Shaun Parsons, Associate, Reconstruct LLP

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The commencement of contentious insolvency proceedings can slip into a tug-of-war for control of the process between the debtor entity and significant secured creditors. As noted by Frank Bennett in the latest edition of his seminal text Bennett on Bankruptcy - on one end of the rope, a debtor entity can apply for an initial order for protection under the Companies’ Creditors Arrangement Act (the “CCAA”)1 to receive breathing room as creditors circle overhead seeking overdue payments.2 On the other end of the rope, secured creditors can bring applications for the appointment of a receiver and manager in light of the outstanding amounts owed.

During this tug-of-war, it will fall to the Court to declare the “winning” entity. If the debtor cannot establish sufficient grounds for an initial order under the CCAA, or where CCAA protection would be inappropriate, the Court can appoint a receiver and manager to take possession of the debtor’s business or, alternatively, dismiss both applications.3

Both an application for the appointment of a receiver and the application for protection under the CCAA have tests that must be met prior to the Court granting protection thereunder. Accordingly, in considering competing applications for a receivership and CCAA protection, the Court will consider whether the applicable tests are satisfied and consider and balance the competing interests of various economic stakeholders to determine which process is more appropriate.4

CCAA Proceedings

As noted in Bennett on Bankruptcy, an insolvent debtor company can access the CCAA restructuring regime if the debtor company or its affiliated companies are insolvent, have debt in excess of five million dollars and operate business in Canada.5 As the application for CCAA protection is generally initiated by the debtor company, the debtor company bears the onus of satisfying the Court that they meet the requirements to receive CCAA protection.6 In granting an initial order, the CCAA offers a no-fault remedy, provided that the applicants act in good faith and with due diligence in the process.7 The CCAA is designed to be remedial; it is not however designed to be preventative.8

Under the CCAA, existing management retains control over the debtor’s operations while developing a plan of arrangement to restructure the debtor. In contrast to the Bankruptcy and Insolvency Act,9 the CCAA offers a flexible process whereby creative and bespoke restructurings can take place. There is no definition of a plan of arrangement under the CCAA, or an exhaustive explanation of how a plan of arrangement must be structured.10 Despite this flexibility, a debtor seeking plan approval must obtain votes in each class representing two-thirds in value and majority in number of the creditors voting.11 Based on these threshold requirements, significant secured creditors can effectively have a “veto” power on any go-forward restructuring plans under the CCAA.

A Court will account for the forecasted restructuring plan of the debtor under the CCAA from the outset. Debtors only need a germ of a plan to be granted relief under the CCAA but, implicitly, where there is a competing receivership there exists the idea that the debtor’s plan must be preferable to alternative receivership proceedings.

Receivership Proceedings

As stated in Bennett on Bankruptcy, once the Court appoints a receiver, the receiver becomes a principal of the business and is answerable to the Court that made the appointment, as well as to all interested parties.12 The receiver must operate the debtor’s businesses independently of any control or direction by the security holder that sought the appointment order.13

Both section 243(1) of the Bankruptcy and Insolvency Act and section 101 of the Court of Justice Act provide that the Court may appoint a receiver if it considers it to be just or convenient to do so. There are no pre-conditions for the exercise of a Court’s discretion to appoint a receiver or receiver and manager, and each case is fact-specific.14 Courts may consider at the minimum the following in determining whether it is just or convenient to appoint a receiver: [There are numerous factors that the court takes into account in deciding whether to grant the receivership order.]

1. that the lenders’ security is at risk of deteriorating;15
2. there is a need to stabilize and preserve the debtors’ business;
3. loss of confidence in the debtors' management;16 and
4. positions and interests of other creditors.

In BCIMC Construction Fund Corporation et al. v. The Clover on Yonge Inc.,17 the Court reiterated the well-stated principle that when dealing with a default under a mortgage where there is a contractual right to appoint a receiver, this relief becomes even less extraordinary.18 As the terms of the contract and expectations of the parties can be seen to inform what is considered to be just and or convenient.

Historically, Courts are willing to appoint a receiver where the debtor is in default of the security documents for a considerable period of time, the debt is not in dispute and the debtor is not operating their business.19 However, the preferable course of action is less clear cut where a significant secured creditor moving to appoint a receiver and manager races against a debtor company looking to receive CCAA protection to retain control of their operations.

The Tug-of-War Between the Proposed Monitor and Receiver

Courts favour neither a creditor nor a debtor driven process, but whichever method works primarily to further the best interests of the creditors, and/or the other ultimate beneficiaries of the restructuring proceeding.20

The specific factors that Courts consider when choosing between CCAA and receivership proceedings are “circumstance-oriented.”21 As with any exercise of discretion, a Court will balance the competing interests of the various economic stakeholders at play. In doing so, courts have considered, among other things: the payment received by the applicants, reputational damage, preservation of employment, speed of the process, protection of all stakeholders, cost, availability of financing, faith in management, previous conduct of management, and the nature of the business.22 There is no specific recipe to success, however, commentators have distilled these competing interests into four elements: prejudice to creditors, benefits to creditors, the likelihood of success under the CCAA and the interests of other stakeholders.23

Other considerations are the number of, and the relationship between, the significant creditors. Where a sole-secured creditor would ultimately bear the risks and costs associated with a CCAA proceeding, a receivership is more appropriate, especially where debtor-in-possession financing is projected to chip away at the creditor’s security.24 Further, CCAA proceedings make little sense where a secured creditor seeking a receivership could veto any plan of arrangement where they prefer to exercise their contractual right of redemption or other receivership remedies.25

Considerations and Conclusion

There is no cookie cutter approach to determining whether a competing CCAA or receivership proceeding is appropriate – similar to how the unique facts of each restructuring proceeding will colour the path forward. Counsel, in participating in a contested proceeding, should consider and carefully articulate the unique factors that support the position that their client’s requested mode of proceeding will result in the most successful outcome to creditors and economic stakeholders, such as the practicalities or efficiencies of a receivership or the alignment with the overarching principles of the CCAA to meet this discretionary burden. Despite this, due care must be given to the fundamentals of the requested relief, as the rope might snap and both parties may leave without the relief sought.