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CCAA: Initial application

Clause by Clause Briefing Book

An Act to establish the Wage Earner Protection Program Act, to amend the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act and to make consequential amendments to other Acts


Bill Clause No. 127
Section No. 10
Topic: Cash-flow Statements

Proposed Wording

10. (2) An initial application must be accompanied by

  • (a) a statement indicating, on a weekly basis, the projected cash flow of the debtor company;
  • (b) a report containing the prescribed representations of the debtor company regarding the preparation of the cash-flow statement; and
  • (c) copies of all financial statements, audited or unaudited, prepared during the year before the application or, if no such statements were prepared in that year, a copy of the most recent such statement.

(3) The court may make an order prohibiting the release to the public of any cash-flow statement, or any part of a cash-flow statement, if it is satisfied that the release would unduly prejudice the debtor company and the making of the order would not unduly prejudice the company's creditors, but the court may, in the order, direct that the cash-flow statement or any part of it be made available to any person specified in the order on any terms or conditions that the court considers appropriate.

Rationale

When a debtor company applies for a court order granting a priority charge in respect of interim financing (also referred to as "DIP financing") the debtor company will normally provide the court with information regarding its cash-flow needs. The intention of the reform is to codify the existing practice regarding interim financing and the supporting information.

Subsection (2) creates an obligation on the debtor company to provide a cash-flow statement and supporting documentation. The reform mirrors requirements in the BIA proposal provisions. The cash-flow statement will provide the court with the information necessary to properly assess the request for interim financing. The supporting documents will provide the court with assurance that the statement has been prepared properly, following standard accounting methods.

Subsection (3) provides the court with the authority to restrict the disclosure of the cash-flow statement. For businesses undergoing a restructuring, protecting the detailed information in a cash-flow statement may be vital to prevent it from providing an unfair advantage to competitors or from violating securities laws, if the debtor company is publicly traded.

Present Law

None.

Senate Recommendation

None.

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Bill Clause No. 128
Section No. 11
Topic: General Power

Proposed Wording

11. Despite anything in the Bankruptcy and Insolvency Act or the Winding-up and Restructuring Act, if an application is made under this Act in respect of a debtor company, the court, on the application of any person interested in the matter, may, subject to the restrictions set out in this Act, on notice to any other person or without notice as it may see fit, make any order that it considers appropriate in the circumstances.

Rationale

The intention of the reform is to codify existing practice.

Currently, the courts read subsection 11(1) to grant them the power to make any order it considers appropriate in order to facilitate a restructuring despite that section only referring to stay orders.

This provision will allow the court to make orders, other than stay orders, that may be necessary or appropriate in respect of the restructuring. The authority to order a stay has been included in section 11.02 of the reform.

Present Law

11. (1) Notwithstanding anything in the Bankruptcy and Insolvency Act or the Winding-up Act, where an application is made under this Act in respect of a company, the court, on the application of any person interested in the matter, may, subject to this Act, on notice to any other person or without notice as it may see fit, make an order under this section.

Senate Recommendation

None.

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Bill Clause No. 128
Section No. 11.01
Topic: Suppliers Rights

Proposed Wording

11.01 No order made under section 11 or 11.02 has the effect of

  • (a) prohibiting a person from requiring immediate payment for goods, services, use of leased or licensed property or other valuable consideration provided after the order is made; or
  • (b) requiring the further advance of money or credit.

Rationale

The reform is a technical amendment to re-order provisions of this Act and correct cross-referencing.

Present Law

11.3 No order made under section 11 shall have the effect of

  • (a) prohibiting a person from requiring immediate payment for goods, services, use of leased or licensed property or other valuable consideration provided after the order is made; or
  • (b) requiring the further advance of money or credit.

Senate Recommendation

None.

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Bill Clause No. 128
Section No. 11.1
Topic: Regulatory Body Stay

Proposed Wording

11.1 (1) Subject to subsection (3), no order made under section 11.02 affects the rights of a regulatory body with respect to any investigation in respect of the company or any action, suit or proceeding taken or to be taken by it against the company, except when it is seeking to enforce any of its rights as a secured creditor or an unsecured creditor.

(2) If there is a dispute as to whether a regulatory body is seeking to enforce any of its rights as a secured creditor or an unsecured creditor, the court may, on application made by the company with notice given to the regulatory body, make an order declaring that the regulatory body is or would be so seeking to enforce its rights.

(3) Subsection (1) does not apply in respect of any or all actions, suits or proceedings taken or to be taken by a regulatory body if the court, on application made by the company with notice given to the regulatory body, makes an order declaring that a viable compromise or arrangement could not be made in respect of the company if that subsection were to apply.

(4) The court shall not make the declaration referred to in subsection (3) if it is of the opinion that it is in the public interest that the regulatory body not be affected by the order made under section 11.02.

(5) In this section, "regulatory body" means any person or body who has powers, duties or functions relating to the enforcement or administration of any Act of Parliament or of the legislature of a province and includes any person or body prescribed to be a regulatory body for the purpose of this Act.

Rationale

The intention of the reform is to ensure that regulatory bodies, exercising powers for the benefit and well-being of all Canadians, should not be restricted by an insolvency situation from properly carrying out their duties.

Subsection (1) prevents an initial order from affecting regulatory bodies that are acting strictly as regulators. The regulatory body will be entitled to continue to investigate or prosecute a debtor company for failings under the relevant regulations. The order would, however, stay a regulatory body that is attempting to enforce a debt or monetary obligation owing to it, for example, in respect of a fine previously imposed.

Subsection (2) is intended to ensure that a debtor company does not frustrate the regulatory body by claiming that an action by the regulatory body is akin to debt collection. In a CCAA proceeding, scheduling of court time is the responsibility of the monitor, who works closely with the debtor company. The monitor could delay scheduling a court hearing when a regulator seeks to challenge an action by the debtor company. To prevent potential, the subsection requires the debtor company to obtain a court order to stay a regulator in any particular circumstance.

Subsection (3) provides the court with the ability to stay regulators generally, regardless of their activity, where the court considers it necessary for the benefit of the restructuring process. The intention is to ensure the court has the flexibility it needs to deal with the particular circumstances of the restructuring. In addition, the court may use this provision to stay regulators whose effects on the management of the debtor company would be excessive in the situation.

Subsection (4) places limits on the application of subsection (3). For example, it would be inconceivable that a court would stay a regulator charged with public health and safety even if it meant the restructuring would fail. It will be on the particular circumstances of each case for the court to determine what would be in the public interest.

Subsection (5) defines what is to be considered a "regulatory body". Effectively, any body charged with enforcing or administering an Act of Parliament or the legislation of a provincial legislature would be such a body. In addition, there is the ability to prescribe by regulation other bodies that would obtain the benefits of the section. For example, stock exchanges and Market Regulatory Services Inc. will be prescribed bodies.

Present Law

None.

Senate Recommendation

The reform follows Senate recommendation #41.

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Bill Clause No. 128
Section No. 11.02
Topic: Initial Application Stays

Proposed Wording

11.02 (1) A court may, on an initial application in respect of a debtor company, make an order on any terms that it may impose, effective for the period that the court considers necessary, which period may not be more than 30 days,

  • (a) staying, until otherwise ordered by the court, all proceedings taken or that might be taken in respect of the company under the Bankruptcy and Insolvency Act or the Winding-up and Restructuring Act;
  • (b) restraining, until otherwise ordered by the court, further proceedings in any action, suit or proceeding against the company; and
  • (c) prohibiting, until otherwise ordered by the court, the commencement of any action, suit or proceeding against the company.

(2) A court may, on an application in respect of a debtor company other than an initial application, make an order, on any terms that it may impose,

  • (a) staying, until otherwise ordered by the court, for any period that the court considers necessary, all proceedings taken or that might be taken in respect of the company under an Act referred to in paragraph (1)(a);
  • (b) restraining, until otherwise ordered by the court, further proceedings in any action, suit or proceeding against the company; and
  • (c) prohibiting, until otherwise ordered by the court, the commencement of any action, suit or proceeding against the company.

(3) The court shall not make the order unless

  • (a) the applicant satisfies the court that circumstances exist that make the order appropriate; and
  • (b) in the case of an order under subsection (2), the applicant also satisfies the court that the applicant has acted, and is acting, in good faith and with due diligence.

(4) Orders doing anything referred to in subsection (1) or (2) may only be made under this section.

Rationale

The reform in paragraphs (1), (2) and (3) is a technical amendment to re-order provisions of this Act, correct cross-referencing and correct for grammatical errors.

Paragraph (4) is added to ensure that court ordered stays are only granted pursuant to this section, including the limitations within this section.

Present Law

11. (3) A court may, on an initial application in respect of a company, make an order on such terms as it may impose, effective for such period as the court deems necessary not exceeding thirty days,

  • (a) staying, until otherwise ordered by the court, all proceedings taken or that might be taken in respect of the company under an Act referred to in subsection (1);
  • (b) restraining, until otherwise ordered by the court, further proceedings in any action, suit or proceeding against the company; and
  • (c) prohibiting, until otherwise ordered by the court, the commencement of or proceeding with any other action, suit or proceeding against the company.

(4) A court may, on an application in respect of a company other than an initial application, make an order on such terms as it may impose,

  • (a) staying, until otherwise ordered by the court, for such period as the court deems necessary, all proceedings taken or that might be taken in respect of the company under an Act referred to in subsection (1);
  • (b) restraining, until otherwise ordered by the court, further proceedings in any action, suit or proceeding against the company; and
  • (c) prohibiting, until otherwise ordered by the court, the commencement of or proceeding with any other action, suit or proceeding against the company.

(6) The court shall not make an order under subsection (3) or (4) unless

  • (a) the applicant satisfies the court that circumstances exist that make such an order appropriate; and
  • (b) in the case of an order under subsection (4), the applicant also satisfies the court that the applicant has acted, and is acting, in good faith and with due diligence.

Senate Recommendation

None.

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Bill Clause No. 128
Section No. 11.2
Topic: Interim Financing

Proposed Wording

11.2 (1) A court may, on application by a debtor company, make an order, on any conditions that the court considers appropriate, declaring that the property of the company is subject to a security or charge in favour of any person specified in the order who agrees to lend to the company an amount that is approved by the court as being required by the company, having regard to its cash-flow statement,

  • (a) for the period of 30 days following the initial application in respect of the company if the order is made on the initial application in respect of the company; or
  • (b) for any period specified in the order if the order is made on any application in respect of a company other than the initial application and notice has been given to the secured creditors likely to be affected by the security or charge.

(2) An order may be made under subsection (1) in respect of any period after the period of 30 days following the initial application in respect of the company only if the monitor has reported to the court under paragraph 23(1)(b) that the company's cash-flow statement is reasonable.

(3) The court may specify in the order that the security or charge ranks in priority over the claim of any secured creditor of the company.

(4) The court may specify in the order that the security or charge ranks in priority over any security or charge arising from a previous order made under subsection (1) only with the consent of the person in whose favour the previous order was made.

(5) In deciding whether to make an order referred to in subsection (1), the court must consider, among other things,

  • (a) the period during which the company is expected to be subject to proceedings under this Act;
  • (b) how the company is to be governed during the proceedings;
  • (c) whether the company's management has the confidence of its major creditors;
  • (d) whether the loan will enhance the prospects of a viable compromise or arrangement being made in respect of the company;
  • (e) the nature and value of the company's assets; and
  • (f) whether any creditor will be materially prejudiced as a result of the company's continued operations.

Rationale

Interim financing provides funds to a business in financial distress to enable the business to continue to operate while it attempts to restructure its debts. The most important element is the obtaining of a priority charge by the interim lender in respect of the amount lent, thereby decreasing the lender's risk and increasing the likelihood that a willing lender can be found. The court, in determining whether to grant a priority charge, relies on factors developed through jurisprudence. The reform is generally a codification of the current practice, with additional safeguards to defend against possible abuse.

Subsection (1) provides a court with the authority to grant a charge against the property of a debtor in respect of interim financing, subject to certain limits. In the situation described in paragraph (a), the court may only approve interim financing to meet the cash flow needs of a business for a period of 30 days. In the situation described in paragraph (b), the court may approve interim financing to meet the needs of a business for a period determined by the court to be appropriate in the circumstances.

The provision in paragraph (a), which is not within the current practice, is a safeguard intended to prevent potential abuse. Creditors have complained that some debtors attend court on the first day armed with an agreement with its chosen financier that provides for interim financing far in excess of the company's short-term cash flow needs and with terms that may be overly generous to the lender. Because the debtor is usually the initiator of proposal proceedings, creditors may not have notice, or insufficient notice, of the hearing to properly prepare to defend their interests at that hearing. On the other hand, a business in severe financial distress may require immediate funding to continue operating. The allowance of limited interim financing at the first hearing is intended to balance the needs of the business with the rights of creditors.

Paragraph (b) is substantially a codification of the current practice. It requires that secured creditors be given notice of the application, allowing them to defend their interests as they determine appropriate. The court should be in the best position, after hearing from the debtor and any interested creditors, to determine the appropriate period for interim financing.

Subsection (2) is intended to ensure that the court has the information necessary to make a proper determination under this provision. The requirement for the monitor to bless the statement is intended to provide assurance to the court that the information is reliable.

Subsection (3) is the heart of the section. It provides the court with legislative authority to grant the interim lender a priority security charge above the secured interests of other creditors. It is necessary because lenders would be very reluctant to provide financing to a business in financial difficulty. The priority charge reduces the risk that the lender will suffer a loss. While the priority charge negatively affects existing creditors, it is widely accepted that interim financing enhances the ability of the business to restructure successfully, which generally results in better recovery for the creditors than a bankruptcy would.

Subsection (4) is intended to ensure that an interim lender that has taken the risk of providing financing early in the restructuring process does not have its security interest effectively shunted aside by a later lender without their consent. A later lender will have better information regarding the likelihood of a successful restructuring and can make the determination at that time whether it chooses to lend to the business. The ability of the first lender to consent to the granting of a higher priority is intended to provide greater flexibility in the process.

Subsection (5) provides the court with guidance regarding factors that should be considered prior to the granting of a priority charge under subsection (3). The described factors are largely a codification of the current jurisprudence. The intention is to provision is to ensure greater consistency, fairness and predictability in the process.

Present Law

None.

Senate Recommendation

The proposed reform follows Senate recommendation #22.

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Bill Clause No. 128
Section No. 11.03
Topic: Director Stays

Proposed Wording

11.03 (1) An order made under section 11.02 may provide that no person may commence or continue any action against a director of the company on any claim against directors that arose before the commencement of proceedings under this Act and that relates to obligations of the company if directors are under any law liable in their capacity as directors for the payment of those obligations, until a compromise or an arrangement in respect of the company, if one is filed, is sanctioned by the court or is refused by the creditors or the court.

(2) Subsection (1) does not apply in respect of an action against a director on a guarantee given by the director relating to the company's obligations or an action seeking injunctive relief against a director in relation to the company.

(3) If all of the directors have resigned or have been removed by the shareholders without replacement, any person who manages or supervises the management of the business and affairs of the company is deemed to be a director for the purposes of this section.

Rationale

The reform is a technical amendment to re-order provisions of this Act, correct cross-referencing and correct for grammatical errors.

Present Law

11.5 (1) An order made under section 11 may provide that no person may commence or continue any action against a director of the debtor company on any claim against directors that arose before the commencement of proceedings under this Act and that relates to obligations of the company where directors are under any law liable in their capacity as directors for the payment of such obligations, until a compromise or arrangement in respect of the company, if one is filed, is sanctioned by the court or is refused by the creditors or the court.

(2) Subsection (1) does not apply in respect of an action against a director on a guarantee given by the director relating to the company's obligations or an action seeking injunctive relief against a director in relation to the company.

(3) Where all of the directors have resigned or have been removed by the shareholders without replacement, any person who manages or supervises the management of the business and affairs of the company shall be deemed to be a director for the purposes of this section.

Senate Recommendation

None.

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