Flexibility and creativity have long been regarded as hallmarks of Canada’s main corporate restructuring statute, the Companies’ Creditors Arrangement Act (the “CCAA”). The CCAA is a facilitative statute applied flexibly to permit Canada’s most complex corporate restructurings. The CCAA, however, is not the only option for implementing creative restructuring solutions. The arrangement provisions of the Canada Business Corporations Act (the “CBCA”), and its provincial equivalents, can also provide a flexible mechanism for completing transactions, reorganizations, or other fundamental corporate changes. These provisions have primarily been used to deal with reorganizations of equity and corporate structures, but have recently also gained in popularity as efficient alternatives for certain debt restructurings. Although the CBCA is not able to facilitate a comprehensive operational restructuring for a distressed corporation, corporate arrangements have proven an expedient and cost-effective tool that allows overleveraged companies with a viable underlying business to conduct a targeted restructuring of their balance sheet.
The basic procedures for effecting corporate arrangements under the CBCA are well established. A corporation seeking to implement an arrangement must apply to one of Canada’s superior courts for an interim order,1 which sets the notice, meeting and voting threshold requirements for security holders affected by the proposed arrangement. The security holders that can be affected by a CBCA arrangement can include debt or equity security holders who will consider and vote on the proposed arrangement. At this stage, the court presiding over the application for the interim order must be satisfied that the arrangement has been put forward in good faith and that the requirements of the CBCA have been met.
Once security holder approval has been obtained at the requisite threshold levels, the company applies to the court for a final order to approve the proposed arrangement. The factors the courts will consider before granting a final order include compliance with the interim order, whether the statutory requirements of the CBCA have been met, whether the application has been put forward in good faith, and whether the arrangement is “fair and reasonable”.
In respect of the fair and reasonable consideration, it has become common for the applicant company to submit a fairness opinion from an independent source with experience in assessing liquidation values, setting out an opinion as to the fairness of the arrangement from a financial point of view. Notably, as recently confirmed in Re Sherritt International Corporation, 2020 ONSC 5822, the mere existence of a fairness opinion is not itself sufficient to satisfy a court that the proposed arrangement is fair and reasonable. As the court in Re Canopy Rivers Inc., 2021 ONSC 355 recently explained, simply referring to the presence of a fairness opinion is of little help. A court will require more than bald assertions that the plan is fair or simple assertions that fairness opinions say the plan is fair. Ultimately the decision of whether the arrangement is fair and reasonable rests with the court presiding over the application.
Over the past decade there has been a notable trend towards companies utilizing the CBCA to effect complex security holder restructurings involving debt. In particular, prominent companies in Canada’s energy sector have recently utilized corporate arrangements to restructure corporate bonds and similar debt obligations. Examples from the past year include: Calfrac Well Services Ltd., Just Energy Group Inc., Pengrowth Energy Corporation, Sherritt International Corporation and Source Energy Services Ltd. The use of arrangement proceedings under the CBCA and its provincial equivalents has also seen steady growth in other sectors of Canada’s economy including health care, construction, media and marketing and cannabis.
Given the use of corporate arrangements as an alternative to effect certain debt restructurings, corporations and their advisors are frequently considering whether a CBCA arrangement may be a viable option for a financially distressed company. To answer this question, it is necessary to understand (i) the potential advantages CBCA arrangements offer, and (ii) the limitations of corporate arrangements.
With respect to potential advantages, Canadian courts have developed a body of jurisprudence that has extended the functionality and flexibility of the CBCA and its provincial equivalents in response to the "real-time" nature of restructuring proceedings. Key developments in the case law and application of CBCA arrangements include:
- its utilization in circumstances where the total business enterprise affected by the arrangement is not solvent (at least as of the date of the interim order hearing), but is solvent at the date of the final order, or an applicant corporation is solvent;
- a court's broad authority to “make any interim or final order it thinks fit”, which has been found to include implementing a limited stay of proceedings;
- the inclusion non-CBCA legal entities, including limited partnerships, as “applicants” for the purposes of CBCA arrangements; and
- applying the principles developed under the CCAA for granting broad third-party releases.
With the benefit of these developments, the CBCA and its provincial equivalents have, in appropriate circumstances, come to serve as a flexible, efficient, and creative restructuring option for distressed companies. Particularly attractive features of the corporate arrangement framework, as it has evolved in practice and in jurisprudence, include:
- Proven solvency. Unlike a company restructuring under the CCAA, the applicant corporation must not be insolvent within the meaning of the CBCA. As noted above, this requirement may be met if the company emerges from the arrangement solvent and may result in less stigma than a formal insolvency proceeding.
- Temporal efficiency. Corporate arrangement proceedings are usually initiated after the transaction to be effected by the plan of arrangement has been substantially negotiated and is in place. A final order approving a plan of arrangement can be obtained much more quickly than completion of a typical CCAA restructuring.
- More limited impact on operations. A CBCA arrangement proceeding allows for the payment of pre-filing trade claims in the normal course and less disruption to the business.
- Lower costs. Professional fees associated with corporate arrangements tend to be lower than CCAA proceedings due to temporal efficiency, fewer stakeholders with rights of participation, and the absence of certain professionals to be paid from the estate.
Despite these potentially material benefits, corporate arrangements do have their limitations when compared to proceedings under the CCAA. In particular, the CBCA arrangement provisions do not contemplate operational restructurings that require the running of sales processes, the granting of court-ordered charges, the appointment of a court-appointed officer to oversee a debtor's restructuring and report to stakeholders, or the arrangement of certain kinds of claims such as those of trade creditors, landlords and employees.
Further, a British Columbia court has recently noted, in the context of arrangement proceedings under the British Columbia Business Corporations Act, that corporate arrangement legislation, while a flexible restructuring tool, “is not as open-ended as the CCAA” (Re iAnthus Capital Holdings, Inc., 2020 BCSC 1442). In refusing to approve a third-party release based on precedents drawn from CCAA proceedings, the court observed that what may constitute an arrangement under the applicable corporate arrangement legislation is more carefully described than under the CCAA. The most notable distinction for the court was that the CCAA expressly contemplates an arrangement proposed to all creditors, or a class of creditors, in which all of them may have a say in whether the relevant arrangement should be adopted. In contrast, the court held that a third-party release granted in a non-CCAA corporate arrangement has the potential for restricting the rights of persons who have not been given a say.
Courts and commentators have also expressed concern that it is not always appropriate to analogize arrangements under the CCAA with those under corporate statutes. The CBCA and its provincial equivalents were arguably not designed to deal with the full range of issues affecting multiple parties that complex CCAA restructurings can permit. It has been questioned whether arrangement proceedings that require broad orders affecting third parties are more properly administered under the CCAA. Regardless of one’s views on this issue, it is likely that the broader the relief sought in an arrangement proceeding, the more discerning will be the analysis of the reviewing court as to whether the CBCA truly should be applied as an alternative to the CCAA.
While the recent growth in the use of corporate arrangements to effect significant debt restructurings has not been without criticism, evolution tends not to work backwards. Corporate arrangements under the CBCA or its provincial equivalent legislation have proved to be an effective and attractive alternative to formal insolvency proceedings. However, to ensure that the significant benefits of this restructuring tool are realized, it is equally important to understand its limitations. Used properly, the authors expect the use of CBCA corporate arrangement proceedings as an alternative means of effecting certain corporate debt restructurings to continue.
Peter Bychawski is a Partner at Blake, Cassels & Graydon LLP in Vancouver. He practices corporate and commercial litigation with a focus on complex commercial disputes and restructuring and insolvency matters. His restructuring and insolvency practice involves advising debtor companies, lender syndicates, secured and unsecured creditors, purchasers of distressed assets, debtor-in-possession lenders, and other parties affected by business insolvency issues.
Peter has also acted as independent counsel for monitors in reorganization cases under the Companies’ Creditors Arrangement Act, trustees appointed under the Bankruptcy and Insolvency Act, as well as Court-appointed receivers.
Aryo Shalviri is a Partner at Blake, Cassels & Graydon LLP in Toronto. His practice includes distressed mergers and acquisitions, complex commercial reorganizations, financial restructurings and security enforcement. He has represented debtors, monitors, receivers, secured creditors, debtor-in-possession lenders, suppliers, lessors and additional clients on commercial and litigation matters across many practice areas, including general commercial and restructuring and insolvency litigation.
James Reid is an Associate at Blake, Cassels & Graydon LLP in Calgary. His practice involves all aspects of corporate/commercial litigation with a focus on restructuring and insolvency law and civil enforcement. He regularly advises clients in reorganizations, corporate arrangements, receiverships, bankruptcies, security reviews and enforcement proceedings. James frequently represents secured and unsecured creditors, debtors, purchasers and court officers in domestic and cross-border cases.