Originally part of a 49 jurisdiction Global Practice Guide by Chambers and Partners, this section on Insolvency in Canada has been republished with permission.

Out now, the Chambers and Partners Insolvency 2021 Global Practice Guide is a resource for legal and non-legal professionals to learn about the differing legal regimes that apply to business restructurings, reorganisations, rehabilitations, insolvencies and liquidations in 49 jurisdictions.

Gowling WLG partners David Cohen, Virginie Gauthier, Thomas Gertner and Cliff Prophet are contributing authors for the section on "Law and Practice" for the Canadian jurisdiction.

Law and practice

1. State of the restructuring market

1.1 Market Trends and Changes

Despite experiencing second and third waves of the COVID-19 pandemic, insolvency and restructuring proceedings in Canada have surprisingly declined. The combination of Federal and provincial emergency support for the economy, and the patience of investors, lenders, landlords and other stakeholders has resulted in a static or declining insolvency filing trend. Notably, proceedings under the Companies' Creditors Arrangement Act (Canada) (CCAA) are down with only five in the first two quarters of 2021. The number of corporate bankruptcies is also down, being lower than for the same periods in 2020 and 2019. The conventional wisdom is that the government support and relaxing of pandemic-related restrictions are a pre-cursor to a significant recovery.

The caveat to the expected recovery is that the global supply chain crisis continues to put inflationary pressure on large consumer economies around the world. Explosive inflation in logistics costs is putting significant cash flow pressures on Canadian businesses that rely on foreign manufacturing, materials and inputs. This is particularly so for Canadian businesses that source out of China and Asia. The reductions in Chinese steel production caused by power shortages and logistical challenges are a major source of inflationary pressure. Sectors to watch are the automotive manufacturing sector with its heavy reliance on steel and parts from overseas as well as manufacturers of consumer goods being made in Asia and sold through North American retail conduits.

The pandemic's effects will linger into 2022. Emergency government supports are being withdrawn. Inflation is knocking at the door. Will suppressed growth in corporate and consumer spending overpower these factors to drive the economy back into the black? Will vacancy rates in commercial properties recover? The answers to these questions are not readily available, but it is reasonable to expect an uptick in restructuring, insolvency and bankruptcy filings into the last quarter of 2021 and the first two quarters of 2022 as businesses that have been "running on fumes" succumb to the pandemic-induced capital deprivation before the recovery takes hold.

Will the recovery be soon enough to save the most troubled Canadian businesses? Inevitably, there will be winners and losers but it is possible that many of the most troubled businesses have already been shuttered or sold to investors with deep pockets and patience. There are still significant pools of cash available for any attractive target though not all businesses in trouble will warrant that capital as some will be too far gone.

2. Statutory regimes governing restructurings, reorganisations, insolvencies and liquidations

2.1 Overview of Laws and Statutory Regimes

There are three main insolvency statutes in Canada:

  • the Bankruptcy and Insolvency Act (BIA);
  • the CCAA; and
  • the Winding-Up and Restructuring Act (WURA).

The BIA governs proposals (a restructuring regime for individuals and small to mid-sized companies) ("proposal"), receiverships ("receivership") and bankruptcies (both personal and corporate) ("bankruptcy"). The CCAA provides a restructuring regime for larger corporations. The WURA is a liquidation statute designed to deal with, among other things, the formal liquidation of certain regulated entities including financial institutions and insurance companies.

 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership

There are five main insolvency processes:

  • bankruptcy proceedings;
  • proposal proceedings;
  • proceedings under the CCAA;
  • receiverships; and
  • winding-up proceedings under the WURA.

 2.3 Obligation to Commence Formal Insolvency Proceedings

There are no express obligations imposed on the directors of a debtor to initiate bankruptcy or restructuring proceedings. However, directors may consider it prudent to commence insolvency proceedings to avoid or minimise statutory liabilities for which the directors may be personally liable by reason of being a director of an insolvent company. Directors may also consider that an insolvency filing is required to avoid any potential claims that the debtor traded while "knowingly insolvent", or that the debtor conducted its affairs in a manner that was oppressive to its stakeholders.

 2.4 Commencing Involuntary Proceedings

Involuntary proceedings may be commenced by creditors under four of the five insolvency and restructuring regimes summarised in 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership. Creditors can apply for the appointment of receivers under the BIA or provincial statutes. Creditors with unsecured liquidated claims in excess of CAD1,000 may apply for bankruptcy orders under the BIA where debtors have committed acts of bankruptcy within six months. Creditors can also apply for orders under the CCAA. Involuntary proceedings can be commenced in respect of entities to which WURA applies by:

  • creditors in respect of certain companies;
  • shareholders; and
  • the Attorney General of Canada (AG) in respect of financial institutions over which the Superintendent of Financial Institutions (OSFI) has taken control.

 2.5 Requirement for Insolvency

The BIA defines an insolvent person as a person who is not bankrupt and who resides, carries on business or has property in Canada, whose liabilities to creditors amount to CAD1,000, and:

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

 2.6 Specific Statutory Restructuring and Insolvency Regimes

The restructuring and insolvency regime applicable to banks regulated under Canadian law is governed by both the Bank Act and WURA. Generally, following the exercise of control over a bank by OSFI under the Bank Act, the AG, at the request of OSFI, will seek the appointment of a liquidator and the making of a winding up order under WURA.

Other financial institutions such as credit unions, insurance companies, loan and trust companies and related businesses are subject to WURA and their home statutes (for example, the Insurance Companies Act, the Trust and Loan Companies Act and the Cooperative Credit Associations Act) with respect to substantive or regulatory matters relevant to winding up under WURA.

Part XII of the BIA applies to the insolvency of "securities firms". These are defined as entities carrying on the business of buying and selling investment instruments on behalf of customers. Part XII provides specific rules applicable to securities firm insolvencies, including rules establishing different funds for the securities held by the firm (the customer name securities fund, customer securities fund and general fund).

Historically, railways have been subject to specific restructuring and insolvency regimes prescribed under their statutes of incorporation, however, in limited circumstances application has been permitted under the CCAA.

2.7. Statutory insolvency and liquidation proceedings

2.7.1 Types of Voluntary/Involuntary Proceedings

Bankruptcy

The formal liquidation of an insolvent debtor is most commonly carried out through bankruptcy proceedings pursuant to the BIA. In the context of liquidation, bankruptcy is intended to provide for the fair distribution of the debtor's unencumbered assets among its unsecured creditors.

In bankruptcy, the pre-bankruptcy remedies of a debtor's unsecured creditors are replaced with the right to file a claim and receive a dividend in the distribution of proceeds resulting from the liquidation of the bankrupt debtor's unencumbered assets. However, secured creditors of a bankrupt debtor can also enforce their security outside of the administration of bankruptcy.

Under the BIA, a debtor is considered bankrupt when they:

  • have debts of at least CAD1,000 owing to their creditors; and
  • have committed an act of bankruptcy within the six months before the application for a bankruptcy order (which may include having become insolvent and unable to meet their financial obligations generally as they become due).

A bankruptcy can be initiated in three ways where the debtor is insolvent. First, the debtor may voluntarily assign itself into bankruptcy. Such proceedings are commenced by the Trustee selected by the debtor filing an assignment in bankruptcy made by the debtor with the Superintendent of Bankruptcy. Second, a debtor may be involuntarily placed into bankruptcy by an order of the court on application by one or more of the debtor's creditors. Finally, a debtor may become bankrupt as a result of the failure of proposal proceedings under the BIA.

For a corporate debtor, voluntary initiation also requires the company's board of directors to pass a resolution before the court approving the assignment into bankruptcy.

Once the bankruptcy is effective, all the debtor's property and assets vest in the trustee (subject to the rights of secured creditors) and the debtor ceases to have any control over its affairs. In a corporate bankruptcy, the trustee replaces the management of the corporation and assumes full control over all of the debtor's assets and property. On bankruptcy, the trustee proceeds to administer the estate for the benefit of the bankrupt's unsecured creditors. Secured creditors retain their right to enforce on their security, provided they do so in a commercially reasonable manner.

In order to participate in any distribution of the bankrupt's estate, creditors must file a proof of claim with the trustee in the manner and form prescribed under the BIA. Where such a claim is allowed, said creditor will, in accordance with the priority regime set out under the BIA, be eligible to potentially share in the recovery from any realization on the property of the bankrupt debtor. Creditors whose claims are disallowed by the trustee may appeal the trustee's decision to the court.

The debtor's assets are distributed to unsecured creditors on a pro rata basis in accordance with the creditors' proven claims. Such distributions are made only after secured creditors have realised their security and after super-priority and preferred creditors have been paid.

Under the BIA, a bankrupt corporation is not eligible to obtain a discharge from bankruptcy unless it has satisfied the claims of creditors in full. Unlike a BIA proposal, there is no specified timeline for corporate bankruptcy proceedings.

Once the trustee has administered the estate for the benefit of the bankrupt's unsecured creditors, the trustee applies to the court for a discharge from their duties.

Receivership

The BIA provides for the enforcement of security and the appointment of a receiver on a national basis. As noted above, a 244 Notice must be delivered prior to a secured creditor enforcing its security on all or substantially all of the property and assets of an insolvent debtor. Once the 244 Notice period has lapsed (or, if the debtor has consented to an earlier enforcement at the time of the delivery of the 244 Notice) a secured creditor may proceed with applying for the appointment of a receiver.

The jurisdiction for the court appointment of a receiver is found in the applicable provincial judicature acts, rules for court proceedings, under Section 243 of the BIA, and under certain specific statues (for instance securities legislation).

The court appointment of a receiver typically commences by a secured creditor bringing an action or application against the debtor. The receiver is then appointed in a summary proceeding within that action or application.

A court order appointing a receiver typically:

  • stays proceedings against the receiver and debtor;
  • provides the receiver with control over the property and assets of the debtor;
  • authorises the receiver to carry on the debtor's business and to borrow money on the security of the assets;
  • ultimately authorises the receiver to sell the debtor's property and assets with the approval of the court; and
  • authorises the receiver to commence and defend litigation in the debtor's name.

Unlike privately appointed receivers, whose duty is primarily to the appointing secured creditor (subject to a general duty to act in a commercially reasonable manner), a court-appointed receiver is an officer of the court and has a duty to protect the interests of all the debtor's creditors.

Once the receiver is appointed, the receiver's duties include:

  • giving notice of its appointment to all creditors;
  • issuing reports on a regular basis outlining the status of the receivership;
  • preparing a final report and statement of receipts and disbursements when the appointment is completed or terminated.

Restructuring Proceedings

The main restructuring and rescue procedures in Canada are proceedings pursuant to the CCAA and proposal proceedings pursuant to Part III of the BIA.

In addition, in appropriate circumstances, the arrangement provisions contained in the Canada Business Corporations Act and equivalent provincial corporate statutes may be used as an alternative to the formal insolvency proceedings under the BIA and CCAA outlined below.

CCAA proceedings

See 6.1 Statutory Process for a Financial Restructuring/Reorganisation.

The principal objective of the CCAA is to enable a debtor to formulate a plan of compromise or arrangement in respect of the debtor's obligations owing to its creditors, to be voted on by the creditors, and if approved by the requisite majority in each class of creditors, sanctioned by the court overseeing the debtor's CCAA proceedings.

Despite this objective, in many CCAA proceedings, the debtor will not formulate or file a plan of arrangement, but rather uses proceedings under the CCAA as a mechanism to effect a sale of all, or part of its business, property and/or assets, through either the implementation of a sales or liquidation process, or a pre-packaged sale transaction that was formulated prior to (but consummated as part of) the CCAA proceedings.

Either a creditor or the debtor can initiate CCAA proceedings by application to the court. CCAA proceedings can only be commenced in respect of insolvent corporations with outstanding debts in excess of CAD5 million.

Generally, the court will exercise its discretion to grant protection if:

  • a reorganisation, or orderly sale/liquidation of the debtor's business would be beneficial to the debtor's stakeholder;
  • the debtor does not have an improper motive for making the application; and
  • the relief being sought pursuant to the initial order under the CCAA is limited to that which is reasonably necessary for the continued operation of the debtor in the ordinary course of business during the initial ten-day stay period.

Provided the debtor (or creditor as the case may be), can establish that the debtor meets the requirements of the CCAA, the burden will be on any opposing creditors to show why the court should not grant the relief requested.

As noted, to proceed under the CCAA, the debtor must:

  • be insolvent, meaning that either the debtor is unable to meet its liabilities as they fall due (cash flow test), or the debtor's assets are less than its liabilities (balance sheet test); and
  • have debts in excess of CAD5 million (including any affiliate companies).

Under the CCAA, a monitor is appointed to oversee the proceedings of the debtor, report on the debtor's business and financial affairs from time to time, and to assist the debtor with the formulation of its plan of reorganisation.

Debtor-in-possession regime

The CCAA is a debtor-in-possession regime meaning the debtor remains in control of its business and its property and assets. However, the debtor remains subject to the monitor's scrutiny and if a transaction is outside the ordinary course of business, or does not comply with any court-imposed restrictions, the monitor will report such activities to the court. The debtor is subject to the overall supervision of the court.

Where a debtor is granted protection under the CCAA, the court will issue an initial order prohibiting all secured and unsecured creditors from taking any further steps to pursue any existing or future claims against the debtor and its directors and officers, without either the prior consent of the debtor and monitor or leave of the court.

CCAA proceedings do not have a prescribed time limit. After the making of the initial order, the debtor is granted up to ten days of protection from its creditors. Within the initial stay period, the debtor must return to court to request an extension. After the initial protection period, there is no limit on the length of any extension or on the number of extensions that a debtor may seek from the court, provided the applicant seeking the extension can show that circumstances exist that make the order appropriate and that the applicant has acted and is acting in good faith and with due diligence.

For a reorganisation plan to be accepted by creditors, a meeting must be held for the purpose of voting on the reorganisation plan, and a majority in number of each class of creditors holding two thirds in value of the total debt represented by that class, must vote in favour of the plan. Once the reorganisation plan is accepted by the requisite majority in each class of creditor, the plan must be approved by the court before it becomes binding on those classes of creditors that voted in favour of the plan.

Once the CCAA reorganisation plan is approved by the requisite majority of the debtor's creditors in each class and is thereafter sanctioned by the court, the debtor will have successfully concluded a compromise or arrangement with its creditors with regard to the debts owed to such creditors before the commencement of CCAA proceedings, provided that the payments or consideration required under the CCAA and the plan are made or provided when required.

After the implementation of the plan and at the conclusion of the CCAA proceedings, the debtor can resume its normal business operations.

BIA proposal

See 6.1 Statutory Process for a Financial Restructuring/Reorganisation.

The objective of proposal proceedings pursuant to the BIA is to enable a debtor to reach a compromise with its creditors through a restructuring of its obligations pursuant to a proposal. Proposal proceedings under the BIA may also be used by the debtor as a mechanism to effect a sale of all or part of its business, property and/or assets.

Under the BIA, a proposal may be made by an insolvent person, a receiver, a liquidator of an insolvent person's property, a bankrupt, and a trustee of the estate of a bankrupt. There is no minimum debt requirement for companies to be eligible to make proposals under the BIA.

A BIA proposal is initiated by either filing a proposal or filing a notice of intention to make a proposal. On the filing of the Notice of Intention, all creditors are stayed for an initial period of 30 days (unless a secured creditor has filed a 244 Notice and the statutory ten-day period has expired).

To proceed with a proposal under the BIA, the debtor must:

  • be insolvent under either the cash flow test or balance sheet test (see above, CCAA proceedings); and
  • have at least CAD1,000 in unsecured indebtedness.

Once the debtor has filed either a proposal or a Notice of Intention, the court will appoint a trustee to supervise the proposal process. The role of the trustee in BIA proposal proceedings is to monitor the debtor's actions, assist the debtor in developing the proposal and in reaching a compromise with its creditors, and to alert the court if there are any material adverse changes.

The debtor remains in control of its property and assets throughout the duration of BIA proposal proceedings and the appointed trustee does not directly control the debtor's affairs.

As noted, once a proposal or notice of intention has been filed, no creditors can bring or continue any proceedings against the debtor. The stay of proceedings prohibits creditors from exercising any remedy against the debtor or its property, or commencing or continuing any action, execution or other proceeding for the recovery of a claim provable in bankruptcy without leave of the court granted on motion on notice to the debtor and the proposal trustee.

Secured creditors may enforce their security interest only if they have served a Section 244 Notice on the debtor and the statutory ten-day notice period has lapsed (or the debtor consented to an earlier enforcement by the secured creditor at the time that the Section 244 Notice was delivered by the secured creditor, or thereafter).

BIA proposal proceedings proceed on defined time limits. On the filing of a notice of intention, all creditors are stayed for an initial period of 30 days. The time for filing a proposal (and the stay period) can be extended by the court for a maximum period of six months (including the initial 30 day stay), in 45-day intervals.

Both the debtor's creditors and the court must approve of a proposal pursuant to the BIA. At least two thirds in value and a majority in number of the creditors, including secured creditors to whom the proposal was made, must approve of the proposal. Following the creditors' approval, the court will approve the proposal if it is for the general benefit of the creditors. To this extent, evidence must be adduced to show that the debtor's creditors will be better off under the terms of the proposal than they would be if the debtor were liquidated pursuant to bankruptcy proceedings.

Once the debtor has fulfilled all of its obligations as set out in the BIA proposal, the trustee will issue a certificate confirming the debtor's full compliance with its obligations under the proposal. Once the trustee's certificate is issued, the debtor is considered to have completed its restructuring and may resume normal operations of its business. However, if the debtor defaults on its obligations to its creditors under the proposal, as approved by its creditors and the court, its proposal may be annulled. Similarly, if a debtor's proposal is rejected by creditors by a majority in number or one-third by value, the debtor will be deemed to be bankrupt.

7.2 Distressed Disposals

See 6.8 Asset Disposition and Related Procedures for court supervised disposal of assets and businesses. 

Distressed sales of assets and/or businesses can and do occur outside of the formal insolvency court proceedings highlighted in 6.8 Asset Disposition and Related Procedures.  However, such "self help" or "consensual" sales processes can be either (or both):

  • transactions requiring consensual arrangements between the debtor and its secured creditors where the creditors are not recovering all of their secured debt from the proceeds of such sale transactions; or
  • require notice of sale or notice of foreclosure to be issued by a secured creditor under applicable provincial personal property security legislation, mortgage legislation.

The statutory distribution schemes for the proceeds of sale flowing from any such statutory notices of sale are prescribed by legislation and cannot be altered except by consensual arrangements made with secured creditors who otherwise have the protection of the priority scheme thereunder.

If the sale transaction is consensual the purchaser contractually confirms the release of security with the secured creditors. If the transaction is under the above noted provincial enforcement regimes in order to obtain clear title free of secured claims the enforcing creditor must be a first ranking creditor thereunder. Otherwise, prior ranking security is not impacted by the notice of a subordinate ranking secured creditor. Court approval and vesting orders provide the highest degree of certainty where priority in the debtor's collateral is in dispute.

Credit bids generally occur in the context of a formal proceeding. However, it is possible to structure debt to equity conversions/debt forgiveness transactions where a secured creditor acquires equity in the debtor by private agreement and generally as a part of a recapitalisation of the debtor outside of formal proceedings. These types of consensual balance sheet readjustment with secured creditors receiving an equity stake are not as common as formal proceedings but can be a very effective tool to avoid the costs and business disruption inherent in formal proceedings. These types of structures are most commonly used where the secured creditors would otherwise suffer a significant loan loss in the absence of the private arrangement.

7.3 Organisation of Creditors or Committees

In bankruptcy, creditors of the bankrupt appoint inspectors to represent their interests. Appointing an inspector is mandatory in corporate bankruptcies. Inspectors may also be appointed in proposal proceedings, however, that is optional.

There is no requirement or statutory framework under the CCAA or the BIA for the formation of creditors' committees. Creditors' committees have been recognised by courts in limited circumstances, and granted court-approved funding.

3. Out-of-court restructurings and consensual workouts

 3.1 Consensual and Other Out-of-Court Workouts and Restructurings

The effectiveness of consensual out-of-court workouts and restructuring in Canada varies depending on the specific circumstances and business context of the debtor.

There is a perception that doing as much as possible outside formal proceedings, and doing so consensually, can be preferable and tends to preserve stakeholder value. This is particularly true for businesses whose value is highly dependent on goodwill or reputation (for example businesses operating as intermediaries, brokers or businesses whose customers are dependent upon after-sales support). In certain situations, required regulatory approvals and critical contractual relationships mitigate in favour of out-of-court workouts, to avoid triggers or terminating events affecting these relationships. Finally, where possible, consensual workouts can save transaction costs.

It is common practice for financing parties in Canada to use professional financial advisors to obtain detailed assessments of their borrower's position and, in appropriate circumstances with contractual protections, to permit time for this to happen. Although not every case is suitable for forbearance arrangements allowing financing parties to develop a highly informed picture of their borrower's situation, where possible this is preferable.

It is common in Canada for significant out-of-court work to be done on the restructuring or workout of distressed companies but to invoke the authority of the courts to complete this work. This is in contrast to the "file first, figure out later" approach. For example, it is not uncommon to have sale and investment solicitation processes managed outside of and prior to a formal court filing, in a rigorous fashion and based on detailed requirements, but to seek court approval for any resulting sale transactions.

3.2 Consensual Restructuring and Workout Processes

Forbearance agreements are common. Among other things, these agreements permit borrowers to have a contractual breathing space subject to enhanced credit agreement protections and milestones specific to the financial circumstances of the borrower. The terms of these arrangements vary widely and are context specific. Examples include required sale processes for non-core businesses, the solicitation of acceptable subordinate or equity financing and compliance with cash flow projections, financial ratios and reduced financing availability.

Creditor committees may play a role in consensual restructurings but this will depend on how widely debt obligations of a business are held. First lien financings controlled by syndicates governed by their own internal rules and bilateral financings between one financing party and a borrower are common in Canada, making creditor committees less important.

Informational requirements in relation to consensual restructuring are common and often additional to those provided for in existing credit documentation.

Priorities tend to be preserved in relative terms during informal restructurings in Canada. Where realisation analysis makes this obvious, compromises in the amount or terms of debt obligations can be made but this will be entirely dependent upon full disclosure and clear information about the economics of the business. In capital structures featuring significant debt components, equity is always in jeopardy in distressed situations.

3.3 New Money

Super-priority liens or rights are not common outside a formal process and could only be practically obtained through contractual subordinations or existing registration or possession priorities. Instead, it is common to seek super-priority for new money in a formal filing. A debtor subject to CCAA or proposal proceedings may obtain interim financing, referred to as debtor-in-possession (DIP) financing.

DIP financing must be approved by the court. A supervising court will consider the following factors (among others) in determining whether to grant an order approving DIP financing:

  • the period during which the debtor is expected to be subject to the proceedings;
  • how the debtor's business and financial affairs are being managed during the proceedings;
  • whether the debtor's management has the confidence of its major creditors;
  • whether the loan would enhance the prospects of a viable compromise or arrangement being made in respect of the debtor (or preserve the value of the debtor's enterprise for the benefit of stakeholders);
  • the nature and value of the debtor's property;
  • whether any creditor would be materially prejudiced as a result of the security or charge; and
  • the monitor's or trustee's report, if any.

Where an order is granted approving DIP financing, a DIP lender may be granted a corresponding priority charge over the debtor's property and assets, and in priority over existing secured creditor claims. The special priority granted to a DIP lender may, however, remain subject to other court-ordered priority charges that are granted such as a charge in favour of directors and officers to cover certain director and officer liabilities and a charge to secure payment of the insolvency professionals employed by the debtor, including the debtor's counsel, the court officer and counsel to the court officer. Existing secured creditors will be notified prior to the court granting an order for DIP financing.

Under the CCAA, where the debtor's application for interim financing is made at the same time as the initial application for protection under the Act, the court must be satisfied that the terms of the loan are limited to what is reasonably necessary for the continued operation of the debtor in the ordinary course of business during the ten-day "come-back" period after the granting of the initial order.

 3.4 Duties on Creditors

Creditors are subject to limited duties in a formal insolvency process. These include in the context of proceedings under the BIA and CCAA, the statutory duty to act in good faith with respect to those proceedings. Creditors are also subject to restrictions and obligations that may be included in an order of the court. Subject to compliance with these requirements, creditors can vote and participate in insolvencies in their own individual economic interest. For instance, the standard form of Ontario initial order under the CCAA and appointment order in the context of receiverships, both contain important restrictions on creditor actions during the proceedings.

 3.5 Out-of-Court Financial Restructuring or Workout

There is no "cram-down" in an out-of-court restructuring or work-out. Indeed, if the landscape of stakeholders is complex and a compromise is required from each, an out-of-court agreement may be elusive. In this regard, out-of-court solutions are normally achieved where a small number of stakeholders are in a position to negotiate a compromise that does not require agreement from a wider group.

It is not uncommon (arguably typical) for large syndicated credits to include provisions permitting a majority (or super-majority) of lenders to bind dissenting lenders. The presence or absence of such provisions and the threshold for the contractual cram-down are a matter of negotiation. Indeed, the scale of the Canadian credit markets has the practical effect of lenders being very familiar with each other and interacting with each other regularly in multiple syndicates. Syndicate co-operation in the face of debtor restructurings is the norm and syndicate conflict is less common because the syndicate members value stable relations across a large number of credits over winning a single syndicate battle. Conflicts do occur but are not common.

Informal processes are not perceived as unworkable. A distressed investor may decide to acquire the secured debt as part of an acquisition transaction arising from an informal restructuring in order to retain that secured creditor's leverage in negotiations with remaining stakeholders after an acquisition is consummated. The implied threat of a formal restructuring with its declining returns to stakeholders and associated costs of recovery often facilitate a post-acquisition negotiated solution among rational economic actors. If a material stakeholder or group of stakeholders continues to refuse to come to an agreement, the investor may trigger the pressure of a filing to bring these stakeholders to the table. Failing a negotiated solution, recourse to a formal process may be necessary.

4. Secured creditor rights, remedies and priorities

4.1 Liens/Security

In the common law provinces of Canada, security over personal property (both tangible and intangible) is usually taken under a general security agreement granting a security interest in all property, undertakings and assets of a debtor. Real property can be charged by way of a mortgage registered on title. In addition to a general security agreement, a lender may wish to take specific types of security against specialised personal property like shares, which can be accomplished by way of a supplementary share pledge. Debenture security may also be taken over real and personal property. Banks licensed in Canada can take specialised types of security under the Bank Act.

In the province of Quebec, the only civil law jurisdiction in Canada, security is obtained by way of hypothecs that can charge both moveable and immovable property.

4.2 Rights and Remedies

Outside of an insolvency process, secured creditors may exercise their contractual rights and avail themselves of the sale and foreclosure regimes prescribed by real and personal property legislation. These regimes prescribe statutory notice periods. Additionally, if a creditor is seeking to enforce on all or substantially all of a debtor's property, it is required under the BIA to provide ten days' notice of its intention to enforce its security.

In formal insolvency proceedings (other than bankruptcy), secured creditors are subject to the stay of proceedings, subject to limited exceptions. For instance, if the ten-day notice period described above has elapsed, a secured creditor will not be subject to the stay of proceedings in a proposal proceeding. In a bankruptcy, secured creditors are not stayed and may enforce their rights.

4.3 Special Procedural Protections and Rights

Under the BIA, the vesting of title to a debtor's assets in the trustee in bankruptcy ("trustee") and distributions to unsecured creditors are subject to the claims of secured creditors. To the extent of their validity, enforceability and perfection, and subject to limited statutory priorities, secured creditors have priority against a trustee and unsecured creditors. A bankruptcy order does not stay secured creditors. 

5. Unsecured creditor rights, remedies and priorities

5.1 Differing Rights and Priorities

In an insolvency, creditors' claims generally rank as follows.

  • Super-priority claims, including:
    1. valid trust claims;
    2. realty property taxes;
    3. certain deemed trusts;
    4. claims for specified amounts and periods for wages and pension contributions;
    5. qualified unpaid supplier or "30-day good" claims; and
    6. court-ordered charges in CCAA, Proposal and Receivership proceedings.
  • Secured claims.
  • Preferred unsecured claims, including:
    1. limited landlords' claims;
    2. amounts that would have been paid to a secured creditor but for the payment of wage and pension claims; and
    3. certain workers' compensation claims.
  • General unsecured claims.

Super-priority and secured claims are paid out of proceeds from sales during the insolvency proceedings in accordance with their respective priority. Where there is a surplus following satisfaction of super-priority and secured claims, the surplus is distributed to preferred unsecured claims and then ratably among general unsecured creditors.

Claims of creditors have priority over the claims of shareholders.

5.2 Unsecured Trade Creditors

Unsecured creditors are not required to supply goods or services, or provide credit, to a debtor without assurance of payment for post-filing goods or services. Unsecured creditors may require that any such goods or services be provided strictly on a cash on delivery basis. They are therefore able to ensure they are kept whole during the restructuring process for post-filing goods or services.

5.3 Rights and Remedies for Unsecured Creditors

Unsecured creditors have the right to commence an action to recover their debt and apply to court for an order adjudging the debtor bankrupt. These remedies are stayed when insolvency proceedings begin. Unsecured creditors have the ability to prove their claim in a bankruptcy, CCAA plan or proposal and receive a dividend based on the pro rata value of their claims relative to the claims of all other unsecured creditors.

5.4 Pre-judgment Attachments

Pre-judgment attachment is available to creditors in appropriate circumstances. Laws of general application and those specific to restructuring and insolvency provide for general attachment.

Remedies under laws of general application include court orders providing for injunctive relief, prohibiting certain acts by debtors or prescribed dealings with particular assets. In addition, "Mareva" injunctions can prohibit debtors from dissipating or concealing assets, or transferring assets out of jurisdiction. Any creditor who can demonstrate that there is a serious issue to be tried, or good case on the merits of their underlying claims, and meet the relatively high thresholds for demonstrating irreparable harm and balance of convenience may be entitled to the injunction.

Secured and unsecured creditors seeking bankruptcy orders have remedies that share some of the characteristics of pre-judgment attachments. A secured creditor who has delivered a notice of intention to enforce security under Section 244 of the BIA (a "244 Notice") may seek the appointment of an interim receiver to conserve the debtor's estate, pending the expiry of the applicable ten-day notice period. An unsecured creditor who has filed a bankruptcy application may seek the appointment of an interim receiver to conserve the debtor's property, pending the hearing of the bankruptcy application.

5.5 Priority Claims in Restructuring and Insolvency Proceedings

The BIA and CCAA provide the court overseeing CCAA, proposal and receivership proceedings jurisdiction to make orders granting super-priority charges that will rank ahead of secured creditors to the extent such creditors have received notice of the proposed charges. The charges can include the following.

  • Administration charge securing the fees and disbursements of the debtor's and court officer's legal and financial advisors. In a receivership, this is termed a receiver's charge.
  • Interim financing charge securing DIP financing. This is called a receiver's borrowing charge in receiverships.
  • Directors and officers charge securing the indemnity provided by the debtor to its directors and officers for liabilities that they might incur in their capacities as directors and officers during the course of the proceeding. In CCAA and proposal proceedings only.
  • Critical supplier charge in both CCAA and proposal proceedings, the court has the authority to order a critical supplier to continue to supply following the commencement of the proceedings provided that the court also issues an order securing the post-filing payment obligations to that supplier.

The BIA also contains statutory provisions granting priority charges (or similar protections in the context of CCAA proceedings) protecting employees' claims for unpaid wages and vacation pay for the six months period preceding the commencement of the proceedings, up to CAD2,000 per employee. The charge covers account receivables, inventory and cash of the debtor. A similar charge against all assets of the debtor protects certain prescribed unremitted pension contributions. Finally, the CCAA provides that a court may not approve a CCAA plan unless it is satisfied that an employer's unremitted source deductions (such as income taxes, unemployment insurance premiums and Canada pension plan premiums) that were outstanding at the time of filing will be paid during the six months period following implementation of the CCAA plan.

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