Thursday, March 20, 2008

Expert Opinion on CCAA and implications

We have received numerous questions from investors about the difference between the Trust Indenture and CCAA. What are the implications of the Crawford Committee converting the trusts to corporations and filing for court protection? We reached out to seek an expert opinion on this topic. Jerrard Gaertner is accountant who specializes in bankruptcy and was happy to offer his advice. Clarity Financial Strategy is pleased to provide an opinion from an expert in this area.

By: Jerrard Gaertner CA, CIRP, CIA, CFI, Soberman LLP

Trust Indenture vs. CCAA

The move from a trust indenture (which is essentially a borrowing and security contract) to the Companies’ Creditors Arrangement Act (“CCAA” - which is a legal framework within which stakeholders and the Court re-organize an entity) entails a substantial shift in “power” away from management and toward the creditors and noteholders as a whole. However, the exercise of this power is now constrained by the Court, procedures, timelines and protocols established within the CCAA.

In addition, the shift entails some loss of individual noteholder’s automony in favour of the group, since it is now the noteholders en masse making choices. Those that disagree, if they are a small enough minority, are compelled to go along.

Here are some of the finer points:

If a noteholder votes “no”, but the plan of re-organization is nevertheless approved by the requisite majorities and the Court, that noteholder is still bound by its terms.

If the plan of re-organization is approved, any right to sue will at best be highly restricted, at worst it will disappear.

Suing for the recovery of money lost on the basis of a commercial debt obligation will probably not be possible, because the plan of re-organization entails a permanent stay of proceedings and a Court ordered compromise of debt.
However, with the permission of the Court, it is sometimes possible to sue if the basis for the action is fraud or there is some overriding social policy objective at play.
The Court will be loath to endanger the re-organization by permitting lawsuits, so the plaintiff must have VERY good reasons to sue (not just lost money).
Moreover, the Court may determine that even if the lawsuit is eventually won, the award simply becomes another pro-rata claim in the CCAA proceeding and will never be paid in full.

If a noteholder votes “yes”, but the plan is not approved, all bets are off. In the most likely scenario, another plan would be proposed; alternatively, the trusts can file for bankruptcy protection.

What would happen if the corporations were to go into bankruptcy?

The most fundamental difference between bankruptcy and a CCAA filing is one of control. Bankruptcy entails the appointment of a Trustee and by operation of law, all assets of the Debtor corporation vest in him (or her) immediately. From that moment onward, neither the shareholders nor Board of Directors have any real say in what happens to the company’s assets, or who gets what.

By contract, when a plan of re-organization is filed under the Companies’ Creditors Arrangement Act (CCAA), there is no vesting of assets and only some loss of control on the part of the shareholders and Board. A CCAA filing is designed to give management time to reorganize the company, not an outside Trustee the opportunity to liquidate it.

A CCAA proceeding is a complex, multilateral process that is much less prescribed than a bankruptcy. Management, senior/secured creditors, statutory creditors (GST, source deductions), unions and employees, landlords, critical suppliers, the Court and its monitor (usually a Trustee) and even shareholders participate in negotiations aimed at creating a viable company from the existing insolvent one.

Under the CCAA:

management proposes the classification and prioritization of creditors (within limits) for voting purposes and in respect of proposed recovery by creditor class;
the court approves or rejects management’s classification;
if approved, creditors vote on the reorganization package; and
if accepted by the requisite majority (by class), the plan of reorganization essentially morphs into a Court Order by which ALL creditors are bound (whether having voted “yes” or not).

So what about the Noteholders?

On balance, my take is that they are far better off with the CCAA filing than with a bankruptcy.

The CCAA provides far more procedural and financial flexibility than does a bankruptcy.
A CCAA proceeding is court-driven (meaning the parties almost always have an opportunity to present their point of view) whereas in bankruptcy, the Trustee and inspectors have considerable power to deal with assets on their own.
With CCAA, the risk of a bargain basement sale of assets is arguably lower than in a pure liquidation.

Jerrard Gaertner CA, CIRP, CIA, CFI
Trustee in bankruptcy

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