The Companies Creditors Arrangement Act is something of a legal juggernaut, with the power to sweep all before it in the cause of restructuring insolvent companies and returning them to profitable operations.
It stays the actions of creditors, arm wrestles them into compromising their debt recoveries, gives special protection to interim lenders, discards environmental cleanup orders and gives the court power to “make any order necessary in the circumstances” to salvage the struggling company.
If successful, the CCAA process saves jobs, preserves the personal and corporate income tax base, protects the affected community and, in most cases, provides creditors with a better recovery than they might have had if the company declared bankruptcy. If restructuring fails and the company is consigned into bankruptcy, the CCAA protects secured creditors, in particular, by safeguarding their priority claim on assets.
In 2018, however, several court challenges are scheduled to test and potentially trim the powers of the CCAA.
In Canada North Group, the Alberta Court of Queen’s Bench found that CCAA courts have power to grant interim lenders (debtor-in-possession or DIP lenders) a super-priority claim on assets of the debtor company ahead of federal payroll tax arrears, thus preserving an established power of the court. Since DIP financing is frequently the only way to secure working capital for the struggling company, the court’s power to ensure repayment of DIP loans is vital to the CCAA process. But the Alberta Court of Appeal has granted leave to appeal the lower court decision and some observers say the case could find its way to the Supreme Court of Canada.
In Canada v Callidus Capital, the Federal Court of Appeal found that, where a struggling company sells assets to pay a secured creditor prior to entering bankruptcy, Canada Revenue Agency (CRA) can lay claim after the date of bankruptcy to proceeds from the asset sale in order to cover HST arrears owed by the company. Secured creditors receiving payments from a debtor company that owes HST are subject to legal action by CRA. The decision potentially undermines the ability of a CCAA court to conduct an orderly and successful restructuring and leave to appeal has been filed with the Supreme Court of Canada.
The ongoing Redwater case challenges the right of a CCAA-appointed receiver to renounce ownership of depleted oil and gas wells under cleanup orders from the Alberta Energy Regulator (AER). The Supreme Court of Canada has previously ruled that the cost of provincial environmental cleanup orders falls back on the province when a company subject to such an order enters CCAA protection. This finding has protected companies seeking to restructure and creditors of bankrupt companies from huge environmental cleanup costs. But the SCC has said it will hear an appeal from the AER on February 15.
Upcoming court decisions could significantly alter the landscape of insolvency law. Companies, creditors and insolvency professionals should ensure they have the latest legal advice.