Soapbox: Northern exposures

Of course, for an unwary American practitioner, the devil in approaching a Canadian insolvency from an American perspective lies in some of the other, pointedly different details.

The Canadian restructuring regime used by most large companies (the Companies' Creditors Arrangement Act, or CCAA) is a lean piece of legislation compared to Chapter 11 of the United States Bankruptcy Code. The CCAA essentially establishes the process for the restructuring but leaves the details and relative rights of the parties to the supervising court. As a result, unlike in America, Canadian restructuring law is largely court-established, and there is not always a statutory answer to a particular question.

For example, there is no provision in the CCAA now that covers the ability of a debtor to deal with its executory contracts. Thus, a counterparty wishing to understand its rights under a contract with a debtor in CCAA would have to look to the prevailing case law which, in each case, turns on specific facts and circumstances. Pending amendments to the CCAA are intended to bring greater certainty and predictability to these issues, but those amendments are not expected to take effect for several months at the earliest and will not be a remedy for any near-term scenarios.

Another key difference: In Canadian restructurings, there is no concept of a formal creditors' committee, a key player in most large U.S. bankruptcy cases. While special committees are formed from time to time, they typically share a common objective that might not be consistent with the interest of the general body of creditors. In CCAA proceedings, the court appoints an insolvency practitioner (the same firms that act as trustees and receivers) to serve as a monitor. The monitor is an officer of the court charged with supervising the affairs of the debtor and ensuring that the interests of the general body of creditors are accounted for in the restructuring process. The monitor is typically selected by the debtor and works with the debtor in forming its plan.

Although not specifically contemplated in the CCAA, Canadian courts regularly create superpriority charges to secure debtor-in-possession financing. Unlike the United States, however, there is no concept of adequate protection in Canada. It is therefore possible that a creditor with a lien on assets of the debtor will have its collateral impaired by a superpriority charge without any form of protection or compensation. In keeping with the concept of court-made law, whether a court will be willing to prime an existing secured creditor will depend on the circumstances and the relative interests of the debtor, the secured creditor and other interested parties.

There is also no class cram-down provision in Canadian insolvency law, another attribute that has played an important role in the success of many Chapter 11 plans. To be passed, a plan must have the approval of two-thirds in value and a majority in actual number of the creditors of each class voting on the plan. Such strict proportionate voting rights can have a significant impact on the outcome of a plan that most U.S. participants would find contrary to their experience.

One last (or perhaps first) thing U.S. companies facing Canadian insolvency proceedings re to remember is that Canada is a sovereign country with its own laws governing the rights of debtors and creditors. Faced with a possible bankruptcy, many American companies -- particularly in manufacturing and retail -- assume they can quickly shut down any Canadian operations and move equipment and resources to the U.S., Mexico or some other lower-cost jurisdiction. Such companies are often unpleasantly surprised upon learning they cannot simply move their assets across the border without making some arrangement for payment to their Canadian creditors or going through a legal process in Canada.

Whether the North American economy is approaching a recession, entering a prolonged slump or set to rebound, ongoing credit tightening and the strengthening of the Canadian dollar are bound to negatively affect American companies doing business in Canada. It is imperative that in-house corporate law departments and their outside counsel bone up on Canadian insolvency laws so that should the worst outcome occur, all parties can breeze through at least this potential border crossing. n

Aubrey E. Kauffman and Stuart Brotman are partners in the insolvency practice of Fasken Martineau DuMoulin LLP, one of Canada's largest law firms. Both attorneys are based in Fasken's Toronto office.