RESTRUCTURING OF A FINANCIALLY DISTRESSED BUSINESS: WHICH OPTION TO CHOOSE BETWEEN BIA AND CCAA?

When a business faces significant financial pressure — whether due to liquidity shortages, overly insistent creditors, or other factors — insolvency often becomes only a matter of time. In such a context, restructuring is frequently the preferred avenue to avoid bankruptcy and preserve enterprise value. What options are then available to an insolvent business?

In Canada, two primary regimes govern such restructurings: the filing of a proposal under the Bankruptcy and Insolvency Act (the “BIA”) or an arrangement proceeding under the Companies’ Creditors Arrangement Act (the “CCAA”).

Although both regimes share the same objective, namely facilitating the survival of financially distressed businesses, the differences between them are numerous. Choosing the appropriate vehicle can directly affect both the likelihood of a successful restructuring and the costs involved. A brief overview of these two regimes is therefore necessary.

Proposal Proceedings under the BIA: A Structured and Expedited Framework

The BIA allows an insolvent company to file a notice of intention to make a proposal (“Notice of Intention”) in order to initiate restructuring proceedings and benefit from an automatic stay of proceedings. A restructuring period then follows, with the goal of ultimately present a viable proposal to creditors and overcome the insolvency situation.

Key Timelines

The first step is the filing of the Notice of Intention, which triggers a temporary stay of proceedings against both unsecured and secured creditors, subject to certain exceptions[1].

Within 10 days of filing the Notice of Intention, the following documents, generally prepared by the Trustee named in the Notice of Intention, must be filed: (1) a cash-flow statement; (2) a report from the trustee as to the reasonableness of that statement; and (3) a report from the debtor commenting on the statement[2].

Within 30 days of filing the Notice of Intention, the debtor must file a proposal, unless an extension is obtained from the court prior to the expiry of that period[3]. The proposal is an offer made to the creditors to address the company’s insolvency and is submitted to creditors for approval.

The initial 30-day period may be extended by up to an additional five months, in increments not exceeding 45 days[4]. In other words, once the Notice of Intention is filed, the debtor has a maximum of 6 months to complete its restructuring and file a proposal.

Once the proposal is approved by the creditors, it must then be approved by the Court[5]. If the creditors reject the proposal, the debtor is deemed to have made an assignment and is therefore bankrupt[6].

Short-Term Impacts on Creditors

The filing of a Notice of Intention automatically stays proceedings, preventing creditors from initiating or continuing legal action against the company or its assets[7].

However, certain exceptions apply. For example, a secured creditor that has issued the required statutory notice more than days prior to the filing of the notice of intention may proceed with the realization of its security[8].

Advantages and Disadvantages

Main advantages of the proposal framework are the following:

The filing of a Notice of Intention can be done quickly, allowing for the prompt imposition of a stay of proceedings with respect to creditors;
It is a much simpler and less costly process than proceedings under the CCAA, which are discussed below; and
The proposal process does not preclude the subsequent filing of an application under the CCAA, subject to certain conditions[9].

Conversely, the main generally recognized disadvantages are as follows:

The filing of a Notice of Intention does not prevent secured creditors from applying for the appointment of an interim receiver, namely an officer of the Court who would assume control of the company’s assets during the restructuring[10];
The six-month time limit to complete the restructuring may pose challenges where the number of creditors or the number of issues requiring negotiation is significant; and
In the event that the proposal is rejected by the creditors, the company is automatically deemed bankrupt[11].

Plan of Arrangement Under the CCAA: A Flexible Approach for Complex Situations

At the outset, it is worth noting that the CCAA provides a judicially supervised restructuring process intended for complex cases. It is available only to companies with debts exceeding $5,000,000[12].

Key Timelines

CCAA proceedings begin with an application for an initial order granting a stay of proceedings against all creditors[13]. Unlike a Notice of Intention under the BIA, the mere filing of an application does not trigger a stay; it is the issuance of the initial order that provides such protection[14].

There is no prescribed timeline for filing a CCAA application. However, timing is important because the stay only takes effect once the court issues the initial order.

The initial order cannot exceed 10 days[15], while the length of subsequent extensions are at the court’s discretion[16]. Also, the Court will typically require regular appearances before it, often every few weeks or months, to monitor the progress of the restructuring.

Finally, there is no statutory time limit for completing the restructuring under the CCAA. The process generally concludes with creditor approval of a plan of arrangement, which must also be sanctioned by the court.

Short-Term Impacts on Creditors

As previously mentioned, the stay of proceedings applies only following the issuance of the initial order.

Because the stay arises from a court order, the court has broad discretion regarding its scope and conditions. In most cases, the stay extends to secured creditors. The order may also require financial institutions to maintain banking facilities; preserve directors’ and officers’ liability insurance (D&O), subject to payment of premiums; and prevent secured creditors from enforcing their security, provided post-filing obligations are met.

Advantages and Disadvantages

The main advantages of the CCAA proceedings are the following:

The process provides greater flexibility and more time to achieve the desired restructuring outcomes than proceedings under the BIA; and
The Court is vested with broader powers and may be further engaged as needed throughout the process in order to facilitate the most effective restructuring possible for the benefit of all stakeholders.

To the opposite, the most common disadvantages are:

The costs of this process are significantly higher than those associated with a proposal proceeding under the BIA, primarily due to the professional fees of the parties involved, including the monitor (as opposed to a trustee). Indeed, because this process entails more frequent appearances before the Court, it can quickly become more costly than proceedings conducted under the BIA; and
The time required to prepare and file an application under the CCAA is greater than that required to file a Notice of Intention under the BIA, as a court application must be drafted and supported by the relevant financial documentation at the time of filing (including a weekly cash flow statement, financial projections for the coming weeks to assess the need for interim financing, the company’s most recent financial statements, etc.). It is also customary, when filing an application seeking the issuance of an initial order, to submit a report from the proposed monitor setting out for the Court an overview of the debtor’s factual and financial circumstances.

Conclusion

In conclusion, both the BIA and the CCAA are powerful restructuring tools, but they differ fundamentally: the former emphasizes speed and structure, while the latter provides flexibility and greater judicial involvement.

The choice between them depends on several factors, including the size and complexity of the business, the structure and magnitude of its debt, the level of cooperation of the creditors, and the anticipated timeline for the restructuring, etc.

Each situation is unique. A strategic assessment of these options can significantly enhance the chances of a successful restructuring, at optimal cost and within an appropriate timeframe, while preserving enterprise value. Accordingly, at the first signs of financial distress, it is advisable to consult a professional, whether a legal advisor or a licensed insolvency trustee, who can guide the company through these options.

[1] s. 50.4 (1) BIA

[2] s. 50.4 (2) BIA

[3] s. 50.4 (8) BIA

[4] s. 50.4 (9) BIA

[5] s. 58 and 59 BIA

[6] s. 57 a) BIA

[7] s. 69 (1) BIA

[8] s. 69 (2) a) and b) BIA

[9] s. 11.6 CCAA

[10] s. 47.1 BIA

[11] s. 57 a) BIA

[12] s. 3 (1) CCAA