The Insolvency Review: Canada
Insolvency law, policy and procedure
i Statutory framework and substantive law
There are three federal statutes that govern insolvency law in Canada: the Bankruptcy and Insolvency Act (BIA),2 the Companies' Creditors Arrangement Act (CCAA)3 and the Winding-Up and Restructuring Act (WURA).4
The BIA, together with its regulations, is a self-contained code that deals with the liquidation of assets and the restructuring of debts of individuals, partnerships, corporations (other than certain excluded types of corporations) and other business entities that meet residency and minimal debt requirements. The BIA also provides for receiverships where an insolvent entity's assets and rights are placed in the custody and care of a third party called a receiver. The receiver may continue operations, but more typically, the assets are liquidated.
The CCAA is a flexible tool for the restructuring of the debts of corporations (other than certain excluded types of corporations) and income trusts that meet certain residency requirements and meet higher minimum debt requirements than those found under the BIA. It can also be used to liquidate assets.
The WURA deals with the liquidation and restructurings of certain specified entities, such as banks and trust companies; in effect, all of those entities and corporations specifically excluded from the BIA and CCAA.
Of the three insolvency statutes, the BIA represents the most complete code, providing substantive provisions dealing with, inter alia, the scope and breadth of stays of proceedings, distributional priorities, fraudulent transfers, the sale of assets, the treatment of contracts, interim financings, cross-border proceedings, and penalties and sanctions against debtors and their directors for violations under the BIA. The BIA also contains provisions dealing with the appointment of receivers and the rules regarding their conduct. Restructurings under the BIA are by way of proposals to creditors. Such proposals bind all affected creditors, if approved by the requisite double majority (two-thirds of proved claims and over 50 per cent of creditors per class) and subsequently by the court.
The CCAA is a more skeletal statute than the BIA, allowing courts more discretion in assisting a restructuring business. For example, under the BIA, a stay of proceedings is limited to a maximum of six months in a proposal, and the scope of that stay is set out and limited by statute. There is no limit to the maximum cumulative length of a stay of proceedings under the CCAA because the court has significant discretion on the scope of the stay of proceedings beyond what is available under the BIA. Like the BIA, the CCAA also has substantive provisions dealing with distributional priorities, fraudulent transfers, the sale of assets, the treatment of contracts, interim financings and cross-border proceedings. Restructurings under the CCAA are done through a plan of compromise or arrangement. Such plans, if approved by the requisite double majority (the same as under the BIA), and subsequently by the court, bind all affected creditors. It is well-established in Canadian law that courts have jurisdiction to approve a plan under the CCAA that includes releases in favour of third parties.
Whether it is the debts of an individual or business entity, the objective is to provide a debtor in financial difficulty the time and opportunity to restructure and develop an arrangement with creditors with a view to avoiding a bankruptcy liquidation. The goal is to keep debtors in financial difficulty operating and protected from creditors, in order to allow the debtor to stabilise operations and develop a restructuring plan that may then be put to its creditors for consideration. If the requisite majorities approve the plan, it binds all aﬀected creditors and the debtor emerges from bankruptcy protection and continues its (restructured) operations.
iii Insolvency procedures
To reorganise under the BIA, an insolvent debtor must have liabilities of at least C$1,000, carry on business in Canada and be insolvent. A BIA reorganisation is commenced by a debtor either lodging a proposal to creditors with a proposal trustee or filing what is known as a notice of intention (NOI) to make a proposal under the BIA. If an NOI is filed, the debtor has 30 days to file a proposal, which may be extended by a court order for up to five additional months, in periods of no more than 45 days at a time. If the debtor fails to file a proposal by the end of the final period, or if the proposal is rejected, then the debtor is deemed to have made an assignment into bankruptcy. A stay of proceedings is automatically imposed by statute upon a proposal or an NOI being filed.
A bankruptcy liquidation commences with either an assignment into bankruptcy by the insolvent debtor or an application for a bankruptcy order by one or more creditors owed at least C$1,000, where the debtor is insolvent and has committed an act of bankruptcy. Once a bankruptcy order or assignment is made, a trustee is appointed over the assets and is charged with collecting and liquidating the assets of the bankrupt with a view to distributing proceeds to creditors. A meeting of creditors takes place shortly after the bankruptcy, and inspectors may be elected by the creditors to oversee and provide instruction to the trustee on how the proceeding is conducted. Once the assets are liquidated, the trustee distributes the proceeds to creditors who have filed proofs of claim based on the priorities scheme set out in the BIA.
To reorganise under the CCAA, a company must carry on business in Canada, have total liabilities exceeding C$5 million and be insolvent. CCAA proceedings are commenced with a court application by the reorganising debtor for what is known as an 'initial order', which establishes the general parameters, including stays of proceedings, provisions that prohibit creditors from enforcing claims against the debtor, provisions that prohibit contracting parties from terminating contracts with the debtor, interim operational matters for the debtor, the appointment of a monitor, and interim financing. Under the new CCAA amendments, after the 10-day stay of proceedings, the proceedings may be extended at the discretion of the court. In the past, reorganisations have taken the form of the development of a plan of compromise or arrangement, consisting of a proposal to creditors to compromise claims. The time frame in which a debtor must file a plan is in the discretion of the court. Creditors are grouped into classes based on commonality of interest for purposes of voting and distribution under the plan. A majority in number, representing two-thirds in value of the claim of each creditor class, must approve the plan, as well as the court. If they do, then the plan will be binding on all creditors in the class. The CCAA is silent on the time frame to seek court approval.
Under the WURA, depending on the circumstances, a debtor, a creditor, a shareholder or the Attorney General of Canada may commence a proceeding. A stay of proceedings may be sought from the court by the debtor, creditor, contributory, liquidator or the original applicant. The remedy is discretionary. Upon the making of a winding up order, an automatic stay is imposed. The WURA provides no restrictions on the amount of time a debtor has to restructure or any restriction on the discretion of the court to grant or restrict such time. There is also no time frame for seeking court approval.
In proceedings under the BIA, CCAA and WURA, any affected party may oppose or seek to lift the stay of proceedings. To do so, creditors must prove that they are likely to be materially prejudiced by the continuance of the stay, or it is equitable on other grounds that the stay be lifted. Unless there are compelling reasons to lift the stay, courts are normally reluctant to do so, especially at the outset of the proceeding, so that the debtor has time to attempt to restructure.
Receiverships can be commenced either under the BIA or under provincial legislation. As an equitable remedy, receiverships take on many forms but typically a receiver is appointed either privately pursuant to a security agreement or by way of court order, and is given certain powers to either operate a business, seize and liquidate assets, or sell a business as a going concern, with a view to distributing the proceeds of sale to the creditors of the debtor. Receiverships are a very common remedy for dealing with insolvency in Canada and a useful tool for monetising the business or assets of an insolvent debtor.
A debtor company in Canada cannot commence an ancillary proceeding until the foreign main proceeding has been commenced. Once the foreign main proceeding has been authorised, local procedures allow for these ancillary proceedings to be filed while the main proceeding is pending in another country. The BIA and CCAA do not focus on specific time frames in which this could occur, but instead, on the prerequisites and exceptions that this can and cannot occur.
Under the CCAA, once an order recognising a foreign proceeding is made, the court must refrain from commencing further proceedings against the debtor company and must stay all proceedings against the company under the BIA and WURA.5 Under the BIA, when an order recognising a foreign main proceeding is made, no person is permitted to continue or commence any proceeding against the debtor's property, debts, liabilities or obligations, nor can the debtor sell or dispose of any of their property in Canada.6
iv Control of insolvency proceedings
The overall control of any court proceeding is in the hands of the court as directed and allowed by the relevant insolvency statute. Restructuring proceedings in Canada, save rare exceptions, are commenced and led by the debtor – similar to the debtor-in-possession (DIP) style of restructuring used in the US. The debtor (via management) remains in control of its assets and operations. In all cases, an insolvency professional (a trustee) will be appointed to act as a proposal trustee in a BIA proceeding, as monitor in a CCAA proceeding, and in several possible capacities under the WURA. In each case, the insolvency professional acts as the eyes and ears of the court and seeks to ensure that the debtor is complying with the statute and court orders (and provides reports to the court and creditors).
v Special regimes
Individuals and most business entities may file under the BIA. Income trusts and most corporations may file under the CCAA. However, banks, trust companies, insurance companies, loan companies, building societies, and certain trading companies may only commence proceedings under the WURA. The WURA is less structured than the BIA and the CCAA and applies primarily to financial institutions. In Canada, the banking system is very stable, and, therefore, there are few proceedings under WURA.
Procedurally, companies are able to file for insolvency collectively as a corporate group, but there are special rules if there is an attempt to consolidate substantively and file as one insolvency estate. Substantive consolidation allows two or more debtors to combine themselves into a single estate and have the separate legal status of each entity to be disregarded and treated as one by the courts. It is usually reserved for extraordinary circumstances because of its potential to prejudice certain creditors.
vi Cross-border issues
Plenary proceedings in Canada may only be commenced by debtors resident in, carrying on business in, or having assets in Canada. A debtor that has no presence in Canada may not commence a plenary proceeding. Where a debtor carries on business in more than one location, the courts will look at factors such as the location of main operations, the location of management, the location of the majority of creditors and convenience for the majority of stakeholders. Canadian courts have generally expressed a willingness to assist foreign courts where such assistance would not contravene public policy concerns in Canada.
With the adoption of most of the UNCITRAL Model Law on Cross-Border Insolvencies in 2009, Canadian courts are now mandated to cooperate with foreign courts, subject to public policy concerns, once an ancillary proceeding is commenced. Pursuant to these regimes, proceedings ancillary to both foreign main and foreign non-main proceedings may be commenced in Canada. Neither the BIA nor the CCAA contain time frames or time restrictions for any such filings. Ancillary proceedings may be commenced by a court order recognising the proceeding is a foreign proceeding and the applicant is the foreign representative appointed in the proceeding. An automatic stay is granted if the proceeding is recognised as a foreign main proceeding, and a discretionary stay may be granted if the proceeding is recognised as a foreign non-main proceeding.
In 2020, the covid-19 pandemic created significant disruption to daily life in Canada as with other parts of the world. Every sector of the Canadian economy has been affected with some sectors, such as the travel and hospitality and retail service industries being particularly hard hit. Despite difficult economic conditions, there was a 29.5 per cent decrease in insolvency filings from 2019, representing the largest annual decrease ever recorded.7 The number of consumer and business insolvency filings decreased by 29.7 per cent and 24.3 per cent, respectively.8 The decrease is largely attributable to government financial support, such as that provided by the Canada Emergency Response Benefit for individuals and Canada Emergency Wage Subsidy for businesses, and deferrals of debt payments during the pandemic.
The hardest hit sectors in 2020 were those most adversely affected by the pandemic: arts, entertainment and recreation (+50 per cent or 39 filings); management of companies and enterprises (+14.3 per cent or 12 filings); educational services (+18.2 per cent or six filings); and public administration (three filings). The three sectors that experienced the largest decrease in the number of insolvencies were: construction; manufacturing; and professional, scientific and technical services.9
While uncertainty remains elevated regarding the end of the pandemic, the Bank of Canada found that the Canadian economy showed resilience during the pandemic and is projecting a favourable economic outlook in 2021 and into 2022.10
Plenary insolvency proceedings
i 9354-9186 Québec Inc v. Callidus Capital Corp, 2020 SCC 10
In early 2020, the Supreme Court of Canada issued an important decision regarding both the powers and discretion of CCAA supervising judges to enforce the requirement that parties act in good faith and confirming that litigation funding is an acceptable form of interim financing in insolvency proceedings.
Bluberi Gaming Technologies Inc (Bluberi) manufactured electronic casino gaming machines. In 2012, Bluberi sought and received financing in the amount of C$24 million from Callidus Capital Corporation (Callidus). Bluberi lost significant amounts of money over the following three years, and Callidus continued to extend credit. By 2015, Bluberi owed Callidus approximately C$86 million. Bluberi claimed that Callidus, as a secured creditor, took de facto control of the business to deplete its value, with the eventual goal of purchasing Bluberi.
In 2015, Bluberi obtained CCAA protection and determined, along with the court-appointed monitor, that an asset sale was necessary. The supervising judge approved a sale in early 2016, over Callidus's objection. Bluberi and Callidus then entered into an asset purchase agreement. Callidus obtained all of Bluberi's assets in exchange for extinguishing almost all of its secured claims against Bluberi. The agreement also allowed Bluberi to retain its claim for damages against Callidus for alleged involvement in causing the debtor's financial difficulties.
In 2017, Bluberi filed a motion seeking approval of an interim financing credit facility to fund litigation against Callidus. However, the day before the motion hearing, Callidus proposed the first of two plans of arrangement. Bluberi's creditors were divided into two classes: unsecured creditors in one class, and Callidus as the sole secured creditor in the other. This first proposal failed to secure the required double majority within the unsecured creditors class (i.e., a majority of unsecured creditors holding two-thirds of the value of the class members' claims).
In 2018, Bluberi filed an application to authorise a third-party litigation funding agreement to pursue its claims against Callidus. A few days later, Callidus proposed its second plan of arrangement. This second proposed arrangement was nearly identical to the first. However, before voting on the plan of arrangement, Callidus filed an amended proof of claim valuing its secured claims against Bluberi at nil.
The supervising judge approved Bluberi's third-party litigation agreement as interim financing pursuant to Section 11.2 of the CCAA, but refused to allow Callidus to vote with unsecured creditors because it was acting with an 'improper purpose'. The Quebec Court of Appeal reversed the supervising judge's decision.
The Supreme Court agreed with the supervising judge that Callidus should not be permitted to vote with the unsecured creditors' class. The Court reaffirmed that Section 11 of the CCAA granted a supervising judge broad discretion to 'make any order that it considers appropriate in the circumstances'. However, certain 'baseline considerations' must be met: the applicant must demonstrate that the order sought is appropriate in the circumstances, and that the applicant has been acting in good faith and with due diligence. Notably, the requirement of good faith conduct was recently codified as Section 18.6 of the CCAA.
Under the CCAA, there is no bar to creditors voting in their own interest. However, the Court held that in this case the 'inescapable inference' was that Callidus had attempted to strategically 'circumvent the creditor democracy the CCAA protects'. The Court concluded that the supervising judge rightfully barred Callidus from voting for the second proposal as an unsecured creditor because it was acting for an improper purpose. The Court found that an improper purpose was any purpose collateral to the purpose of insolvency legislation, which in this case was Callidus' attempt to manipulate the creditors' vote to ensure that its second plan would succeed where its first plan had failed.
ii Arrangement relatif à Nemaska Lithium Inc, 2020 QCCS 3218
In October 2020, the Quebec Superior Court granted a reverse vesting order under the CCAA. A reverse vesting order transfers undesirable assets and liabilities from the insolvent entity to a new company, typically incorporated specifically for the purpose. This was the first time a Canadian court granted an opposed reverse vesting order, as they had only previously been granted on consent of the parties.
The debtor companies (Nemaska entities), were involved in the development of a lithium mining project in Quebec. When lithium prices declined, they sought CCAA protection, and a sales process was approved. A group of Nemaska's largest secured creditors then offered to purchase subject to a reverse vesting order.
Two shareholders of Nemaska entities (one of whom was also a creditor) objected the issuance of the reverse vesting order on multiple grounds, including the impossibility under the CCAA for debtor companies to emerge from CCAA protection outside a compromise or arrangement as well as the Court's lack of authority to grant a vesting order for anything other than a sale or disposition of assets.
The presiding judge dismissed these arguments, and held that the reverse vesting order meets the statutory criteria under the CCAA. The issuance of the reverse vesting order was a valid use of the discretion afforded to the supervising judge and in line with the CCAA's remedial objectives.11 The judge also noted the catastrophic impact other alternatives would have on all stakeholders and highlighted that CCAA generally prioritises 'avoiding the social and economic losses resulting from the liquidation of an insolvent company'.12
When approving any vesting order under the CCAA, the court must first assess: '1) whether sufficient efforts to get the best price have been made and whether the parties acted providently; 2) the efficacy and integrity of the process followed; 3) the interests of the parties; and 4) whether any unfairness resulted from the process'.13
This decision was appealed to the Quebec Court of Appeal and recently to the Supreme Court of Canada, but both courts have denied leave to appeal.
iii Petrowest Corporation v. Peace River Hydro Partners, 2020 BCCA 339
In November 2020, the British Columbia Court of Appeal held that a receiver can enforce executory contracts of a debtor without being bound by the arbitration clauses contained in them.
Petrowest Corporation and its affiliates, were placed into receivership. The receiver brought an action against Peace River Hydro Partners and its partners (Peace River), to recover amounts outstanding under various contracts. Peace River subsequently sought an order to stay the action under BC's Arbitration Act,14 because all disputes were subject to mandatory arbitration.
The BC Supreme Court rejected the application for a stay, allowing the Receiver to proceed with the action. It reasoned that while BC's Arbitration Act applied, Section 183 of the BIA allowed the Court to control its own processes, including avoiding the operation of Section 15(1) of the Arbitration Act.15
On appeal, Peace River argued that the chambers judge erred in her interpretation of Section 183 of the BIA and the Receiver argued that she erred in concluding that the Arbitration Act applied. The BC Court of Appeal dismissed the appeal, but concluded that the Arbitration Act did not apply in this case because the action was not commenced by a 'party' to the arbitration agreements within the meaning of the provision. There is a fundamental distinction between a receiver/trustee and a debtor/bankrupt as the former has the power to disclaim contracts entered by the debtor/bankrupt.16 This is because unlike the debtor/bankrupt, a receiver is an officer of the court and owes a fiduciary duty to realise proceeds for all stakeholders.17 In opting to commence this action, the receiver had, in effect, disclaimed the arbitration agreements entered by the debtor and was not a 'party' to them. The arbitration agreements became 'void, inoperative or incapable of being performed'.18 Furthermore, arbitration agreements are treated as 'independent agreements' and can be separated from the main contract due to the doctrine of separability in Canada.19 Therefore, due to a receiver's particular powers and position, as well as the separability of the arbitration agreements, the receiver can sue to enforce the debtors' contracts while also disclaiming the arbitration clauses within them.
The Supreme Court has granted leave to appeal this decision.
iv Groupe Dynamite Inc v. Deloitte Restructuring Inc 2021 QCCS 3
The Quebec Superior Court held that under the CCAA, the debtor was not relieved from paying post-filing rent for the premises it had not disclaimed, even though its ability to 'use' them had been severely limited by government-imposed covid-19 restrictions.
Groupe Dynamite Inc (Dynamite) operated several retail stores in Canada and suffered from covid-19 restrictions in Ontario and Manitoba. Dynamite, along with its US affiliates, had sought protection under the CCAA. The court order granting CCAA protection stated that no person who supplied goods, services or the 'use of leased property' to Dynamite after the order, could be prohibited from requiring immediate payment. This provision also closely mirrors Section 11.01 (a) of the CCAA.20
Following the continued covid-19 restrictions, Dynamite applied to amend the court order arguing that it was not 'using' the premises during the lockdowns and should not be obligated to pay post-filing rent. The landlords objected, contending that as long as the leases were not disclaimed, Dynamite's occupation qualified as a 'use' of the premises.
The court dismissed Dynamite's application on the basis that it would violate Section 11.01(a) of the CCAA and the court cannot make orders contrary to the restrictions explicitly set out in the CCAA. It noted that for a debtor to make 'use' of the property within the meaning of Section 11.01(a), it need not carry on the original activity for which the property was leased. Despite Dynamite's inability to fully operate its business in the leased properties due to the covid-19 restrictions, it had not disclaimed the premises and continued to assert its right to 'sole possession'. The court noted that 'where leased premises are occupied by a debtor and cannot be leased to anyone else, the landlord is not prevented from demanding immediate payment of rent regardless of whether or not the debtor is carrying on business'.21
v CWB Maxium Financial Inc v. 2026998 Alberta Ltd, 2021 ABQB 137
The Alberta Court of Queen's Bench provided guidance on the duty of good faith required by the newly enacted Section 4.2 of the BIA. This section has two parts: (1) any interested person in any proceeding under the BIA must act in good faith with respect to those proceedings; and (2) if satisfied that an interested person failed to act in good faith, then on application by any interested person, the court may make any order that it considers appropriate in the circumstances.
The court made several key findings in this case. First, a secured creditor seeking a receivership order is an 'interested person' subject to the good faith requirement of Section 4.2. Second, the 'good faith' to be exhibited in respect of' BIA proceedings, encompasses not only the conduct in the course of the proceedings, but also the conduct that precipitated the proceedings, 'where that conduct is factually and temporally connected to the proceedings'.22 In this case, the secured creditors' conduct since the issuance of the first demand letters was when the prospect of receivership proceedings first materialised, and thus was relevant for the purposes of Section 4.2. Third, 'good faith' requires that a creditor not bring or conduct proceedings for an oblique motive or improper purpose; it requires parties not to lie to or mislead the other. However, it is not a fiduciary duty, and does not impose a duty of loyalty or disclosure, or require the subordination of one's own interests to the other.
vi Chandos Construction Ltd v. Deloitte Restructuring Inc, 2020 SCC 25
In October 2020, the Supreme Court of Canada affirmed the anti-deprivation rule and the effects-based test. The anti-deprivation rule is a long-established common law rule, which prevents contractual provisions from frustrating the insolvency regime and maximises assets available for a trustee to pass to creditors.23 The anti-deprivation rule invalidates a contractual clause if: (1) it is triggered by bankruptcy or insolvency; and (2) if its effect is to remove value from the insolvent's estate that would otherwise be available to creditors.24
Chandos Construction Ltd (Chandos), a general contractor, entered into a subcontract with Capital Steel Inc (Capital Steel). The contract contained a provision where Capital Steel was to pay Chandos 10 per cent of the total contract price in the event Capital Steel became insolvent. Capital Steel filed for bankruptcy prior to completing its contract, and Chandos argued it was entitled to set off the costs it had incurred to complete Capital Steel's work on the project and 10 per cent of the contract price as per the agreement. Furthermore, Chandos submitted that the effects-based test of the anti-deprivation rule should be substituted by the purpose-based test adopted by UK courts.25 The application judge found the provision was enforceable, but the Court of Appeal reversed the decision.
In an eight-to-one decision, the Supreme Court rejected the UK purpose-based test and affirmed that the anti-deprivation rule renders void provisions that remove value otherwise available to an insolvent person's creditors. The Supreme Court, however, noted that provisions that eliminate a property from the estate but not value, or provisions whose effect is triggered by an event other than bankruptcy or insolvency, may not offend the anti-deprivation rule. Moreover, where commercial parties protect themselves against a contracting counterparty's insolvency by taking security, acquiring insurance, or requiring a third-party guarantee, the anti-deprivation rule is not offended.26
vii Legislative reforms
On 1 November 2019, reforms to Canada's BIA and CCAA came into force. These reforms aimed at improving the consistency and transparency of the insolvency regime and enhancing protections for workers and pensioners. There were no further legislative reforms in 2020.
Ancillary insolvency proceedings
AllSaints USA Limited
On 17 June 2020, the Ontario Superior Court of Justice, for the first time, recognised an English company voluntary arrangement (CVA) proceeding in Canada under the CCAA. The CVA proceeding in question was commenced by AllSaints Group, a global fashion brand headquartered in the UK, after covid-19 restrictions forced it to close most of its international locations. AllSaints USA Limited (AllSaints USA), a UK-incorporated subsidiary of AllSaints Group with retail stores in Canada and the United States, was unable to pay its rent obligations, including those owed to its Canadian landlords. Therefore, the foreign representative moved to have the CVA proceeding recognised in Canada. Among other things, the CVA (as it relates to AllSaints USA) aimed to amend go-forward payment terms of its Canadian and US leases by temporarily shifting to a sales percentage-based rent model.
The closest Canadian counterpart to a CVA proceeding is a proposal proceeding under the BIA, although the two differ in key ways, including that a BIA proposal: (1) does not allow for different subcategories of unsecured creditors to receive distributions or recoveries on different terms; and (2) does not contemplate amending contractual agreements with unsecured creditors. In recognising this CVA, the Ontario Superior Court confirmed that a foreign proceeding may be recognised in Canada even if the particular relief available under the foreign proceeding is not available domestically, provided that the substantive legal effect it imposes is not inconsistent with Canadian public policy. This case exemplifies the utility and flexibility of the CCAA in facilitating complex, cross-border reorganisations.
i Emergence of litigation funding in Canada
Litigation financing agreements (LFA) are relatively novel in Canadian restructuring practice. Despite being widely used in Australia, the United States and United Kingdom, these funding agreements are still relatively uncommon in Canada. However, Canadian courts will allow LFAs, provided they do not overreach or interfere with the lawyer-client relationship or the administration of justice. As described above, in Callidus, the Supreme Court of Canada confirmed that LFAs are appropriate in the context of insolvency proceedings.
LFAs in a restructuring context originated from Crystallex and Strateco.27 In Crystallex, the court considered whether the CCAA allowed a judge to approve financing that would continue significantly outside the period of CCAA protection, without approval from the creditors. The case dealt with an interim financing through a specialised lender that was to be used to finance litigation in exchange for the lender receiving 35 per cent of the litigation proceeds. In Strateco, the court evaluated another interim financing under the CCAA, which was intended to guarantee legal fees for the prosecution of a claim against the government that constituted the debtor's principal asset. In both cases, the pending litigation was the best chance at recovering any value for the creditors from the insolvent assets and the courts relied on a liberal and purposive interpretation of the CCAA in finding that the financing agreements were in the interest of the creditors. These two cases laid the foundation for Callidus, which is the latest in a string of LFA-type cases in the context of CCAA restructurings.
In Callidus, the Court reaffirmed that the supervising judge appropriately considered that the LFA was fair and reasonable. In particular, he considered terms upon which lawyers would be paid, the risks and investments of the funder, and the extent of the funder's control of the litigation. The Court reaffirmed the supervising judge's findings that the agreement was appropriate.
However, the Court rejected an argument that the LFA was in reality a plan of arrangement that must be put to a creditors' vote. Without fully defining a plan of arrangement, the Court held that there must be some compromise of creditors' rights for a proposal to amount to an 'arrangement' requiring creditor approval. The proposed LFA did not impact creditors' rights and could therefore be court-approved as interim financing pursuant to Section 11.2 of the CCAA. Despite the developments in case law, the use of LFAs in Canada is still limited and the rules are relatively undefined. Following the Supreme Court's decision in Callidus, this is an area that will continue to develop since LFAs are an attractive option for insolvent parties lacking the resources to pursue and monetise litigation claims.
ii OSB Omnibus Motion
At the beginning of the pandemic-induced shutdown in Canada, the Office of the Superintendent of Bankruptcy obtained an omnibus order that applied to the deadlines in all bankruptcy proceedings. It established a suspension period from the date of the order to 30 June 2020 to relieve pressure on stakeholders and the insolvency system due to covid-19.28
iii Popularity of Reverse Vesting Orders in 2020
Reverse vesting orders have been employed in significant restructurings in 2020, including Cirque du Soleil and Nemaska Lithium. Unlike standard approval and vesting orders that transfer desirable assets of the debtor company to a purchaser in exchange for sale proceeds, a reverse vesting order transfers unwanted assets and liabilities to a newly-incorporated, non-operating company. This allows the original debtor company to retain desirable assets, and its shares are sold to purchaser free and clear of all the unwanted liabilities (by way of share purchase agreements rather than asset sale agreement). A significant benefit of a reverse vesting order is that the original company's existing rights such as permits, licences, tax attributes and essential contracts are all preserved. Reverse vesting orders are, therefore, very attractive for distressed companies that operate in highly regulated industries or companies that own undesirable and difficult-to-transfer assets. It is also an effective alternative to a plan of arrangement, both in terms of time and cost, taking place without a vote of creditors. At the end, the original debtor emerges from CCAA proceedings while the newly-created residual company becomes subject to the CCAA.
ii Future developments
The economic disruption caused by covid-19 in 2020 was unprecedented. Yet, due to government supports, the number of insolvency filings was significantly lower in 2020 as compared to 2019, and this trend has continued in 2021. As vaccine rollout is progressing with broad immunity expected in Canada in the autumn of 2021, there is increased confidence in Canada's economic recovery.29 The federal government has released Budget 2021: A Recovery Plan for Jobs, Growth, and Resilience, which includes proposals to extend business and income support measures to the autumn of 2021 and make large investments in the green economy and childcare.30 It appears that Canada is poised for a robust economic recovery after the pandemic. At the same time, there is a high level of uncertainty around the trajectory of recovery, with covid-19 variants leading to renewed lockdowns in many countries. The critical question is whether distressed businesses, especially those in the retail, tourism and arts and entertainment sectors, will hold out long enough to participate in the expected economic recovery.
1 Michael Nowina is a partner, and Sandy Park and Milinda Yimesghen are summer students at Baker McKenzie in Toronto, Canada.
2 Bankruptcy and Insolvency Act, RSC 1985, c B-3.
3 Companies' Creditors Arrangement Act, RSC 1985, c C-36.
4 Winding-up and Restructuring Act, RSC 1985, c W-11.
5 Companies' Creditors Arrangement Act, RSC 1985, c C-36, Section 48.
6 Bankruptcy and Insolvency Act, RSC 1985, c B-3, Section 271(1).
7 Office of the Superintendent of Bankruptcy Canada, 'Insolvency Statistics in Canada — 2020', online: http://www.ic.gc.ca/eic/site/bsf-osb.nsf/eng/h_br04455.html.
10 Bank of Canada, 'Monetary Policy Report' April 2021, online:http://www.bankofcanada.ca/wp-content/uploads/2021/04/mpr-2021-04-21.pdf.
11 Arrangement relatif à Nemaska Lithium Inc, 2020 QCCA 1488 at paragraph 14 (Nemaska).
12 ibid., at paragraph 15.
13 ibid., at paragraph 13.
14 Arbitration Act, RSBC 1996, c 55.
16 ibid., at paragraph 42.
17 Groupe Dynamite Inc v. Deloitte Restructuring Inc 2021 QCCS 3 at paragraph 37 (Dynamite).
18 Section 15(2) of the Arbitration Act stipulates that a court must make an order staying the legal proceedings as per Section 15(1) unless it determines that the arbitration agreement is void, inoperative or incapable of being performed.
19 Note 15 at paragraph 47.
20 Section 11.01(a) states that no order made under Section 11 or 11.02 has the effect of prohibiting a person from requiring immediate payment for goods, services, use of leased or licensed property or other valuable consideration provided after the order is made.
21 Note 17 at paragraph 42.
22 CWB Maxium Financial Inc v. 2026998 Alberta Ltd, 2021 ABQB 137 at paragraph 59 (CWB).
23 Chandos Construction Ltd v. Deloitte Restructuring Inc, 2020 SCC 25 at paragraph 30 (Chandos).
24 ibid., at paragraph 31.
25 Belmont Park Investments Pty Ltd v. BNY Corporate Trustee Services Ltd,  UKSC 38 (Belmont).
26 Note 23 at paragraph 40.
27 Re Crystallex International Corporation, 2012 ONSC 2125 (Crystallex); Strateco Resources inc/Ressources Strateco inc (Arrangement relatif à), 2015 QCCS 4671 (Strateco).
28 Office of the Superintendent of Bankruptcy Canada, 'Ontario - Superior Court of Justice in bankruptcy and insolvency' April 2020, online: http://www.ic.gc.ca/eic/site/bsf-osb.nsf/eng/br04258.html.
30 Department of Finance Canada, 'Budget 2021' April 2021, online: http://www.budget.gc.ca/2021/report-rapport/toc-tdm-en.html.