CCAA offers struggling corporations a way to avoid bankruptcy

This article looks at how corporations can avoid bankruptcy through the Companies' Creditors Arrangement Act (CCAA).

For larger corporations that are struggling financially, the Companies' Creditors Arrangement Act (CCAA) could be the lifeline they need to pay their debts and return to financial stability. The CCAA gives struggling corporations protection from creditors while allowing them to avoid filing for bankruptcy. As Industry Canada notes, by giving a company the chance to work out a plan to repay its debts and possibly restructure its business, the CCAA helps ensure not only the survival of the corporation itself, but also preserves jobs and creditors' returns.

What is the CCAA?

The CCAA is a federal status that provides court protection for struggling companies so that they have the opportunity to come up with a plan for repaying creditors more than they would receive in a bankruptcy. The CCAA allows corporations to address both creditors and shareholders. It is, however, only available to corporations that owe more than $5 million to their creditors. Smaller businesses are not eligible under the CCAA, although they may be able to pursue a corporate restructuring plan either through an informal arrangement or through similar proceedings under the Bankruptcy and Insolvency Act.

How it works

The company initially makes an application for court protection that, if accepted, will result in a court order giving the company 30 days of protection from creditors so it can work out a Plan of Arrangement. The 30-day stay can be extended by the court for an indefinite period of time, although creditors can also petition the court to have the stay lifted.

The Plan of Arrangement is the company's proposal to its creditors for how it plans to repay its debts and it may include a corporate restructuring plan. The Plan of Arrangement may, for example, propose downsizing the company, offering less than 100 cents on the dollar for outstanding debts, liquidating assets, extending the debt repayment schedule, finding new sources of capital, and so on.

The Monitor, an independent accounting firm that is appointed by the court, plays a crucial role during this process. As PricewaterhouseCoopers Canada notes, the Monitor's main role is often to make sure the company is complying with all court orders. The Monitor may also advise the company on its Plan of Arrangement, but it has no control over the actual management of the company itself.

Once the Plan of Arrangement is prepared, it is delivered to the creditors by the Monitor. The creditors will be able to vote on the Plan and, if it is accepted, then the company will have to attain court sanction for the Plan. In sanctioning the Plan, the court will want to see that it is fair and reasonable, complies with the law and previous court orders, and that it is feasible. Once sanctioned, the Plan becomes binding on both the company and its creditors. If either the creditors or the court rejects the Plan, then the stay protecting the company from its creditors is usually lifted, although the corporation does not automatically enter bankruptcy when this happens. Alternatives to bankruptcy may still be available to corporations whose Plan of Arrangement has been rejected.

Legal advice

The CCAA is just one route that struggling companies can use to avoid bankruptcy. Regardless of its size and circumstances, any company that finds its financial situation getting out of hand should consult with an insolvency and restructuring law firm about all the options that may be available to it.