Canadian Insolvency Law

In this paper I will review the similarities and differences between the Canadian
CCAA (Companies Creditors Arrangement Act) and the Chapter 11 of the U.S.
Bankruptcy Code. At the end of this work I will present my preferences features of
each system and the reasons for my preferences.

Both the CCAA and the USA's chapter 11 are federal statutes meant for the
reorganization of an Insolvent business.1 The main goals of those body of law is to
help businesses emerge from a state of bankruptcy or to sell their assets to a third
party.2

Under the CCAA law there are several conditions in order for a debtor to file for
reliefs: (1) The debtor must meet one of the Canadian statute requirements. Thats
means that it's must be a company incorporated in Canada or having assets in Canada

1
Linc A. Rogers and Pamela L.J. Huff, Commercial Restructuring and Insolvency in Canada, Bankruptcy
and Insolvency Basics For Lawyers, 2 [2011].
2
Ibid.

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or to conduct businesses in Canada; (2) The debtor must be insolvent or to commit
an act of bankruptcy as within the meaning set out in the BIA; (3) The debtor also
Have in excess of C$5-million in debt or an aggregate in excess of C$5- million in
debt for a filing corporate family.3A Partnership or a solvent company cannot file
Under the CCAA (although the Canadian courts have granted reliefs similar to the
CCAA to partnerships and solvent entities).
In contrast, Chapter 11 does not have such strict conditions and more entities can
apply for petition. Partnerships and even high wealth individuals can file under
chapter 11, and the debtor mustnt even be insolvent.4
In both the CCAA and chapter 11 a creditor can also initiate an involuntary
proceeding upon the debtor, although it is unusual.5
Under chapter 11, the debtor can also get an automatic stay of proceeding, just by
filing a petition. The petition can be filed by electronic means, and debtor thus
achieves a skeletal stay of proceedings and by that subsequently obtains a first day
relief.6 Under the CCAA, the stay of proceeding isnt automatic and it depends on the
court approval. The debtor company must seek the granting of a single omnibus initial
order that will provide her a comprehensive stay of proceedings and other reliefs
under the statute.7

Another difference between the statutes is the scope of the stay of proceeding thats
granted by the courts. While under chapter 11 there's no time limits on the stay
granted at the "first day", under the CCAA the time scope of the stay is in the
discretion of the court. The court will typically exercise its discretion to issue an
initial stay for up to a maximum of 30 days. For any extension an application to the
court is required. There is no statutory limit on the duration or length of extensions
that the court can grant the debtor.8

Another difference is that while proceedings under the CCAA are commenced by an
initial application to the superior court of the relevant province in Canada, In the US

3
Ibid.
4
Jeanette L. Thomas et al., WHAT CANADIANS NEED TO KNOW ABOUT US INSOLVENCY LAW , 3
(undated).
5
Rogers and Huff, 4.
6
Ibid.
7
Ibid.
8
Ibid, 5.

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applications under chapter 11 are submitted to the federal bankruptcy court, which is a
unit of the District Courts with subject matter jurisdiction over bankruptcy cases.9

Another big difference between the CCAA and chapter 11 is the court supervision
over the debtor. As part of the initial order under the CCAA, the court appoints a
"monitor" to supervise and advise the debtor. In its supervisory role, the monitor
oversees the steps taken by the company as an officer of the court. The monitor also
files periodic reports with the court and creditors, including reports of the debtor's
business and affaire. The monitors duties can also be expanded by the court order.10
There is no similar duty under chapter 11. On the other hand, under chapter 11 a
trustee may be appointed upon request of a party in interest in extraordinary cases of
fraud or gross mismanagement.11 If it is appointed, the trustee will operate (or
liquidates) the estate in the debtors place. The US bankruptcy court may also appoint
an examiner to investigate certain allegations of fraud, dishonesty etc.12
In the US, there's also The U.S. Trustee, a division of the Department of Justice, a
government agency whose main job is to license the Trustee in Bankruptcy, but they
sometimes intervene in bankruptcies to make sure that everything in the process is
fair.13 They conduct the meeting of creditors; monitor the debtor in possessions
operation of the business and reviews operating reports and professional fees. The
U.S. Trustee also imposes certain requirements on the debtor with respect to reporting
its monthly income and operating expenses, and paying current employee withholding
and other taxes. The Canadian CCAA doesn't have a direct equivalent to the U.S.
Trustee,14 although the Monitor and Office of the Superintendent of Bankruptcy
(OSB), department of the federal government, perform some of the same oversight
functions.15
In both the CCAA and the chapter 11 proceedings, the debtors management will
remain in control of the business and coordinates the reorganization efforts.16

9
Mark Zigler, class; 11U.S. Code 105.
10
Rogers and Huff, 5.
11
U.S. Code CH.11 1104.
12
Ibid.
13
Thomas et al., 22.
Rogers and Huff, 6.14
15
See the Office of the Superintendent of Bankruptcy Canada web site:
https://www.ic.gc.ca/eic/site/bsf-osb.nsf/eng/h_br01852.html#mission.
16
Rogers and Huff, 5.

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However, under the CCAA the monitor will assist management in dealing with the
restructuring of the company and with other issues that arise.17

In CCAA and chapter 11 the court can generally authorize DIP ("debtor in
possession") financing.18 Thats means that the court can grant super priority charges
over the assets of the debtor in favor of the DIP lender, At the request of the debtor
company. Under the CCAA, The DIP financing will be granted if the court will be
convinced that additional financing during the restructuring is critical to the continued
operations of the business. The CCAA statute require the courts to take into account
among other things: the expected duration of proceedings, the way that the debtors
business and financial affairs are managed during the proceedings, the confidence of
the major creditor has on the debtor's management, the monitors report on the cash
flow forecast etc. 19

Under the US chapter 11, the court will approve DIP financing as long as he satisfied
that the debtor cannot obtain such financing on less burdensome terms and that non-
consenting pre-petition secured lenders that are primed are adequately protected".20
Adequate protection can take many shapes and forms like periodic payments to the
secured party or as an additional or replacement lien on the debtor's property and so
on. Canada hasn't adopted the U.S. concept of adequate protection. Although
Canadian courts may provide protective relief in orders to address prejudice to other
creditors of the debtor.

Another issue that can be compared between the two statutes is treatment at executory
contracts. Chapter 11 allows the debtor, under court approval, to assume or reject
executory contracts.21 Rejection is automatic if the contract is not assumed within a
certain time. Under the CCAA the debtor is not required to elect to accept or to reject
certain executory contracts (other than aircraft leases) or real property leases. 22 A
debtor under the CCAA must fulfill its post-filing obligations under all agreements
unless the debtor disclaims the agreement in accordance with the CCAA. Disclaimers
by the debtor are subject to approval by the Monitor or by the Court. In his approval,

17
Ibid.
18
Ibid, 6.
19
Ibid.
20
Ibid, 6- 7.
21
Thomas et al., 5.
22
Rogers and Huff, 7.

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the court will take into account whether the disclaimer of the contract will cause the
debtors counterparty significant financial hardship. All disclaimers approved by the
monitor are subject to review by the court if the counterparties object.23

There are also similarities and differences in the statutes attitude towards suppliers.
Under the CCAA the Canadian Courts can order critical supplier to continue to supply
goods and services.24 That means that suppliers cannot terminate their agreement with
the debtor company as a result of the stay of proceeding. The CCAA protect these
suppliers by providing that they are not required to continue to supply goods on
credit, and they are not obliged to continue supplying unless they paid. If the supplier
elects to continue providing goods or services on credit, he does not get any priority
over the debtor property. However, the Court may give a priority to a "critical
vendors" (vendors which considered vital to the ongoing operation of the business),
and grant them a charge over all or any part of the debtors property to secure their
payment. They can be given a priority over any secured creditor of the debtor.25
In contrast, under chapter 11 the debtor may request the Bankruptcy Court to
authorize it to immediately pay (and not just to give a priority) the pre-petition claims
of critical vendors in exchange for such critical vendor selling to the debtor post-
petition on credit.26 There was also the historic similar approach in Canada, but The
2009 amendments to the CCAA change it.27
As I mentioned before, the CCAA and chapter 11 are aimed for the reorganization of
insolvent businesses. Both those statutes authorize the debtor to file a plan of
arrangement or compromise with its creditors. Under the CCAA, the Plans of a may
be filed by the debtor, any creditor, a trustee in bankruptcy or liquidator of the debtor.
But As a matter of practice, plans are almost always filed by a debtor, or filed by a
creditor, with the consent of the debtor. The CCAA does not provide for an
exclusivity period which Dedicated for the debtor only to file for a plan.28
In contrast, chapter 11 takes a different approach and grants the debtor an exclusive
period to file for a plan. Under chapter 11 the debtor has an exclusive right to file a

23
Ibid.
24
Ibid, 8.
25
Ibid, 8-9.
26
Mark G. Douglas, Paying Pre-Petition Critical Vendor Claims Without Relying on the Doctrine of
Necessity, 1-2 [2005].
27
Rogers and Huff, 8.
28
Ibid, 9.

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plan for 120 days after the petition date and the exclusive right to solicit acceptances
of the plan during the first 180 days after the petition date. Bankruptcy Courts may
extend the debtors "Exclusivity Periods" up to 18 months (to file a plan) and 20
months (to solicit acceptances of the plan). After those periods, any party in interest
may file a plan under chapter 11.29
In voting for the reorganization plan Under the CCAA, the Creditors are separated
into different classes based on the principle of commonality of interest. Each class of
creditors to which the plan is proposed is entitled to vote on the plan. For a plan to be
approved it must be supported by a double majority in each class of creditors: more
than 50% of the total number of creditors voting in the class and 2/3 of the total value
of claims voting in the class.30

In the US's chapter 11 normally the decision of approving the plan need to pass the
same special double majority in each class as in the CCAA (majority of the number of
creditors and 2/3 of the value).31 But there's a difference, and according to chapter 11
As long as there is at least one impaired accepting class, the Bankruptcy Court can
cram down a plan over dissenting classes of creditors, and pass the plan of
arrangement despite objections. In order to "cram down" a plan, the plan must not
"discriminate unfairly," and it has to be "fair and equitable". In Canada there is no
there is no concept of cram-down and the plan must be approved by each class of
creditors affected by the plan.32

Both the CCAA and chapter 11 have a similar demand that after the reorganization
plan is approved by the creditors, it must then be submitted to the court for approval.
In Canada this proceeding is known as "the sanction" or "the fairness hearing", and in
it's the court determine whether the plan is fair and reasonable (the Creditor approval
is a significant factor for that determination).33
Under chapter 11 there's an equivalent demand for confirmation hearing, but with bit
different requirements. The Bankruptcy court can only confirm a plan if it complies
with the relevant provisions of the Bankruptcy Code, was proposed in good faith is

29
Ibid,9; Thomas et al., 9.
30
Rogers and Huff, 10.
31
Thomas et al., 10.
32
Ibid, 11.
33
Rogers and Huff, 10- 11.

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feasible, pays creditors more than they would have received in liquidation, and has
been accepted by at least one impaired class.34

In my opinion there are features in both the statues that are preferable. I think that the
CCAA toward the granting of the initial stay of proceeding is more accurate. I dont
think that the debtor should receive a "first day" relief and stay of proceeding without
having to prove anything. This procedure can be misused by the debtor and offence
the creditor without justification. The cost of automatic stay of proceeding is falls
largely upon the debtor small creditors, who often the income needs stream for the
continuing of their businesses (the tragedy of the insolvent man or company, is in
many times the tragedy of theirs suppliers and workers). In my opinion, the stay of
proceeding must be considered seriously before granted by the court and not on an
automatic basis.
On the other hand, I think that because of the General interest in reorganization of
debtors (of the creditors and Of society as a whole(, that the options provided by these
Rules should be open to partnerships and other economic entities and large-scale
business (like gas partnerships) and not just for companies as in the CCAA.

I also dont think that the CCAA condition that the debtor will have an excess of
C$5-million in liabilities is appropriate because this process have high costs (time,
officers salary, the stop of the company economic activity etc.) and for reasons of
efficiency (especially if we want the court to be involved the depth of the procedure)
Another feature of the CCAA that I prefer is Monitor. Because of the mix of interest
involve in bankruptcies, the sensitivity of procedure, the fear from creditors deception
and because that on the surface the business management proved that she's
Incompetent to lead the business (the Economic failure as evidence), I think that the
court as a neutral third party who sees the various considerations should be more
involve in the procedure Through the monitor, as an officer of the court.

In my opinion the chapter 11 "adequate protection" arrangements is preferable for

creditors when the debtor obtains DIP financing. I think it gives the court another
important measure and freedom of action in order to help the debtor and the creditor's
interest.

34
Thomas et al., 10-11.

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For that reason I also prefer the chapter 11 "Cram down" option over the CCAA
arrangement because it gives the court freedom of action and the option to do what is
good for most of the creditors, the debtor and the company (workers, society etc.)
even against a creditor who is a stubborn resistance or try to blackmail the company.

in sum, the US The Bankruptcy Code chapter 11 and the Canadian CCAA give the
court powerful tools in order to help debtor business to reorganize and emerge from a
state of bankruptcy. In my opinion, the court rule in this procedure is crucial, among
others due to its neutral status between the parties and we shell Strive to expand its
powers and capacities, even at the expense of the debtor, the company management or
even over some of the creditors.