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Commercial Insolvency
Businesses facing financial difficulties need to explore their options. We at MacKayCo will meet
with you and explain the options and the process. In order to prepare you we provide an
overview of the process. We include in commercial insolvencies, incorporated businesses,
partnerships, and the insolvency of individuals not in business but with complicated financial affairs.
This material is intended as an overview and is no substitute for professional guidance.
While we cannot and do not give legal advise, we will provide you a menu of options. This
is done on a confidential basis and there is no charge for the initial consultation. Please
feel free to call any of our representatives or to submit questions to us by email.
MacKayCo Services
TO DEBTORS
- Advise debtors on restructuring their affairs in order to recover from temporary set backs, to avoid bankruptcy
- Proposals
- Bankruptcy
- Companies Creditors Arrangement
TO CREDITORS
- Advise on collection matters;
- Serve as Receiver under security agreements including mortgages on real estate and assignments of rents;
- Serve as Trustee acting for creditors in bankruptcy matters
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I. A. Commercial Proposals
A Division I Proposal is an offer to creditors to compromise their claims. The offer can be made to both
unsecured and secured creditors and may be a deferral of time for payment in full or it may be an offer to
settle in full satisfaction at something less than 100¢ on the dollar, or it may be a combination of both of these.
The Proposal also provides for a stay of proceedings against the debtor. A Trustee is appointed to administer
the Proposal, but the Trustee does not normally go into possession of the assets. A Proposal provides for
the debtor to remain in possession and is similar to, but not the same as, a Chapter 11 proceedings in the
United States.
Debtors will often approach their larger creditors in advance of filing the Proposal to seek their support.
In order for a Proposal to be accepted, it requires a majority of 2/3 in dollar value and simple majority
in number of creditors voting in favour. It further requires the approval of the Court. Failure on either
count results in automatic Bankruptcy.
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B. Notice of Intention to Make a Proposal
Many Proposals are precipitated by pressure from creditors. In particular, a secured lender may be threatening
to appoint a Receiver to realise on the lenders security. That often prompted the filing of Proposals that were
hastily prepared and not well thought out.
Amendments to the Bankruptcy and Insolvency Act in 1992 attempted to deal with precipitous appointments of Receivers
and the race for assets in two ways. Firstly, a secured lender must now provide a debtor with ten days notice of its
intention to realise on its security. This gives the debtor ten days to consider its options. Secondly, a debtor can
now file a Notice of Intention to Make a Proposal. This gives the debtor an initial stay of proceedings for thirty
days and the debtor can apply for extensions of up to forty-five days each, the aggregate of which will not exceed
five months. In this period the debtor can take time to properly formulate its Proposal. Unfortunately, during
this period it will likely be cut off from additional borrowings and customers will be reluctant to deal with it.
Accordingly, the thirty day stay and the extensions are not something to be taken for granted. The Notice of
Intention and each extension adds an extra layer of cost on to the cost of the Proposal, at a time when the debtor
can at least afford it.
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II. Bankruptcy Proceedings
A. Bankruptcy
Bankruptcy and Insolvency Act proceedings are intended to provide for an orderly realization of assets, to facilitate
an investigation into the affairs of the debtor, to prevent fraudulent evasion of obligations and to provide an
equitable distribution to all creditors. The Act also provides for a stay of proceedings against the debtor and a
forum to facilitate the rehabilitation of the individual debtor. It provides honest debtors with an opportunity
to discharge their debts.
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B. Type of Bankruptcy
Bankruptcies are originated either by assignments made by the debtor or by petitions made to the Court by
creditors. One is voluntary and the other is involuntary.
1. Voluntary Bankruptcy
A debtor assigns all of its assets and liabilities to a Trustee in bankruptcy. The Trustee lodges the documents
with the Official Receiver, an employee of the Superintendent of Bankruptcy of Canada. The appointment of the
Trustee is made by the Official Receiver on an interim basis.
The Trustee will immediately upon appointment, take possession of all of the assets and make an inventory of
same. The Trustee will call a meeting of creditors, by mailing to the creditors notice of the bankruptcy,
lists of creditors and Proof of Claim forms. The creditors are asked to file their claims and must do so
prior to the creditors meeting if they choose to participate in the creditors meeting.
The Trustee will make a preliminary investigation of the debtor's affairs to try to determine the cause
of the insolvency. The Trustee will also be looking for reviewable transactions, that is transactions
that can be set aside for the benefit of creditors.
At the creditors meeting, the Trustee submits a written report to the creditors on its preliminary
investigation. It normally makes a recommendation as to how the assets should be realised upon and any
litigious matters. The bankruptcy is normally a liquidation. A Trustee rarely carries on the business of the debtor.
The creditors meeting will be asked to affirm the appointment of the Trustee, appointed on a preliminary basis
by the Official Receiver, and will be asked to appoint inspectors. They appoint anywhere from one to five
inspectors, usually from amongst the creditors. It is the inspectors that give the Trustee its instructions
and approve any sales conducted by the Trustee.
Once the assets have been liquidated the Trustee adjudicates the claims received and then distributes the
funds to creditors. There are many checks and balances provided under the Bankruptcy and Insolvency Act
and many notices are sent to either creditors, Inspectors, the Court or the Official Receiver. These notices
are time sensitive, but it is not unusual for a corporate estate to take two years to fully administer.
In straightforward estates one year is more the norm.
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2. Involuntary Bankruptcy
A bankruptcy petition is initiated by a creditor. The first step is for the creditor to identify a Trustee who
will agree to act. Once appointed, the Trustee is obligated to complete the statutory duties, whether there are
any available assets to cover the costs of administration or not. A petitioning creditor should be prepared to
provide a retainer to a Trustee and to indemnify the Trustee for costs.
The petition is served on the debtor and there is a hearing a minimum of ten days later. The debtor may argue
that it is not insolvent and that it should not be adjudged bankrupt. The creditor will argue the contrary.
If the Court agrees with the petitioner it will hand down a Receiving Order which gives effect to the bankruptcy
of the debtor. The Trustee then performs the same duties that it would under an Assignment, except that often
it does not have the same degree of co-operation since the Appointment is involuntary.
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III. Receivership
A Receiver or Receiver-Manager may be appointed by a secured lender under a General Security Agreement covering
all of the security of the debtor, under a specific mortgage such as a mortgage of an office building or apartment
block, and may be appointed under the Supreme Court rules if the Court thinks it is just and equitable. This may
occur where, for example, there is a shareholders' dispute.
In the most common form of receivership, that is under a Security Agreement, the Receiver is appointed to take
possession of the assets, to manage them in such a manner that provides the secured lender will be paid out, or
to liquidate them for the same purpose.
The Receiver or Receiver-Manager acts primarily for the secured lender, but also has a fiduciary relationship to
the debtor. The Receiver must act in good faith and preserve the assets of the debtor, but is not obligated to
consider the long term objectives of the debtor. If the Receiver-Manager can realise sufficient funds to pay out
the secured lender in the short term, then the Receiver-Manager will most likely be there only for the short term.
Once the secured lender is paid out the surplus assets are returned to the debtor to be managed by its directors.
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IV. Companies' Creditors Arrangement Act (CCAA)
CCAA has been described as Canada's equivalent to the U.S. Chapter 11 proceedings, which involves the debtor
retaining control of its assets and a stay of proceedings on all creditors' actions, while a workable plan
of reorganisation is formulated for the Court's approval.
There are similarities to the Bankruptcy and Insolvency Act. CCAA plans customarily involve debt reduction
and/or extension of time, and can involve releases from certain contractual obligations. The plan must
similarly be accepted by the creditors and subsequently approved by the Court. Failure to do so will
lift the stay and release the debtor to face the collection actions of the individual creditors. A Creditors
Committee may be appointed to oversee the process, as do the inspectors in a bankruptcy.
The differences between CCAA and the Bankruptcy and Insolvency Act are of greater interest:-
- CCAA proceedings are driven by applications to, and Orders of the Court. This sometimes gives greater
flexibility than is available under the more codified form of the Bankruptcy and Insolvency Act and Rules.
- Consequently, lawyers play a more prominent role in CCAA. Accountants will participate as a Monitor to
oversee and report on the debtor's financial affairs during the period of the stay of proceedings.
CCAA is only available to large debtors because of the complexity and cost of the ongoing Court proceedings.
Access is limited to CCAA to corporate groups with debt in excess of
$5 million. There is no such qualifying minimum to Proposals under the Bankruptcy and Insolvency Act.
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V. Interim Receiver
Interim Receivers may be appointed in several situations:
A. Under A Bankruptcy Petition
One can see from the foregoing section on Petitions, IIB 2 above, that in the ten day period between the petition
and the hearing, or a longer period if adjournments are granted, and they frequently are, the debtor has an
opportunity to hide assets. If the petitioner is of the view that it would be cost effective, the petitioner
can apply for an Interim Receiver. This is an Ex-parte Order (without notice to the parties) handed down at
the same time that the petition is filed. There is no notice to the debtor.
The Interim Receiver is normally the Trustee named as Trustee in the Petition. The Interim Receiver attends
at the debtors premises to safeguard the assets. The Interim Receiver would usually change the locks, open
new bank accounts, confirm insurance and generally take protective measures including ensuring receipts are
deposited to the Interim Receiver's accounts. The Interim Receiver has no management powers and must relinquish
the receipts to the debtor for legitimate purposes.
The Interim Receiver may find it necessary to stay on the premises during business hours. This can be costly in a
retail operation with several branches in shopping centres that do business seven days a week. The petitioner will
be called upon to pay the Interim Receiver's expenses and will have to indemnify the Interim Receiver if the
application was improperly brought on or if the debtor suffers damages as a result of the appointment of the
Interim Receiver.
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B. In Receivership Situations
The appointment of a Receiver on application of a secured creditor requires that ten days notice be given to
the debtor. An Interim Receiver may be appointed for this interim period. The Interim Receiver's duties may
be set out in the Order but generally are to safeguard assets. The appointment of a Receiver on initiation
from someone other than a secured creditor, such as a shareholder, a securities commission or other regulatory
body, will not require the ten day notice.
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C. Pending Proposal Meeting, Appointed By The Court
Where a Notice of Intention to Make a Proposal or a Proposal has been filed, the Court may, if it can be
shown to be necessary for the protection of the debtor's estate or for one or more of the creditors generally,
appoint a Trustee as Interim Receiver. The Court will set out the duties of the Interim Receiver which may be
expanded over those enumerated above.
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D. Appointed By The Proposal
The Proposal put forward by a debtor contains terms dictated by the debtor. If the debtor believes that there
is reason to believe that the estate will dissipate or that the creditors mistrust the debtor, the debtor may
by the terms of the Proposal, appoint an Interim Receiver for the protection of the creditors.
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