1 Legal framework
1.1 What domestic legislation governs restructuring and insolvency matters in your jurisdiction?
There are two key insolvency statutes in Canada:
- The Companies' Creditors Arrangement Act (CCAA) is a federal statute which governs restructuring and insolvency in every Canadian province and territory. It is the main instrument for the reorganisation of insolvent corporations which are subject to claims of more than C$5 million. It also applies where corporations that are part of a related group of companies are subject to claims of over C$5 million in aggregate.
- The Bankruptcy and Insolvency Act (BIA) is a federal statute that facilitates the liquidation and reorganisation of insolvent debtors, both individual and corporate. The specific provisions that govern corporate reorganisation are known as the ‘proposal process'. The proposal process is frequently used for smaller, less complex reorganisations than those that take place under the CCAA, as the BIA subjects debtors to more stringent timelines and – due to the structured nature of a BIA proposal process – affords less flexibility than the CCAA. Where a proposal fails or where an assignment in bankruptcy is made, a trustee-in-bankruptcy is appointed over the assets of an insolvent debtor, thereby commencing a liquidation process. In addition to proposal and liquidation processes, the BIA provides for the appointment of a receiver by a secured creditor, as well as an interim receiver to project and preserve assets where there is evidence that the debtor's assets are vulnerable and the appointment is necessary to protect the debtor's estate.
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. Certain criteria must be met: the applicant must demonstrate to a court that a ‘foreign proceeding' exists and there is a ‘foreign representative'. The recognition proceeding is characterised as ‘main' or ‘non-main', depending on where the centre of main interests is located.
The determination of what rules, standards and practice relating to the paramountcy of a jurisdiction's laws are governed predominantly by common law rules of private international law, accompanied by legislation based on the UNICTRAL Model Law.
Generally, procedural matters are administered according to the laws of the local jurisdiction, while substantive matters are administered by the court with plenary jurisdiction. However, exceptions do exist. For example, parties may contract out ex ante or may abide by the jurisdiction of another court ex post. Courts become crucial in the determination of the validity of cross-border instruments where a conflict of law exists.
1.3 Do any special regimes apply in specific sectors?
Winding-Up and Restructuring Act: The Winding-Up and Restructuring Act is a federal statute that applies to federal and foreign banks, federal and foreign loan or trust companies and federal, provincial or foreign insurance corporations carrying on business in Canada. The liquidation process is similar in nature to the liquidation process under the BIA.
1.4 Is the restructuring and insolvency regime in your jurisdiction perceived to be more creditor friendly or debtor friendly?
The overarching purpose of the restructuring and insolvency regime in Canada is to minimise the impact of a debtor's insolvency by ensuring equitable distribution of the debtor' assets or, where possible, by rehabilitating the debtor.
Courts in Canada take seriously the aim of rehabilitating debtors and allowing companies breathing room to continue as going concerns. Accordingly, the approach in Canada may be perceived as more debtor friendly than that in other jurisdictions, such as the United States. Nevertheless, creditors remain well protected under the Canadian regime. Creditors, particularly secured creditors, play a key and often powerful role in restructurings and insolvencies.
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 insolvency statutes dating back to 1919. Amendments to the insolvency statutes are made from time to time, to ensure that they continue to reflect market realities. The most recent amendments to the federal CCAA and BIA took effect in 2018.
Canadian courts dedicate specialised resources to the administration of insolvency matters. In many jurisdictions, a specialised roster of judges is tasked with hearing bankruptcy, insolvency and restructuring matters. Canada also maintains a special bankruptcy court for the purpose of administering BIA bankruptcies and proposals.
The Canadian bankruptcy and insolvency professional community consists of lawyers, trustees comprised of accountants and accounting firms, advisers and persons providing other niche services, such as chief restructuring officer engagements. Professionals are typically accessible to most debtors and creditors, and the quality of representation within this community is generally high.
2.1 What principal forms of security interest are taken over assets in your jurisdiction?
Security interests in Canada can be granted over any property, including tangible personal property, intangible personal property such as licences and intellectual property, and real property. Security interests are typically established by a written grant of security interest; the criteria of attachment and perfection must then be met.
Canada maintains title and notice filing systems for personal property, real property and some forms of intellectual property, to ensure transparency.
2.2 How can those security interests be enforced (and what factors could complicate or prevent this process)?
Enforcement procedures are set out in the Personal Property Security Act, the Bankruptcy and Insolvency Act (BIA) and real property mortgage statutes. The particular process will depend on the character of the collateral. In general, secured creditors are entitled to private enforcement (which does not require court involvement) or may have a receiver appointed by the court to deal with the assets. Certain criteria must be met before a creditor may enforce its security; each step in this process is governed by rules of commercial reasonableness 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 protection for the debtor. For instance, the debtor may be entitled to certain rights to ‘cure' defaults after notice of enforcement. Further, the filing of a proposal under the BIA or a Companies' Creditors Arrangement Act application will trigger a stay of proceedings that will prevent enforcement steps.
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 companies 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 before commencing a ‘pre-pack' insolvency process to have the court approve a proposal or transaction.
Informal resolutions can include:
- partial sale of the debtor's assets;
- refinancing of existing debt;
- bridge loans; and
- creditor or stakeholder forbearance.
The benefits of proceeding informally on a consensus basis is the avoidance of fees and costs associated with a formal restructuring process. However, without a formal process in place, the debtor is not protected by a stay of proceedings and is vulnerable to enforcement and other action by creditors and stakeholders.
Consensus-based resolutions are encouraged by the Canadian courts. Even in a formal process, participants are encouraged to negotiate and settle disputes. Increasingly, courts are recognising the value of alternative dispute resolution within large and complex insolvency processes.
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 issuing a notice of intent to make a proposal. 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 for a maximum of six months from the date of the stay of proceedings. The notice of intent process allows a debtor to make a proposal to its creditors which would allow it to continue operating as a going concern and avoid insolvency. If the proposal is rejected by the creditors, the debtor is automatically deemed to have made an assignment in bankruptcy.
Under the Companies' Creditors Arrangement Act (CCAA), which applies to debtors subject to at least C$5 million of liabilities, a debtor may restructure its business under the supervision of a court-appointed monitor. A CCAA proceeding provides greater flexibility for restructuring, as there are no prescribed timelines for completion of the process under the statute. The skeletal nature of the statute allows for creative resolution and workouts that would not otherwise be possible under the BIA. In CCAA proceedings, debtors remain in possession of their assets. CCAA proceedings tend to be more expensive than other formal proceedings, due primarily to the size of the debtor that is typically involved, as well as the larger number of professionals usually needed and the higher level of court involvement and scrutiny.
More recently, the CCAA has been used to conduct liquidation processes for 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.
Section 192 of the Canada Business Corporations Act (CBCA) permits CBCA corporations to apply for court approval of a plan of arrangement with secured creditors. The debtor remains in possession of its assets during this process. The CBCA does not require ongoing attendance at court or the appointment of a monitor; the management of the debtor maintains a high level of control. As a corporate statute, the CBCA cannot compromise contingent or unsecured claims; nor does the statute provide for a general stay of proceedings (although courts will often grant this in practice). The CBCA process is often expedient and the absence of ongoing court supervision limits the expense of professional fees. Filing under the CBCA may be attractive to corporations that wish to avoid the potential stigma of filing under a designated insolvency statute.
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 the formal restructuring proceedings detailed above, 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 insufficient – 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 against which a bankruptcy order has been made under the BIA; or
- is in the course of being wound up under the WURA because it is insolvent.
3.4 What are the effects of the commencement of formal restructuring proceedings, both for the debtor and for creditors?
Where a corporate debtor initiates a CCAA restructuring, all creditor claims are automatically stayed. The corporation continues to operate as a going concern, with its existing management and governance structures. The debtor must seek court approval of significant asset dispositions outside the ordinary course of business. Creditors are grouped by classes of common interest and these classes eventually vote to approve a plan of arrangement proposed by the debtor.
The effects of a BIA proposal process for the debtor and creditors are similar to those of a CCAA restructuring. An automatic stay of proceedings is granted for claims against the debtor. A significant difference is that, as the proposal process operates under the BIA, the claims of secured creditors are not affected and secured creditors can therefore realise against the assets of the debtor concurrent with the proposal.
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 issuance of a notice of intent or when the proposal is made to creditors. Under the CCAA, a court-ordered stay of proceedings triggers a stay upon the granting of the application by the court. While there is a stay of proceedings, the debtor continues to operate as a going concern under the full control of the existing board and management. A stay of proceedings is 30 days initially and may be extended by 45-day increments for up to six months.
If a proposal by a debtor is rejected by its creditors and the proceedings convert from restructuring proceedings to insolvency proceedings, then the stay of proceedings will apply only to unsecured creditors and not secured creditors.
3.6 What process do restructuring proceedings typically follow (including likely length of process and key milestones)?
Restructuring proceedings typically take place via the BIA or the CCAA.
Under the BIA, an insolvent person, the receiver of an insolvent person's property or a bankrupt or trustee of the estate of a bankrupt will file either a proposal to creditors under the terms listed in Part III of the BIA or a notice of intent with the bankruptcy superintendent. Both processes have the effect of putting creditors on notice of the debtor's intent to restructure; they 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, bankruptcy occurs automatically. 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 a stay extension, 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.
If the debtor proceeds via a proposal to its creditors, the 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 dictated via the proposal. Any new debt obligations that the debtor accrues as of the date of approval of the proposal are dictated by terms agreed outside the proposal. However, if the proposal is rejected, the meeting of creditors either to accept or reject the proposal becomes the first creditors' meeting in bankruptcy proceedings.
Under the CCAA, to commence restructuring 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, a debt of at least C$5 million in aggregate.
A stay of proceedings is triggered when the application is granted by the court. The initial limit on the stay of proceedings is 30 days; this can be extended at the court's discretion to typically either 60 to 90 days. Unlike under the BIA, there is no restriction on the total duration of the stay of proceedings. To obtain a stay extension, 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.
Restructuring proceedings under both the BIA and the CCAA are heavily court supervised and are normally compromised of distressed asset sales and/or restructuring plans/proposals. Sometimes, a liquidation may be enforced under the restructuring statutes of the CCAA, but not the BIA. Further, there are statutory limitations on the scope of restructuring actions that may be undertaken. Such limitations include:
- protections for eligible financial contracts;
- restrictions on disclaiming or rejecting certain contracts; and
- restrictions on compromising limited crown/pension/employee claims.
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.
Debtor: Restructuring proceedings are usually initiated by the debtor, which is obliged to follow appropriate procedures under the BIA or CCAA. The debtor is subject to court supervision and is restrained from disposing of its assets outside the ordinary course of business.
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.
Shareholders of the debtor: The liability of shareholders in Canada is 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.
Creditors: Creditors have the right to accept or reject a proposal for restructuring. When voting on the proposal, for a proposal to be binding on a given class, it must be approved by a two-thirds majority of a dollar value in that class. If such a majority is obtained, the vote binds all creditors in that class.
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.
Unsecured creditors: Unsecured creditors typically have the fewest rights and corresponding responsibilities in restructuring proceedings, and are often left with little to no disbursement of assets.
Employees: Restructuring proceedings often involve some level of workforce reduction. 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.
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 often contain provisions to permit continued contributions to benefit plans and payments to current retirees. Defined benefit plans are often underfunded by companies on the verge on insolvency.
Insolvency officeholder (if any): All insolvency officeholders are impartial fiduciaries and must be licensed through the Office of the Superintendent of Bankruptcy. The most common restructuring officers are ‘monitors' appointed under the CCAA and ‘proposal trustees' appointed through the BIA proposal process. The main role of these officials is to report to the court on the status of the debtor and to provide strategic and financial recommendations.
Court: Formal restructuring proceedings necessarily involve some level of court supervision. Depending on the complexity of the proceedings, frequent attendance before the court may be required to approve administrative processes or to dispute claims between stakeholders.
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 that approves the proposal or plan. Creditors are separated into classes for the purposes of voting in the proceedings. Creditors are classified by the debtor at first instance, but 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 two-thirds majority of the dollar value of the respective class.
Canada's formalised debt restructuring regimes do not allow for cross-class cramdowns.
3.9 Can restructuring proceedings be used to compromise secured debt?
CCAA restructuring can compromise secured debt, whereas a BIA proposal cannot. The restructuring powers of the BIA are subject to the rights of secured creditors and therefore cannot be used to compromise secured debt. Similar restrictions do not apply under the CCAA.
3.10 Can contracts / leases be disclaimed or otherwise addressed through restructuring proceedings?
Contracts/leases cannot be terminated due to the failure of a party, which is subject to the restructuring process, to honour contractual obligations. This is dictated by both the BIA and the CCAA. Both acts permit the debtor to disclaim most types of agreements by delivering notice in the prescribed format. The counterparty to such an agreement may file a claim for damages that result from the disclaimer.
However, certain contracts cannot be disclaimed. An example of a contract that cannot be disclaimed is a collective agreement.
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. In certain instances, such releases are incorporated into corporate plans of arrangement. However, third-party releases are restricted to those that contributed to the proceedings in a material way.
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)?
Debtor-in-possession (DIP) financing is available in the context of formal restructuring proceedings. DIP financing is typically granted with court approval and the court may exercise its discretion to grant a super-priority charge in favour of the debtor.
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 accepting the proposal are bound by it. Once approved by a two-thirds majority in value of the creditors, the proposal must be approved by the court. Hence, the restructuring proceedings conclude following the court's approval.
Under the CCAA, the plan of compromise and arrangement must also be approved by the creditors at a creditors' meeting. Similarly, to be accepted, the plan must be approved by two-thirds in value of the creditors. 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.
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.
Under the Bankruptcy and Insolvency Act (BIA), there are four sub-divisions of proceedings, as follows:
- Consumer proposal (Division II): This is a formal and legally binding arrangement made with the 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.
- Consumer bankruptcy: A LIT will help a consumer to complete all required forms and file the documents with the Office of the Superintendent of Bankruptcy Canada, at which point the consumer 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.
- Commercial proposal: This is similar to a consumer proposal, but is filed by a commercial entity.
- Commercial bankruptcy: This is similar to a consumer bankruptcy, but is filed by a commercial entity.
- 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.
The benefits of the various procedures under the BIA are that they are consumer-initiated, structured processes. They also tend to be cheaper and more efficient than other options. Another major benefit is that the priorities of claims under the BIA differ from those under other legislation, which means that a creditor can 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 consumer initiated, they include little flexibility in terms of pay-outs. Further, courts have less discretion under the BIA than in other options.
Receivership: Normally appointed by a court, a receiver is responsible for overseeing the proper distribution of an insolvent party's assets. Pursuant to the BIA and the Courts of Justice Act, 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.
The benefit of receivership is that it is a flexible process. The drawback is that it is controlled by the secured creditors.
Companies' Creditors Arrangement Act: Proceedings under the Companies' Creditors Arrangement Act (CCAA) are the preferred proceedings 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 is required to 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. The drawback is that all of the factors that are advantageous to the debtor are typically disadvantageous to secured creditors. Another drawback is that CCAA proceedings are expensive for the debtor.
Canada Business Corporations Act: Proceedings under the Canada Business Corporations Act (CBCA) are similar to those under the CCAA; the main benefit is that they are more flexible. The process does not require attendance at court or the appointment of an administrator. 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 and cannot be used to compromise unsecured claims.
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.
The benefit (and drawback) of the WURA is that it limits entities in certain sectors in the process that they can follow in case of insolvency.
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 involuntary restructuring where there has been a default or an unpaid obligation by the debtor, and the secured creditor has made a demand for payment and given the debtor a reasonable timeframe to respond to the demand.
An unsecured creditor may initiate involuntary restructuring proceedings. However, an unsecured creditor must first obtain a judgment through a court process. Where such a judgment goes unsatisfied by the debtor, the unsecured creditor may commence insolvency proceedings with a view to satisfaction of such judgment.
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.
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 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, 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 remain in place under the supervision of the court-appointed monitor.
4.5 What process do insolvency proceedings typically follow (including likely length of process and key milestones)?
There are three ways to liquidate an insolvent company in Canada. The first is through bankruptcy under the BIA. The second is by way of receivership under the BIA. The third is led by the debtor in possession under the supervision of a court-appointed monitor under the CCAA, without the cooperation of the debtor's main secured creditors.
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. The creditor must also allege that the debtor committed an act of bankruptcy in the six months preceding the application; or
- on 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.
Debtor: 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 shortly before the date of bankruptcy may be clawed back.
Directors of the debtor: Depending on the circumstances, the insolvency administrator 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.
Shareholders of the debtor: Shareholders have limited capacity to participate in insolvency proceedings and rarely see returns.
Secured creditors: Secured creditors are generally unaffected by proceedings under the BIA. Receiverships are often used as enforcement remedies by secured creditors.
Unsecured creditors: Claims by unsecured creditors are stayed during insolvency proceedings.
Administrator: The obligations of professionals acting as insolvency administrators vary significantly by role. Generally, insolvency administrators must be professionally licensed through the Office of the Superintendent of Bankruptcy. In most court-appointed roles, insolvency administrators are court officers with fiduciary duties.
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 Programme Act, for wages in arrears, termination pay and severance pay. Collective bargaining agreement cannot be terminated under the BIA or the CCAA.
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 subordinated to other claims, often seeing little to no return. Statutory deemed trusts in favour of pensioners have generally been held to be ineffective.
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, will be relayed to the stakeholders in the proceedings.
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?
In order to file claims in insolvency proceedings, both debtors and creditors must meet certain criteria to have standing to commence the proceeding.
A debtor may initiate voluntary liquidation by filing an assignment for the general benefit of its creditors. This is filed with the official receiver and includes a sworn statement listing all of the debtor's assets and liabilities, the names and addresses of its creditors, and the amounts owing to those creditors.
Alternatively, creditors may initiate an involuntary liquidation by filing an application for a bankruptcy order with the court. The court must be located in the principal jurisdiction in which the debtor conducted business or resided in the year preceding the date of the application. Additionally, the application by the creditor must show that the debtor owed at least C$1,000 to the creditor, and that the debtor committed an act of bankruptcy in the six months preceding commencement of the bankruptcy proceedings.
Under the CCAA, filings for the liquidation of a debtor's assets are normally made by the debtor. The debtor must have at least C$5 million in debt to be eligible under CCAA.
A debtor's assets can also be liquidated through receivership. This process is typically an involuntary proceeding commenced by a creditor.
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 as follows:
- priority claims;
- court-ordered priorities;
- wage and pension claims (these claims have super-priority);
- debtor-in-possession financing and administrative charges;
- unpaid supplies; and
- certain crown claims;
- secured claims;
- preferred claims; and
- unsecured claims.
There are no priority claims in bankruptcy.
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. 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. The counterparty may be entitled to terminate the contract of its own accord, on the basis of a material adverse change or similar clause in the language of the contract.
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 and the WURA. Such transactions may include undervalued transfers, preferences, share redemptions and payment of dividends. The oppression remedy and tort 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 also has the ability to challenge a transaction, particularly in bankruptcy and receivership proceedings.
The length of the look-back period depends on how the transaction is being challenged and is specified in the BIA. 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 look-back period of one year.
The limitation period for civil actions in Ontario is two years from the date of discoverability.
The debtor can rebut allegations of preferential payments or transfers at an 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. An effective defence is to adduce evidence to rebut each criterion.
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.
Liquidation procedures are formally approved if they are compliant with the BIA. 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.
Certain liabilities cannot be discharged through insolvency proceedings. For instance, employee source deductions 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?
Canadian courts recognise foreign restructuring proceedings according to principles of comity. Generally, foreign debtors cannot avail of Canadian insolvency regimes if they do not have an establishment in Canada.
5.2 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?
Recognition of foreign restructuring and insolvency proceedings requires that there be a ‘foreign proceeding' and a ‘foreign representative', as well as a unified determination of the centre of main interests (COMI), in order to categorise the foreign proceedings as ‘main' or ‘non-main'. Both the Bankruptcy and Insolvency Act (BIA) and the Companies' Creditors Arrangement Act (CCAA) allow for recognition of foreign insolvency proceedings in Canada under this structure. The structure itself is predicated on the UNCITRAL Model Law on Cross-border Insolvency.
5.3 To what extent will the courts cooperate with their counterparts in other jurisdictions in the case of cross-border insolvency or restructuring proceedings?
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 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).
Generally, procedural matters are administered according to the laws of the local jurisdiction, while substantive matters are administered by the court with plenary jurisdiction. However, exceptions do exist. For example, parties may contract out ex ante or the parties may abide by the jurisdiction of another court ex post. Courts become crucial in the determination of the validity of cross-border instruments in case of a conflict of law.
5.4 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.
5.5 How is the debtor's centre of main interests determined in your jurisdiction?
Canada determines a debtor's COMI according to the UNCITRAL Model Law. Generally, it is presumed that the debtor's COMI is located in the jurisdiction of its registered office; the debtor can rebut this presumption.
5.6 How are foreign creditors treated in restructuring and insolvency proceedings in your jurisdiction?
Foreign creditors are treated similarly to domestic creditors in Canada, with minor differences. For example, a foreign creditor may receive preferential treatment through longer notice periods, but may also be subject to the added requirement to provide security for costs.
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.
Specifically, directors and officers owe a fiduciary duty to the company to which they are appointed. Encompassed within this fiduciary duty are a duty of loyalty and a duty of care, which directors and officers must continuously observe. Directors and officers must also abide by various security environmental, tax and employment laws. They are typically not charged with a criminal offence unless there is evidence of fraud or criminal conduct. The directors and officers also owe a continued duty to stakeholders, which is also encompassed in the fiduciary duty. Allegations of a breach of duty become more compelling when a company is in the zone of insolvency or is actually insolvent.
While it is improper for a company to continue operating while it is insolvent, there is no obligation for the directors or officers to commence insolvency proceedings at any particular time. There is also no liability in Canada for deepening the insolvency of the company.
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.
Directors can mitigate the financial burden of personal liability by seeking indemnification from the company – for example, through contractual indemnification and insurance.
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 regarding when the corporate veil may be pierced, including for shareholder wrongdoing such as fraud.
7.1 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 court can approve the sale free and clear of security.
7.2 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 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.
8 Trends and predictions
8.1 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 insolvency markets are experiencing an upward trend in business. Consumer bankruptcies in particular have increased, and Manitoba and Nova Scotia have experienced significant increases in corporate bankruptcies. Canada's restructuring market has also seen considerable activity, with 15 major corporations filing for protection under the Companies' Creditors Arrangement Act (CCAA) in 2019 thus far. These filings have contributed to an increase in business for insolvency administrators and legal counsel.
The Canadian markets are reflective of trends in the international markets, where insolvencies have increased since 2017. Analysts are conflicted as to whether this growth will continue or plateau. The Canadian economy has exceeded forecasts for 2019 and seems likely to cool in the short term. A slowing of the Canadian economy – particularly employment and interest rates – could contribute to a greater number of insolvency filings in 2020.
On 1 November 2019 various amendments to the Bankruptcy and Insolvency Act (BIA) and the CCAA will take effect with the entry into force of Bill C-97. Among other things, the amendments will:
- create statutory duties of good faith under both regimes;
- establish a mechanism for disclosure of economic interest under the CCAA;
- shorten the initial stay period for CCAA applications; and
- create new powers to assign liability to directors under the BIA.
9 Tips and traps
9.1 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.
Regarding sticking points, a further fundamental insight is that even the most straightforward plans of arrangement can be undermined by a poor understanding of the key financials, due diligence documents and corporate structures. Effective planning at the outset is essential to ensure that these elements do not become an issue.
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.