Comparative study of the characteristics of use of the proposal procedures set out in the BIA by incorporated businesses in Canada, and analysis of the success of these procedures — Table of contents

By Jocelyne Gosselin and Benoît Mario Papillon

Study conducted for the Office of the Superintendent of Bankruptcy

Volume I: Text of the Report

October 2007

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Printable Version: Comparative study of the characteristics of use of the proposal procedures set out in the BIA by incorporated businesses in Canada, and analysis of the success of these procedures (PDF Format, 1.59 MB — 457 pages)

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Acknowledgements

The authors would like to thank the Office of the Superintendent of Bankruptcy for the financial assistance provided for the research on which this report is based. The opinions expressed in the report are not necessarily those of the Office of the Superintendent of Bankruptcy, Industry Canada, or the Government of Canada

We also benefited from the work of Martin Morin, professional researcher at the Université du Québec à Trois-Rivières, in processing databases and producing various calculations from them; we thank him for his efforts. In editing the many tables and figures appended to the report, we had the support of the secretarial services in the Department of Management Sciences and the Department of Accounting Sciences at the Université du Québec à Trois-Rivières. We would like to thank Christiane Baril and Tammy Davis in particular.

The authors are responsible for any errors of observation or interpretation that may still be found in the report.

Table of contents

• Introduction

Part I: Use and success of proposal procedures, by Benoît Mario Papillon

• Chapter 1: Empirical scope of the research
  • 1.1 Category of business (incorporated, financial data, location (by office and by place of business))
    • 1.1.1 Interpreting financial data
  • 1.2 Sectors of activity (variations over time and by location)
• Chapter 2: Processes in the procedure and success
  • 2.1 Stages in the BIA proposal procedure
  • 2.2 Aggregate measure of the success of the procedure
  • 2.3 The fate of creditors: another perspective on success
  • 2.4 Diversity of processes
    • 2.4.1 Analysis of voluntary assignments among failure cases
    • 2.4.2 Summary exploration of other categories of case
  • 2.5 Conclusion
• Chapter 3: Changes in the rate of success
  • 3.1 Variations based on location
  • 3.2 Variations based on sector of activity
  • 3.3 Based on location and sector of activity
  • 3.4 Effect of financial characteristics
  • 3.5 Conclusion

Part II: Exploratory and comparative analysis, by Jocelyne Gosselin

• Chapter 4: Analysis of the fate of creditors
  • 4.1 The outcome of the procedure
  • 4.2 Dividends
  • 4.3 Conclusion
• Chapter 5: Financial data and length of the procedure
  • 5.1 Analysis of financial data
  • 5.2 Length of the procedure
  • 5.3 Financial data and length
  • 5.4 Conclusion
• Chapter 6: Comparison with the bankruptcy procedure
  • 6.1 Categorization of businesses included in the population
  • 6.2 Fate of creditors
  • 6.3 Financial data
  • 6.4 Length of the procedure
  • 6.5 Financial data and length
  • 6.6 Conclusion

Part III: Detailed study of proposals, by Jocelyne Gosselin and Benoît Mario Papillon

• Chapter 7: Case studies
  • 7.1 Presentation of individual cases
  • 7.2 Summary
• Appendices: Figures and tables
  • Chapter 1
  • Chapter 2
  • Chapter 3
  • Chapter 4
  • Chapter 5
  • Chapter 6

Introduction

The overall objective of this research is a better understanding of the use by incorporated businesses of the proposal procedure set out in the BIA. Specifically, the research is aimed first of all at reproducing on a national level the analysis of the characteristics of use of this procedure that was carried out for Quebec in the context of the 2005 research project entitled Empirical analysis of the effectiveness of the reorganization procedures under the BIA and the CCAA. The current research is applied to a wider geographic area and a longer period of time. Instead of restricting itself to 1998-2004, the analysis covered the period 1995-2005, which provided for verifying whether the characteristics of use of these procedures had changed over this period, and whether they vary across regions of Canada. There are several other new elements to this research in addition to the broader geographic scope and longer period of time covered.

The case studies conducted in the context of the 2005 research revealed that the proposal procedure could be used to obtain results that we tend to associate more with a liquidation procedure, such as the block sale of the insolvent business to new owners. This raises certain questions with regard to the respective use and features of each type of procedure. Part II presents some elements of response by comparing the use of proposal and liquidation procedures by incorporated businesses. These comparisons are preceded by an exploratory analysis of the available data on the length and outcome of proposal procedures and some of the financial data produced and filed with the Office of the Superintendent of Bankruptcy in the context of these procedures.

Part III of the report presents a new series of case studies on proposals by incorporated businesses. For the 2005 research, thirteen public companies that had used a BIA proposal procedure were selected. The study’s focus on financial and accounting information dictated the choice of public companies. Moreover, these public companies proved to be a representative sample of the target population in terms of average rate of success. Among other things, their proportion of failure at some stage of the procedure or in performance of the proposal was comparable with that of the target population. Based on that sampling, we learned that proposals completed without notice of default mainly gave rise to liquidation or sale of the business, rather than providing for continuation of the business with the management team kept in place for the transition period.¹ The criteria for the 2005 sample coverage may not have been adequate; in order to verify whether it is reasonable to apply this result to the entire population, a random sample was drawn of nineteen businesses representing approximately 1% of all proposals completed without notice of default by incorporated businesses. The case studies deal with this sampling of businesses. Given that these are closely held companies, the analysis is based on information that is available in the files of the Superintendent of Bankruptcy.

After a detailed description of the new database covering the period 1995-2005 for all of Canada that was used for this research, Part I begins by presenting a series of results on the use of the procedure. We used the typical process for a business within a proposal procedure represented in the 2005 research, as well as the aggregate measure of success developed in the context of that same research. The notion of analyzing success was then expanded to include considerations and observations on the fate of creditors, and the assumption of a typical process was abandoned.² This provided for a more detailed analysis of voluntary assignments. Part I concludes with a measure of the differences in success rates for the procedure and an attempt to explain these differences using certain financial data available in the files.

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¹ The proposal procedure is intended as a transition period between the situation of insolvency in which the business using the procedure finds itself and the solvent entity the procedure is aimed at creating.

² It was possible to abandon this restrictive assumption for part of the analysis thanks to a database that was made available to us following discussions at the OSB 2007 Insolvency Research Symposium. This additional database provides information on the stages of the procedure that have been completed by businesses.

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