Under the Bankruptcy and Insolvency Act (BIA) and the Companies’ Creditors Arrangement Act (CCAA), companies in financial straits may seek a stay of proceedings in order to given the company time to devise a proposal to creditors under the BIA (Proposal) or a plan or arrangement and compromise to creditors under the CCAA (Plan) rather than declare bankruptcy. The Proposal or Plan will address compromises on amounts owing and the timing of repayment. If the Proposal or Plan is approved by the creditors and the court, the arrangement allows a company to manage debt while continuing to operate its business.
Meeting of creditors
After a debtor company files a Proposal, creditors meet to approve or reject it by way of a vote. Under the BIA, this meeting must take place within 21 days of the proposal’s filing, but may be adjourned with the approval of the creditors to allow an amended Proposal to be put forward.
Under the CCAA, the process is at times more formalized; but timelines are determined by the court for many steps and can be longer that a BIA process. The debtor company will prepare a Plan and then seek approval of the court to present the Plan to the creditors in accordance with a process approved by the court.
Under the BIA, a Proposal may be made to secured creditors and must be made to unsecured creditors. If the Proposal is made to both secured and unsecured creditors, there will be at least two classes of creditors who will vote separately on the Proposal. In some instances, a debtor may decide to divide the two main creditor classes into subclasses. Classes of creditors are generally also created in respect of a Plan under the CCAA. Although there are no strict rules regarding how the classes are determined, creditors must have some common interest within their class.
The debtor company must be mindful of having too many classes of creditors given that failure to obtain the requisite approval of all classes can undermine the Proposal or Plan. Accordingly, fewer classes of creditors may be preferable in most cases.
Numbers required for a successful vote
Both the BIA and CCAA require that in order to move onto the next stage of the process, a proposal must be approved by:
- All classes of creditors;
- With a majority in the number of creditors within each class; and,
- The majority of creditors in each class must hold 2/3 of the total dollar value of the debt in the class.
Given these thresholds, a single large creditor holding more than 1/3 of the total debt in the class may defeat a Proposal or Plan.
Result of the vote
If the unsecured creditors reject a Proposal, the debtor company will be automatically assigned into bankruptcy. Rejection by the secured creditors will not defeat the Proposal and result in bankruptcy, but it may make performance of the Proposal more difficult.
Even in cases where creditors vote to accept the Proposal, a court can still withhold approval if a judge finds the Proposal does not comply with the BIA or if it is unreasonable or unfair.
If the creditors reject the Plan, there is no automatic assignment into bankruptcy. In such case, however, one or more secured creditors will likely request the court lift the stay of proceedings. Should this occur, it will generally result in the debtor company being placed into receivership or bankruptcy.
If the creditors have accepted the Plan, the court must still sanction the Plan. Like a Proposal, if there has been a failure to comply with the CCAA or if the Plan is unreasonable or unfair the court may refuse to sanction the Plan.