CHOOSING AN INSOLVENCY REGIME Canada has two main insolvency regimes – governed by the Bankruptcy and Insolvency Act (BIA) and the CCAA. To access either regime, the corporation must be insolvent. This term is interpreted with some differences depending on whether relief is being sought under the BIA or the CCAA, although courts have been willing to interpret access broadly under both regimes. 60 Only companies with at least $5 million in debt can access the CCAA, whereas companies of any size can use the BIA. 61 Additional advice should be obtained for corporations with assets or operations outside Canada or where another jurisdiction’s laws may apply. In general, the CCAA process is more flexible and can allow corporations with complex structures to pursue more novel and creative solutions to restructure their affairs. This process was historically used to reach an agreement with creditors that would allow the corporation to continue in business. However, it has increasingly been used for liquidation purposes, with the court-appointed officer – the monitor – reporting to the court on the corporation’s ongoing financial situation and on its efforts to develop a plan of arrangement or negotiations with creditors. 63 The CCAA’s principles- based approach requires extensive court involvement, which can increase both the cost and the complexity of the proceedings. 64 This process may not be appropriate for corporations with smaller debts and highly strained liquidity. While a CCAA proceeding takes place, current management typically continues to run the business, although personnel changes may be required by creditors as part of the negotiations. 65 Management and other key personnel may be encouraged to stay with the entity through an employee retention or incentive plan, though care must be taken to ensure that these plans are reasonable. 66 As of August 10, 2020, 41 corporations, including Cirque du Soleil, Reitmans, Aldo, and DAVIDsTEA, have been granted CCAA
OUT-OF-COURT WORKOUTS In addition to the options available to issuers under the BIA and the CCAA, businesses can also restructure their debts without involving the courts by negotiating with creditors. Such a process is referred to as an out-of-court workout and is done in the shadow of both the BIA and the CCAA regimes. In addition, various “bankruptcy-adjacent” laws, such as the CBCA, also come into play and inform these workouts. 62 Out-of-court workouts are more feasible for smaller and/or closely held corporations dealing with a few key creditors. The essential aspect of an out-of-court workout is that all stakeholders compromising their positions must agree to it. Often, out- of-court workouts take place with one secured lender (or syndicate) while the trades continue to be paid in the ordinary course. Further, out-of-court workouts are best suited for situations in which no operational fix is needed. When the requisite factors are in place, and where courts may become overwhelmed, out- of-court workouts can offer an agile mechanism for businesses to move forward with the support of their creditors. It is expected that out-of-court workouts will become more common as government supports run out and businesses need to make decisions about how to restructure their debts in the face of pandemic-related constraints on access to the courts. This trend has already been observed in the United States.
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Governance Insights 2020
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