Corporate Debt Restructuring
The two most frequent options available to companies seeking to restructure their debts are as follows:
- filing for creditor protection pursuant to the Bankruptcy & Insolvency Act (“BIA”). The BIA applies to companies of all sizes. It allows insolvent companies to compromise creditor claims through a proposal that is then voted on by the creditors (the “BIA Proposal Process”); or
- filing for creditor protection pursuant to the Companies’ Creditors Arrangement Act (the “CCAA process”). The CCAA is restricted to companies and they must have at least $5 million in creditor claims. The CCAA process allows debtor companies to compromise creditor claims through a plan of arrangement that is voted on by creditors.
The following are some of the benefits that are common to both the BIA Proposal Process and the CCAA Process:
- Each process provides for a stay of proceedings. Therefore, all outstanding legal actions against a debtor are stayed and no new actions may be commenced by creditors without leave of the court.
- Each process allows a debtor to seek court approval for additional financing to fund ongoing operations.
- Each process allows for a “cram down” on dissenting creditors. Here is an example of how a legal “cram down” works. Assume a debtor has 50 unsecured creditors who are owed $5,000,000 in aggregate. Assume that only 26 of the 50 unsecured creditors file a proof of claim and the aggregate dollar value of the 26 claims is $2,000,000. Provided that majority of the proven claims (i.e. 13 of the 26 filed proofs of claim) vote to accept the BIA Proposal or CCAA plan of arrangement and provided the dollar value of those 13 claims is at least two-thirds of the aggregate dollar value of the 26 proofs of claim that were filed ((i.e. 2/3 x $2,000,000 =$1,333,333) then the BIA Proposal or the CCAA plan of arrangement has been approved and will bind all 50 creditors upon court approval. Thus, it is binding on those creditors who voted against the BIA Proposal and those who did not file a proof of claim.
* The above information is intended to provide a general overview of restructuring options available for corporate debtors in Canada; it is not intended to be an exhaustive overview of these options. The above information is not intended to be, and should not be construed as, legal advice. Debtors and creditors who may be involved with a debt restructuring are strongly advised to seek legal advice from an insolvency professional since a debt restructuring may adversely affect your interest.