The governmental restrictions and social customs implemented to combat the spread of COVID-19 have led to significant fallout throughout the economy.  Many companies, particularly those with significant retail, hospitality, and personal services operations, may become insolvent and may have to consider their options for avoiding bankruptcy.  Creditors looking to recover from insolvent companies may find their claims subject to a debtor’s reorganization proceedings under the Companies’ Creditors Arrangement Act, RSC 1985, c-36 (“CCAA“).

The CCAA is federal legislation that allows a debtor company to reorganize the debtor company’s debts through an agreed plan of arrangement while the debtor company continues to operate.  Originally enacted by Parliament in response to the economic challenges posed by the Great Depression, the CCAA is a more flexible mechanism allowing for greater business and judicial discretion than a proposal under the Bankruptcy and Insolvency Act, RSC 1985, c. B-3 (“BIA“).[1]  Although the CCAA offers a flexible reorganization process for debtor companies, it is a complicated legal process that can involve significant costs and impair the ability of unsecured creditors to collect money from a debtor company.

Scope and Application

The purpose of the CCAA is to avoid bankruptcy by allowing a court-supervised attempt to reorganize a debtor company’s financial affairs.

A debtor company may make an application under the CCAA when it is insolvent and the total secured and unsecured claims against it and its affiliates exceed $5 million. The application may also be brought by an interested party such as a creditor, the bankruptcy trustee, or the liquidator of the debtor, although in practice this is rare.  The application is made in superior court, generally in the province where the head office or chief place of business of the debtor company is located.  The CCAA applies to most companies aside from banks, insurance companies, trust and loan companies, and railways.

Powers of the Court

Once an application is accepted, the CCAA grants wide-ranging discretionary powers to the court to craft orders and remedies appropriate to the particular reorganization before it.  In making orders, the court will do so at the instance of the company, with the support of its monitor, and in accordance with the purpose of the CCAA, often over the objections of creditors.

The CCAA mandates the court to appoint the monitor, who must be a trustee within the meaning of subsection 2(1) of the BIA, to monitor the business and financial affairs of the debtor company during the reorganization.

The standard initial order in a CCAA proceeding is to stay enforcement actions by creditors to allow the debtor company’s business to continue. The initial stay order is usually for 30 days and can be extended. Other often-used steps are:

  • Prohibiting parties from terminating agreements with the debtor company.
  • Disclaiming or terminating existing contracts entered into by the debtor company.
  • Authorizing post-filing security for debtor in possession financing or super-priority charges on the debtor company’s assets when necessary to allow debtor company to continue to do business during the reorganization.
  • Establishing the existence of creditors’ claims by way of a time-limited claims process, then creating a process to determine creditors’ claims which may be disputed by the debtor company.
  • Approving a plan of arrangement created by the debtor company to compromise or arrange the debts owed to some or all of its creditors, including, importantly, any claims against directors and officers for their statutory liabilities.

Whether any particular step occurs in a reorganization under the CCAA will depend on agreement between the debtor company, the monitor, and creditors, or in the absence of agreement, by court order over the objections of one or more creditors.

There are, however, limits to the powers of the court, which may limit a debtor company’s creditors ability to collect on their legitimate claims.  An order made under the CCAA cannot compel third parties to advance any further money or credit to the debtor company or prohibit creditors from requiring immediate payment for services provided to the debtor company during a CCAA proceeding.

As well, if the reorganization is unlikely to be successful the stay of proceedings may be lifted by the court, which would terminate the CCAA proceedings and lead to bankruptcy proceedings under the BIA.  In rare cases, there may be liquidation proceedings within the CCAA proceedings.

Concluding CCAA

There are three ways of concluding a CCAA reorganization:

  • The initial stay of proceedings may provide the debtor company with sufficient room to restore solvency, in which case a full CCAAreorganization does not occur and the process ends;
  • The plan of arrangement is accepted by the creditors and the reorganized debtor company emerges solvent from the CCAAproceedings; and
  • The plan of arrangement fails or is seen to be doomed to fail, so either the debtor company or a creditor(s) apply to liquidate the company’s assets under the applicable provisions of the BIA or to place the debtor company into receivership.

For creditors with claims against a debtor company in or considering CCAA reorganization, the process for recovery may be complicated and obtaining legal advice early in the process may be imperative. In particular, a landlord who suspects a tenant in default may become insolvent should consider proactively enforcing its rights under the its lease before the tenant begins a CCAA reorganization.  For more information or for advice regarding specific concerns about the CCAA or debt collection and commercial litigation more generally, please reach out to: H. David Edinger, Mark C. Stacey, or Dan Barber.

[1] Century Services Inc. v. Canada (Attorney General), 2010 SCC 60 at para. 14

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