1 Legal framework

1.1 What domestic legislation governs restructuring and insolvency matters in your jurisdiction?

The two key federal insolvency statutes applicable throughout in Canada are as follows:

  • The Companies' Creditors Arrangement Act (CCAA) is typically used for complex restructurings of corporate debtors with liabilities in excess of C$5 million or a related group of companies which are subject to claims of over C$5 million, in aggregate.
  • The Bankruptcy and Insolvency Act (BIA) is typically used for liquidations and for less complex reorganisations. The specific provisions of the BIA that govern corporate reorganisations are known as 'proposals'. The BIA is a rules-based mechanism that offers less flexibility and contains more stringent timelines, due to the structured nature of BIA proceedings. As a result, the BIA is typically a quicker, more affordable, but less flexible option for debtors with less complex operations and restructuring needs. In addition to proposals, the BIA provides for the appointment of a receiver, interim receiver, or a receiver and manager by a secured creditor to protect and preserve assets where there is evidence that the debtor's assets are vulnerable or to carry out an orderly liquidation of same.

The Winding-up and Restructuring Act (WURA), which covers insolvencies of financial institutions and certain other corporations, such as insurance companies, is not addressed in this Q&A.

1.2 What international / cross-border instruments relating to restructuring and insolvency have effect in your jurisdiction?

Both the BIA and the CCAA allow for the recognition of foreign restructuring and insolvency proceedings in Canada under a model predicated on the UNCITRAL Model Law on Cross-Border Insolvency. For recognition of foreign proceedings, a foreign representative of the debtor must demonstrate to a Canadian court sufficient evidence of a foreign proceeding and the authority of the foreign representative to seek such recognition. The recognition proceeding is characterised as 'main' or 'non-main', depending on where the centre of main interests (COMI) of the debtor is located. In the absence of proof to the contrary, the registered office is typically deemed to be the COMI. When a foreign proceeding is recognised as main, the Canadian court orders a stay of proceedings; whereas when a foreign proceeding is recognised as non-main, the Canadian court may order a stay of proceedings.


  • procedural matters in a foreign proceeding recognised in Canada are administered according to the Canadian laws of the local jurisdiction; and
  • substantive matters are administered by the court of the foreign main proceeding and governed by the laws of the foreign main proceeding.

As always, exceptions do exist. For example, the Canadian court can refuse to make an order that would be contrary to public policy.

1.3 Do any special regimes apply in specific sectors?

Winding-Up and Restructuring Act: WURA is a federal statute that applies to the following enterprises carrying on business in Canada:

  • federal and foreign banks;
  • federal and foreign loan or trust companies; and
  • federal, provincial or foreign insurance corporations.

The liquidation process is similar in nature to the liquidation process under the BIA. WURA is not addressed in this Q&A.

1.4 Is the restructuring and insolvency regime in your jurisdiction perceived to be more creditor friendly or debtor friendly?

Debtor friendly. Both the CCAA and the BIA share the same remedial purpose of providing a means whereby the social and economic losses from the liquidation of an insolvent company's ongoing business operations can be avoided, while a court-supervised attempt to reorganise the financial affairs of the debtor is attempted. Canada's insolvency statutes pursue an array of overarching remedial objectives that reflect the wide-ranging and potentially catastrophic impacts that insolvency can have. These objectives include:

  • providing for timely, efficient and impartial resolution of a debtor's insolvency;
  • preserving and maximising the value of a debtor's assets;
  • ensuring fair and equitable treatment of the claims against a debtor;
  • protecting the public interest; and
  • balancing the costs and benefits of restructuring or liquidating the company.

The overarching purpose of the restructuring and insolvency regimes in Canada, however, is to minimise the impact of a debtor's insolvency.

While the focus of Canadian courts is on restructuring debtors and allowing debtors the necessary breathing room to attempt to restructure their affairs, creditors and key stakeholders remain well protected under the Canadian regime. Creditors – particularly secured creditors – play a key a role in restructuring and insolvency proceedings, and courts will commonly consider the relative prejudices faced by creditors and stakeholders throughout the proceedings.

1.5 How well established is the legal regime and infrastructure relevant to restructuring and insolvency in your jurisdiction (e.g. extent of recent legislative changes, availability of specialist judges / courts / advisers)?

Canada has a mature and well-established legal system, with the predecessors of current insolvency statutes dating back to 1919. Amendments to the CCAA and BIA are made on an ongoing basis to ensure that these statutes:

  • continue to address contemporary issues;
  • provide certainty in evolving legal and financial markets; and
  • reflect current business practices.

The most recent amendments to the federal CCAA and BIA took effect in November 2019.

In many provinces, Canadian courts have dedicated specialised resources for the administration of insolvency matters, including a specialised roster of judges who are tasked with hearing bankruptcy, insolvency and restructuring mandates. Canada also maintains special bankruptcy registries and lists for the purpose of administering BIA bankruptcies and proposals.

The professional bankruptcy and insolvency community in Canada consists primarily of lawyers, trustees (comprised of accountants and accounting firms), and various advisers and chief restructuring officers. Professionals are accessible at every level, and the quality of representation within Canada is generally specialised and of a high quality.

2 Security

2.1 What principal forms of security interest are taken over assets in your jurisdiction?

Security interests in Canada can be granted over any personal, movable, real, immovable, tangible or intangible property. Security interests are typically established by a consensual and executed written grant of a security interest. For such a grant to be valid and enforceable, various attachment and perfection requirements must be met.

Canada maintains various registries and notice filing systems, at a provincial level, for general personal property and real property. Separate and specialised registries do exist for certain specific property, such as intellectual property, oil and gas, and other mineral interests and extraction rights.

2.2 How can those security interests be enforced (and what factors could complicate or prevent this process)?

Enforcement procedures are set out in various overlapping provincial and federal statutes. The most common of these are:

  • the Personal Property Security Act of the applicable common law province and, in Quebec, the Civil Code of Quebec;
  • the Land Titles Act and other statutes governing the creation and priority of security interests, mortgages and charges with respect to real property, in the applicable common law province; and
  • the Bankruptcy and Insolvency Act (BIA).

The particular process will depend on the nature or the property and security interest. In general, secured creditors are entitled to private enforcement over personal property (which does not require court involvement) or may have a receiver appointed, as agent or through court appointment, to preserve and liquidate property subject to a secured creditor's interests. In most provinces, while secured creditors may be entitled to certain specific self-help remedies, mortgagees of real property are not entitled to any such self-help remedies and must be enforced by way of court proceedings.

Certain criteria must be met before a creditor may enforce its security: each step in the enforcement process is governed by rules of commercial reasonableness, good faith and reasonable notice of the creditor's intentions. The conduct of a secured creditor can affect its entitlement to demand payment. Written loan and security agreements may limit the availability of certain creditor remedies or provide additional protections and rights for a debtor. For instance, the debtor may be entitled to certain rights to 'cure' defaults after notice of enforcement or defaults provided. Further, the filing of a proposal under the BIA (prior to the expiry of a creditor's 10-day notice of intention to enforce under the BIA) or a successful Companies' Creditors Arrangement Act application will generally trigger a stay of proceedings that will prevent any further enforcement steps or exercise of remedies.

3 Restructuring

3.1 Are informal workouts available in your jurisdiction? If so, what forms do they typically take, and what are the benefits and drawbacks as compared to formal restructuring proceedings?

Informal workouts are available and common in Canada. Distressed debtors may seek consensual resolutions with their creditors and stakeholders, as a first resort, before commencing formal court proceedings. It is also not unusual for debtors to seek a consensus-based resolution with stakeholders or pre-filing sales process before commencing a 'pre-pack' insolvency process in which the court approves a pre-negotiated sales process, proposal or transaction.

Informal resolutions can include, without limitation:

  • partial sale of the debtor's assets;
  • extension or amendment of repayment schedules;
  • refinancing of existing debt;
  • bridge loans; and,
  • creditor or stakeholder forbearance.

The primary benefit of informal consensual proceedings is the avoidance of:

  • the fees and costs associated with a formal restructuring process;
  • certain potential operational impacts; and
  • the stigma associated with insolvency proceedings.

However, without a formal process in place, the debtor is not protected by a stay of proceedings and is vulnerable to any enforcement action of any unsupportive creditors or stakeholders.

Consensus-based resolutions are encouraged by the Canadian courts. Even in formal processes, participants are encouraged to negotiate and settle disputes. Increasingly, courts are recognising the value of alternative dispute resolution within large and complex insolvency processes. In certain recent proceedings under the Companies' Creditors Arrangement Act (CCAA), mandatory mediation has been approved; in most such cases, the court-appointed mediator is a former judge.

3.2 What formal restructuring proceedings are available in your jurisdiction, and what are the benefits and drawbacks of each?

Under the Bankruptcy and Insolvency Act (BIA), an insolvent debtor may restructure by filing a notice of intention to make a proposal or filling a proposal directly. The filing of a notice of intent triggers an automatic 30-day stay of proceedings against all of the debtor's creditors, which may then be extended in increments of 45 days, up to an overall maximum of six months. The notice of intention process grants a debtor the necessary breathing room to put together and make a proposal to its creditors, which, if accepted, would allow the debtor to continue operating as a going concern and avoid insolvency. If the proposal is rejected by the debtor's creditors, the debtor is automatically deemed to have made an assignment in bankruptcy. The primary benefits of restructuring under the BIA proposal process include:

  • lower professional costs;
  • priority provisions affecting certain potential tax claims; and
  • a streamlined and well-defined process.

The primary drawbacks are that the BIA proposal process is a primarily rules-based system, which lacks flexibility and has a six-month time limit within which the debtor must file its proposal or is otherwise deemed to have made an assignment into bankruptcy.

The CCAA applies to debtor corporations with at least C$5 million of liabilities. Under the CCAA, a debtor may restructure its business under the supervision of a court-appointed monitor. The CCAA is less restrictive and provides far greater flexibility, as:

  • there are no prescribed timelines for completion of the process under the statute; and
  • the supervising court is empowered to make any order that it determines is appropriate in the circumstances, provided that three 'baseline considerations' are met – that is:
    • the debtor is acting:
      • in good faith; and
      • with due diligence; and;
    • the order sought would further the remedial purposes of the CCAA.

The skeletal nature of the CCAA allows for creative resolutions and workouts that would not otherwise be possible under the BIA. In CCAA proceedings, as in proposal proceedings under the BIA, debtors remain in possession of their assets. CCAA proceedings tend to be more expensive – primarily due to:

  • the size of the debtor;
  • the complexity of the restructuring; and
  • the larger number of professionals usually needed.

The CCAA can also be used by the debtor, to conduct a liquidation processes. Typically, this is used by debtors with large, complex and often cross-border businesses, where a higher level of professional and court involvement is seen as beneficial to an orderly liquidation process.

Depending on the nature of the debtor's incorporation, the Canada Business Corporations Act (CBCA) and various other provincial Business Corporation Acts permit debtors to apply for court approval of an arrangement. A CBCA process typically does not require the appointment of a monitor and the debtor remains in possession of its assets during this process. As a general rule, the CBCA process involves two stages:

  • First, the applicant debtor seeks an interim order setting out, among other things, the plan and voting mechanics, on the basis that certain statutory conditions have been met and the application is made in good faith.
  • If the plan is approved by the requisite majorities, the applicant debtor returns to court to seek a final order, where it must satisfy the court that the statutory conditions are met and that the proposed arrangement is 'fair and reasonable'.

As a corporate statute, the CBCA cannot generally compromise contingent or unsecured claims nor does the statute provide for a general stay of proceedings (although courts may grant this under certain Business Corporations Acts). This process is often expedient and the absence of ongoing court supervision limits the expense of professional fees. Filing under the applicable Business Corporations Act may be attractive to corporations that wish to avoid the potential stigma of filing under a designated insolvency statute and that intend to complete a balance-sheet restructuring, rather than an operational one.

3.3 How, by whom and on what grounds are formal restructuring proceedings initiated? What are the main preconditions for success?

In order to commence formal restructuring proceedings, a debtor must meet the definition of an 'insolvent person' under the BIA or a 'debtor company' under the CCAA.

The BIA defines an 'insolvent person' as a party:

  • that for any reason is unable to meet its obligations as they generally become due;
  • that has ceased paying its current obligations in the ordinary course of business as they become due; or
  • the aggregate of whose property is not sufficient at a fair valuation – or, if disposed of at a fairly conducted sale under a legal process, would not be sufficient – to enable payment of all its obligations, due and accruing.

The CCAA defines a 'debtor company' as a company that:

  • is bankrupt or insolvent;
  • has committed an act of bankruptcy within the meaning of the BIA or is deemed insolvent within the meaning of the Winding-up and Restructuring Act (WURA), whether or not proceedings in respect of the company have been taken under either of those acts;
  • has made an authorised assignment or has had a bankruptcy order made against it under the BIA; or
  • is in the course of being wound up under WURA because it is insolvent.

The notion of 'insolvent' under the CCAA is the same as under the BIA, with the caveat that a company is also insolvent if it is reasonably expected to run out of liquidity within reasonable proximity of time as compared with the time reasonably required to implement a restructuring.

In addition, the CCAA has a threshold requirement that the claims against the debtor or affiliated group of companies total more than C$5 million.

3.4 What are the effects of the commencement of formal restructuring proceedings, both for the debtor and for creditors?

When a debtor initiates restructuring proceedings, under the BIA or CCAA, it is typically granted a stay of proceedings and a stay of the enforcement of various rights and remedies. The CCAA was amended in 2019 to limit the initial relief in respect of a debtor to:

  • a stay period of no more than 10 days; and
  • such other relief as is reasonably necessary for the continued operations of the debtor, in the ordinary course of business, during that initial 10-day period.

On or before the expiry of the initial stay period, the debtor will return to court to seek a 'comeback order' extending the stay period and seeking any ancillary or additional relief.

While undergoing restructuring proceedings, the debtor continues to operate as a going concern, with its existing management and governance structures. However, the debtor must seek court approval of any significant asset dispositions outside the ordinary course of business. Furthermore, as part of a formal restructuring process under the CCAA, the supervising court is empowered to make "any order that it considers appropriate in the circumstances"; among other relief, this may include:

  • third-party releases;
  • approval of key employee retention programmes;
  • reverse vesting orders;
  • stays against related non-applicant entities (eg, related limited partnerships that are part of the debtor's operations or structure); or
  • the issuance of critical supplier charges compelling continued supply.

The effects of a BIA proposal process for the debtor and creditors are similar to those of the CCAA but less flexible and designed for smaller and less complex restructurings. Also, upon the filing of a proposal or notice of intention to make a proposal, an automatic stay of proceedings is granted for claims against the debtor for 30 days, which may be extended in 45-day increments, up to a maximum total amount of six months.

3.5 Does a moratorium or stay apply and, if so, what is its scope? Are there exceptions?

Proceedings under both the BIA and CCAA trigger a stay of proceedings. Under the BIA, the stay is automatic upon the filing of a notice of intent or when the proposal is made to creditors. Under the CCAA, a court-ordered stay of proceedings may be granted; while discretionary, the ordinary practice is to approve a stay. These stays of proceedings typically stay all formal enforcements proceedings and litigation and the enforcement of a number of rights and remedies of contractual counterparties, subject to very limited exceptions.

Under the BIA proposal process, the stay of proceedings is 30 days initially and may be extended by 45-day increments for up to six months. Under the CCAA, the stay of proceedings is no more than 10 days initially and may be extended indefinitely in increments determined by the court.

If a proposal by a debtor under the BIA is rejected by the creditors, the proposal proceedings automatically convert from restructuring proceedings to insolvency proceedings; the stay of proceedings will then no longer apply to properly perfected secured creditors.

There are certain statutory exceptions to the generally applicable stay of proceedings, including:

  • under the BIA and CCAA, with respect to the crystallisation of 'eligible financial contracts';
  • under the BIA, with respect to secured creditors that have completed certain enforcement steps prior to the commencement of proposal proceedings;
  • under the BIA and CCAA, insofar as no creditor will be obliged to provide continued supply on credit (although an order may be granted under the CCAA compelling supply if the supplier is a 'critical supplier' and is granted a corresponding secured priority charge over the debtor's assets); and
  • under the BIA and CCAA, in respect of certain regulatory investigations which do not constitute attempts to enforce a regulatory body's rights as a creditor.

3.6 What process do restructuring proceedings typically follow (including likely length of process and key milestones)?

Under the BIA, a debtor will typically file either:

  • a proposal to creditors under the terms listed in Part III of the BIA; or
  • a notice of intention to file a proposal with the superintendent of bankruptcy.

Both processes have the effect of putting creditors on notice of the debtor's intent to restructure. A proposal under the BIA must be made to all unsecured creditors and may be made to secured creditors. Following the filing of either a formal proposal or a notice of intent, a proposal trustee is appointed to oversee the process and assist the debtor in preparing and overseeing the proposal. The proposal trustee has a statutory duty to report on the debtor's cash flow and advise the court of any adverse material change.

The filing of a notice of intent automatically triggers a 30-day stay of proceedings, which can be extended for 45 days at a time for up to six months from the start of the initial 30-day stay. If this six-month maximum is exhausted and a proposal still has not been filed by the debtor, the debtor is deemed to have automatically made an assignment into bankruptcy (although a debtor which meets the requirements of the CCAA may seek to convert its proposal proceedings to CCAA proceedings by application to the court). If a notice of intent has not been filed, the stay of proceedings is triggered when the proposal is made to the creditors.

To obtain any further extension of the stay of proceedings, the debtor must satisfy the court that:

  • it has acted and is acting in good faith and with due diligence;
  • it would likely be able to make a viable proposal if the extension being applied for were granted; and
  • no creditor would be materially prejudiced if the extension being applied for were granted.

Once a proposal has been filed, creditors must vote either to approve or to reject the proposal. If the proposal is approved, the debtor's obligations to the creditors for the amounts owing prior to the date of the proposal are restructured and compromised in accordance with the proposal. However, if the proposal is rejected, the meeting of creditors at which the decision either to accept or reject the proposal was taken becomes the first creditors' meeting in bankruptcy proceedings. The aforementioned BIA proposal process typically take one to six months.

Under the CCAA, to commence proceedings, a debtor must make a court application and meet the minimum statutory requirement of:

  • debt of at least C$5 million; or
  • in the case of affiliated companies, debt of at least C$5 million in aggregate.

While uncommon, CCAA proceedings may also be initiated by a creditor of the debtor, provided that the statutory requirements with respect to debtor companies are met.

On an initial application, a discretionary stay of proceedings is typically granted for a maximum of 10 days, which can be subsequently extended as many times and for such length as is necessary and reasonable in the circumstances, at the court's discretion. Unlike under the BIA, there is no restriction on the total duration of the stay of proceedings. To obtain a subsequent extension of the stay of proceedings under the CCAA, the debtor must satisfy the court that:

  • circumstances exist that make the order appropriate; and
  • it has acted, and is acting, in good faith and with due diligence.

CCAA proceedings are typically lengthier than BIA proposal proceedings – particularly in situations where the debtor is seeking to realise upon an asset over a lengthy period and the creditors are supportive of the debtor's continued efforts.

3.7 What are the roles, rights and responsibilities of the following stakeholders in restructuring proceedings? (a) Debtor, (b) Directors of the debtor, (c) Shareholders of the debtor, (d) Secured creditors, (e) Unsecured creditors, (f) Employees, (g) Pension creditors, (h) Insolvency officeholder (if any), (i) Court.

(a) Debtor

Restructuring proceedings are usually initiated by the debtor. The debtor is obliged to follow appropriate procedures under the BIA or CCAA and act in good faith and with due diligence, all under and subject to court supervision. The debtor is restrained from disposing of its assets outside the ordinary course of business.

(b) Directors of the debtor

The general fiduciary duty, including a duty of loyalty and duty of care, is owed by the directors to the debtor during the restructuring proceedings. Further, the directors must continue complying with obligations under securities, environmental, tax and employment law; and may incur personal liability if they do not do so.

(c) Shareholders of the debtor

The liability of shareholders in Canada is generally restricted to the value of the interest in their shares. Generally, shareholders cannot be held liable for the liabilities of a company. However, there are statutory exceptions to this rule – for example, where a shareholder is found to have been in control of a company's business that is found to have violated environmental obligations. There are also exceptions where the corporate veil may be pierced, including for shareholder wrongdoing, such as fraud. Forms of unlimited corporate organisation are available in certain provinces and provide a further exception to the rule of limited shareholder liability.

(d) Creditors generally

Creditors have the right to accept or reject a debtor's proposal or plan. When voting on a proposal/plan, it must be approved by at least a majority in number of voting creditors representing a two-thirds majority of dollar value in each affected class. If such majority is achieved, all creditors in the approving class are bound by the proposal/plan.

(e) Secured creditors

Secured creditors are granted a variety of rights and remedies, depending on the context of the insolvency proceedings and the governing statute. These rights and remedies are predominantly governed by contract. Courts will typically examine the prejudice faced by secured creditors at various stages in a debtor's restructuring proceedings and when determining the appropriateness of any relief or orders sought by the debtor.

(f) Unsecured creditors

Unsecured creditors typically have the fewest rights and corresponding responsibilities in restructuring proceedings. Unsecured creditors are typically grouped as one class, whose claims, rights and priorities rank pari passu with one another.

(g) Employees

Restructuring proceedings often occur while the debtor maintains some level of ongoing operations, which require employee support. Employees who continue to work in the normal course are entitled to the same wages and benefits. Employers must adhere to applicable labour and employment standards throughout the restructuring process. For unionised employees, collective agreements remain in force, although unions may be asked to reopen bargaining agreements as part of the process. Additionally, to ensure the ongoing support of key personnel during a restructuring process, a debtor may seek court approval of a key employee retention programme as part of their restructuring process, which contemplates a bonus being paid to strategic employees upon hitting specific milestones or timelines.

(h) Pension creditors

Pension plans are considered to be separate from the general assets of a corporation and cannot be drawn on to satisfy debts or operating expenses. Formal restructuring orders may or may not contain provisions to permit continued contributions to benefit plans and payments to current retirees. Statutory deemed trusts in favour of pensioners have generally been held to be ineffective in insolvency proceedings.

(i) Insolvency officeholder (if any)

All insolvency officeholders are impartial fiduciaries and must be licensed as licensed insolvency trustees through the Office of the Superintendent of Bankruptcy. The most common restructuring officers are 'monitors' appointed within CCAA proceedings and 'proposal trustees' appointed in BIA proposal proceedings. The main role of these officials is to:

  • report to the court and the debtor's creditors and stakeholders on the status of the debtor; and
  • provide strategic and financial recommendations.

(j) Court

Formal restructuring proceedings require court supervision. Depending on the complexity of the proceedings, frequent attendance before the court may be required to:

  • approve administrative processes;
  • obtain interim financing;
  • approve key employee retention plans;
  • institute a claims process and resolve disputed claims;
  • complete the sale of assets outside the ordinary course of business; and/or
  • seek other reasonable and necessary relief needed by the debtor to successful restructure their affairs.

While not statutorily mandated, it is common for an experienced commercial judge to take carriage of the proceedings and to hear all or almost all of the applications made in respect of the debtor.

3.8 Can restructuring proceedings be used to "cram down" and bind dissentient creditors to a transaction supported by other creditors? Are creditors separated into classes for the purposes of voting in the proceedings? What are the relevant voting thresholds? Is "cross-class cramdown" available?

Under a BIA proposal or a CCAA plan, creditors can generally be crammed down only if the dissenting creditor is in a class of creditors where the requisite majority approves the proposal or plan. Creditors are separated into classes, based on their shared rights, interests and priorities, for the purposes of voting in the proceedings. Creditors are classified by the debtor at first instance, but the proposed classification may be challenged and determined by the courts. Classes of creditors must have a commonality of interest to be classified as a class. In order for a proposal to be approved by a class, it must be passed by a majority in number and two-thirds majority of the dollar value of each respective class.

Canada's formalised debt restructuring regimes generally do not allow for class cramdowns. However, recently, 'reverse vesting orders' have been approved in BIA and CCAA proceedings, pursuant to which transactions similar in effect to a proposal or plan of arrangement may be approved without requiring a creditor vote, thereby potentially providing an avenue for a de facto cramdown. The jurisprudence regarding reverse vesting orders is novel and continues to evolve, and debtors must prove the necessity and appropriateness of a reverse vesting order prior to obtaining court approval of same.

3.9 Can restructuring proceedings be used to compromise secured debt?

Yes. Restructuring proceedings under both the CCAA and the BIA can be used to compromise secured claims.

3.10 Can contracts / leases be disclaimed or otherwise addressed through restructuring proceedings?

Under the BIA and the CCAA, the debtor can disclaim most types of agreements by delivering notice in the prescribed format, subject to certain statutory exceptions and requirements. The counterparty to such any disclaimed agreement may file a claim for damages that result from the disclaimer or seek to appeal the validity of disclaimer itself.

Certain contracts cannot be disclaimed. For example, a collective bargaining agreement cannot be disclaimed.

3.11 Can liabilities of third parties (e.g. guarantors) be released through restructuring proceedings?

Liabilities of third parties can be released through restructuring proceedings. Typically, such releases are incorporated into corporate plans of arrangement. However, third-party releases are generally restricted to those parties that contributed to the proceedings in a material way; in some circumstances, this may include directors or officers of the debtor.

3.12 Is any protection and/or priority afforded to the providers of new money in the context of restructuring proceedings (i.e. is "DIP financing" available)?

DIP financing, otherwise referred to as 'interim financing', is available in the context of formal restructuring proceedings. Interim financing is subject to the approval of the supervising court. In connection with any interim financing and court approval of same, the court will often grant the interim financing lender a super-priority charge – ahead of, among others, all pre-filing secured creditors – to secure post-filing advances under either the BIA or the CCAA. The charge may not secure pre-filing advances, although 'creeping roll-up DIPs' (in which post-filing cash is swept by the DIP lender and applied to pre-filing obligations) have been approved in certain limited circumstances – and particularly where such DIP facility has been approved in foreign main proceedings.

3.13 How do restructuring proceedings conclude?

Restructuring proceedings conclude when a BIA proposal is formally approved by the creditors. Dissenting creditors within a class in which the requisite majority has approved the proposal are bound by the proposal. Once approved by affected creditors, the proposal must be approved by the court. The formal portion of a BIA proposal process concludes following court approval of the proposal. The parties are then expected to implement the proposal in accordance with its terms and any order approving same. Alternatively, if the proposal is not approved by the requisite majority of each class of affected creditors, the debtor will be deemed to have made an automatic assignment in bankruptcy.

Under the CCAA, a plan of compromise and arrangement must also be approved by affected creditors at a creditors' meeting. Similarly, to be accepted, the plan must be approved by a majority in number and two-thirds in value. The creditor-approved plan must then be approved by the court. To be approved by the court, all statutory requirements of the CCAA must be met and the plan must be fair and reasonable. Following implementation of the plan, the monitor will typically be discharged from its role as monitor and the CCAA proceedings will be terminated. In 'liquidating CCAA proceedings', in which no plan of arrangement is put forward and the debtor is instead liquidated, the proceedings will generally be terminated upon the final distribution being made by the court-appointed monitor, all other remaining matters (eg, priority contests, determination of entitlement to assets and completion of an allocation of costs) having been addressed and the monitor having been discharged.

4 Insolvency

4.1 What types of insolvency proceeding are available in your jurisdiction, and what are the benefits and drawbacks of each?

There are five types of formal bankruptcy and insolvency proceedings in Canada.

Bankruptcy and Insolvency Act (BIA): Under the BIA, there are various sub-divisions of proceedings, as follows:

  • Consumer proposal (Division II): This is a formal and legally binding arrangement made with an individual consumer's creditors using a licensed insolvency trustee (LIT). The LIT works with the consumer to develop an offer to pay a percentage of the amounts owed to each creditor or to extend the timeframe in which the debt is to be repaid. This option is available to consumers who owe less than C$250,000.
  • Bankruptcy: A LIT will help a consumer or corporation to complete all required forms and file the documents with the Office of the Superintendent of Bankruptcy Canada, at which point the consumer or corporation will be formally declared bankrupt. The LIT will work to sell the consumer's assets (some assets are excluded) and continue to communicate with the creditors on behalf of the consumer in order to distribute proceeds of the assets to help pay down the consumer's debt. In addition to voluntary bankruptcy proceedings commenced by way of an assignment in bankruptcy, creditors may seek to petition an insolvent person into bankruptcy by application to the court.
  • Division I proposal: This process is also overseen by a LIT and is available to both individuals and businesses with debts of more than C$250,000. The party filing the proposal works closely with the LIT to compile an offer to present to the creditors to pay back a reduced amount of the debt over a specific timeframe. Division I proposals are addressed in further in question 3.

The benefits of the various procedures under the BIA are that:

  • they are debtor-initiated, structured processes;
  • they tend to be cheaper and more efficient than other options; and
  • the priorities of claims under the BIA differ from those under other legislation, which means that a creditor may choose to decide what process to take depending on where it has the most debt. For example, under the BIA, debts owed to the crown become unsecured claims, which are positioned low down the list of priority of claims.

The major drawback of the various procedures under the BIA is their rigid nature: although they are debtor initiated, they include little flexibility in terms of payouts. Further, the courts have less discretion under the BIA than in other options.

Receivership: Normally appointed by a court, a receiver is responsible for overseeing the orderly liquidation and distribution of a debtor's assets. Pursuant to the BIA and certain provincial legislation, a receiver is appointed where it is 'just or convenient' to do so. The factors that a court typically looks for include the following:

  • whether irreparable harm might be caused if no order is made – although it is not essential for a creditor to establish irreparable harm if a receiver is not appointed;
  • the risk to the security holder, taking into consideration the value of the debtor's equity in the assets and the need to protect or safeguard the assets while litigation takes place;
  • the nature of the property;
  • the apprehended or actual waste of the debtor's assets;
  • the preservation and protection of the property pending judicial resolution;
  • the balance of convenience to the parties;
  • the fact that a creditor has the right to appoint a receiver under loan documentation;
  • the enforcement of rights under a security instrument where the security holder encounters or expects to encounter difficulty with the debtor and others;
  • the principle that the appointment of a receiver constitutes extraordinary relief that should be granted cautiously and sparingly;
  • the consideration of whether a court appointment is necessary to enable the receiver to carry out its duties more efficiently;
  • the effect of the order on the parties;
  • the conduct of the parties;
  • the length of time for which a receiver may be in place;
  • the cost to the parties;
  • the likelihood of maximising return to the parties; and,
  • the goal of facilitating the duties of the receiver.

Receivership generally benefits the creditors of the insolvent party, as it provides a flexible, creditor-driven process by which the assets of the debtor will be liquidated by an independent court officer. The receiver effectively replaces the board and management of the debtor and obtains exclusive authority to act with respect to its property, assets and undertakings. The primary drawbacks of the receivership process are that:

  • it is limited to liquidation; and
  • it is generally not possible to effect a going concern restructuring within receivership proceedings.

Companies' Creditors Arrangement Act: Proceedings under the Companies' Creditors Arrangement Act (CCAA) are preferred for large companies. A court-appointed monitor, which must be a LIT, is appointed to oversee the restructuring in this process. The monitor's duties include reporting to the court on the debtor's cash flow and restructuring. Furthermore, the monitor must advise the court of any material adverse change in the debtor's financial condition. The benefits of proceedings under the CCAA include:

  • the flexibility of the rules;
  • the duration;
  • the timelines;
  • the limited procedural requirements; and
  • the court's discretion and broad authority to grant any order that it considers to be appropriate in the circumstances.

Among other things, the flexibility of the CCAA has been utilised by debtors to:

  • approve a claims process or mandatory mediation;
  • obtain 'channelling orders' limiting certain claims to insurance proceedings;
  • obtain approval of court-ordered charges in favour of various restructuring advisers, key employees or critical suppliers;
  • allocate the costs of the proceedings among secured creditors;
  • effect partial or complete liquidations with the benefit of a stay of proceedings; and
  • obtain sale approval and vesting orders, which vest sold assets in a purchaser 'free and clear' of claims and encumbrances against such assets.

The primary drawback of the CCAA is the increased cost as compared with BIA proposals. Additionally, while creditors may take comfort in the ongoing oversight of the monitor and the court, debtors are generally granted wide latitude to attempt to effect a restructuring under the CCAA, which may result in debtor-friendly orders granted at the expense of secured creditors.

Canada Business Corporations Act: Proceedings under the Canada Business Corporations Act (CBCA) are similar to those under the CCAA. The main benefits include a low cost and high degree of flexibility in structure. The process does not require frequent attendance at court or the appointment of an administrator, monitor or trustee. The CBCA is also attractive to corporations that want to avoid public scrutiny. A key drawback is that, as a corporate statute, the CBCA does not provide for a general stay of claims (although a court-ordered stay may be obtained in certain circumstances) and generally cannot be used to compromise unsecured or contingent claims. Similar restructuring regimes are available under various provincial Business Corporations Acts with respect to provincially incorporated companies.

Winding-Up and Restructuring Act: The Winding-up and Restructuring Act (WURA) applies only to specific entities, such as:

  • federal and foreign banks;
  • provincial and foreign insurance corporations carrying on operations in Canada; and
  • federal and provincial load and trust companies, building societies and incorporated trading societies.

Proceedings under WURA are rare. WURA is generally focused on the orderly liquidation of the insolvent entity and the distribution of proceeds to its creditors under the close supervision of the court, although the act does contain certain skeletal provisions concerning potential restructurings.

4.2 How, by whom and on what grounds are insolvency proceedings initiated? Can the instigating party (or any other parties) select the identity of the relevant insolvency officeholder?

Insolvency proceedings can be initiated by both secured and unsecured creditors via the BIA, through receivership or through bankruptcy proceedings.

A secured creditor may initiate receivership or involuntary bankruptcy proceedings under the BIA where:

  • there has been a default or an unpaid obligation by the debtor;
  • the secured creditor has made a demand for payment and given the debtor a reasonable timeframe to respond to the demand; and
  • certain statutory requirements are met.

To commence bankruptcy proceedings, a secured creditor must also have an unsecured claim against the debtor; this requirement may be satisfied where the secured creditor is insufficiently secured or where the creditor voluntarily gives up its security.

An unsecured creditor may also initiate involuntary bankruptcy proceedings under the BIA, subject to a number of restrictions regarding the amount and nature of the debt.

In either case, the creditor must prove that the debtor has committed an act of bankruptcy within the preceding six months, which may include (among other things):

  • admitting its insolvency at a meeting of its creditors; or
  • generally failing to pay its liabilities as they come due.

It is often necessary to prove the existence of multiple unsecured debts of the debtor.

4.3 What are the effects of the commencement of insolvency proceedings, both for the debtor and for creditors?

Where a debtor becomes bankrupt, its property vests in the trustee in bankruptcy, subject to the rights of secured creditors. The debtor is restrained from disposing of property or from otherwise dealing with its assets. All claims by unsecured creditors are automatically stayed against the debtor. Unsecured creditors can assert claims by submitting a proof of claim form to the trustee. The stay of proceedings in bankruptcy does not apply to prevent enforcement by secured creditors, although they are required to account to the trustee regarding the value of their security.

Receivers are typically appointed on application by a secured creditor. A receiver has the right to take possession and control of the debtor's assets, and to sell them. In some circumstances, a receiver may be appointed to manage the debtor's business for a certain timeframe. A court-appointed receivership order typically provides for a stay of proceedings against the debtor, in order to facilitate a more stable realisation.

4.4 Does a moratorium or stay apply and, if so, what is its scope? Are there exceptions?

Liquidation proceedings trigger a stay of proceedings. In bankruptcy, the stay of proceedings is statutory. In receivership, WURA and CCAA proceedings, the stay of proceedings is effected pursuant to a court order.

The general rule is that liquidation proceedings result in the removal of the board and its replacement by a trustee in bankruptcy (or similar official), which takes control of the company's business and assets. The sole exception to the rule is in CCAA liquidations, where the board and management of the debtor usually remain in place under the supervision of the court-appointed monitor. In some cases, particularly where the board has resigned, the monitor may be granted additional 'super-monitor' authority to exercise certain corporate functions of the debtor.

4.5 What process do insolvency proceedings typically follow (including likely length of process and key milestones)?

There are three primary ways to liquidate an insolvent company in Canada:

  • through bankruptcy under the BIA;
  • by way of receivership under the BIA; or
  • led by the DIP under the supervision of a court-appointed monitor under the CCAA.

The process of bankruptcy under the BIA may be voluntary or involuntary. It is commenced in one of three ways:

  • voluntarily, by the debtor making an assignment in bankruptcy for the general benefit of its creditors, which is filed with the official receiver. Upon filing, the debtor is considered bankrupt;
  • involuntarily, by one or more creditors filing an application for a bankruptcy order against the debtor. To be eligible to file, the creditor must:
    • be owed a minimum of C$1,000 by the debtor; and
    • allege that the debtor committed an act of bankruptcy in the six months preceding the application; or
  • automatically upon the failure of a BIA proposal by the debtor to its creditors, due to either:
    • a default under the proposal; or
    • the rejection of the proposal by the creditors or the court.

The duration of bankruptcy or receivership proceedings is not time limited. Claims trading is permitted, and is contractual and subject to 'record dates' established ahead of voting or distribution.

4.6 What are the respective roles, rights and responsibilities of the following stakeholders during the insolvency proceedings? (a) Debtor, (b) Directors of the debtor, (c) Shareholders of the debtor, (d) Secured creditors, (e) Unsecured creditors, (f) Administrator, (g) Employees, (h) Pension creditors, (i) Insolvency officeholder, (j) Court.

(a) Debtor

In bankruptcy, all assets of the debtor vest in the trustee in bankruptcy; a receiver is similarly entitled to seize and sell assets. The debtor is restrained from disposing of property and preferential payments made within certain prescribed periods before the date of bankruptcy (or other triggering event, such as the filing of a proposal) may be clawed back.

(b) Directors of the debtor

Depending on the circumstances, the insolvency official may take over control of the corporation in place of directors and management. Generally, corporate directors' duties of care continue to apply during insolvency proceedings.

(c) Shareholders of the debtor

Shareholders have limited capacity to participate in insolvency proceedings and rarely see returns.

(d) Secured creditors

Secured creditors are generally unaffected by proceedings under the BIA. Receiverships are often used as enforcement remedies by secured creditors and, while creditors cannot bind or directly control a receiver, their views are often paramount in determining the process to be followed. In liquidations commenced under WURA or the CCAA, secured creditors are similarly more involved and their views may be canvased by the applicable insolvency official.

(e) Unsecured creditors

Claims by unsecured creditors are stayed during insolvency proceedings.

(f) Administrator

The obligations of professionals acting as insolvency administrators vary significantly by role. Generally, insolvency administrators must be professionally licensed as LITs through the Office of the Superintendent of Bankruptcy. In court-appointed roles, insolvency administrators are court officers with fiduciary duties to all creditors, who are tasked with reporting to the court and (in a bankruptcy or receivership) monetising the debtor's assets and completing distributions to its creditors.

(g) Employees

All employment agreements are considered to be terminated in bankruptcy proceedings. Employees will be retained only where necessary and will be paid in ordinary course pursuant to a court order. The claims of employees have a super-priority charge against the debtor for wages in arrears for the last six months, excluding termination and severance pay. The maximum amount that each employee can be paid is an amount not exceeding C$2,000. A super-priority charge also applies to certain deducted but unremitted employee pension contributions and prescribed pension plans. Employees will be compensated by the federal government, pursuant to the federal Wage Earner Protection Program Act, for wages in arrears, termination pay and severance pay. Collective bargaining agreement cannot be terminated under the BIA or the CCAA.

(h) Pension creditors

Pension funds, to the extent that they are properly funded, are considered to be separate from the general assets of a corporation and cannot be drawn on to satisfy creditor claims. Unfunded portions of plans are unsecured claims, and accordingly subordinated to most other claims, often seeing little to no return. Statutory deemed trusts in favour of pensioners have generally been held to be ineffective in insolvency proceedings.

(i) Insolvency officeholder

The roles of trustees are largely statutory and are governed by the BIA and the common law. However, receivers and monitors are court appointed, and the breadth and scope of their roles are defined by orders of the court. Information officers are a creation of common law.

Court officers are independent parties with fiduciary duties. These officers report directly to the court and are expected to make regular reports. Such reports, when they are not deemed to be confidential (in whole or in part; for instance, with respect to offers received within a court-supervised sales process), will be relayed to the stakeholders in the proceedings.

(j) Court

Bankruptcy proceedings and most receivership proceedings are court supervised, though less frequent attendance before the court is required than in formal restructuring proceedings.

4.7 What is the process for filing claims in the insolvency proceedings?

The specific process for filing claims within the proceedings varies by statute. As a general rule, the creditors are initially identified by the insolvency official, who delivers a claims package to the known address of each creditor and provides notice of the proceedings to the public via publication in newspapers and/or electronic circulations. In bankruptcy or proposal proceedings, creditors must submit a 'proof of claim' package to the trustee, along with details of their claim. Secured creditors may be required by the trustee to provide a 'proof of security', but are only required to submit a proof of claim in the event that a portion of the bankrupt's indebtedness is unsecured.

The CCAA does not provide a specific process by which claims must be proven, but rather incorporates the BIA process along with a process for summary disposition of disputed claims. In CCAA proceedings, it is relatively common for the court to set a specific process for determining the claims against the debtor by court order, which is generally similar to that under the BIA with respect to bankrupts. In such a case, the court may also establish a 'claims bar date', after which no further claims will be accepted. The purpose of such an order is to ensure all legitimate creditors come forward on a timely basis, to permit the debtor to determine the parties to be affected by any plan of arrangement or compromise.

4.8 How are claims ranked in the insolvency proceedings? Do any claims have "super priority" and is there scope for subordination by operation of law (e.g. equitable subordination)?

The hierarchy of claims in insolvency proceedings is generally as follows:

  • priority claims, which under the CCAA are established by court order:
    • court-ordered priority charges, including DIP financing and administrative charges; and
    • certain wage and pension claims (these claims have a limited form of super-priority within proceedings under the BIA, but not the CCAA. Generally, the 'super-priority' component of these claims is limited to certain amounts claimed against the crown);
  • certain crown claims;
  • secured claims;
  • preferred claims in bankruptcy (there are no 'preferred claims' under the CCAA), including:
    • certain administrative costs;
    • various employee or wage claims;
    • certain municipal tax claims; and
    • claims in favour of landlords in certain circumstances;
  • unsecured claims; and,
  • equity claims.

4.9 What is the effect of insolvency proceedings on existing contracts? Is the counterparty free to terminate? Can they be disclaimed?

The commencement of insolvency proceedings does not automatically result in the termination of existing contracts. The BIA and the CCAA provide that the debtor has the right to terminate and abandon contracts to which it is a party as of the date of filing; under the CCAA, disclaimer may also be available with respect to post-filing contracts in certain limited circumstances. The trustee and the receiver are given a prescribed timeframe to accept or disclaim contracts, and have no obligation to accept or perform a contract.

Upon the rejection of a contract, the counterparty will have a claim for damages that will be permitted to be proven in the proceedings. Certain specified contracts may be terminated by the non-debtor counterparty.

4.10 Can transactions entered into by the debtor prior to be insolvency be challenged and set aside? What are the relevant grounds / look-back periods / defences?

Yes, transactions entered into by the debtor prior to becoming insolvent can be challenged and set aside using various provisions of the BIA, the CCAA and WURA. Such transactions may include:

  • undervalued transfers;
  • preferences;
  • share redemptions; and
  • payment of dividends.

The oppression remedy, provincial law and tort or extracontractual law claims may also be used to challenge transactions.

Generally, any creditor may have standing to challenge transactions. Standing to challenge transactions depends on the method chosen. The debtor can also challenge a transaction, particularly in bankruptcy and receivership proceedings. Under CCAA proceedings, the ability to challenge transactions may be vested in the monitor.

The length of the look-back period depends on how the transaction is being challenged and is specified in the BIA or the applicable provincial legislation. Preferences have a look-back period of three months, or 12 months if the parties to the transaction were not at arm's length. Undervalued transfers have a look-back period of 12 months, or five years if the parties were not at arm's length. Share redemptions and dividend payments have a lookback period of one year.

The debtor can rebut allegations of preferential payments or transfers at undervalue by adducing contradictory evidence. In order for the court to order that a payment was unlawful, the party asserting this claim must prove the claims according to certain statutory criteria. 'Pressure' from a creditor is not a legitimate defence to a preference claim. Rather, the debtor may defend the claims by proving that:

  • the parties were acting at arm's length (with respect to the applicable lookback period);
  • the transaction falls outside of the statutory lookback period; or
  • the transaction was at fair market value and/or the debtor was not insolvent at the applicable time.

4.11 How do the insolvency proceedings conclude? Can any liabilities survive the insolvency proceedings?

Insolvency proceedings typically conclude with an application for the discharge of the court officer. This discharge includes approval of activities and the passing of accounts, as well as an order of discharge.

If the action was brought under the CCAA or via a court-appointed receiver, it is governed by the courts and any liquidation is subject to court approval. As a general principle, the monitor or receiver will seek its discharge upon completing all distributions to creditors and any other unresolved matters related to the administration of the estate.

Certain liabilities cannot be discharged through insolvency proceedings. For instance, employee source deduction tax claims survive CCAA restructurings and certain contingent or unliquidated claims cannot be discharged through any insolvency regime. Recent case law developments have also clarified that some regulatory orders – in particular, environmental clean-up orders – cannot be discharged.

5 Cross-border / Groups

5.1 Can foreign debtors avail of the restructuring and insolvency regime in your jurisdiction?

Foreign debtors can avail of the Canadian insolvency regimes if they reside in or carry on business in Canada, or have property located in Canada. In some circumstances, a limited amount of property located in Canada (eg, a bank account with a nominal amount deposited in it or a retainer held by the debtor's Canadian counsel) has been sufficient to allow a foreign-domiciled debtor to avail itself of the Canadian insolvency regimes.

5.2 Has the UNCITRAL Model Law on Cross Border Insolvency or the UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments been adopted or is it under consideration in your country?

No answer submitted for this question.

5.3 Under what conditions will the courts in your jurisdiction recognise and/or give effect to foreign insolvency or restructuring proceedings or otherwise grant assistance in the context of such proceedings?

The Companies' Creditors Arrangement Act (CCAA) and the Bankruptcy and Insolvency Act (BIA) each contain a section governing the recognition of foreign restructuring and insolvency proceedings in Canada that is based on the UNCITRAL Model Law on Cross-Border Insolvency.

These regimes require that there be a 'foreign proceeding' and a 'foreign representative', as well as a determination of the 'centre of main interests' (COMI) of the debtor, in order to categorise the foreign proceedings as 'main' or 'non-main'.

The Canadian courts have a strong tradition of extending comity to foreign courts, especially those in established common law jurisdictions such as the United States and United Kingdom, and of recognising foreign proceedings and orders emanating from those courts.

5.4 To what extent will the courts cooperate with their counterparts in other jurisdictions in the case of cross-border insolvency or restructuring proceedings?

Upon the recognition of a foreign proceeding under the CCAA or BIA regimes, a stay of proceedings and other relief is automatically granted in favour of the debtor in Canada. Canadian courts also commonly recognise and enforce 'first day' and other material orders that are issued in the foreign proceeding.

Courts often enter into cross-border protocols with the aim of coordinating foreign and domestic proceedings. Cross-border cooperation is particularly strong between Canada and the United States: courts frequently conduct joint hearings and adopt shared protocols and guidelines to streamline the large number of shared cases (see the Guidelines Applicable to Court-to-Court Communications in Cross-Border Cases, published by the American Law Institute).

An "information officer" is typically appointed by the Canadian court upon the recognition of a foreign insolvency proceeding. The information officer is typically a firm of licensed insolvency trustees that assists with the dissemination of information regarding the foreign proceeding to the Canadian court and Canadian stakeholders. An information officer is not strictly required by the CCAA or BIA, however it has become common practice for one to be appointed in significant cross-border insolvencies.

5.5 How are corporate groups treated in the context of restructuring and insolvency proceedings? If there is no concept of a group proceeding (or consolidation), is there any regime through which insolvency officeholders must / may cooperate?

Canadian insolvency filings commonly include multiple affiliated entities. This is particularly effective in CCAA filings to effect a restructuring of a broader corporate group. Such proceedings will be procedurally consolidated, although substantive consolidation is rare.

5.6 Is your country considering adoption of the UNCITRAL Model Law on Enterprise Group Insolvency?

No answer submitted for this question.

5.7 How is the debtor's centre of main interests determined in your jurisdiction?

The determination of a debtor's COMI by a Canadian court under the CCAA or BIA is based on the UNCITRAL Model Law on Cross-Border Insolvency. Generally, it is presumed that the debtor's COMI is located in the jurisdiction of its registered office; the debtor can rebut this presumption by adducing evidence regarding its operations. The test to determine whether the location in which the proceeding has been filed is the COMI involves consideration of three primary factors – namely, whether the location is:

  • readily ascertainable by creditors;
  • one in which the debtor's principal assets or operations are found; and
  • where the management of the debtor takes place.

At a high level, the factors courts look at to determine COMI in the context of a Canadian entity that operates as part of a larger corporate group include:

  • the location where corporate decisions are made;
  • the location of employee administrations, including human resource functions;
  • the location of the company's marketing and communication functions;
  • whether the enterprise is managed on a consolidated basis;
  • the extent of integration of the enterprise's international operations;
  • the centre of the enterprise's corporate, banking, strategic and management functions;
  • the existence of shared management within entities and in an organisation;
  • the location where cash management and accounting functions are overseen;
  • the location where pricing decisions and new business development initiatives are created; and,
  • the location of an enterprise's treasury management functions, including management of accounts receivable and accounts payable.

5.8 How are foreign creditors treated in restructuring and insolvency proceedings in your jurisdiction?

Foreign creditors are typically treated similarly to domestic creditors in Canada.

6 Liability risk

6.1 What duties do the directors of the debtor have when the company is in the "zone of insolvency" (or actually insolvent)? Do they have an obligation to commence insolvency proceedings at any particular time?

The duties of the directors of a debtor which is in the zone of insolvency or is actually insolvent are regulated by federal and provincial legislation, as well as by common law decisions. The duties imposed are generally applicable regardless of whether the company is financially troubled. If the conduct of the directors or officers falls below the standard required in the circumstances, they may be held liable.

Generally speaking, directors and officers have two main duties to the company to which they are appointed:

  • a fiduciary duty of loyalty to act honestly and in good faith with a view to the best interests of the corporation; and
  • a duty of care to exercise the care, diligence and skill that a reasonably prudent individual would exercise in comparable circumstances.

Directors and officers must also abide by various security, environmental, tax, employment and other laws. There is no obligation for the directors or officers to commence insolvency proceedings at any particular time.

6.2 Are there any circumstances in which the directors could incur personal liability in the context of a debtor's insolvency?

A director can incur personal liability in the context of insolvency due to the company's failure to meet its legal obligations under various statutory provisions. For example, directors may incur personal liability where they approve the payment of dividends while the company is insolvent. A director may also be personally liable for up to six months of unpaid wages; accordingly, directors frequently resign when it becomes apparent that a company will be unable to meet its payroll obligations.

Directors can mitigate the financial burden of personal liability by seeking indemnification from the company – for example, through contractual indemnification and insurance. In certain types of restructuring proceedings, including under the Companies' Creditors Arrangement Act (CCAA) and Bankruptcy and Insolvency Act proposal proceedings, the court has the discretionary power to authorise a priority charge securing the company's indemnification obligations to its directors. Such charges are generally granted where there is insufficient insurance coverage and the continued services of the directors are likely to be vital to a restructuring.

6.3 Is there any scope for any other party to incur liability in the context of a debtor's insolvency (e.g. lender or shareholder liability)?

Yes, shareholders can be found to have limited liability in the context of a debtor's insolvency. However, their liability is limited to the value of the interest in their shares. Additionally, a shareholder may be exposed to liability where it is found to be in control of a company that violates various laws, such as environmental obligations. Exceptions also arise in circumstances where the corporate veil may be pierced, including for shareholder wrongdoing such as fraud. Lenders will generally not be liable for any act of a debtor as a result of its insolvency or for exercising the lender's contractual rights.

7 The Covid-19 pandemic

7.1 Did your country make any changes to its restructuring or insolvency laws in response to the Covid-19 pandemic? If so, what changes were made, what is their effect and are they temporary or permanent?

No answer submitted for this question.

8 Other

8.1 Is it possible to effect a "pre-pack" sale of assets, and is it possible to sell the assets free and clear of security, in restructuring and insolvency proceedings in your jurisdiction?

'Pre-pack' sales are permitted under Canadian insolvency law. Such sales are typically negotiated without court supervision, based on an understanding that the transaction will eventually close through the insolvency process. The sale of assets by a debtor that is subject to insolvency proceedings is generally effected through an approval and vesting order granted by the supervising court which vests the assets in the purchaser free and clear of encumbrances.

8.2 Is "credit bidding" permitted?

Credit bids by secured creditors to purchase assets using the release of debt as consideration are permitted, provided that:

  • the claims being bid are first ranking;
  • any prior-ranking bids are assumed and paid; or
  • there is also a cash purchase price sufficient to pay prior-ranking claims.

'Stalking horse' transactions are permitted where the rules and procedures are proposed by the debtor and subsequently approved by the court. Such rules may expressly permit credit bidding.

9 Trends and predictions

9.1 How would you describe the current restructuring and insolvency landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

The Canadian market has experienced a continued downturn in formal insolvency filings since the commencement of the COVID-19 pandemic, with certain signs indicating that insolvencies are likely to increase over the next 12 months.

The Companies' Creditors Arrangement Act (CCAA) and the Bankruptcy and Insolvency Act (BIA) were most recently amended with changes coming into effect on 1 November 2019, which:

  • created statutory duties of good faith under both regimes;
  • established a mechanism for disclosure of economic interest under the CCAA;
  • shortened the initial stay period for CCAA applications; and,
  • created new powers to assign liability to directors under the BIA.

While there has been some recent discussion on the amendment of the Canadian insolvency statutes to provide additional protection to employees and pensioners, there has been no substantial movement in this regard as of yet. No substantial amendments are anticipated over the next year.

10 Tips and traps

10.1 What are your top tips for a smooth restructuring and what potential sticking points would you highlight?

Any restructuring effort requires a strong foundation of collegiality and cooperation to run smoothly. In Ontario, this key insight is often referenced using the 'three Cs' – communication, cooperation and common sense – coined by Justice James M Farley.

The most complex restructuring challenges also frequently require the debtor and the various stakeholders to craft creative solutions that result in a compromise that will allow the debtor to maintain its ongoing business operations to the extent possible while also treating stakeholders fairly. In insolvency proceedings, Canadian courts are generally not receptive to the argument that a particular solution should not be approved because it has not been done before. Parties and their counsel must be prepared to recognise and adapt to the exigencies of each particular case.

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.