Ten reasons to restructure under Canada’s Companies’ Creditors Arrangement Act

Cross-border filings between the United States and Canada have been common place for many years and parties are fortunate that Canadian and US courts share a respectful, cooperative and deferential approach to one another. Even prior to the adoption of the UNCITRAL Model Law by the United States in 2005 and Canada in 2009, options for foreign recognition proceedings were available in both countries.

Debtors and creditors are often faced with gating decisions as to the appropriate forum(s) for cross-border filings and there are often many good reasons to consider a chapter 11 filing with a Canadian ancillary proceeding. Although the general factors that determine COMI, or the centre of main interest, often drive the analysis, it is also important to consider some of the substantive legal remedies available under each respective statute when deciding where to file a main proceeding versus an ancillary proceeding.

Chapter 11 certainly gets its fair share of restructurings and remains a very popular venue for distressed enterprises. However, Canada's CCAA also offers a viable path that can be beneficial to debtors and creditors. In fact, chapter 11 and the CCAA share many "big picture" attributes and both are intended to allow distressed companies to restructure their debt. That said, there are also some key and positive differences that the CCAA offers. Below, we set out ten reasons why a main proceeding under the CCAA in Canada may be advantageous:

• Third party stays
  The initial stay granted generally includes all of the debtors and their property as well as directors and officers. Stays of proceedings under the CCAA can also extend to third parties (with certain limitations, such as guarantee actions)—such as a debtor's non-insolvent affiliates or in respect of third party litigation. CCAA courts have broad discretion to grant stays and have frequently extended stays to third parties where doing so supports the restructuring process.

• Third party releases
  The CCAA jurisprudence on the availability of third party releases is well developed, with Canadian courts disposed to grant broad releases. There is a noted history of chapter 15 courts recognizing the granting of third party releases where such releases may not have been available in a chapter 11. This is in distinction to the challenges that third-party releases have faced in chapter 11 cases, including several recent decisions in which such releases were rejected by US courts.

• Appointment of a monitor
  The existence of the court-appointed monitor in a CCAA case is generally seen to be a significant benefit to debtors that undergo a restructuring. The Monitor (a qualified trustee in bankruptcy) is an officer of the court and oversees the restructuring but works closely with the debtor to assist in the restructuring. The Monitor's written recommendation is highly persuasive with the court and, other than in the Province of Quebec, the Monitor is rarely able to be cross-examined on its reports.

• Fewer committees
  There are rarely official court approved or appointed unsecured committees in CCAA proceedings, and with no automatic requirement for an official unsecured creditors' committee, the result is often an economically more efficient restructuring.

• The "RVO"
  We have written in past issues about "reverse vesting orders". The availability of the "reverse vesting order" (or RVO) in applicable cases is a critical tool in Canadian restructuring cases. Under the RVO, instead of vesting good assets out into a newco or to a purchaser, the unwanted assets and liabilities of a debtor are vested out into a "residualco", leaving the clean assets behind to the debtor and allowing it to emerge from the CCAA through an equity acquisition without a creditor vote under a plan. The transaction is approved by the court and thus protected from challenge. Recently, the recognition of an RVO was granted by the United States Bankruptcy Court for the Southern District of Texas in the chapter 15 proceedings of re Just Energy Group Inc. [Case No. 21-30823].

• Structurally less adversarial
  Other than in the Province of Quebec, live witness testimony is seldom offered in court hearings and most evidence, even in contested matters, is submitted in writing. Extensive cross-examination and discovery on specific motions relating to the restructuring itself is also minimized given, among other things, the role and voice of the Monitor in the proceeding. The voidable and fraudulent preferences mechanisms under the CCAA are also generally less expansive and more targeted.

• Cost and time efficiency
  CCAA proceedings are often more cost effective and shorter in part given the overall fewer court filings, less direct noticing/mailings required, fewer objections and adversarial motions and oversight by the Monitor.

• Flexible time limits
  The CCAA has no prescribed timelines for filing a plan.

• Court ordered charges
  Charges under the CCAA are available for interim lenders and key employee retention (or incentive) plans, and the evidentiary case for securing such charges tends to be less rigorous than for equivalent charges under chapter 11. The CCAA-restructuring company can also secure a charge in favour of directors and officers to secure compensation for liability claims, which is unique to the Canadian restructuring regime. The rules for assuming and rejecting contracts under the CCAA are less strict.

• Cannabis-specific restructurings permitted
  Cannabis companies can be restructured under the CCAA, including with respect to US operators with Canadian parent companies.

The above factors are some of many "arrows in the quiver" to aid in corporate restructuring under Canada's CCAA. While there are many factors that will be considered when deciding if, when and where restructuring proceedings will be commenced, we hope that the factors above will assist parties in understanding some of the ways in which the CCAA is a favorable venue and can be beneficial to achieving a restructuring.