CHAPTER 03 Navigating Financial Distress: Key Considerations for Directors
Responding to Financial Distress: Steps for Directors As soon as it appears likely that an issuer will exhaust its credit, directors should obtain insolvency advice and consider the merits of selling, restructuring or liquidating the business. Separate counsel may be required to advise directors on their duties, on the one hand, and to advise the corporation about its options, on the other. Even if a special committee of the board is struck to assist the board in evaluating its options, ultimately, the board must pass a resolution authorizing the sale, liquidation or reorganization of the corporation. A further discussion about the role of special committees in different contexts can be found in Chapter 1, Special Committees: Governance Safeguards for Conflict of Interest Transactions and High-Stakes Situations. Putting an insolvency plan in place early gives a corporation more opportunities to survive the downturn and return to profitability. It also makes it more likely that a sale or reorganization will be successful and reduces the probability that key infrastructure will be seized by a secured creditor. An insolvency plan may involve taking a step back to determine whether the issues that the corporation is facing are in the form of short-term liquidity challenges or longer-term issues that necessitate reorganizing or liquidating the business.
Putting an insolvency plan in place early gives a corporation more opportunities to survive the downturn and return to profitability. It also makes it more likely that a sale or reorganization will be successful and reduces the probability that key infrastructure will be seized by a secured creditor.
TABLE 3-1: Formal and Informal Insolvency Options
Informal Processes
Formal Processes
Sale of assets
Companies’ Creditors Arrangement Act
M&A, divestiture
Bankruptcy and Insolvency Act
Conversion of debt to equity
Canada Business Corporations Act
Renegotiating key agreements
N/A
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