Restructuring

NORTH OF THE BORDER UPDATE

This article has been contributed to the blog by Andrea Lockhart and Steven Golick. Steven Golick is a partner in the insolvency and restructuring group of Osler, Hoskin & Harcourt, LLP, and Andrea Lockhart is an associate in the group.
Similar in many respects to the Companies’ Creditors Arrangement Act (the “CCAA”), Part III, Division I of the Bankruptcy and Insolvency Act (the “BIA”) allows an insolvent debtor to compromise existing indebtedness through the presentation of a proposal to its creditors.
However, restructuring by way of a BIA proposal is in some aspects less attractive to a debtor than a CCAA restructuring due, in part, to the more rigid nature of the rules-based BIA regime. For example where a debtor files a notice of intention to make a proposal to its creditors, it must file a proposal within a stipulated time period (which period may be extended by the court to a maximum of six months from when the notice of intention was originally filed). In addition, where a debtor presents the proposal to its creditors and the proposal is not approved by the requisite majorities of creditors as set out in the BIA, the debtor is deemed to have made an assignment into bankruptcy (i.e. liquidation under the BIA).
Sometimes, a debtor who has filed a notice of intention to make a BIA proposal runs out of time and seeks to convert the BIA proceedings to CCAA proceedings to take the benefit of lack of fixed time periods for filing a plan of arrangement under the CCAA.
In a recent case, a debtor that had filed a notice of intention to file a proposal under the BIA was running up against the six month time limit, and realized that it would not be able to garner enough creditor support for a proposal and would have to sell its business. In Re Clothing for Modern Times Ltd., 2011 ONSC 7522 the Ontario Superior Court of Justice (Commercial List) considered the test for converting from a BIA proposal proceeding to a CCAA proceeding.
In this case, the debtor filed a notice of intention to make a proposal under the BIA and commenced a self-liquidation of its underperforming stores. The debtor also negotiated a going-concerned sale for one of its businesses. In addition, the debtor had intended to present a proposal to it unsecured creditors with the support of its secured creditors. However, following discussions with certain of its landlords, the debtor believed that it lacked the requisite creditor support to make a viable proposal and determined a going-concern sale for its remaining business would be in the interest of all of its stakeholders. The debtor therefore brought an application before the Court for order transitioning the proceedings to CCAA proceedings pursuant to Section 11.6(a) of the CCAA which provides:

(a) proceedings commenced under Part III of the Bankruptcy and Insolvency Act may be taken up and continued under this Act only if a proposal within the meaning of the Bankruptcy and Insolvency Act has not been filed under that Part.

In considering the debtor’s application, the Court indicated that an applicant must satisfy the Court: (a) that the debtor has not yet filed a BIA proposal; (b) that the proposed continuation would be consistent with the purposes of the CCAA; and (c) that the applicant has provided evidence which serves as a reasonable surrogate for the information which would accompany any initial application under the CCAA and approving the sale process.
On the facts of this case, the Court noted that the debtor had not yet filed a BIA proposal and that the BIA proposal trustee supported the proposed CCAA restructuring and consented to act as CCAA Monitor if the requested relief was granted.
The Court also noted the purposes of the CCAA were, among other things, to permit the debtor to carry on business and to avoid the social and economic losses arising from a liquidation but that in appropriate circumstances the purposes of the CCAA would be met even though a re-organization involves the sale of the company as a going concern. It was clear that a viable proposal could not be made.  The result under the BIA proposal sections was that a failed BIA proposal would result in a bankruptcy.  The Court held that the alternative, being a going-concern sale under the CCAA, would maximize recovery for the debtor’s secured creditors, preserve employment for the debtor’s approximately 500 employees and provided a tenant to the landlords.
The Court was also satisfied the debtor had provided sufficient evidence to support the viability of the CCAA continuation as the debtor filed cash flow statements with the Court which demonstrated the debtor had sufficient resources to continue operating in a CCAA proceeding and run a sales process. The proposal trustee also opined as to the reasonableness of such cash flow statements.
It was also material to the Court that no one opposed the application and the secured creditors supported the application.
As a result of the foregoing, the fact that the debtor was acting in good faith and with due diligence, the Court granted an order continuing the debtor’s restructuring proceedings under the CCAA and approved the recommended sales process.

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