What Is Corporate Restructuring?
When businesses face financial difficulties and become insolvent, they have the option of two federal statutes (depending on their size) to reorganize and revitalize. These two choices are the Bankruptcy and Insolvency Act (BIA) or the Companies Creditors Arrangement Act (CCAA). While they both have differences, either option may be utilized to create corporate restructuring. The restructuring happens with both the financial and internal operations of the business. The goal is to manage debt servicing and reorganize other operations within the business, such as staffing changes or the sale of assets.
Both the BIA and CCAA allow corporations to propose how they will be restructuring and then the proposal has to be approved by creditors and the court overseeing the corporate reorganization.
What Is the Difference Between BIA & CCAA?
BIA – Division 1 Proposal
The corporation must submit either a notice of intention (NOI) or a corporate reorganization proposal. Once this is done, the corporation will be granted an automatic 30-day stay, which will keep creditors away and stop any repossessions and foreclosures. The formal reorganization plan is known as a Division 1 Proposal and must be submitted through a Licensed Insolvency Trustee (LIT). The proposal will usually ask the creditors for better terms on the debts owed, and may request that the creditors to accept less money.
The creditors that you owe are typically grouped into different classes. These classes must then approve the proposal for any continued proceedings, as required by the legislation. In many cases, creditors will be convinced to support a corporate restructuring proposal if they can recoup more on their debt than they would if they went with a straight liquidation of the business assets via bankruptcy.
Once the proposal is approved, your creditors will be bound by it, and then it’s up to the bankruptcy court to approve the plan. When the proposal is approved by all parties, the debtor will be able to operate the company under the guidance of a LIT and the court, and fulfill the terms of the proposal.
The Companies Creditors Arrangement Act has similar requirements to the Bankruptcy and Insolvency Act, aside from the amount of debt to qualify. The CCAA can allow the court to extend creditor actions for longer than 6 months and, in some cases, years for more complicated financial situations. While a BIA Proposal process can be over in as little as 4-6 months, corporate restructuring through a CCAA has no time limit, and generally takes longer to execute.
Under the CCAA, the LIT will act as a Court – appointed monitor to look over the entire process. Any filed proposals will still have to go through the approval process, and voting creditors must accept the proposal as required by law.
During the CCAA process, the debtor will still be allowed to operate their company while fulfilling their obligations of the reorganization plan and under the watchful eye of the court-appointed monitor.
While the stay of proceedings is in effect, contracting parties cannot terminate their agreements or contractual obligations. However, the debtor can disclaim agreements through a formal notice process, which will allow the disclaimed party to file a claim in the plan for damages. Any sale of assets will have to be approved by the court to move forward.
What Are the Types of Corporate Restructuring in Canada?
As a debtor, you have the option to restructure or liquidate. For restructuring under a BIA, you will need a Division 1 Proposal. A licensed insolvency trustee can assist the company in putting the proposal together and may also include
debt repayment terms funded by a sale of assets. The creditors will then vote on whether they accept the proposal.
Liquidation during corporate restructuring is another option that you may have. However, this type of restructuring is usually forced through the BIA. This can also happen through receivership and bankruptcy. This process includes the appointment of a trustee to take over the business and liquidate the company’s assets. The proceeds will then be distributed to the priorities highlighted by the BIA.
What Is Cross-Border Insolvency?
Both the BIA and CCAA have outlined procedures for cross-border insolvencies. This option is useful if a debtor has any assets or creditors that are located in more than one country. Cross-border insolvencies often proceed as a single process, with one jurisdiction being the main focus. To determine what should be the main proceeding, the court will figure out if there is any connection between Canada and the matter at hand. Judges will try to determine where the creditors are located and if they know about the proceeding, as well as whether Canada is the location of the debtor’s main operation or their assets.
What Is a Receivership?
A receiver can be appointed in one of two ways: Privately by a secured creditor, or by a Court Order. The BIA provides for the enforcement of security and permits the court appointment of a receiver.
A secured creditor may want to enforce its security on all or some of the assets of a debtor.
They must give prior notice and wait 10 days before proceeding.
If a receiver is appointed, they must give notices to all the creditors involved, regularly issue reports on the status of the receivership, and prepare a final report/statement of all receivership accounts.
A privately appointed receiver can carry on the business of the debtor or sell their assets through an auction or private sale, in accordance with their security documentation. However, a court-appointed receiver is an officer of the court. They have the responsibility to protect the interest of any stakeholders related to the debtor’s corporation.
What If Corporate Restructuring Isn’t Right for Me?
Your financial difficulties may be too much to realistically restructure the corporation. In some cases, bankruptcy is an inevitable option to clear you of your debts. When a corporation has declared bankruptcy, a trustee is then appointed and responsible for the assets at hand. The trustee will review all the debtor’s assets to determine which assets the creditors may be entitled to repossess.
A bankruptcy may occur in numerous ways, such as:
- The debtor declares bankruptcy.
- The court grants a bankruptcy order upon the application of a creditor.
- The court or creditors refuse a restructuring proposal made by the debtor.
What Do I Have To Do If My Corporation Is Insolvent?
You should seek a consultation with an LIT if your company is insolvent, which will lead you to a formal windup process. During the winding-up process, your LIT will advise you to follow some required steps:
- Remove any personal effects from the premises of the business.
- Expect to provide the CRA with financial details of your final year of operation.
- Work with the landlord as they secure the premises, and discuss the status of any insurance. Keep records of communication, as well as a copy of the lease and any extensions.
- Advise the corporate lawyer of your intentions and determine your obligations regarding annual returns.
- If you disperse any assets without the help of a LIT, ensure that you keep records of anything that was sold or repossessed, as well as where the proceeds went. You may want to seek legal advice prior to doing so.
Not all of these steps can be expected for every situation, as each insolvency is different from the last. Consider consulting with an LIT to determine specific advice for your situation.
It can be difficult to determine if corporate restructuring is the right move for you. It’s not an easy decision, but with the help of a qualified Licensed Insolvency Trustee, you can go over what options best suit your financial situation. Make an appointment for a free initial consultation today. You can be well-assured that you’ll get the best financial debt assistance possible. See the other services we offer.