CHAPTER 03 Navigating Financial Distress: Key Considerations for Directors
protection this year, compared with 38 in all of 2019. It is expected that corporations will increasingly seek CCAA protection as the pandemic runs its course. In contrast, the BIA is based more on rules than principles, which reduces both the cost and the complexity of the proceedings. 67 This process can be used to either reorganize a corporation’s affairs or liquidate them. Unlike the CCAA, if the plan is rejected by creditors, the company automatically becomes bankrupt and begins to liquidate. 68 During the liquidation, the corporation and its assets are controlled by an external trustee who acts for the benefit of the creditors. Outside Canada’s insolvency regimes, the CBCA also offers an increasingly popular option to restructure a corporation. A corporation can apply to a court for an order approving an arrangement provided that (1) it is not possible for the corporation to effect a fundamental change under any other provision of the CBCA, and (2) the corporation is not insolvent. 69 Unlike the CCAA, there is no court-appointed monitor and, instead, fairness opinions are obtained in support of the proposed reorganization. In addition, a CBCA arrangement must be reviewed by the office of the director appointed under the CBCA. 70 Although the director may take a position on the transaction, ultimate approval remains with the same court that hears CCAA proceedings. The primary benefits of proceeding under the CBCA include the speed and flexibility offered to accomplish an arrangement and the avoidance of potential stigma associated with insolvency. However, a CBCA restructuring may only involve the compromise of bondholders, debenture holders, and equity holders’ rights. In contrast, the CCAA contemplates the compromise of every type of claim that may arise from the insolvency of a corporation. Further, there is also the possibility that a CBCA plan of arrangement could be converted into a CCAA proceeding, with the added expense and time arising from two proceedings.
DECIDING HOW TO PROCEED The choice of which regime to proceed under is based on many factors, including the nature and scope of the issuer’s assets and debts, the financing available for restructuring, the number of creditors and whether the issuer has any current or pending litigation against it. The viability of the entity’s products, industry and business model should also be considered. For example, industries that experienced financial difficulty before the pandemic may be more successful with a sale or liquidation than a restructuring proceeding. The choice of which regime to proceed under is based on many factors, including the nature and scope of the issuer’s assets and debts, the financing available for restructuring, the number of creditors and whether the issuer has any current or pending litigation against it. A restructuring proceeding under both the BIA and the CCAA can allow for releases of directors’ liabilities. 71 Under the CCAA, the release can be authorized when there is a connection between the claim being compromised and the restructuring achieved by the plan. 72 However, a release is not available if directors made misrepresentations to creditors or were engaged in wrongful or oppressive conduct. 73
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