A simple introduction to the CCAA process for those considering a restructuring
The Companies' Creditors Arrangement Act (generally referred to as the “CCAA”) is a Canadian federal statute allowing financially distressed companies the ability to restructure their business and financial affairs within a relatively flexible process under the supervision of a Court (for our American readers, think of this as a Canadian Chapter 11 restructuring). However, to take advantage of the CCAA, a debtor company must owe at least $5 million to creditors.
The provisions of the CCAA are skeletal in nature which offers more flexibility and greater judicial discretion to deal with complex issues that may arise during the restructuring process, as compared to the proposal provisions in Part III of the Bankruptcy and Insolvency Act (BIA) which are more prescriptive.
During the CCAA process (or when the proposal process is utilized under the BIA), a company may continue to operate its business while seeking a compromise or arrangement with its creditors, which if successful would allow it to emerge as a viable going concern.
All interested persons in a CCAA proceeding are required to act in good faith with respect to those proceedings. If the Court is satisfied that an interested person fails to act in good faith, on application by an interested person, the Court may make any order that it considers appropriate in the circumstances.
Pre-Filing of Initial Application
In advance of filing the Initial Application for protection under the CCAA, a company will generally seek out a qualified Court Monitor to be appointed by the Court to oversee the restructuring. The Court Monitor will generally monitor the company’s business, report to the Court on any major events that might impact the viability of the company and assist the company in the preparation of a Plan of Arrangement setting out terms of a proposed restructuring with creditors. A Court Monitor is usually an accountant with experience in insolvency.
A company will also generally seek DIP financing prior to making the Initial Application, to provide liquidity through the restructuring process. A DIP lender generally won’t fund without approval from the Court of a priority of its interest over existing creditors of the company. A Court Monitor can help secure the commitment of a DIP lender.
A company will also often seek out a Chief Restructuring Officer (“CRO”) at this time to be appointed by the Court. This is generally an individual sourced from a firm which specializes in restructuring and turnaround management. This individual either replaces or in some cases, supplants, existing management, bringing important financial and operational expertise, as well as knowledge of the CCAA process.
The Initial Application
To begin the process, a company files an Initial Application with the Court for protection under the CCAA, which includes the filing of prior financial statements of the company and a projected cashflow statement. There is no requirement for the company to give notice of its intention to make the application to any third party, including creditors or other stakeholders.
In connection with the application, the company will generally request an order of the Court to, among other things, stay all proceedings against the company, approve DIP financing, restrain suppliers from discontinuing services, appoint a CRO and appoint a Court Monitor to oversee the restructuring. The Court will want to understand that there are potentially viable ways forward in restructuring the company under the Act before granting the order requested.
The Court may grant an order for an initial 10-day period, which effectively stays all proceedings against the company during the period. While the stay is in place, the company may continue to operate its business, however, creditors are barred from enforcing debts owed to them before the initial application was filed, suppliers are required to continue providing services and the company is barred from making payments except as may be required to operate its business.
The stay gives the company time to prepare a Plan of Arrangement for presentation to its creditors on how it intends to deal with its debts. If the company needs additional time to prepare the plan, the Court can be asked to grant an extension of the stay.
The Comeback Hearing
Because there is no requirement for the company to give notice of its intention to make the Initial Application to any third party, the CCAA requires that a "comeback hearing" be held no more than 10 days after the initial order is issued. Creditors and other stakeholders are given notice of this hearing and have an opportunity to challenge the initial order and to seek other relief from the Court as appropriate.
At this hearing, the company will usually seek to continue the protection beyond the initial 10-day period which is typically granted if the company can satisfy the Court it is has acted, and is acting, in good faith and with due diligence. The company may also seek to amend the initial order, for example to approve a key employee retention plan to ensure key employees are not lost during the restructuring.
There is no time limit on how long the stay can be extended, nor on the number of stay extensions that may be granted. However, creditors or other stakeholder may apply to the Court to have the stay varied or lifted if there is good reason.
The Claims Process
To accurately determine the creditors of the company and amounts due to them, the company may seek approval of the Court to implement a claims process under the supervision of the Court Monitor. Through the claims process, the company is also able to dispute claims and finally arrive at an aggregate amount owed creditors.
Creditors are usually informed about the claims process by the Court Monitor and asked to complete and submit Proof of Claim forms before a claims bar date. The Proof of Claim form submitted by a creditor sets out what is claimed to be owing to the creditor and is reviewed by both the company and the Court Monitor. The company may dispute the amounts claimed under the process established. Once accepted, the Proof of Claim evidences the amount agreed is owed to the creditor by the company and the creditor.
To be able to vote at a meeting of creditors on a Plan of Arrangement, a creditor’s claim must have been proved. If a creditor does not file a Proof of Claim before the claims bar date, the creditor's rights could be severely and irreversibly affected.
The Restructuring Plan
During the stay period, a company will consider one or more paths towards becoming a viable going concern. This may involve a sales and investment solicitation process under which assets may be sold or an investment accepted in the company. Or it may involve a negotiated compromise of claims with creditors, a distribution of equity to creditors, an investment by a third party involving a change in operating structure or some other path. There are no restrictions in this regard.
Once a proposed path has been determined, the company generally will request the Court to order a meeting of creditors (and shareholders if necessary, depending on the path proposed) to formally vote on the Plan of Arrangement. Creditors may be separated into various classes for the purpose of voting on the Plan. For a Plan to be accepted, it must be approved by a majority of creditors in each class and at least two thirds of the total value of the creditors' claims in that class. Often a company will create a convenience class of creditors for purposes of the Plan and negotiate with its larger creditors in an attempt to meet these two thresholds for approval of the Plan.
If the Plan is approved as required, it must then be sanctioned by the Court.
Court Sanction of Plan
An application for Court sanctioning of a Plan of Arrangement is generally brought by the company after obtaining the required approvals from creditors (and shareholders when necessary). In determining whether to sanction the Plan, the Court considers, among other things, whether the Plan is fair and reasonable. If the Court determines that the Plan is not fair or reasonable, it can refuse to sanction the Plan even if it has been approved by creditors (and shareholders when necessary).
If the Plan is not approved as required or not sanctioned by the Court, the stay is usually lifted, and the company may find it necessary to file for receivership or bankruptcy.
Cross Border Insolvencies
Part IV of the CCAA sets forth provisions for the recognition of foreign insolvency proceedings as contemplated by the UNCITRAL Model Law on Cross-Border Insolvency. A foreign representative may apply to the Court for recognition of a foreign proceeding in respect of which he or she is a foreign representative. If recognized, the Court may make an order, among other things, staying proceedings against the company, restraining further proceedings and prohibiting the company from disposing of any assets in Canada, to allow for the handling of the proceeding as contemplated by the foreign proceeding, subject to a public policy exception.
The United States has adopted the Model Law through Chapter 15 of the U.S. Bankruptcy Code. However, because the U.S. Bankruptcy Code is a federal statute, and cannabis is federally illegal in the United States, it remains unclear whether a U.S. bankruptcy court will recognize a foreign proceeding involving a cannabis company seeking to protect cannabis assets located in the United States during a restructuring. More on this to come in a future post.