Insolvency and insolvency litigation is generally understood to relate to acting for and advising lenders, other creditors, debtors, trustees in bankruptcy, receivers and other participants in corporate insolvencies and debt enforcement, collection and recovery, and typically involves bankruptcy, receivership or similar court-supervised insolvency proceedings or private enforcement remedies. Insolvency lawyers who work in litigation are focused on these topics.
Insolvency lawyers may also be advising corporations, financial institutions, bondholders, distress or hedge funds, investors, purchasers and other participants in the formulation, negotiation and implementation of corporate financial restructurings, whether in circumstances of insolvency or solvency and whether involving debt and/or equity, and includes informal negotiated workouts and refinancings and financial restructurings implemented pursuant to insolvency statutes such as the Companies' Creditors Arrangements Act and the Bankruptcy and Insolvency Act or corporate statutes such as the Canada Business Corporations Act or similar provincial statutes. Practitioners in this area may be involved in cross-border restructuring matters.
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Insolvency and restructuring are two separate terms which may mean different things; however, their goal is basically the same – to help a debtor-company recover from its financial difficulties in order to become financially stable once again.
Insolvency is when a debtor-company is in a financial distress, making it difficult to pay its creditors when these debts become due and demandable. Here, a debtor-company may implement restructuring, among other statutory procedures available to them, to manage insolvency.
Restructuring is when debts are “restructured” into feasible payment schedules in coordination with the debtor-company's creditors, while continuing its business operations. Plans or proposals on restructuring debts are details of how the said debtor-company will pay off these restructured debts, while sustaining operational expenses to continue its day-to-day business transactions.
This may result to cost cutting measures through disposal of assets, reorganisation of the company, laying off employees or reduction of their benefits but not below labour standards. The plan or proposal may also be subject to court approval or action, depending on the state laws on restructuring and insolvency, and of the creditors also.
In Canada, the difference between insolvency and bankruptcy is in its nature:
When financial restructuring and insolvency have separate applicable statutes, or have different respective laws which may overlap with each other, financial restructuring and insolvency lawyers assist clients in the construction of these statutes.
As financial restructuring and insolvency lawyers, they may either represent the debtor, which is either an individual, a company, or an organisation at the verge of becoming insolvent or bankrupt; or they may also represent the creditor/s who have interests in the debtor’s insolvency or bankruptcy state.
Restructuring plans or proposals may be done extrajudicially or outside the auspices of the court, but this is subject to the parties’ own volition and protections set by the law may not be applicable in this case. Hence, it is recommended that restructuring be done with the help of financial restructuring and insolvency lawyers under the guidance of the court through a judicial proceeding.
Most of the work of financial restructuring and insolvency lawyers is negotiating with the other party for a restructuring proposal that would be beneficial to both parties – either judicially or extrajudicially. Thus, part of their work would also be transactional, such as preparation of the restructuring proposal, or other documents needed for the regulatory compliance of filing for insolvency or bankruptcy under the law.
After this, when court proceedings commence, financial restructuring and insolvency lawyers represent their clients before the courts during insolvency litigation, keeping in mind the desired outcomes of their clients. They are also present during administration, until receivership, or even during liquidation.
Prior or during the judicial filing of insolvency or bankruptcy of a debtor-company, financial restructuring and insolvency lawyers do not only exhibit their knowledge on insolvency and restructuring laws, but also of corporate laws, property laws, contract laws, taxation, or banking laws.
The Winding-up and Restructuring Act (WURA) is the Canadian federal statute that mainly outlines the judicial process of liquidation, winding-up, and restructuring of government-regulated companies or corporations, financial institutions, and insurance companies.
Section 3 of the WURA enumerates the circumstances when a company is already considered insolvent, but mainly, when such company is unable to pay off its debts or its liabilities as these debts become due and demandable.
In Section 4, the WURA specifies when a company is deemed unable to pay its debts – when a creditor has sent a notice to the debtor for the payment of the latter’s debts, and the debtor has not responded after 60 days, a debtor is now considered insolvent.
The WURA is applicable only to corporations and companies listed in Section 6(1) that is insolvent, is currently on the process of liquidation or winding up, either by petition of the shareholders, its creditors, assignees, or liquidators, or through the control of the appointed Superintendent of Financial Institutions.
When an application winding up has been filed, a debtor-company ceases to operate, followed by the appointment of liquidator/s or trustee/s, and the said debtor-company's assets will be applied to the satisfaction of its debts to its creditor/s.
The main insolvency laws in Canada are the Bankruptcy and Insolvency Act (BIA), and the Companies' Creditors Arrangement Act (CCAA). This is in addition to provincial and territorial laws on insolvency and other federal laws which may apply to a certain institution, such as the Bank Act.
The BIA is the federal law on bankruptcy and insolvency processes, thus providing for the specific scope and rights of all parties involved – the debtors, its creditor/s, the trustees, and the federal government through the Superintendent of Bankruptcy.
Part III of the BIA governs the provisions of the proposals, which is the restructuring regime prepared by the debtor-companies or –individuals for its creditors on any compromise or sale of the former’s assets for the orderly satisfaction of the debts. Trustee/s will then manage the debtor’s properties, followed by a creditor/s’ meeting to decide on such proposal, which will be the basis for issuance of the court order.
The CCAA is a federal law which applies to larger companies or corporations. It provides for a restructuring regime where the claims against the debtor-company is more than $5,000,000, according to Section 3(1). With end view of preventing the said debtor -company or -corporation from becoming bankrupt, the CCAA provides for processes for all parties to reach a compromise agreement, to be agreed to also during a creditors’ meeting.
Here, the debtor-regime of CCAA is different from the BI, where the debtor in former retains ownership of its properties and assets, while continuing its operations; as compared to the latter where a trustee is appointed. Although, both circumstances are under the supervision of the court.
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