CANADA Law and Practice Contributed by: Clifton Prophet, David F W Cohen, Virginie Gauthier, Thomas Gertner and Kate Yurkovich, Gowling WLG
Note on Asset Dispositions and Related Procedures
Under the CCAA, the court commonly makes orders prescribing the procedure for proving and determining claims and establishing dates after which they will be barred as against the insolvent debtor if not proven. Generally, monitors appointed in CCAA proceedings administer these claims processes. New Money A debtor subject to CCAA or BIA proposal proceed - ings may obtain interim financing, referred to as debt - or-in-possession (DIP) financing. DIP financing must be approved by the court. The court will consider the following factors, among oth - ers, in determining whether to grant an order approv - ing 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 confi - dence 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 preju - diced 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. Where a debtor’s application for interim financing is made at the same time as the initial application for protection under the CCAA, the court must be satis - fied 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.
As noted, a debtor can also use CCAA or BIA pro - posal proceedings as a mechanism to effect a sale of all or part of its business, property or assets through either the implementation of a sales process, or a pre- packaged sale transaction that was formulated prior to, but is consummated as part of, the proceedings. The CCAA With limited exceptions, the debtor runs the pro - cess for assets and going-concern sales. Following negotiations with its primary creditors, the debtor will often seek court approval for an order that prescribes a sales and investment solicitation process (SISP) that involves varying degrees of involvement of, and supervision by, the monitor. A court may order the monitor to have a much higher degree of control over a SISP where the debtor’s directors/management are unwilling to be involved, lack sufficient resources to run the process, or are in a conflict of interest. DIP lenders and secured creditors may also be granted rights to information and input into a SISP. The court may permit or even mandate the hiring of a “sales agent” to run the SISP. Recently, share acquisition transactions through the use of a “reverse vesting” structure have been employed in situations such as where a debtor entity holds valuable assets such as licences, or favourable tax attributes that a purchaser entity wishes to pre - serve, that cannot be transferred out of a debtor com - pany’s existing corporate structure. In a reverse vest - ing transaction, a debtor will seek the court’s approval of a reverse vesting order, whereby the unwanted assets and liabilities of a debtor entity are transferred out of the debtor company and into a related “residual co”, expunging the corporate structure of the debtor entity from assets and liabilities the purchaser does not want to acquire. As a result, the debtor entity suc - cessfully emerges from its CCAA proceedings (albeit under new ownership) and the residual co, holding the unwanted liabilities and assets of the CCAA debtor, will be liquidated and placed into bankruptcy. BIA proposal The board of directors and management of the debt - or generally run any sale process. As in the CCAA
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