The Canadian Creditor’s Arrangement Act, (“CCAA”) is federal legislation that provides insolvent companies the opportunity to restructure their affairs, in doing so, it provides the company the ability to avoid bankruptcy while opening dialogue with its’ creditors.

To start the dialogue the troubled company seeks an order from the court under the CCAA. This Order provides an immediate 30 day Stay of Proceedings* against the company affording the company the time to prepare its Plan of Arrangement.

A Plan of Arrangement is an offer from the company to its creditors in which the creditors are offered a reduced amount, on the outstanding debt, in exchange for the company paying a lump sum of cash, or entering into a payment plan. The CCAA offers significant flexibility and not all plans involve a payment. Plans can include an offer of shares, possessions or cash or a mixture of the three.

The troubled company has the ability to exclude a specific creditor or group of creditors from its Plan, and can even include the shareholders as creditors. There is no limit to what the Plan could entail.

In order to be eligible under the CCAA, the company must be:

  1. a Canadian company; or,
  2. a foreign company with assets in Canada or conducting business in Canada; or,
  3. an income trust;

The company must be insolvent or have committed an act of bankruptcy and the company must have in excess of $5 million in debt.

After receiving the Plan of Arrangement the creditors will meet to vote on acceptance of the Plan. In order to be accepted, and therefore binding on all the creditors in that class, 2/3rds of the creditors, by dollar value, must approve the Plan. If the creditors don’t immediately approve the Plan it can be altered by negotiation between the creditors and the company until all the necessary changes are made to have it approved.

If the creditors and the insolvent company cannot come to an agreement the Plan is rejected and the troubled company loses the protection of the Stay of Proceedings, which ultimately would result in the insolvent company filing for bankruptcy under the Bankruptcy and Insolvency Act (“BIA”). From a creditor perspective, an insolvent company filing for bankruptcy would be the least beneficial option available.

*Stay of Proceedings is the halting of all legal and collection actions by the creditors against the insolvent company.