A company can go bankrupt for a number of reasons, such as difficult market conditions, insufficient cash flow, or poor decision making.
But there is a federal law in Canada that gives companies a fair chance to restructure and pay off debts to creditors or reach a compromise or arrangement with them. We are talking about the Companies Creditor Agreement Act (CCAA).
What exactly is creditor protection (CCAA) in Canada? How is it beneficial to both the financially troubled company and its creditors? Who is eligible for it?
What is the Companies Creditor Agreement Act (CCAA)?
A federal law, the CCAA helps insolvent companies avoid the consequences of bankruptcy and resolve financial affairs. Thanks to this law, financially troubled companies can restructure their business and finances to remain solvent. Avoiding bankruptcy is usually in the best interest of not only the company but also its creditors, employees, and shareholders.
A debtor company can use CCAA to reorganize its debts through a court-approved Plan of Agreement. This course of action is beneficial for both the concerned parties. Reorganizing the debts allow the troubled company to stay functional. At the same time, it gives the creditors a chance to recoup some of the money they had lent.
As beneficial as the CCAA is, it does not come to the aid of all troubled companies. Instead, it is restricted to big companies. A corporation must owe its creditors more than $5 million to be able to use the CCAA. Companies that owe less than $5 million can make use of the Bankruptcy and Insolvency Act (BIA) to create a plan of action to avoid bankruptcy.
The CCAA shares many similarities with the (BIA), but there are some major differences between the two. For instance, the CCAA is far less restrictive than BIA, which includes strict rules, timelines and guidelines. Also, the two Acts impact unsecured claims differently. While the CCAA can impair the ability of unsecured creditors to recoup money, the Bankruptcy and Insolvency Act includes a proposal for them.
If a corporation chooses, it can use the CCAA to address both its creditors and shareholders. Generally speaking, the company shareholders are only given a chance to vote on the Plan of Agreement when they are impacted by it.
Who is covered by the CCAA?
The CCAA covers troubled companies that owe more than $5 million. However, insurance companies, banks, loan companies, trust, telegraph and rail companies are not covered by the CCAA.
The CCAA does not cover the following:
- companies that have already been declared bankrupt or insolvent
- companies that have been adjudged insolvent under the Winding-up and Restructuring Act or that have already started the bankruptcy process.
How does the CCAA work?
To start the process, a company must approach the court for CCAA protection. After the company submits an application, the court grants it a 30-day stay against its creditors. During this period, the creditors cannot take any action against the corporation in question. The initial 30-day stay also gives the company a chance to prepare for the next steps.
However, the 30-day limit can be extended. The court can extend the stay any number of times, provided the corporation is able to show that it is doing its best to file the Plan of Agreement or Compromise. The company will continue to operate during this period, although it may start implementing the restructuring plan at any time.
The court does not place any restrictions on how the Plan of Agreement or Compromise should be structured. The corporation can suggest any plan of action that treats all its creditors equitably.
For instance, the company may suggest to:
- downsize the corporation
- create a new organizational structure
- set up a new company in such a way to allow its all major creditors to control the new entity
- reduce the debt amount by a certain percentage and repay the loan gradually or at once
- extend the repayment terms
- sell its divisions or assets
- obtain cash infusion from third-party investors.
What are the powers of the court?
The court enjoys broad-ranging discretionary powers under the CCAA. The court can draft remedies and orders that it thinks are needed to reorganize the corporation before it. The court will consider the inputs offered by the monitor appointed by it and will act in accordance with the goal of the CCAA, even if creditors raise objections.
In the case of a CCAA application, the court usually passes the standard stay order to halt all enforcement actions undertaken by creditors. The first stay order typically last for a period of 30 days, but there is no limit on how long the stay may be extended. The court may continue offering time extensions to the Company if it is convinced the former is acting in good faith to draft a viable Plan of Agreement or Compromise. As long as the stay applies, the creditors cannot initiate any action against the creditor.
However, the court cannot stop creditors from asking for immediate payments from the debtor corporation for services provided during the CCAA proceedings. Nor can it stop creditors from advancing further credit to the debtor.
If the court believes the organization before it is not serious about developing a Plan of Agreement or Compromise to reorganize and pay off its debts, it can refuse to extend the initial stay order. That means the creditors can take action against the debtor company to recoup their money.
The Plan Monitor
After a company files a CCAA application, the court appoints a monitor. This person is an independent third party and his/her main responsibilities include the following:
- helping the corporation create the Plan of Agreement or Compromise
- assisting with the filing of the Plan of Agreement or Compromise
- attending the process of gaining approval for the submitted plan
- tracking the company’s ongoing financial and business operations and reporting to the court in case it finds anything that might affect the corporation’s sustained viability
- notifying the creditors of any meeting.
How Debts Get Paid
The court-appointed monitor hands out a Proof of Claim to each creditor. The creditor must file it with the monitor before the expiry of the due date. With the filling of claim, the creditor wins voting rights. The responsibility of proving the claim lies with the creditor. The creditor is also responsible for submitting supporting documents if required. If the creditor fails to file by the stipulated date, they may lose their voting rights. All the same, they may still receive payments according to the approved plan.
A representative of the company along with the monitor verifies the Proof of Claim filed by a creditor. This document spells out the amount the company owes to the creditor. In case of any discrepancies regarding the amount owed, the company must investigate the matter and handle disputes as outlined by the approved Plan of Agreement.
After creating a Plan of Agreement or Compromise, the corporation files it and forwards it to its creditors. The mentor will set up a meeting of creditors so that the creditors can vote on the proposed Plan of Agreement. If the shareholders are impacted by the Plan of Agreement or Compromise, a copy will be forwarded to them as well and they will be invited to vote.
The stakeholders are divided into different classes, such as secured creditors, shareholders, and unsecured creditors. Unlike the BIA, the CCAA does not offer a proposal to unsecured creditors.
The Plan becomes binding on all creditors within a particular class if it receives a 2/3rd majority by dollar value and a 2/3rd majority by number in that class, subject to the approval of the Plan by the court. When the Plan receives an approval from all the classes of creditors, the court must approve the submitted plan of action. Upon its approval, the corporation operates as per the provisions of the approved plan until each of the listed requirements is met.
If the court or a class of creditors disapproves the Plan, the stay is lifted. The court may not give its approval if it is convinced that the debtor corporation is not making a genuine effort to fix the problem. While the corporation can continue to operate, it can no longer rely on CCAA protection. That means the pressures that led it to seek CCAA protection against its creditors will resume. Consequently, the corporation is likely to slip into bankruptcy or receivership.
Frequently Asked Questions
Why do companies file for creditor protection (CCAA)?
Companies file for CCAA to seek temporary protection from their creditors and gain more time to work out their difficulties.
What is the main purpose of the CCAA?
CCAA gives financially-troubled corporations that owe more than $5 million to their creditors a chance to avoid bankruptcy. This federal law grants companies short-term protection from their creditors so that they can find a way to put their financial and business affairs back on track. Initially, the court grants the debtor company a 30-day protection, but it may extend it a number of times if the company shows genuine intent to resolve the issue.
What happens when a company files for CCAA?
The court gives the debtor company a 30-day protection from creditors. The company can continue its business during this time, while it crafts a Plan of Agreement or Compromise. The court may extend the CCAA protection for however long it deems fit if it is convinced that the debtor company is acting in good faith to remedy its business and financial affairs.
The CCAA is a federal law that helps financially troubled companies avoid bankruptcy. Corporations that owe more than $5 million can use the CCAA to restructure their business and finances.
When a corporation files for CCAA protection, the court is likely to grant it a 30-day protection from creditor action so that it can develop a plan to pay off the debts or reach a compromise or arrangement with its creditors.
The court may extend the initial stay any number of times if the debtor company demonstrates it is doing its best to file a Plan of Agreement or Compromise.
Once the company files a Plan of Agreement or Compromise and it is approved both by its creditors and the court, it must act as per the provisions of the approved plan till each of the listed requirements is met. If the creditors or court disapproves the Plan, the company is likely to slip into bankruptcy or receivership.