides that a lien on accounts or after-acquired property is effective only as to proceeds from those accounts or property existing as of the petition date, and not against accounts or property generated or acquired post-petition, which is the property of the separate legal bankruptcy estate. Accordingly, as adequate protection against the diminution of the value of a pre-petition secured creditor’s collateral (see Adequate Protection below), the Bankruptcy Court may grant the pre-petition secured creditor a replacement lien on post-petition acquired property (such as new inventory or accounts receivable). | Replacement Liens | Canadian courts do not need to grant “replacement liens” because a pre-filing secured creditor’s security, if granted over after-acquired property (as typically would be the case), continues to apply and automatically extends to post-filing assets (such as new inventory or accounts receivable) acquired by the debtor |
| The Bankruptcy Code permits the creation of an official committee of unsecured creditors and, where appropriate, an official committee of equity security holders. In each case, the fees and expenses of the committee are paid by the estate. The committees consult with the debtor about the administration of the estate, investigate the debtor’s conduct and operation of the business, and participate in the formulation of a plan of reorganization. The Bankruptcy Court may also authorize the formation of other representative committees to represent the interests of other groups (e.g., tort claimants, retirees, employees). | Creditors’ Committees and Representative Counsel |
The CCAA does not provide for unsecured creditors’ committees, although they have been formed on an ad hoc basis. Courts have, on several occasions, ordered the appointment of representative counsel to act on behalf of classes of claimants (e.g., pensioners, employees, investors). |
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Bankruptcy Courts commonly authorize debtor in possession (DIP) financing and grant super priority liens over the assets of the debtor in favour of the DIP lender as long as the Bankruptcy Court is satisfied that:
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DIP Financing |
Canadian courts generally authorize DIP financing and grant super-priority charges over the assets of the debtor in favour of the DIP lender as long as the court is satisfied that additional financing is required for the continued operations of the business. The court will consider the recommendation of the Monitor, the duration of the proceedings, the debtor’s property and management, whether the debtor has the confidence of its lenders and whether any creditor will be “materially prejudiced” by the security to be granted. Where DIP financing is sought under an initial order, the relief must be limited to the amount that is reasonably necessary for the continued operation of the debtor during the initial stay period of no more than 10 days. Approval of a full DIP facility for the duration of the proceedings must be sought on a subsequent motion. |
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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.
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.
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