The Restructuring Review: Canada
Overview of restructuring and insolvency activity
In 2021, the covid-19 pandemic continued to create significant disruption to daily life in Canada as in other parts of the world. The pandemic affected every sector of the Canadian economy, with some sectors being particularly hard hit. Despite difficult economic conditions, there was a 6.7 per cent decrease in insolvency filings over the 12-month period ending 31 December 2021 as compared with the same period ending 31 December 2020.2 The number of consumer and business insolvency filings over the same period decreased by 6.6 per cent and 11 per cent, respectively.3 This is likely attributable to the comprehensive government support programmes put in place to assist individuals and businesses affected by the pandemic-induced lockdowns. Although uncertainty remains elevated regarding the end of the covid-19 pandemic, the Bank of Canada has reported that the Canadian economy has strong momentum and the employment market is robust. As high vaccination rates lessen the impacts of covid-19 and health restrictions are lifted, household spending is expected to strengthen and export demand to remain solid. However, inflation has driven energy and food prices higher and the Russian invasion of Ukraine in early 2022 has introduced new uncertainties.4
General introduction to the restructuring and insolvency legal framework
i Statutory framework
There are three federal statutes that govern insolvency law in Canada: the Bankruptcy and Insolvency Act (BIA),5 the Companies' Creditors Arrangement Act (CCAA),6 and the Winding-Up and Restructuring Act (WURA).7
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 when 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, together with its regulations, deals only with the restructuring of the debts of corporations (other than certain excluded types of corporations) and income trusts that meet certain residency requirements and higher minimum debt requirements than those found under the BIA.
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 flexible statute than the BIA, allowing courts more discretion in assisting restructuring corporations. 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.
The WURA is less structured than the BIA or the CCAA and applies primarily to financial institutions. In Canada, the banking system is very stable and, therefore, there are few proceedings under the WURA.
In respect of restructurings, whether it is the debts of an individual or a business entity, the objective is to provide a debtor in financial difficulty the time and opportunity to restructure and develop a fresh arrangement with creditors with a view to avoiding a bankruptcy liquidation. The goal is to keep debtors who are in financial difficulty operating and protected from creditors 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 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, when 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 the 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 proceeding and sets out 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 proceeding, the proceeding 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 at 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 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 that 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.
Recent legal developments
i Canada v. Canada North Group Inc, 2021 SCC 30
In June 2021, the Supreme Court of Canada confirmed that judges supervising a CCAA proceeding can grant priming charges over Crown interests in unremitted source deductions for government remittances. However, the supervising judge should consider whether ranking the priming charge ahead of the Crown is necessary and appropriate in the circumstances of a given case.
Canada North Group and six related corporations had initiated restructuring proceedings under the CCAA and sought super-priority charges to facilitate the insolvency proceedings. The supervising judge granted the requested super-priority charges and ordered that they take priority over all other interests and not otherwise be limited by the provisions of any other federal or provincial statute. The Crown applied to vary the initial order on the grounds that the order failed to recognise the Crown's legislative proprietary interest in unremitted source deductions. The Crown argued that the nature of its interest is determined by the Income Tax Act, which creates a proprietary interest. The supervising judge dismissed the motion and the Court of Appeal upheld the lower court's decision, finding that the Crown's interest under the deemed statutory trust provisions of the Income Tax Act creates a security interest that ranks ahead of the interests of all other secured creditors but could be subordinated to a priming charge. The Supreme Court agreed, finding that a judge supervising a CCAA proceeding has the discretionary authority to subordinate a Crown interest. While recognising the Crown's distinct interests and considering the remedial objectives of the CCAA, the Supreme Court's decision makes clear that supervising courts may grant priming charges priority over the Crown's deemed trusts on a discretionary basis, when necessary.
ii Ernst & Young v. Aquino, 2022 ONCA 202
In Ernst & Young v. Aquino, the court considered the doctrine of corporate attribution in the context of challenging a transfer that was alleged to be undervalue and intended to prefer certain creditors over others. It had been discovered that the insolvent companies had paid tens of millions of dollars to illegitimate suppliers on the basis of fraudulent invoices dating back more than five years. To recover the funds, proceedings were commenced to declare that the payments to the illegitimate suppliers were 'transfers at undervalue' and thus voidable under the BIA. The application judge found that a corporate officer and his associates, who collectively orchestrated the fraudulent invoicing scheme, were liable for the illegitimate transactions of the insolvent debtor and ordered them to repay over C$30 million to company creditors. In upholding this decision, the Ontario Court of Appeal considered the following question: 'who should bear responsibility for the fraudulent acts of a company's directing mind that are done within the scope of his or her authority – the fraudsters or the creditors?'8 The Court of Appeal held that the corporate attribution doctrine is grounded in public policy and reframed the test for the insolvency context to impute the intent of a directing mind to a corporation to better protect creditors' interests. The Ontario Court of Appeal established three principles to be considered when applying the doctrine of corporate attribution in the context of an insolvency proceeding:
- courts shall be sensitive to the context established by the field of law in which an imputation of corporate intent is sought to be made;
- courts should recognise that the attribution exercise is grounded in public policy, which is based on the underlying question 'who should bear responsibility for the impugned actions of the corporation's directing mind'?; and
- courts retain the discretion to refrain from applying the doctrine of corporate attribution when, in the circumstances of the case, it would not be in the public interest to do so.9
iii PricewaterhouseCoopers Inc v. Perpetual Energy Inc, 2021 ABCA 16
The Alberta Court of Appeal issued an important ruling regarding the abandonment and reclamation obligations associated with energy projects. This case involved complex claims by the trustee in bankruptcy of Sequoia Resources Corp, formerly known as Perpetual Energy Operating Corp (Perpetual/Sequoia), against a former director of Sequoia and certain other companies in the Perpetual Energy Group arising from a pre-bankruptcy multi-step transaction. After reviewing Perpetual/Sequoia's affairs, the bankruptcy trustee commenced litigation after concluding that the pre-bankruptcy asset transaction was not in the best interests of Perpetual/Sequoia. All of the trustee's claims were initially struck out or summarily dismissed. However, the Alberta Court of Appeal allowed the appeal and the claim that Perpetual had undertaken pre-bankruptcy transactions at less than fair market value and ordered for the case to proceed to trial.
The Court of Appeal relied on the Supreme Court of Canada's landmark 2019 decision Orphan Well Association v. Grant Thornton Ltd, 2019 SCC 5 (Redwater) when confirming that these environmental obligations are a continuing obligation of a bankrupt corporation that must be discharged even in priority to secured creditors.10 The Court of Appeal confirmed that Redwater should be interpreted to mean that although these environmental obligations are not considered current liabilities or obligations, they should nonetheless be considered real obligations of a company.11 Although the environmental obligations are not conventional debts as there is no creditor, they still constitute environmental obligations that companies owe to the public.12
iv 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 2021.
Significant transactions, key developments and most active industries
i Significant transactions
The covid-19 pandemic has had a significant impact on many businesses, including DAVIDsTEA, a leading tea merchant in North America. Having faced financial difficulties prior to the pandemic stemming from losses from unprofitable brick and mortar locations, the retail shutdowns implemented in response to the covid-19 pandemic impelled an application for CCAA protection on 8 July 2020, with the aim of accelerating its transition into an online retailer and wholesaler.13 The following day, the monitor successfully applied for provisional recognition of the CCAA proceedings in the United States under Chapter 15 of the United States Bankruptcy Code.14 On 11 June 2021, the company announced that its plan of arrangement was approved by the creditors of DAVIDsTEA and its wholly owned US subsidiary and would distribute an aggregate amount of approximately C$18 million as a full and final settlement of all claims under the plan.15 The US court issued an order ending the CCAA proceedings under Chapter 15 on 3 November 2021.16 On 14 December 2021, the Canadian court issued an order terminating the receivership and discharging the receiver, which was sought to allow former employees to claim under the Wage Earner Protection Program Act, allowing the restructured company to emerge from creditor protection following a successful transaction with its creditors.17 This is a noteworthy restructuring because it was completed in roughly a year, which is a relatively short period for a CCAA case.
On 1 February 2021, Laurentian University of Sudbury commenced CCAA proceedings and obtained an initial order appointing Ernst & Young Inc as monitor, with the goal of ensuring the financial viability of the institution and minimising the effects on the day-to-day experience of current students.18 On 10 February 2021, the court approved a debtor-in-possession interim financing facility in the amount of C$25 million, which was extended to C$35 million on 29 April 2021, at the same time as the court approved agreements with two labour unions and Huntingdon University.19 On 31 May 2021, the court granted an order appointing a chief redevelopment officer to oversee restructuring and a governance review.20 According to the monitor's latest report dated 29 April 2022, on 27 January 2022, the court granted two orders further extending the stay of proceedings to 31 May 2022 and approving a new interim financing facility with the Province of Ontario as lender, represented by the Ministry of Colleges and Universities, with a maturity date of 30 September 2022. In addition, the court authorised the monitor and chief restructuring officer to develop a process to retain an independent third party to develop a new strategic plan.21 This is the first time that a CCAA protection has been granted to one of Canada's public universities, and Laurentian continues to operate under court protection.
ii Key developments
Priority of environmental liabilities
As is highlighted above, the Alberta Court of Appeal's decision in Perpetual Energy is significant for insolvency and corporate law in Alberta. The complex issues raised in this case will proceed to trial, but it confirmed that the environmental obligations relating to the abandonment and reclamation obligations of oil and gas wells were real liabilities of a bankrupt corporation owed to the public. In coming to this decision, the Court of Appeal applied the Supreme Court of Canada's decision in Redwater and we expect that the Supreme Court's ruling in Redwater will continue to be an important decision impacting future cases in which environmental and insolvency laws intersect.
Popularity of and caution regarding reverse vesting orders
Although reverse vesting orders were employed in significant restructurings over the last few years, the Superior Court of Ontario in early 2022 stated that granting a reverse vesting order should be 'an unusual or extraordinary measure' granted only after 'close scrutiny'.22 In Re Harte Gold Corp, the court stated that the relevant parties should be able to show the necessity of the order, that it produces an economic outcome at least as favourable as any alternative, that it does not adversely affect any stakeholder more than any alternatives, and that the consideration paid reflects the importance and value of intangible assets being preserved.23
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 the purchaser free and clear of all the unwanted liabilities (by way of share purchase agreements rather than through an 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, in terms of both time and cost, taking place without a vote of creditors.
iii Most active and distressed industries
The sectors that saw the largest overall increase in insolvencies over the 12-month period ending 31 December 2021 as compared with the same period ending 31 December 2020 were construction (+9.2 per cent or 31 filings) and transportation and warehousing (+15.9 per cent or 26 filings). Meanwhile, retail trade (-32.4 per cent or 122 filings) and accommodation and food services (-16.8 per cent or 74 filings) saw the largest overall decrease in insolvencies over the same period.24
Plenary proceedings in Canada may be commenced only 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. If 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 when 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 foreign representative, which is a party appointed in the foreign 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.
The economic disruption caused by covid-19 in 2020 and 2021 was unprecedented. However, the number of insolvency filings was significantly lower in 2020 than in 2019 and this trend continued in 2021. According to the Budget 2022, real gross domestic product has returned to pre-pandemic levels earlier than expected, and job recovery has outperformed G7 peers in 2021.25 As 2022 has brought about the relaxation of covid-19-related restrictions across Canada, the critical question remains about how rapidly the expected economic recovery will begin to return life and economic activity to pre-pandemic levels or whether increasing inflation and global uncertainties will take hold.
1 Michael Nowina is a partner and Eleanor Dennis and Jesse Kaminski are associates at Baker McKenzie.
2 Office of the Superintendent of Bankruptcy Canada, 'Insolvency Statistics in Canada — December 2021', online: www.ic.gc.ca/eic/site/bsf-osb.nsf/eng/br04582.html [Insolvency Statistics - December 2021].
4 Bank of Canada, Monetary Policy Report April 2022 at 1, online: www.bankofcanada.ca/wp-content/uploads/2022/04/mpr-2022-04-13.pdf.
5 RSC 1985, c B-3.
6 RSC 1985, c C-36.
7 RSC 1985, c W-11.
8 Ernst & Young v. Aquino, 2022 ONCA 202 at Paragraph 78 [Ernst & Young 2022].
9 ibid at Paragraphs 71–73.
10 Orphan Well Association v. Grant Thornton Ltd, 2019 SCC 5 [Redwater].
11 PricewaterhouseCoopers Inc v. Perpetual Energy Inc, 2021 ABCA 16 at Paragraph 87.
12 ibid at Paragraphs 93–95.
13 DAVIDsTEA, 'DAVIDsTEA to Implement Restructuring Plan Under Companies' Creditors Arrangement Act' July 2020, online: ir.davidstea.com/news-releases/news-release-details/davidstea-implement-restructuring-plan-under-companies-creditors.
14 PwC, 'DAVIDsTEA Inc. and DAVIDsTEA (USA) Inc' December 2021, online: www.pwc.com/ca/en/services/insolvency-assignments/davidstea-inc-.html.
15 DAVIDsTEA, 'DAVIDsTEA Obtains Sanction Order from the Québec Superior Court for CCAA Plan of Arrangement' June 2021, online: ir.davidstea.com/news-releases/news-release-details/davidstea-obtains-sanction-order-quebec-superior-court-ccaa-plan.
16 PwC, supra note 34.
17 ibid; PwC, 'Motion for a Receivership Order' July 2020 at 2, online: https://www.pwc.com/ca/en/car/davids-tea/assets/davids-tea-026_071720.pdf.
19 Ernst & Young, 'Twelfth Report of the Monitor April 29, 2022' April 2022 at 1-2, online: https://documentcentre.ey.com/api/Document/download?docId=35485&language=EN.
20 ibid at 3; Laurentian University, 'Laurentian seeks appointment of Chief Redevelopment Officer as part of CCAA process' May 2021, online: https://www.laurentianu.info/redevelopment-officer-ccaa/.
21 Ernst & Young, supra note 43 at 3-4.
22 Re Harte Gold Corp, 2022 ONSC 653 at Paragraph 38.
24 Insolvency Statistics – December 2021, supra note 2.
25 Department of Finance Canada, 'Budget 2021' April 2021 at 3, online: www.budget.gc.ca/2022/report-rapport/toc-tdm-en.html.