As complex restructurings increasingly implicate cross-border considerations, other countries’ insolvency laws have become increasingly more relevant to practitioners in the U.S. This article will focus on creditors’ in various jurisdictions to provide a better understanding of how foreign creditors protect their rights in an insolvency proceeding.
Canada’s federal system for reorganizing large companies, the Companies’ Creditors Arrangement Act (CCAA),[1] features significantly less statutory framework than the analogous chapter 11 of the U.S. Bankruptcy Code. Notably, the CCAA does not formally recognize creditors’ committees, although some committees have formed in larger cases, though usually on an ad hoc basis.[2] However, the representative professionals of a committee in Canada might not receive funding from the debtor.[3] The absence of formal committees deprives unrepresented unsecured creditors of a voice to protect their interests, given many Canadian courts’ willingness to make orders on very short notice, or not require notice at all in certain circumstances.
To provide protection to unsecured creditors, courts in Canada utilize a distinctive approach: court-appointed representative counsel.[4] Courts will grant a representation order where it is fair and convenient to do so, particularly where the order will serve the CCAA’s objectives, which include ensuring an orderly and equitable claims-resolution process.[5] Representative counsel differs from traditional creditors’ committees in that representative counsel will only represent a specific subset of unsecured creditors, such as salaried employees or class-action plaintiffs, as compared with the constituents of a traditional creditors’ committee encompassing the general unsecured creditors. Factors that courts consider in granting representation orders include (1) the vulnerability and resources of the group sought to be represented; (2) any benefit to the debtor; (3) any social benefits; (4) the effect on the efficiency of the facilitation and administration of the proceedings; (5) the avoidance of multiple legal retainers; (6) fairness to other creditors; (7) whether creditors with similar interests already obtained representative counsel, and that counsel is prepared to also act for this creditor group; and (8) the position of other stakeholders.[6] Inclusive in these factors is the requirement that the proposed creditor class show a commonality of interest.[7]
Court-appointed representative counsel is important for creditors to pursue their claims and protect their interests in a complex CCAA proceeding, particularly because the CCAA’s provisions do not contain built-in creditor protections similar to chapter 11 of the U.S. Bankruptcy Code. For example, the CCAA does not contain a complete distribution scheme, with the exception of disallowing equity claims unless all other claims are paid in full.[8] In addition, the CCAA does not provide unsecured creditors with an absolute priority right, similar to that in the Bankruptcy Code, although the CCAA carries the same requirement of acceptance of two-thirds in amount and majority in number of claims per creditor class before binding creditors to a distribution.[9]
Obtaining representative counsel is also important for creditors to fully utilize protections afforded to them by the CCAA. For example, the CCAA permits interested parties to apply to the court to remove an individual director from a debtor if they believe that the director is unreasonably impairing, likely to unreasonably impair the possibility of a viable reorganization, or if the director is otherwise acting inappropriately under the circumstances.[10] In addition, the CCAA requires debtors to obtain the approval of certain otherwise-unsecured creditors before the court will approve its plan. For example, debtors must obtain approval from holders of claims stemming from the following: (1) fraud, embezzlement or misappropriation; (2) debts resulting from obtaining property or services by false pretenses or fraudulent misrepresentation; (3) civil suit awards for bodily harm, sexual assault or wrongful death; or (4) any fine, penalty, restitution order or similar order imposed by a court.[11]
Another unique benefit that the CCAA affords creditors regards the rejection and assumption of contracts. While the CCAA permits debtors to reject contracts (not limited to executory contracts like in the U.S.), it also allows the other party to such a contract to object to the rejection, requiring the court to rule.[12] Also, if a debtor is a lessor of real property, the CCAA does not permit rejection of the lease.[13]
The CCAA enables courts in Canada to adopt a flexible and pragmatic approach to complex corporate restructurings. While this allows for streamlined insolvency proceedings, it also opens up the risk that unsecured creditors will miss opportunities to maximize their recoveries through representation at hearings that may concern issues that are material to their claims. Despite no formal recognition of creditors’ committees in Canada, obtaining representative counsel provides a more tailored representation to enhance various groups of unsecured creditors and enables creditors to best utilize applicable and beneficial provisions in the CCAA.
[1] RSC 1985, c C-36 (2013) (Can.). Companies in Canada may also elect to restructure under the Bankruptcy and Insolvency Act (BIA) through a proposal procedure; however, larger companies generally elect to restructure under the CCAA to utilize its more flexible and debtor-advantageous laws. See RSC 1985, c B-3 (2013) (Can.) (BIA).
[2] See, e.g., Sino-Forest Corp., 12-9667-00CL (Ont. Sup. Ct. 2012) (Can.) (ad hoc committee of security holders).
[3] The CCAA provides for a security or charge on a debtor’s property for the fees and expenses of any financial, legal or other experts engaged by an interested person if the court believes it necessary for their effective participation in the insolvency proceedings. CCAA § 11.52.
[4] See e.g., Canwest Publishing Inc., 2010 ONSC 1328, ¶ 20 (Ont. Sup. Ct. 2010) (Can.) (“No one challenged the court’s jurisdiction to make a representation order and such orders have been granted in large CCAA proceedings. Examples include Nortel Networks Corp., Fraser Papers Inc., and Canwest Global Communications Corp.”).
[5] See, e.g., Nortel Networks, 53 C.B.R. (5th) 196, ¶ 13 (Ont. Sup. Ct. 2009) (Can.).
[6] Canwest Publishing Inc., at ¶ 21.
[7] See, e.g., Fraser Papers Inc., 2009 ONSC 4287, ¶¶ 2, 11 (Ont. Sup. Ct. 2009) (Can.).
[8] CCAA § 6(8).
[9] See 11 U.S.C. §§ 1129(b)(2)(B); 1126.
[10] CCAA § 11.5.
[11] CCAA § 19(2).
[12] CCAA § 32(2).
[13] CCAA § 32(9).
