This article looks at how corporations can avoid bankruptcy through the Companies’ Creditors Arrangement Act (CCAA). For larger corporations that are struggling ﬁnancially, the Companies’ Creditors Arrangement Act (CCAA) could be the lifeline they need to settle their debts and return to ﬁnancial stability. The CCAA gives struggling corporations protection from creditors while allowing them to avoid ﬁling for bankruptcy. As Industry Canada notes, by giving a company the chance to work out a plan to repay its debts and possibly restructure its business, the CCAA helps ensure not only the survival of the corporation itself, but also preserves jobs and creditors’ returns.
What is the CCAA?
The CCAA is a federal statute that provides court protection for struggling companies so that they have the opportunity to come up with a plan for repaying creditors more than they would receive in a bankruptcy. The CCAA allows corporations to address both creditors and shareholders. It is, however, only available to corporations that owe more than $5 million to their creditors. Smaller businesses are not eligible under the CCAA, although they may be able to pursue a corporate restructuring plan either through an informal arrangement or through similar proceedings under the federal Bankruptcy and Insolvency Act.
How it works
The company initially makes an application for court protection that, if accepted, will result in a court order giving the company 10 days of protection from creditors. Within 10 days the court will consider a second confirmation application to continue the protection for some further length of time, so that the company can work out a “Plan of Arrangement” to put to its creditors. Creditor protection can be extended by the court for a series of time periods, although on the other hand creditors can also petition the court to have the protection lifted.
The Plan of Arrangement is the company’s proposal to its creditors for how it plans to repay its debts. The Plan of Arrangement may, for example, propose downsizing the company, offering less than 100 cents on the dollar for outstanding debts, liquidating assets, extending the debt repayment schedule, ﬁnding new sources of capital, and so on. The Monitor, an independent Licensed Insolvency Trustee that is appointed by the court, plays a crucial role during this process. The Monitor ensures that the company is complying with all court orders and advises the company on its Plan of Arrangement, but the Monitor has no control over the actual management of the company itself, which remains in the hands of the company’s board of directors.
Once the Plan of Arrangement is prepared, it is delivered to the creditors by the Monitor. The creditors will be able to vote on the Plan and, if the necessary majority of creditors vote to accept the Plan, then the company next applies for court sanction for the Plan. In sanctioning the Plan, the court will want to see that it is fair and reasonable, complies with the law and previous court orders, and that it is feasible. Once sanctioned, the Plan becomes binding on both the company and its creditors, even on those creditors who voted against the Plan.
If either the creditors or the court rejects the Plan, then the stay protecting the company from its creditors is usually lifted, although the corporation does not automatically enter bankruptcy when this happens. Alternatives to bankruptcy may still be available to corporations whose Plan of Arrangement has been rejected.
The CCAA is just one route that struggling companies can use to avoid bankruptcy. Regardless of size and circumstances, any company that ﬁnds its ﬁnancial situation getting out of hand should consult with insolvency and restructuring advisors about all the available options.
Our firm provides strategic advice and representation to businesses that find themselves facing a financial crisis. We frequently work with businesses on issues including confirming the availability of CCAA protection and implementing alternate restructuring options. Contact us to discuss how we can help you.