CANADA Law and Practice Contributed by: Clifton Prophet, David F W Cohen, Virginie Gauthier, Thomas Gertner and Kate Yurkovich, Gowling WLG
4. Statutory Restructuring, Rehabilitation and Reorganisation Proceedings 4.1 Opening of Statutory Restructuring, Rehabilitation and Reorganisation Statutory Process for a Financial Restructuring/ Reorganisation CCAA and proposal proceedings are the main Cana - dian restructuring proceedings. An alternative to these proceedings, in certain circumstances, are the arrangement provisions contained in the Canada Business Corporations Act and equivalent provincial The principal objective of the CCAA is to enable a debtor to formulate a plan of compromise or arrange - ment (“CCAA Plan”) in respect of the obligations it owes its creditors, to be voted on by the creditors and, if approved by the requisite majorities in each class of creditors, sanctioned by the court. corporate statutes. CCAA proceedings In many CCAA proceedings, the debtor will not file a CCAA Plan but will rather use the proceedings as a mechanism to effect a sale of all or part of its business, property or assets, through either the implementation of a sale process, or a pre-packaged sale transaction that was formulated prior to, but is consummated as part of, the CCAA proceedings. Either a creditor or the debtor can initiate CCAA pro - ceedings by application to the court. The CCAA applies to a debtor “Company” including corporations incorporated within Canada, corpora - tions incorporated outside of Canada that have assets or do business in Canada, and income trusts. To proceed under the CCAA, the debtor must: • be insolvent, meaning that 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”). Courts have also expanded the definition of “insolvent” to include a debtor fac - ing a “looming liquidity crisis”; and
provincial personal property security legislation and mortgage legislation. The statutory distribution schemes for proceeds of sale flowing from any such notices of sale are pre - scribed by legislation and cannot be altered except by consensual arrangements made with secured credi - tors that 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 provin - cial enforcement regimes, 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 subordi - nate-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 court- supervised proceeding. However, it is possible to structure debt-to-equity conversions or debt forgive - ness transactions where a secured creditor acquires equity in the debtor by private agreement and gener - ally as part of a recapitalisation of the debtor outside of formal proceedings. 3.2 Legal Status Out-of-court restructurings are structured as contrac - tual arrangements between parties. The effectiveness of consensual out-of-court work - outs and restructuring in Canada varies depending on the specific circumstances and business context of the debtor. Financing parties in Canada often use pro - fessional financial advisers to obtain detailed assess - ments of their borrower’s position and, in appropriate circumstances, will enter into out-of-court restructur - ing or support arrangements.
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