Every company’s goal is to survive and do business despite the different risks that it may encounter. There may come a point when financial difficulties become too overwhelming, and there’s a need to restructure one’s business, operations, and especially its financial aspect. For this, it’s important to first get a grasp on the steps in financial restructuring to better understand what happens during this process.
What is financial restructuring?
Financial restructuring is one of the options of financially challenged businesses and corporations (called the debtor). It looks to reorganize the debtor’s financial structure, for two purposes:
- to still meet the demands of its creditors on the payment of its debts
- to continue its business and keep ownership over its assets
At the end of a court-supervised process, the debtor and its creditors will enter an agreement on debt repayment. It will also avoid being declared bankrupt on the part of the debtor, which has a different set of procedures and rules.
But while the debtor’s business may continue so it can pay its creditors during this time, there are some consequences of financial restructurings to meet the terms of the agreement:
- some employees may have to be laid off
- departments may be merged into one
- expenditures will be cut to save money
- assets (real or personal) will be sold
Watch this video that shortly explains what a company or financial restructuring is:
Manitoban businesses interested in financial restructuring can consult any of the Lexpert-ranked best insolvency and financial restructuring lawyers in Manitoba.
Canadian laws on financial restructuring
In Canada, there are many laws that govern the framework of insolvency and restructuring. For financial restructuring, there are two important federal laws:
The specific law that applies to a debtor will depend on certain circumstances, and consulting with a legal professional is encouraged for this. It mainly revolves around the debt of the corporation involved:
|
CCAA |
BIA |
|
when the corporation’s debts are larger than $5 million |
when the corporation’s debts are below $5 million |
|
Plan of Compromise or Arrangement applies to insolvent corporations |
Consumer Proposal applies only to individuals; Division I Proposal applies both to individuals and corporations |
What are the steps in financial restructuring?
There are five steps in financial restructuring, whether under the CCAA or the BIA:
- Filing of the application in the court
- Creation of the plan or proposal
- Approval of the creditors’ claims
- Approval by the creditors of the plan or proposal
- Implementation of the plan or proposal
While these steps refer to a formal process guided by the court, the company and its creditors are not prevented from doing an out-of-court restructuring. The discussions below are mainly based on a court-supervised process.
1. Filing the application in court
The first of these steps in financial restructuring is filing an application before the appropriate body with jurisdiction over the matter:
- under the CCAA: called the initial application, which must be filed in the province where the head office or chief place of business of the debtor is located
- under the BIA’s Division I Proposal: called the notice of intention to file a proposal, which must be filed with the Office of the Superintendent of Bankruptcy (OSB), not with the courts
After an application or notice is filed, the debtor-company can avoid paying its creditors until the final plan (for the CCAA) or proposal (for the BIA) is finally approved. This is called a “stay”, where creditors cannot enforce their rights over the debtor — for the meantime. Creditors are also prevented from filing or continuing a court action against the debtor.
There’s a difference between the CCAA and the BIA as to the stay:
- CCAA: the court must issue an initial order that will protect the debtor from its creditors for a period of 30 days
- BIA: there’s an automatic stay after the filing of the notice of intention
2. Creation of the plan or proposal
If the initial application or notice of intention is accepted, the debtor will now put all its efforts into crafting the plan of compromise or arrangement (CCAA) or the proposal (BIA). This plan or proposal will lay out the details for how the financial restructuring will be done, and how creditors will be paid by the debtor. The court-appointed monitor may also help in the creation of the plan, among other functions.
For this plan or proposal, creditors may also be divided into classes, depending on:
- their common interests or claims
- whether they’re secured or unsecured
- for secured creditors, the nature of their security
- the remedies being offered such creditors
3. Approval of creditors’ claims
The claims of creditors, especially if disputed, must be approved for them to participate in any of these steps in financial restructuring. For instance, under the CCAA, a claims officer may be appointed by the court, to whom the creditors will file their proof of claim.
4. Approval by the creditors of the plan or proposal
One of the important steps in financial restructuring is that the creditors must approve the plan or proposal. A meeting will be held, where creditors will vote whether to approve or reject the proposed plan or proposal. Once approved by the creditors, it will then be approved again by the court, which will signify its implementation.
If the plan or proposal is rejected by the creditors, it will then have the following effects:
Under the CCAA
- the debtor-company is not automatically declared bankrupt
- the stay from its creditors will be lifted
- creditors may now pursue actions against the debtor-company
Under the BIA
- the debtor-company is automatically declared bankrupt from the date of the creditors’ meeting
5. Implementation of the plan or proposal
The plan or proposal will be binding upon the debtor and its creditors. These creditors will be paid according to the terms of the plan or proposal. However, there will be effects if the debtor violated any of its terms. For instance, according to the BIA, the proposal may be annulled, and the debtor may then be declared bankrupt for violating its own proposal.
Want to know more about these steps in financial restructuring? Reach out to the best insolvency and financial restructuring lawyers in Canada as ranked by Lexpert.