Stay of proceedings reorganization proceedings – its effects and duration

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A debtor company seeking to reorganize its financial affairs has two powerful tools by which it can hold creditors at bay and stay collection proceedings while it formulates its reorganization plan. For debtor companies with significant debt, initiating proceedings under the Companies’ Creditors Arrangements Act (“CCAA”) may be the appropriate course. For debtor companies with debt under $5,000,000.00 (the threshold requirement for application of the CCAA), or for which the CCAA process is not appropriate, a proposal under the Bankruptcy and Insolvency Act (“BIA”) may be the better course.

A stay of proceedings under the CCAA requires a court order. The debtor company will make application to the court and seek the protection that an initial order can provide. Since the granting of the order is discretionary, there is no guarantee that the stay will be granted. The one benefit of this procedure is that secured creditors, even those who might not be caught by a stay of proceedings under the BIA, can be stayed under the CCAA.

A stay under the BIA can be initiated without the need for a court application by either filing a completed proposal to creditors (with the assistance of a licensed insolvency trustee), if the debtor company knows what the proposal will be; or, by filing a notice of intention to make a proposal (“NOI”) (again with the assistance of a licensed insolvency trustee). While the filing of the proposal or NOI will stay all unsecured creditors, it will not stay secured creditors who have delivered a notice of intention to enforce security under section 244 of the BIA (“244 Notice”) where 10 days has passed since delivery of the 244 Notice.

The effect of a stay

Once imposed, a stay of proceedings under the CCAA order (subject to any exceptions expressly contained in the order, or by operation of the BIA (subject to the limitations noted in respect of secured creditors who have delivered a 244 Notice more than 10 days prior to the initiation of the BIA process) is binding on the debtor company’s creditors – both secured and unsecured. The stay bars all creditors from taking proceedings, including execution proceedings, to recover the debts claimed, and any existing proceedings will be stayed, subject to variation by a court on application by a creditor.

During the stay period, the debtor company will be able to continue to operate its business.

Duration and extension of a stay

The stay of proceedings under the initial order in CCAA proceedings will be no more than 30 days. During that time, the debtor company may consider preparing a plan of arrangement, but in most instances, an extension of the stay will be sought at the “come back hearing” generally set for a date 30 days from the initial order. However, anytime during that 30 day period, creditors are entitle to apply to court to seek to set aside the initial order and the stay. The debtor company may seek extensions with no limit on their length and the stay will continue as long as the court is prepared to grant extensions.

In NOI proceedings, the debtor company is required to file the proposal within the 30 day period; but can, prior to the expiration of the period, apply the court to extend the time to file the proposal. These extensions may be granted in 45-day increments to a total of 5 months from the expiry of the initial 30 day period

Where the debtor company has filed a proposal as the initiating event, or files a proposal following the initial NOI, the stay will continue in place until the proposal is approved by the creditors, and then the court. Once approved by both the creditors and the court, the stay will continue until the completion of the proposal, unless a court order is made lifting the stay for a particular creditor or other order is made. If the creditors or the court do not approve the proposal, the debtor company will be bankrupt and the stay of proceedings that is imposed under the BIA in the event of a bankruptcy will then apply.

An experienced insolvency lawyer can help debtor companies determine the most appropriate reorganization process to be taken to managing outstanding debt without resorting directly to bankruptcy.

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