CCAA: Bankruptcy Act lite

.BGUEST COLUMN/Bruce Leonard

The recent market decline has significantly impacted resource companies.

Downsizings, closures, layoffs and reduced levels of operations have all made their mark. However, where downsizing won’t fix the problem and other resources aren’t available, businesses must consider the alternative of a financial restructuring. Several major Canadian companies have recently sought court protection to allow for the negotiations necessary to place their ongoing operations on a more sound financial basis.

Businesses are increasingly turning to the Companies’ Creditors Arrangement Act (CCAA) as the reorganizational vehicle of choice. Most people remember the CCAA from the wave of real estate reorganizations that took place under it several years ago. Although the CCAA developed in the 1930s to allow larger companies to reorganize without having to resort to the Bankruptcy Act, it was regarded for several decades as little more than a legislative curiosity; few major reorganizations were carried out under it. Beginning in the 1980s, however, the CCAA was reinterpreted and reinvigorated by the courts.

The CCAA’s advantage is its exceptional flexibility and the extraordinarily broad powers it provides to the court to protect and guide the reorganizing business. It is more effective than the U.S.’s Chapter 11, but is less complex and time-consuming. In addition, CCAA reorganizations typically involve significantly lower management and professional costs. The primary reason is the CCAA’s very general legislative scheme. Until it was amended in September 1997, the CCAA consisted of only 20 sections and, for that reason, has been called “Chapter 11 without rules.”

Where a reorganizing business is given court protection under the CCAA, the court invariably prohibits proceedings from being taken against the business while its plan of reorganization is negotiated and considered by its creditors. The reorganizing business must, however, satisfy the court that its cash flows are sufficient to continue operations, and must accept the appointment of a monitor to oversee its activities during its period of court protection. In return, the business is stabilized and permitted to operate in status quo while its reorganizational negotiations proceed. As a result of the 1997 amendments, the initial court protection lasts for only 30 days, but is typically extended if the court is satisfied that constructive negotiations are taking place toward a suitable reorganization.

The outside time limit for a reorganization is determined by the court based on its view of whether the interests of the business and its creditors are being served by the continuation of the negotiation process. In most cases, because going-concern values almost always exceed liquidation values, courts tend to conclude that, unless there is substantial creditor opposition, the reorganizing business ought to be given an opportunity to make its best offer to creditors.

The restructuring is ultimately formulated through the Plan of Reorganization, which is usually negotiated in advance between businesses and creditors. The proposed plan is circulated to all of the creditors, who must vote on it. After the creditors accept the plan, the court must approve it.

The CCAA permits a company to propose almost any commercially acceptable variety of plan, including a payout of a reduced amount in installments, a cash payout, issuance of shares in return for debt and even variations of a liquidating plan, by which the business is put into a separate package and sold as a going concern.

During a CCAA reorganization, the business is usually carried on by the company’s existing management, subject to review by the court-appointed monitor. CCAA protection usually restricts the company from conducting out-of-the-ordinary business transactions, though reorganizing businesses typically carry on in much the same fashion as before a CCAA filing. Cash flow is important to post-filing business operations, but cash flow requirements are aided by the fact that the court order freezes payments on pre-filing liabilities.

The availability of the CCAA means that companies with viable business and financial plans have the opportunity to negotiate reasonable arrangements with their creditors to ensure that their businesses can be carried on for the benefit of creditors, employees, shareholders and everyone else involved.

— The author heads the Business Reorganization Group at the Toronto-based law firm of Cassels Brock & Blackwell and is a director of Washington, D.C.-based American Bankruptcy Institute.