New insolvency reforms will impact your business

September 16, 2009   by Christopher Porter

Many manufacturers may not feel the long-anticipated amendments to the Bankruptcy and Insolvency Act (BIA) and the Companies Creditors Arrangement Act (CCAA)—which come into force on Sept.18—are a cause for excitement. While the amendments provide owners of financially stressed businesses with more tools to restructure operations, they will also have an impact on virtually every company that’s a supplier or borrower.

One of the goals of insolvency reform is to encourage company restructurings instead of liquidations so the government has amended the principal insolvency statutes to promote this goal. When a company becomes insolvent, the options are reorganization under the CCAA; a proposal under the BIA; a bankruptcy under the BIA; or an interim, private or court-supervised receivership.

Insolvency reform will encourage company restructurings instead of liquidations.

Large companies tend to use the CCAA more often since a business must have debts of more than $5 million to qualify for proceedings. Smaller organizations are more likely to make a proposal under the BIA, which is essentially an offer to creditors to repay a portion of debts owed, typically over a defined period of time. A proposal is generally combined with financial restructuring and a turnaround plan to keep a company operating until it returns to profitability. Until the reforms, this process was not as flexible as a CCAA arrangement. The amendments harmonize procedures under the CCAA and BIA to provide more consistency and flexibility. Thus smaller companies will have better access to restructuring opportunities—without the complexity and cost of a CCAA.

The court can now authorize interim financing, known as debtor-in-possession or DIP financing, under both acts and lenders receive priority rights over existing secured creditors.

To avert directors and officers from abandoning ship to reduce their personal liability when a company initiates a restructuring plan, the court may issue a priority charge to protect them from liability that may arise—whether the restructuring is conducted through the CCAA or a BIA proposal. And if any directors present a barrier to a successful restructuring, the court replaces them.

An insolvent business that files a proposal is now able to proactively take control of its own restructuring by initiating the process, continuing operations, implementing a restructuring plan and managing refinancing/sales.

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