What is Companies’ Creditors Arrangement Act (CCAA)?
Posted on | January 15, 2009 |
What is Companies’ Creditors Arrangement (CCAA)?
The Companies’ Creditors Arrangement (”CC, double A” or “CCAA”) was legislated by the Government of Canada during the depression of the 1930’s. The Act allows financially troubled companies to file for financial and business restructuring.
Under CCAA a financially distressed company (also referred to as the “Debtor”) tries to seek protection via a court-order. The court typically grants protection to the company from its creditors and allows the company to restructure its financial affairs and come up with a formal ‘Plan of Arrangement’ ( Plan) with its creditors. Thus the act presents a Canadian company with the opportunity to avoid bankruptcy (liquidation) or Receivership (remedies of a secured creditor). The creditors also tend to benefit if the company successfully emerges from the protection and eventually pays the creditor according to the arrangement presented in the Plan.
Keep in mind that the company that has filed under the CCAA for protection from its creditors is not in receivership or bankruptcy. Instead filing for CCAA is an attempt to rescue and plan restructuring so that the debtor the possibility of going into receivership or bankruptcy. The Act aims at facilitating compromises and arrangements between companies and their creditors.
As a US creditor if you are seeking a parallel then CCAA is the closest statutory framework Canadians have to Chapter 11 “Debtor in Possession” proceedings under the U.S. Bankruptcy Code.
The initial application to the Court under CCAA is generally done without notice to the creditors (ex-parte) accompanied with the filing, the Court requires the debtor company’s projected cash flow and financial statements. The Court then issues a Court Order giving the company 30 days of protection (referred to as the “Stay”) from its creditors to allow for the preparation of the Plan of Arrangement and has a provision for additional applications to be made to extend the Stay as long as the extension of the Stay is not prejudicial to the creditors.
Once a Stay Order is granted a mandatory appointment of a Monitor occurs. Although not essential, usually a ‘licensed’ Trustee in Bankruptcy is appointed as a Monitor in CCAA proceedings. The accounting firm which acts as an auditor of the debtor company is eligible to apply and act as Monitor. This is sometimes viewed as a conflict of interest by the creditors as the Monitor is supposed to be ‘independent’.
The role of the Monitor is detailed in the Court Order and is open to modifications in subsequent orders. Typically a Monitor oversees the operations of the Debtor to ensure that the company’s operations are in compliance with the Court Order(s) and from time to time report back to the Court if any activity impacts the viability of the debtor. The Monitor assists in preparation of the Plan of Arrangement; manages the ‘ Proofs of Claims’ received from the creditors; notifies creditors of meetings; chairs the meeting of creditors and tabulates the votes.
From the creditor’s point of view all post CCAA communications and filing of Proof of Claim should be made with the Monitor’s office. It is important for a creditor to file a Proof of Claim with the Monitor as only then a creditor becomes eligible to vote on the Plan of Arrangement and receive any distribution of proceeds under it.
Regarding ‘repossession of goods supplied to the debtor’ before filing of CCAA, the past Court decisions in this regard weighs unfavorable for the creditor. Generally creditors have not been able to repossess their goods/inventory from a Debtor who is continuing business under the Stay provisions of CCAA.
The creditors that are affected by a Debtor filing for protection under CCAA should review the appointing Court Order and any subsequent Court Orders, as it is this document that lists and sets out the conditions under which the Debtor can continue operations and sets restrictions on the actions of creditors. As far as supplying future credit to the Debtor operating under CCAA is concerned, the creditor should determine that after reading the court order. Most Court Orders under CCAA let the debtor carry on business and pay for post-CCAA goods and services on pre-CCAA negotiated credit terms.
Although there is no legislated time limit on the stay provided to a debtor under CCAA, on an average the process usually takes anywhere between 6 to 12 months to accomplish.
CCAA has an entry-barrier and is restricted to corporations that owe to creditors in excess of 5 million dollars in order to be eligible to use this Act. In essence it is for large organizations and businesses under the threshold of 5 million dollars of debt can avail of Division I Proposal under the Bankruptcy and Insolvency Act (BIA). Another interesting aspect of CCAA is that along with addressing its creditors the can also pitch to its shareholders in its Plan of Arrangement. In such cases the shareholders then have the opportunity to vote for or against the plan offered.
A copy of the Plan from the Monitor is sent to all creditors (and shareholders, if included) who have filed a proof of claim with the Monitor within the stipulated time frame. The creditors then have the opportunity to vote on it at a creditors’ meeting. The Monitor informs the stakeholders of the date and location of this meeting.
For the Plan to be successful each class of creditors, a majority of the proven creditors in that class, by number, together with 2/3 of the proven creditors in that class, by dollar value, must approve the Plan. All classes of creditors (and shareholders, if included) must approve the Plan. The Plan becomes binding once the court approves it. The debtor then continues as per the Plan until it satisfies the requirements of the Plan.
Based on the voting on the Plan, a no-approval from the creditors or a no-approval on the Plan by the court or failure of the debtor to perform as per the plan does not automatically place the debtor into bankruptcy (liquidation). Only the Stay or protection from the courts gets lifted. Once the court protection under CCAA is gone, the pressures that caused the debtor company to initially file for CCAA (restructuring and bankruptcy protection) from its creditors shall most likely return perhaps then forcing the debtor into receivership or bankruptcy.
This Article is intended to provide a general overview of CCAA and to assist creditors in obtaining a broad understanding of their remedies within its structure.
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