Beyond COVID-19: Crisis response or road to recovery?
Crisis response or road to recovery?
In Canada, most insolvent businesses in need of restructuring still elect to proceed under traditional insolvency statutes including, most commonly, the Companies' Creditors Arrangement Act (CCAA). However, Canadian corporate laws also provide alternatives to implement a targeted restructuring of aspects of a corporation's debt structure. This alternative corporate restructuring transaction is referred to under Canadian corporate law an 'arrangement'.
In recent years many restructuring corporations have favoured the more streamlined approach of a corporate arrangement. The benefits of the corporate arrangement mechanism, if used for an appropriately structured transaction, can be: (i) reduced professional costs; (ii) expedited implementation; (iii) minimized impact on ongoing operations; and (iv) a reduction in the perceived stigma sometimes associated with insolvent restructurings.
Because corporate arrangements are often used as an alternative to a restructuring plan under the CCAA, restructuring debtors will look to import favourable elements of typical CCAA restructuring processes into corporate arrangements. This is often feasible as the Canada Business Corporations Act, under which most corporate arrangements will proceed, provides the supervising court broad powers to make interim or final orders it thinks fit.
It is not unusual for a corporate arrangement proceeding to include, for example, a limited stay of proceedings while the proposed arrangement is being structured and implemented, or the appointment of a foreign representative to apply for recognition in foreign jurisdictions, including under Chapter 15 in the United States.
Other relief that is typical in an insolvent restructuring under the CCAA is not particularly well-suited to a corporate arrangement process. For example, there is no specific authority in corporate statutes to grant charges to secure interim 'DIP' financing, and there is no specific authority to disclaim contracts under corporate statutes or to run claims allowance/objection processes. These types of relief are generally seen to be outside of the scope available in a corporate arrangement. As a result, corporations with significant and immediate liquidity issues or those requiring extensive operational modifications to restructure successfully will usually utilize the more expansive mechanisms available under the CCAA and Canada's other insolvency statutes.
Many restructuring companies will seek to implement broad non-consensual releases and waivers of claims against and amongst various third parties connected to the corporation as part of their restructuring process, whether under the CCAA or under applicable corporate arrangement statutes. The releases and waivers can provide an important fresh start and/or protections for affected parties involved in or supporting or contributing to the restructuring process. Substantial case law has developed around the availability of these releases and waivers in insolvency proceedings. The exact scope of third party releases and waivers available under corporate arrangements, however, remains an open question, as shown in a recent decision in the arrangement of iAnthus Capital Holdings, Inc.
Releases are a common aspect of restructuring plans under the CCAA. Even very broad releases of claims against or amongst third parties can be justified if the court is satisfied they are appropriate based upon a number of established factors aimed at determining: whether the releases are rationally connected to the resolutions provided by the restructuring plan; whether the releases will benefit creditors generally; and whether the releases are or are not overly broad.
In appropriate circumstances, broad releases have been granted in CCAA restructuring plans in favour of the debtor's former auditors and advisors, former directors and officers, parent companies, and a variety of other parties who may face liability as a result of their past involvement with the debtor.
Claims arising from conduct such as fraud or wilful misconduct are typically excluded from these releases. In the case of releases in favour of the directors of the debtor company, claims for misrepresentations to creditors or wrongful or oppressive conduct are also limited.
The availability of these releases is viewed as an important aspect of the restructuring process because the parties receiving the benefit of the release are often contributing something of value to the restructuring and, in return for that contribution, expect to receive finality with respect to issues involving the debtor. In addition, there is often value to the debtor company itself in obtaining finality with respect to claims involving stakeholders so that the debtor company will not become re-engaged in any such claims that may be brought against those third parties in the future.
Third party releases in insolvency proceedings have facilitated a broad variety of restructurings where a key element of the restructuring process is the resolution of outstanding litigation against third parties. A common structure involves a financial contribution by some or all of those parties being released to a pool of funds that will be available to satisfy, in whole or in part, certain of the claims being released.
In a 2018 decision, the Ontario court considered third party releases in an arrangement of Concordia International Corp. under the Canada Business Corporations Act.
This arrangement involved: (i) the restructuring of approximately CAD$4 billion of secured and unsecured debt, reducing outstanding indebtedness by approximately CAD$2.4 billion, and (ii) the investment of new equity by way of a private placement, all through a corporate arrangement.
The arrangement included releases in favour of various parties in connection with the debt and debt documents, the equity of the corporation, the private placement and the arrangement proceedings. The court confirmed that releases in favour of third parties could be approved in a corporate arrangement proceeding. In its decision approving these releases, the court highlighted a number of the factors generally applied when considering such releases in CCAA insolvency proceedings, such as:
The court also granted certain additional relief commonly granted in CCAA insolvency proceedings deeming third parties to have waived defaults arising out of, among other things, the arrangement, and limiting the recourse in certain litigation by equity holders to the proceeds of any available insurance policies.
The decision in Concordia International Corp. suggested an increased harmonization of the relief available to restructuring debtors under insolvency statutes and corporate arrangement statutes, further increasing the attractiveness of corporate arrangements, even in circumstances where third party releases and related relief are required.
The scope of releases available under a corporate arrangement and the decision in Concordia International Corp. itself were recently considered by the Supreme Court of British Columbia in connection with the arrangement of iAnthus Capital Holdings, Inc.
iAnthus presented an arrangement under the Business Corporations Act (British Columbia) that restructured the secured and unsecured notes and equity of the corporation and provided releases in favour of, among others, current and former officers, directors, employees, shareholders, auditors, financial advisors, legal counsel and agents.
The British Columbia court considered the decision in Concordia International Corp. but did not accept that the principles applicable to third party releases in a CCAA proceeding should apply in an arrangement proceeding under corporate legislation.
The court noted that the provisions of corporate legislation regarding arrangements serve different purposes and operate differently than the CCAA:
iAnthus relies on Concordia International Corp., 2018 ONSC 4165 at paras. 37-52 where, in the context of an arrangement proposed pursuant to s. 192 of the [Canada Business Corporations Act], the court applied principles developed under the CCAAin deciding that third-party releases were appropriate.
I do not accept this reasoning.
The CCAA is a statute that deals with insolvent corporations. It permits a company to propose a compromise arrangement with its creditors. It is skeleton legislation establishing judicial powers and procedures to address, outside of bankruptcy, the enormous variety of scenarios under which a corporation's liabilities exceed its assets; in consequence, its provisions are given a broad and generous interpretation.
Despite some common terminology – both statutes contemplate "arrangements" – the arrangement provisions of the [Business Corporations Act (British Columbia) and the Canada Business Corporations Act] serve different purposes and operate differently than the CCAA. The purposes and inquiries engaged by a corporate arrangement are more focused. It is central to an arrangement under the CCAA that substantive rights will be compromised; that is not the case under corporate arrangement legislation.
The court concluded that, at least under the British Columbia corporations statute, third party releases in arrangements should be limited to those releases that are truly ancillary and the substantive positions of third parties are protected. Notably, the court did not have to determine whether such broader releases would be available under the federal Canada Business Corporations Act. This is an open issue based upon the court's statements about corporate arrangements generally.
At a subsequent hearing, the court approved a narrower release that was targeted so that: (i) claims brought by any person in connection with the plan of arrangement, the arrangement proceeding before the court or the restructuring support agreement were released; and (ii) in all other cases, the parties bound by the release were the same parties benefitting from the proposed arrangement. It appears the revised releases were determined by the court to be truly ancillary to the proposed arrangement.
The iAnthus decision will be welcomed by parties seeking to implement a restructuring that requires third party releases under the corporate statute of British Columbia and under Canada's federal corporate statute. The decision reinforces the availability of third party releases in appropriate circumstances.
The decision does, however, introduce questions regarding the appropriate scope of those releases under corporate arrangements in Canada.
The earlier decision of the Ontario court in Concordia International Corp. suggested that the principles applicable to third party releases in CCAA proceedings should apply, making a corporate arrangement equally as attractive as a CCAA restructuring on this issue. However, corporations considering restructuring in situations where third party releases are a material concern will need to give careful consideration to the impact of iAnthus, which may support a narrowing of the releases available under corporate statutes.
This consideration will be relevant in situations where, for example, the restructuring seeks to resolve litigation claims by a company's stakeholders against third parties such as the company's advisors or current and former officers and directors, or where the restructuring seeks to deem outstanding contractual defaults to be cured. While these types of provisions may be reasonably connected to the restructuring and acceptable for the purposes of a CCAA restructuring, the decision in iAnthus suggests a narrower view on appropriate releases and waivers may also be considered by the court in a corporate arrangement context.
On May 4, the decree amending the Mexican Hydrocarbons Law was published in the Federal Official Gazette.
© Norton Rose Fulbright LLP 2020