Canadian restructuring practice is continuing to evolve as creditor-led proceedings, sales of distressed businesses, and reverse vesting orders become increasingly established features of proceedings under the Companies’ Creditors Arrangement Act.
Lawyers say the basic objective has not changed: preserve value and, where possible, maintain a viable business as a going concern. But the methods used to achieve that result have expanded considerably, giving debtors, creditors and courts more flexibility while also prompting closer scrutiny of the tools being used.
Chris Burr, a partner at Blake, Cassels & Graydon LLP, points to creditor-initiated proceedings and the expanding role of court-appointed monitors as among the most significant developments.
If restructuring practice is now operating in what he calls “the era of the reverse vesting order,” a remedy once considered extraordinary but increasingly common, the newer trends include “the increase in non-debtor-initiated CCAA proceedings” and the related rise of “super-monitors.”
Christian Lachance, a partner at Davies Ward Phillips & Vineberg LLP, says creditor-led proceedings are no longer merely an emerging development.
“Creditor-led CCAA is probably not a trend anymore, and is more an established practice,” he says, while cautioning that this does not necessarily mean there are large numbers of such proceedings. “It’s something that is not controversial anymore if it’s done with the right factual background.”
Brad Wiffen, a partner in the corporate restructuring group at Goodmans LLP, similarly sees creditor-driven proceedings as an evolution rather than a new paradigm.
“In some ways, a creditor-driven CCAA proceeding takes the cost-effectiveness of a receivership process, and then combines it with the flexibility of a CCAA process,” he says.
The CCAA becomes more flexible
Guillaume Michaud, partner and Canadian head of restructuring at Norton Rose Fulbright Canada LLP, sees the rise of creditor-led cases as part of a broader evolution rather than evidence that courts have begun favouring creditors.
The more lasting development, he says, is the increasing flexibility with which parties can use CCAA.
Now, creditors themselves may initiate the proceeding and, in appropriate circumstances, lead an effort to restructure a company as a going concern.
Michaud describes creditor-led and debtor-led cases as cycles rather than a permanent movement in one direction. What is more enduring is the range of restructuring solutions now available.
Heather Meredith, a partner in the bankruptcy and restructuring group at McCarthy Tétrault LLP in Toronto, notes that a “super monitor” may be a feature of creditor-led processes.
Traditionally, a monitor watched the debtor's activities and reported to the court, while a receiver assumed possession and control of the business.
A super monitor can be given greater powers.
“This super monitor idea is much more like a receiver, but in a CCAA context,” Meredith says.
“Now, with the rise of the super monitor, the creditor can use a CCAA and still have that control that they would get in a receivership.”
“Creditor-led CCAA processes tend to arise when there is tension between the lenders and debtor company. In such situations, a lender may need or want a court officer to control the business. In a creditor-led CCAA, a super monitor can help to achieve that.”
Burr similarly says creditor-initiated CCAAs are becoming a viable alternative to conventional receiverships, particularly in highly regulated or licence-intensive industries.
They can reduce enforcement uncertainty, strengthen stakeholder engagement and give creditors greater control when confidence in management has eroded.
Not every creditor-led proceeding is hostile
The fact that a creditor initiates a CCAA does not necessarily mean that the debtor and the creditor are engaged in a race for control.
Lachance says the more important consideration is often whether the secured creditor trusts the debtor, its advisers and the proposed restructuring.
“I don’t think it’s a run to the courthouse here,” he says. If creditors have confidence in management and believe the proposed restructuring is realistic, it may make relatively little difference who formally initiates the proceeding.
“I think where it gets a debate is when there is [a] trust issue or disagreement as to what is the proper remedy.”
Geneviève Cloutier, leader in the restructuring and insolvency group at Gowling WLG, sees a similar dynamic.
That collaboration often begins well before the formal proceeding. On the creditor side, Cloutier says parties increasingly try to map out the major steps before filing.
“When a filing is contemplated, we aim to have a clear plan already in place and implement it in collaboration with major stakeholders,” she says.
Equity joins the picture
Creditor-led proceedings are not the only development expanding the traditional understanding of who can initiate a restructuring.
Aryo Shalviri, a partner at Blake, Cassels & Graydon LLP, points to the Angus Manor case in Alberta, in which a CCAA proceeding was commenced by equity investors.
He describes it as an interesting departure from the conventional assumption that equity has no meaningful place in an insolvency proceeding, since shareholders are generally considered “out of the money.”
The proceeding was significant, he says, because it was initiated by investors who traditionally would not have had a role in an insolvency.
For Shalviri, the case reinforces the statute's underlying flexibility and the breadth of orders courts may enter when circumstances require.
Sales increasingly shape the outcome
The expansion of who can lead a proceeding has occurred alongside another fundamental change: the increasing importance of sales.
Lachance says a significant proportion of formal insolvency proceedings now end in some form of sale transaction.
Wiffen puts that development into a longer historical context.
The CCAA was originally built around plans of arrangement that restructured the existing company. Over roughly the past 10 to 15 years, however, there has been an increasing focus on asset sales.
That does not necessarily mean the going-concern objective has been abandoned.
“Both of those paths can produce going concern outcomes,” Wiffen says.
“The overall goal is the same. It’s just that the implementation method has evolved over time.”
Cloutier says sale processes are now routinely launched early in proceedings.
“In almost all of them, I see the sales process being implemented very quickly within the process because these processes are very expensive,” she says.
Cloutier says sales processes are increasingly launched at the outset of proceedings.
“Sales processes are now being implemented very early in the proceedings because these processes are costly, and preserving value depends on moving efficiently,” she says.
Pre-packs offer another route
Burr identifies another development within that movement toward sales: an apparent increase in “pre-packs.”
In a pre-pack, most or all of the sale process occurs before the insolvency filing, and the formal proceeding is commenced to close the transaction.
“There appears to be an uptick in ‘pre-packs,’ where a sale process is conducted to its conclusion outside of a filing, and then a filing is commenced for the explicit purpose of consummating a sale,” he says.
If properly structured, Burr says, pre-packs can reduce costs and minimize the stigma or harmful effects associated with a longer insolvency proceeding. They may be particularly useful for asset-intensive restructurings in the middle and lower markets.
But efficiency creates its own concerns.
Pre-packs carry procedural risks, Burr cautions, making it important that reducing time and expense does not come at the cost of stakeholder rights.
RVOs move into the mainstream
Reverse vesting orders have become an increasingly prominent means of completing distressed transactions.
Wiffen explains that an RVO reverses the structure of a conventional asset sale.
Normally, desirable assets are transferred out of the insolvent company to a buyer. Under an RVO, valuable assets remain in the existing corporation while unwanted assets and liabilities are transferred into a separate entity, commonly called a ResidualCo.
“The existing company emerges as the going-concern entity,” Wiffen says. “It still holds valuable assets. It still holds the business, but the unwanted liabilities and obligations have been transferred out and separated.”
Meredith says RVOs developed in situations such as cannabis restructurings, where valuable licences could be difficult to transfer.
Instead of attempting to transfer the critical licence to a purchaser, the purchaser acquires the corporation that holds it, while the unwanted liabilities are moved elsewhere.
That concept has since broadened to other situations involving licences, permits, tax losses, or other attributes that cannot easily move through a conventional asset transaction.
“I think this is here to stay,” Meredith says.
But courts still expect parties to demonstrate why the RVO is necessary and whether creditors would be worse off than under an alternative structure.
Lachance similarly says RVOs have moved beyond novelty.
“We used to say it’s new. I think now we’re past that. It’s accepted,” he says.
Acceptance, however, does not mean automatic approval. Parties still need to justify why an RVO provides a better solution than a conventional vesting order.
Cloutier says the tool has become common enough that restructuring professionals are discussing whether RVOs should eventually be expressly addressed in insolvency legislation rather than continuing to develop principally through judicial discretion.
An exception that became common
Michaud describes the growth of RVOs since approximately 2019 or 2020 as “exponential.”
Courts continue to describe them as exceptional, he says, but their increasing use has created something of a paradox: “It kind of became the rule that we call the exception.”
He strongly supports the tool because it can preserve value that might otherwise disappear in a conventional asset transfer.
“RVOs are a victory for efficiency in insolvency law and practice,” Michaud says.
But he also acknowledges the need for safeguards. The structure should not be used to produce an outcome that unfairly disadvantages creditors or other stakeholders.
WEPP tests the limits of RVOs
One issue attracting particular attention is how reverse vesting transactions interact with the Wage Earner Protection Program.
Meredith says WEPP provides financial assistance, up to a prescribed maximum, to eligible employees terminated during certain insolvency proceedings who are owed unpaid wages.
The difficulty arises because an RVO leaves the operating company intact while transferring unwanted liabilities into a ResidualCo.
In a recent case arising from Synaptive Medical's restructuring, Meredith says the Attorney General of Canada, on behalf of Employment and Social Development Canada, argued that ResidualCo was not a “former employer” for purposes of the legislation because the terminated employees had never provided services to it.
The court rejected that argument and found that ResidualCo qualified as a former employer.
Shalviri says the broader issue remains important because the effect of these transactions on unretained employees “cannot be overstated.”
“The availability of WEPP becomes an important policy consideration when weighing the merits of a receivership versus a CCAA,” he says.
Shalviri says appeals on the issue are pending before the Quebec and Nova Scotia Courts of Appeal, which may provide further guidance. Depending on the outcome, he says, the issue may ultimately require consideration by the Supreme Court of Canada.
Wiffen similarly describes the relationship between WEPP and RVOs as an issue that has been “somewhat resolved but not fully dealt with.”
Michaud takes a stronger position. He regards concerns that employees should lose access to wage-earner protection merely because an RVO was used instead of a conventional asset sale as misplaced.
In his view, transferring employee liabilities to ResidualCo can allow workers to receive benefits they could have obtained had the transaction instead been structured as an asset sale.
“There’s no prejudice here,” Michaud says. “There are only benefits.”
More scrutiny of director releases
Greater flexibility is also being accompanied by greater judicial scrutiny in other areas, including releases for directors and officers.
Cloutier says courts across Canada appear increasingly focused on narrowing releases for directors and officers to what is actually required in a particular restructuring.
“What I am seeing is a genuine effort by the courts across Canada to tighten up those releases,” she says.
She points to recent decisions in which courts have demanded that releases be specifically justified and adapted to the facts.
“Courts are now working to ensure that releases are specifically justified and limited to what is truly necessary in the circumstances.”
Lachance says the critical question is not simply whether someone remained a director during the restructuring, but what that individual actually contributed.
“The court is okay to give a release in favour of the directors if the monitor and the directors can show that those directors really worked to improve whatever outcome in the restructuring,” he says.
Wiffen sees the same movement toward evidentiary scrutiny.
“They want to see specific evidence and specific reasons why that is the case,” he says.
Courts may be more comfortable granting releases tied directly to the approval of a transaction, while broader releases covering past conduct generally invite closer examination.
Michaud says releases became so frequent that obtaining them could at times approach “rubber stamping.”
That prompted judicial intervention where releases could extinguish third-party rights, sometimes without affected parties fully appreciating what was occurring.
He regards the resulting stricter criteria as a healthy development, though adding that directors and officers need an incentive to remain with a troubled company and participate in a restructuring rather than resign.
Flexibility — with guardrails
Across creditor-led proceedings, super-monitors, sales, pre-packs, and RVOs, the common thread is a CCAA process that is much more flexible than the traditional debtor-led plan of arrangement.
But flexibility does not mean an absence of limits.
Courts increasingly ask parties to demonstrate why a proposed structure is necessary, whether it maximizes value and whether creditors, employees or other stakeholders are unfairly disadvantaged.
For Meredith, that flexibility is also what makes restructuring practice creative.
“I think we all see ourselves as trying to find solutions to keep companies going, to save jobs,” she says.
For Cloutier, finding those solutions requires lawyers to understand the commercial realities behind the legal proceeding.
“It’s very difficult to practice insolvency law by at the legislation alone,” she says.
“Businesses are very sophisticated. Creditors are sophisticated. You have to take into consideration every dimension of the situation, including the commercial realities.”
For Cloutier, finding restructuring solutions requires lawyers to understand the commercial realities behind the legal proceedings.
“It’s very difficult to practise insolvency law by looking at the legislation alone,” she says.
“Businesses are very sophisticated. Creditors are sophisticated. You have to take into consideration every dimension of the situation, including the commercial realities.”
The CCAA may increasingly be used in ways that look very different from its traditional plan-of-arrangement model. But the lawyers see the underlying objective as largely unchanged: use the available tools to preserve value and, wherever possible, leave a viable business standing at the end.