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COVID-19: Solutions for distressed businesses

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While it is too early to evaluate the full extent of the economic consequences of the COVID-19 pandemic, it is apparent that Québec businesses will continue to be importantly affected in the coming months and years.

In order to mitigate the damage caused by COVID-19, governments have developed various initiatives aimed at supporting businesses in Quebec and throughout Canada. Nevertheless, many companies will be required to find other means of weathering the storm, including, in some cases, seeking redress under Canadian insolvency legislation. The following provides a brief overview of certain solutions that may be available to distressed businesses operating in Québec.

1.  Government assistance

Various support programs have been deployed by the Canadian government to provide relief to qualifying businesses that have experienced an important decline in revenue due to the pandemic. These programs include:

    • The Business Availability Credit Program (BCAP), through which qualifying Small and Medium Enterprises can obtain loans or guarantees from the Business Development Bank of Canada or Export Development Canada;
    • The Canada Emergency Business Account (CEBA), through which qualifying small businesses can obtain a credit facility of up to $40,000;
    • The Canada Emergency Rent Assistance (CECRA) program, through which commercial landlords are incentivised to reduce the rent payable by qualifying businesses by 75% during April, May and June 2020; and
    • Various extensions of deadlines to pay or remit federal taxes or duties.

The Quebec and local governments have also adopted various measures, such as providing access to urgent aid, loans and guarantees through Investissement Quebec, and extensions to payment deadlines for property taxes.

Quebec businesses in financial difficulty should first explore whether and to what extent they qualify for these government programs.

2.  Negotiated solutions with creditors

In the event that government assistance is not available or is insufficient to alleviate the financial pressure caused by the crisis, distressed businesses can seek out agreements with their creditors – such as lenders, suppliers, and landlords – in an effort to modify existing contractual obligations to account for the extenuating circumstances.

For example, a forbearance agreement can be a means of obtaining commitments from creditors to tolerate defaults, forbear from the exercise of recourses and grant payment moratoriums in consideration of the debtor respecting certain conditions. Such conditions can include more robust reporting – sometimes with the assistance of external consultants – operational reorganizations or the granting of additional collateral.

Proactively seeking to renegotiate onerous obligations can help reassure creditors and potentially avoid the cost and inconvenience of responding to default notices or debt recovery proceedings.

3.  Formal proceedings the under the CCAA or the BIA

If no consensual workout can be achieved, a distressed business can also seek the protection of Canadian insolvency legislation. Restructuring proceedings under the Companies’ Creditors Arrangement Act (CCAA) or the Bankruptcy and Insolvency Act (BIA) can provide insolvent companies with access to a court-supervised process through which to attempt a reorganization of their operational or financial affairs. The ultimate objective of the process is to allow the distressed business to emerge as a viable economic entity for the benefit of all of its stakeholders, including its creditors, employees, contractual counterparties and, in some cases, shareholders[1].

During the restructuring process, the status quo is preserved through legal mechanisms including a stay of proceedings[2] and limitations on the rights of third parties to terminate or modify contractual arrangements with the debtor[3]. The law also affords debtor companies access to a wide range of restructuring tools, including the ability to obtain super-priority secured interim financing, protections for directors and officers, measures to retain key employees and suppliers, as well as the disclaimer of certain onerous contracts[4].

CCAA proceedings, more flexible and reserved for corporations with liabilities of at least $5,000,000, are commenced pursuant to an initial order of the supervising court, which retains broad discretion to render “any order it considers appropriate in the circumstances[5]. Proposal proceedings under the BIA afford access to a similar but more rules-based and streamlined process, which can be commenced without court approval[6]. Under both statutes, the debtor maintains possession of its assets and a Licenced Insolvency Trustee acts as an independent officer of the court, which helps ensure that the process remains fair and transparent[7].

The restructuring process often culminates in the conclusion of an arrangement between the company and its creditors[8] or in a transaction involving the disposition of the company’s property[9]. In recent years, going-concern asset sales have emerged as the primary means of restructuring Canadian businesses[10]. Where rehabilitation is not possible or practicable, the debtor company’s assets can be liquidated – in the context of the restructuring proceedings or through a formal bankruptcy under the BIA – with the proceeds being distributed to its creditors.

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Proceedings under the CCAA or the BIA are instituted before the Commercial Division of the Superior Court of Québec. According to recently published Directives, hearings before the court are for the moment strictly limited to urgent matters. Judges are however equipped to receive proceedings and render judgments by email as well as to conduct hearings by telephone, if necessary. Thus, should restructuring proceedings be necessary to preserve value, avoid prejudice to stakeholders or for other compelling reasons, the current crisis should not prevent distressed businesses from accessing the court system.

[1] The purpose of both the CCAA and BIA restructuring regimes is to avoid the social and economic consequences of liquidation: see Century Services Inc. v. Canada (Attorney General), 2010 SCC 60.

[2] No proceedings or execution measures, subject to certain exceptions, can be commenced or continued against the debtor company during process: CCAA, s. 11.02 and ff.; BIA ss. 69 and ff. In some cases the stay can be extended to third parties such as the company’s directors, officers or affiliates.

[3] No person may terminate or amend any agreement with a debtor company by reason only that the latter is insolvent or has commenced insolvency proceedings: CCAA, s. 34; BIA, s. 65.1. The counterparties to such agreements may, however, require immediate payment for the goods or services provided during the restructuring.

[4] Certain tools have been codified, such as interim financing (CCAA, s. 11.2; BIA, s. 50.6), director’s indemnification charge (CCAA, s. 11.51; BIA, s. 64.1) and disclaimer of agreements (CCAA, s. 32; BIA s. 65.11). Others are rendered pursuant to the court’s general power, which effectively allows the arsenal of restructuring tools to constantly evolve through judicial innovation.

[5] CCAA, s. 11. A court supervising BIA proceedings may also rely on its inherent power to grant relief not expressly provided for in the statute: see Groupe Bikini Village inc. (Proposition de), 2015 QCCS 1317.

[6] An insolvent person may commence restructuring proceedings under the BIA simply by filing a notice of intention to make a proposal. A proposal must be filed during a period that cannot exceed 6 months or the insolvent person will be deemed bankrupt: BIA, s. 50.4.

[7] The Monitor, in CCAA proceedings, and the Proposal Trustee, under the BIA, make investigations and provide regular reporting on the debtor’s affairs: CCAA, ss. 23 and ff.; BIA ss. 50 (5) and ff.

[8] A compromise or arrangement under the CCAA or a proposal under the BIA can take many forms but often consists of an agreement between the company and its creditors to compromise or modify the terms of their indebtedness. Such an agreement must be approved by a simple majority in number of creditors representing two-thirds in value of all proven claims as well as by the court: CCAA, s. 6; BIA ss. 54 and 58.

[9] A disposition of assets outside the ordinary course of business requires court approval and is often completed through a vesting order, which permits the purchaser to acquire the purchased assets “free and clear” of any encumbrances: CCAA, s. 36; BIA s. 65.13.

[10] See Third Eye Capital Corporation v. Ressources Dianor Inc./Dianor Resources Inc., 2019 ONCA 508. Sales whereby the business is continued under new stewardship are considered to fulfil the remedial objectives of restructuring legislation: see Nortel Networks Corporation (Re), 2009 CanLII 39492 (ON SC).