Insolvency Becomes Customized

It’s been called a “bespoke solution” to insolvency proceedings: Canada’s Companies’ Creditors Arrangement Act (CCAA) or, indeed, “Canada’s other insolvency proceedings.” Canadian insolvency lawyers call it more flexible than other international regimes, and more principles- rather than rules-based, allowing for faster and more efficient outcomes.

“The Canadian Act [has] an important section that says a judge can make any order that he or she sees fit, [that] she thinks appropriate in the circumstances,” says Robert Thornton of Thornton Grout Finnigan LLP in Toronto, a boutique firm practising exclusively in the areas of litigation and restructuring.

By comparison, says Thornton, the US bankruptcy system “has developed over many decades, and is now, I believe, thousands of sections and subsections long, and if you can’t fit within a particular section or subsection, then the idea is that it can’t be done. The philosophy behind the two regimes are dramatically different.”

In November 2016, Pacific Exploration and Production Corp., a Canadian company that was the largest non-state oil producer in Latin America, announced it had successfully implemented a restructuring plan under the CCAA, even though it largely operated in Colombia. This was novel in Colombia, says Melaney Wagner, a partner in the Corporate Restructuring Group at Goodmans LLP in Toronto, as “Colombia recognition proceedings had never been used with the CCAA” before. (Goodmans was counsel to the ad hoc noteholders in the proceedings.)

However, she says, a unique feature of the CCAA proceedings is the court-appointed monitor, who in this case built a connection with the office of the superintendent of bankruptcy in Colombia and worked closely with it. This avoided Pacific being taken over by the superintendent, says Wagner. The court-appointed monitor “was instrumental …, so because of that, and all of the flexibility under our statute, the Pacific [restructuring] was completed in a time-effective and cost-efficient manner.” In June 2017 the company changed its name to Frontera Energy Corp. and is listed on the TSX.

While insolvency lawyers don’t see a general swing to using the Canadian insolvency regime in international restructurings, they see its advantages and aren’t surprised when it is favoured over other regimes.

“Our regime has a lot to commend it,” says Thornton. “But clients in particular are reluctant to go into an uncertain regime as opposed to one [such as the US regime] where they can predict the result — even if it takes longer and costs more.”

Perhaps the greatest foreign player in Canadian insolvency proceedings is the United States, where investors are often located. The US Bankruptcy Code is more codified and rules-based, insolvency practitioners agree, though one that allows players to show up at the last minute, on the courthouse steps, to make a deal; it’s described as results- rather than principles- and process-driven.

“The Canadian system is more flexible and practical,” says Alex MacFarlane, a partner in Borden Ladner Gervais LLP’s Toronto office and national co-chair of BLG’s Insolvency & Restructuring Group. “It leaves more discretion with the sitting judge and allows others to come up with solutions.”

However, he says, “the systems work pretty smoothly together.”

Wagner agrees that “the CCAA is a lean and flexible statute with fewer codified rules,” which allows courts to adapt to unique circumstances. “We aren’t tied to a lengthy code, like the US Bankruptcy Code, and multiple first-day papers and motions that significantly increase the cost of the proceedings,” she says. “Under our CCAA, we have one initial order that covers all first-day relief” in proceedings. “And that’s based on a model order that was developed with the assistance of our judges and the insolvency Bar for efficiency.

“Relief after the first day is driven by principles as opposed to rigid rules,” Wagner adds. There is more flexibility under the inherent jurisdiction of the CCAA courts for third-party releases, and which are sometimes key to resolution of a case. “We don’t have unsecured creditors’ committees that are statutorily mandated and very active in the United States that can lead to increased costs and lengthier proceedings,” she says. What the CCAA provides for is a court-appointed monitor to look out for the interests of stakeholders in a fair and efficient manner.

Challenges can arise when a Canadian company is a debtor in processes under Chapter 11 of the US Bankruptcy Code and in Canada under the CCAA, she says. “It’s more cumbersome and you’re trying to meet both sets of rules, which are not the same.” If there is a conflict between the two regimes, the Canadian company that files in both jurisdictions may be disadvantaged by the more rigid US regime.

For this reason, Wagner says her firm typically advocates for concurrent proceedings whereby a corporation with legal entities in both Canada and the US has its Canadian companies file proceedings in Canada and its US companies in the United States. She gives the example of Golf Town, owned and operated by Golfsmith International Holdings Inc. of Austin, Texas. While very few locations were closed in Canada, almost all locations in the US were closed down, she says. The US and Canadian companies were in a shared credit facility and the US operations were in dire straits. The proceedings ran separately, in two jurisdictions and under two regimes. This meant that US trade creditors didn’t get Canadian assets; rather, the Canadian assets got to those creditors, and the Canadian operations continued.

The restructuring of Target Canada also used the CCAA, she says (Goodmans acted for the court-appointed monitor), and although there was initial trepidation, as Target US was the parent, the restructuring was a success. “That plan received virtually unheard-of approvals,” says Wagner.

As head of the Restructuring & Insolvency group in Calgary for Blake, Cassels & Graydon LLPKelly Bourassa has handled parallel and other proceedings on both sides of the Canada/US border. Canadian and US proceedings, despite their differences, do have a lot of similarities, she says. “They still have the same underlying concepts of debtor in possession, restructuring and the idea that creditors can be compromised.

“In the French sauvegarde regime, it becomes very interesting because even where there is not enough money to pay all the creditors, shareholders still get a vote,” she says, “which is completely averse to what would be accepted in Canada and in the US, where we both have the view that equity claims have to come behind debt.”

In 2015 and 2016, Bourassa handled two “very similar” restructuring cases involving Canadian entities with US assets. One case, Parallel Energy, involved parallel proceedings, while the second, Argent Energy, engaged the CCAA in Canada and Chapter 15 proceedings in the US (recognition proceedings under the US Bankruptcy Code). The Parallel case is still not fully resolved, she says; however, the second case, which was started in February 2016, was fully resolved by the end of the year.

“So there’s the ability to run a much quicker process under the CCAA,” Bourassa says.

Bourassa has seen great success, she says, with CCAA proceedings with Chapter 15 proceedings in the US. “From my own experience, we’ve been able to incorporate the Canadian principles” especially in cases where there are not enough assets to pay secured creditors, as Canadian proceedings value them more. “In a few cases … it allowed us to avoid some of the rules that would be commonplace in a Chapter 11 proceeding, because they’re not part of Canadian regime. So we’ve been able to streamline the US proceedings.”

Other foreign jurisdictions can come into play in international restructurings, sometimes with struggles to coordinate regimes. MacFarlane recalls the winding up of the business of Maple Bank GmbH in Canada. It was the first authorized foreign bank liquidation in Canada and was liquidated by German regulators, he says.

“We had two different systems; in Canada, it was the Winding-up and Restructuring Act, but the Germans wanted to apply their system in Canada,” he says. Borden Ladner Gervais, acting for the liquidator, was adamant that the CCAA should be used. “We ended up working out a protocol with the Germans, so the two systems did work in the end, and quite effectively. But you just have to work out a protocol, and that’s what largely happens between US cases and Canadian cases: that the lawyers, monitor, judges work out a cross-border protocol that helps run the two cases smoothly.”

Several international cases involving mining companies have used the CCAA regime, including Crystallex International Corporation, he says. Crystallex has operations in Venezuela and chose Canada to restructure; “that’s still ongoing.” Great Basin Gold Limited also restructured in Canada; based in Vancouver, it has mining assets in Africa. “Canada is used quite frequently for such cases. For companies that have head offices in Toronto or Vancouver, it gives them the legal basis to file in Canada.”

MacFarlane is seeing more coordination of the Canadian and American regimes, and Wagner, too, notes that international companies, stakeholders and advisors are seeing more examples of successful restructurings under the CCAA.

“They’re becoming more familiar with the flexibility, optionality and efficiencies of our CCAA regimes and the effect of our Canadian orders,” she says. “This is leading to more discussion and consideration at the initial strategizing stage, as there’s a recognition of what can be done under our CCAA, and a desire to take advantage of these benefits.