Key Canadian bankruptcy laws and terms
With the number of commercial bankruptcies and insolvencies expected to rise in the coming months, here are some key Canadian laws and terms that will show up as corporations look to restructure their operations:
A corporation becomes insolvent when it’s unable to pay the money it owes, generally to suppliers of goods or services. This can stretch on for a long period before the corporation relies on legislation that governs commercial insolvency and restructuring proceedings in Canada.
Canada’s insolvency laws are intended to help return a corporation to a productive existence by allowing it to restructure itself (through what’s called a Plan of Arrangement) instead of closing operations. The insolvency and restructuring regime consists of two statutes, which are similar to restructurings in Chapter 11 and liquidations in Chapter 7 of the U.S. Bankruptcy Code.
The Companies’ Creditors Arrangement Act offers legislative framework for an insolvent company to restructure, with guidance from the courts, typically through an appointed monitor — an independent third party who oversees operations and reports back to the court. The act only applies to large capital companies who owe their creditors more than $5 million. When a company is under CCAA, creditors are prevented from taking legal action to collect owed money, while the insolvent company navigates the next steps for its business, which could include a compromise on debts to be voted on by the creditors. In some instances, the insolvent company never files a plan to reorganize, but rather sells off parts, or the entirety, of its assets, sometimes through liquidation.
Filing under CCAA can offer a company a chance to avoid bankruptcy and pay creditors some of what’s owed.
The framework of the Bankruptcy and Insolvency Act allows a company to either liquidate assets and distribute the proceeds to creditors in a process overseen by the courts, or allow the insolvent business to avoid bankruptcy by reaching arrangements with its creditors that help reorganize the business.