Developer’s decision to manage debt under court protection

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Last week, Urbancorp, a major Toronto property developer, announced plans to start restructuring proceedings under Canada’s Bankruptcy And Insolvency Act. It’s just one more case dotting the landscape of businesses navigating financial woes. But comments made by the company’s CEO give struggling businesses pause for reflection on the critical choice between court-supervised and out-of-court alternatives.

Urbancorp’s financial troubles include a smorgasbord of twists and turns – complaints from buyers, lawsuits from contractors, construction liens registered against one of its projects, a recent threat issued by the province’s home warranty insurer to revoke its registration, and agitated investors in Israel who relied on the company’s “AAA credit rating” to invest more than $60 million in bonds whose prices recently plummeted.

The company filed for bankruptcy restructuring and is looking to the court to grant permission for the sale of some of its assets. The proceeds would go toward paying down debt while allowing Urbancorp over the next two years to complete construction of the 1,000 homes it currently has on the go.

A Key Advantage of Court Proceedings

CEO Alan Saskin stated: “We determined, after much consideration and consultation, that a court-supervised process is the best way to deal with current cash flow issues… This will allow us to reduce debt in an efficient manner while continuing to focus on our core business.”

His words highlight one of the key benefits that struggling businesses can draw on by choosing a formal, court-monitored process to manage debt. Once the process is underway, creditors are “stayed”: legal action against the debtor cannot be started and any current actions cannot be continued. The protection allows a company that is viable, but that simply needs more time or a measure of debt relief, to keep itself liquid, continue operating and get itself back onto its feet.

Deciding between a formal insolvency proceeding and an out-of-court workout is a complex exercise requiring analysis of advantages, drawbacks, rules and unique considerations. Seeking legal advice in the early stages of financial difficulty is the course of prudence that leaves the door open to the possibility of saving the business and ultimately returning value to stakeholders.

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