The Canadian insolvency and restructuring framework is primarily governed by the Bankruptcy and Insolvency Act (BIA) and the Companies Creditors Arrangement Act (CCAA). The Parliament of Canada has exclusive jurisdiction over bankruptcy and insolvency and to enact laws to achieve its goals. These federal statutes establish the formal procedures available to companies facing financial distress including proposals under the BIA, restructurings under the CCAA, and bankruptcy liquidation proceedings. Complementing these statutory options, informal out-of-court restructurings are often utilized as a flexible, cost-effective means of addressing financial challenges. Together, these mechanisms provide businesses with a comprehensive set of tools to navigate insolvency, balance stakeholders’ interests, and achieve equitable outcomes.
The BIA serves as the foundation for bankruptcies, proposals, and the orderly liquidation of assets. In bankruptcy proceedings, a licensed insolvency trustee (LIT) takes control of the debtor’s estate, liquidates assets, and distributes the proceeds among creditors in accordance with statutory priorities. For those seeking to avoid bankruptcy, the BIA allows for proposals, which enable debtors to negotiate repayment terms with creditors while continuing their operations. Proposals provide a structured, rules-based pathway for individuals and smaller businesses to resolve financial difficulties without resorting to liquidation.
For larger corporations, the CCAA offers a more adaptable framework designed to accommodate complex restructurings. Applicable to businesses with debts exceeding CAD 5 million, the CCAA allows companies to develop plans of arrangement or compromise under court supervision. The primary goal of this process is to preserve the company’s value, avoid liquidation, and provide a platform for negotiated solutions among creditors and stakeholders. The flexibility inherent in the CCAA makes it particularly well-suited to addressing large-scale, multi-stakeholder insolvency situations.
In addition to these federal statutes, certain financial organizations operate under specialized insolvency regimes. Banks and insurance companies are governed by the Bank Act and the Insurance Companies Act, respectively. Insolvent banks and insurance companies are both further subject to the Winding-up and Restructuring Act in regard to insolvency proceedings. These statutes provide tools to approach insolvency that ensure the stability of critical financial institutions and maintain public confidence.
Together, Canada’s insolvency statutes and sector-specific laws create a robust framework for managing financial distress across diverse industries and business structures. This comprehensive legal regime allows for the resolution of insolvency matters in a way that balances the needs of debtors and creditors while preserving economic value.
An out-of-court restructuring is an informal process by which a financially distressed debtor collaborates with creditors to address financial challenges without resorting to formal insolvency proceedings under the CCAA or the BIA. This method prioritizes flexibility, efficiency, and confidentiality, allowing the debtor to craft customized solutions while avoiding the costs, delays, and public scrutiny associated with court proceedings.
There is no cram-down mechanism available to force dissenting stakeholders into agreeing to any out-of-court restructuring or workout. As a result, out-of-court agreements are generally successful where there is no requirement of large-scale acceptance or approval by varied stakeholders. There is the possibility for contractual cram-down which must be negotiated between the creditors where there is a coordinated loan provided by a group. This may include provisions in syndicated loans permitting a majority or super majority of lenders to bind dissenting lenders.
Creditors often engage financial professionals to obtain details of the debtor’s financial position. Forbearance agreements allowing creditors to ascertain an in-depth understanding of the debtor’s situation are preferable. It is common to undertake out-of-court work prior to utilizing the courts’ power to complete restructuring work.
By leveraging Canada’s insolvency framework, out-of-court restructurings provide an effective pathway for resolving financial distress. Combining informal negotiations with court-supervised mechanisms when needed allows businesses to address financial challenges efficiently, maximize recovery for stakeholders, and preserve long-term operational viability.
Out-of-court restructurings in Canada frequently involve forbearance agreements, granting debtors time to stabilize operations while creditors temporarily suspend enforcement actions. Other measures include equity injections to enhance liquidity, asset sales to generate cash and reduce liabilities, and debt refinancing to renegotiate terms or secure additional financing. These tools are tailored to protect operations, preserve creditor value, and address the unique legal and business environment in Canada.
The debtor’s early engagement with creditors and advisors enables the development of recovery plans, cash flow assessments, and operational adjustments. This groundwork often supports a transition to a court-supervised restructuring if necessary, demonstrating the debtor’s commitment to resolving financial difficulties responsibly.
There is no statutory framework mandating or providing for creditor committees. However, courts have occasionally recognized such committees and approved funding for them in specific instances. Creditors’ committees may contribute to consensual restructuring, but they remain generally uncommon in Canada.
A hybrid restructuring approach, combining out-of-court negotiations with formal court-supervised processes, is increasingly common in Canada. For instance, a debtor may negotiate a Restructuring Support Agreement (RSA) with major creditors to define agreed terms before seeking CCAA protection. Court-supervised proceedings then enforce these terms on all creditors, including dissenting parties, providing binding certainty crucial for complex, multi-stakeholder cases.
Out-of-court restructurings offer significant advantages, including cost savings, faster resolutions, and enhanced privacy, helping protect the debtor’s reputation and stakeholder confidence. Privacy is especially valued in financial proceedings where public disclosure of financial hardships may disrupt operations. Flexibility allows parties to craft customized solutions beyond the limitations of formal insolvency statutes. If court involvement becomes necessary, prior out-of-court efforts often streamline the process, minimizing costs and delays.
In insolvency proceedings under the BIA or the CCAA, claims are prioritized to ensure fairness among creditors while addressing policy objectives. This ranking dictates the order in which creditors are paid from the proceeds of the debtor’s estate.
Administrative and super-priority claims are addressed first, covering costs related to managing and liquidating the debtor’s assets as well as professional fees for legal and financial advisors. These include unpaid wages (up to CAD 2,000), unremitted pension contributions, critical supplier charges, and indemnities for directors and officers during insolvency proceedings.
Secured claims are the second priority, tied to specific assets, and including mortgages, general security agreements, and pledges. Other examples include expenses for improving or maintaining the assets, unpaid property taxes, and floating charges that directly affect the secured property.
General priority claims rank after secured claims and often include unpaid wages exceeding the super-priority limit, contributions owed to social security systems, and unremitted payroll taxes. These claims ensure certain statutory obligations and employment-related liabilities are satisfied before unsecured creditors are paid.
Unsecured claims, which lack collateral, are paid after higher-ranking claims and are subject to the debtor’s remaining estate value. These include trade creditors, contract-based debts, and any residual amounts from partially secured claims.
Finally, contractually subordinated claims rank below all other claims, receiving payment only after all other creditors have been satisfied. Such claims typically arise from agreements where creditors voluntarily accept a lower payment priority in the event of insolvency.
Claims of creditors have priority over the claims of shareholders. This structured approach ensures administrative costs, secured claims, and critical statutory obligations are prioritized, while unsecured and subordinated creditors recover only from any surplus remaining.
In Canadian insolvency proceedings, creditor rights are largely dependent on whether they are secured or unsecured creditors in relation to the debtor company and its assets. A secured creditor has security over property typically by way of a security agreement granting an interest in all property and assets of the debtor. Secured creditors retain the right to enforce their security, subject to statutory and procedural constraints. With limited exceptions, under the BIA, secured creditors must issue a Section 244 Notice, providing at least 10 days’ notice before enforcing its security. One of those rights is to appoint a receiver to take possession of the debtor’s assets and liquidate them to satisfy the debt owed. Any shortfall not covered by the collateral becomes an unsecured claim and is treated accordingly during distribution.
Secured creditors are less frequently involved in restructuring proposals under the CCAA or the BIA unless their participation is essential to the restructuring plan. Unlike unsecured creditors, secured creditors’ approval is not always required unless the debtor explicitly includes them in the plan. When secured creditors are involved, their claims are typically satisfied in full unless they agree to alternative terms. Failure to secure the approval of secured creditors does not prevent unsecured creditors from endorsing a reorganization plan unless the debtor ties the outcomes of both groups. Consequently, secured creditors lack the same vetoing power as unsecured creditors.
Unsecured creditors are those who do not possess security over the assets of the debtor company. Their rights and remedies largely depend on the debtor’s restructuring plan or the bankruptcy process. In CCAA or BIA proposals, unsecured creditors must submit proofs of claim, which are reviewed for validity by the court or trustee. Approval of the plan requires a double majority: creditors representing a majority in number and two-thirds in value of claims. Once approved and sanctioned by the court, the plan binds all unsecured creditors, even those who did not consent individually.
In bankruptcy, unsecured creditors must also file a proof of claim to recover debts. Their recovery depends on the proceeds remaining after super-priority and secured claims are satisfied, often resulting in limited payouts. Unsecured creditors receive distributions proportionally based on their claim’s percentage of the total unsecured debt. While they play a critical role in restructurings, unsecured creditors face significant challenges in recovering substantial amounts during liquidation.
Canadian insolvency law seeks to balance the rights of secured and unsecured creditors while emphasizing debtor rehabilitation and equitable treatment. Secured creditors benefit from strong protections linked to their collateral, whereas unsecured creditors hold procedural rights ensuring their participation in restructuring and liquidation processes, despite their lower distribution priority.
The CCAA and proposal proceedings are the primary mechanisms for restructuring in Canada. In some cases, the Canada Business Corporations Act (CBCA) and similar provincial statutes provide alternative arrangements.
The CCAA is Canada’s central restructuring framework for mid-sized and large companies, enabling debtors to propose a formal Plan of Arrangement, which allows companies to avoid bankruptcy and allows creditors to receive some form of payment for amounts owing to them by the company. Approval requires a double majority—two-thirds in value and a majority in number of each creditor class. Once approved, the court can sanction the plan, making it binding on all creditors. The CCAA also facilitates the orderly sale of a debtor’s business or assets, often through pre-packaged sales or court-supervised sales and investment solicitation processes (SISP).
Proceedings can be initiated by either the debtor or a creditor. To qualify, the debtor must be insolvent, as determined by a cash flow or balance sheet test, and have debts exceeding CAD 5 million. The court may grant protection if the application supports an orderly reorganization, sale, or liquidation and is made in good faith. Upon commencement, an initial order imposes a 10-day stay of proceedings, barring creditors from pursuing claims without court permission. The Court can extend the stay against the creditors upon further application to the Court by the company. Generally, the Court will continue the protection beyond the initial 10-day period if the company can demonstrate that it is likely that it will file a Plan of Arrangement and an extension of the stay is not prejudicial to the creditors, as a whole. While the stay is operative, the company will frequently continue operating, although it may commence restructuring activities at any time.
The court appoints a monitor, typically a LIT who is an independent third party, to oversee the debtor’s operations, financial disclosures, and compliance with court orders. While the debtor maintains control of its business, the monitor ensures transparency and reports any irregularities to the court. Plans are approved through creditor meetings and become binding upon court sanction. Once implemented, the debtor resumes normal operations.
Proposal proceedings under the BIA provide a more structured alternative, often used by smaller or less complex businesses. Debtors can restructure obligations by filing a Notice of Intention (NOI) or a formal proposal. Filing triggers an automatic 30-day stay of proceedings, extendable up to six months in 45-day increments. A Proposal Trustee, appointed by the Office of the Superintendent of Bankruptcy (OSB), assists in crafting the proposal, monitors the debtor’s actions, and reports material changes to the court. Proposals require creditor approval through a double majority similar to the CCAA process. The court must also find, among other things, the proposal is reasonable, calculated for the benefit of creditors, and meets the technical requirements of the BIA. If creditors reject the proposal or the debtor defaults, bankruptcy proceedings are initiated.
Both the CCAA and BIA permit court-supervised asset sales, ensuring fairness and transparency. Approval and vesting orders clear assets of prior claims, enabling buyers to acquire them freely and clear. Reverse vesting orders (RVO) are increasingly used, transferring unwanted liabilities to a residual entity while the debtor emerges under new ownership. Neither the BIA nor the CCAA deal specifically with the use or application of an RVO structure; however, courts in Canada have relied on Section 11 of the CCAA in making such an order, which gives the court in CCAA proceedings the authority to make any order that it thinks fit, in the interests of the restructuring.
With respect to court-supervised asset sales, creditors are grouped into classes based on shared interests, and the double majority rule ensures fair representation in voting. While statutory creditor committees are not required, ad hoc committees often form to represent collective interests. Both the CCAA and BIA impose disclosure requirements, ensuring creditors receive financial reports, cash-flow projections, material adverse change notices, and creditor lists.
If a debtor defaults on a CCAA plan, the court may issue orders, including bankruptcy adjudication. Under the BIA, a default results in annulment and automatic bankruptcy. In either case, non-compliance typically leads to liquidation for creditor recovery.
Court orders frequently strip liens and secured claims from sold assets, ensuring buyers acquire clear title. Secured creditors may credit-bid, and pre-packaged processes expedite sales while preserving creditor oversight. In multi-entity corporate groups, procedural consolidation is common to simplify administration, though substantive consolidation, merging assets and liabilities, is rare.
In Canada, the liquidation of an insolvent debtor is primarily undertaken pursuant to the BIA, which aims to ensure the equitable distribution of the debtor’s unencumbered assets among unsecured creditors. In bankruptcy, unsecured creditors relinquish pre-bankruptcy remedies in exchange for the right to file a claim and receive a dividend from the liquidation proceeds. Secured creditors, however, retain the ability to enforce their security outside of bankruptcy, provided they do so in compliance with statutory requirements.
Under the BIA definition, a debtor is deemed bankrupt if it has debts exceeding CAD 1,000 and has committed an act of bankruptcy within six months prior to the application for a bankruptcy order, such as becoming insolvent and failing to meet financial obligations. Bankruptcy may be initiated in three ways: (1) through a voluntary assignment by the debtor, requiring the filing of prescribed forms with the OSB; (2) by court order, upon application by a creditor; or (3) as a result of the failure of a proposal proceeding under the BIA. For corporations, a voluntary assignment must be preceded by a resolution of the board of directors.
Once bankruptcy is declared, the debtor’s assets and property immediately vest in a LIT, subject to secured creditors’ rights. The trustee assumes full control of the debtor’s affairs, replacing management in corporate bankruptcies. The trustee’s role involves administering the estate, liquidating assets, and distributing proceeds to unsecured creditors. Creditors must file proofs of claim to participate in distributions, which are made on a proportional basis after satisfying super-priority and secured claims. Disallowed claims can be appealed to the court. Corporate bankruptcies lack a fixed timeline and a corporation may not be discharged from bankruptcy unless all of the provable claims against it have been satisfied, which may occur by payment in full or pursuant to a successful BIA proposal. Upon completing the administration, the trustee seeks court approval for discharge.
The BIA also governs receiverships, providing a mechanism for secured creditors to enforce their security. A Section 244 Notice must be delivered, granting a 10-day notice period before enforcement on substantially all of the debtor’s assets. If this period lapses or is waived, the creditor may seek a receiver’s court appointment under Section 243 of the BIA, provincial judicature acts, or other statutes.
Under the BIA, any sale of assets is generally overseen by the corporation’s board of directors. However, the BIA provides for the potential appointment of a receiver and, for the appointment of inspectors.
Court-appointed receivers are officers of the court with duties to all creditors. Their powers typically include managing the debtor’s business, borrowing against assets, and selling property, subject to court approval. In contrast, privately appointed receivers primarily serve the interests of the appointing secured creditor, though they must act in a commercially reasonable manner.
In bankruptcy proceedings, creditors may appoint inspectors to represent their interests. Inspectors may also be appointed in proposal proceedings, though this is optional. There is no statutory framework mandating or providing for creditor committees. However, courts have occasionally recognized such committees and approved funding for them in specific instances.
In 2009, amendments to the BIA and CCAA introduced a portion of the UNCITRAL Model Law on Cross-Border Insolvency into Canada’s insolvency framework. These amendments codified parts of the Model Law into Part XIII of the BIA and Part IV of the CCAA, respectively. The purpose of these provisions is to facilitate cooperation between Canadian and foreign courts in cross-border insolvency cases.
Under both statutes, a foreign representative may apply for an order recognizing an insolvency proceeding initiated outside Canada as either a foreign main proceeding or a foreign non-main proceeding. A foreign main proceeding occurs in the jurisdiction where the debtor’s centre of main interests (COMI) is located, while a foreign non-main proceeding occurs in other jurisdictions. The primary distinction lies in the level of deference Canadian courts afford to the foreign court overseeing the proceeding. For a foreign main proceeding, Canadian courts typically grant a higher level of deference, including issuing an initial order imposing an automatic stay of proceedings in Canada. In contrast, the deference given to foreign non-main proceedings is determined on a case-by-case basis.
The classification of proceedings as foreign main or non-main has significant implications for how they are treated in Canada and for the relief available to the debtor. If a Canadian court recognizes a proceeding as a foreign main proceeding, the debtor is entitled to certain automatic protections and reliefs under Canadian law. In some instances, Canadian courts have collaborated with foreign courts by implementing protocols to coordinate cross-border insolvency proceedings effectively.
Foreign creditors are generally treated on par with domestic creditors in Canada. However, without a recognition order in their local jurisdiction, foreign creditors are not subject to stays of proceedings in their home jurisdictions. Canadian courts may also recognize and enforce foreign monetary and non-monetary judgments, provided certain criteria are met. For monetary judgments, these include whether there was a real and substantial connection between the jurisdiction in which the judgment was obtained and the subject matter of the action; the judgment is for a sum certain; the judgment is final and conclusive; and the action to enforce is commenced within the applicable limitation period, which may vary in different provinces or may be prescribed by reciprocal enforcement legislation. There are defences to recognizing a foreign judgment, which are limited to public policy, fraud, and of natural justice, but once recognized, the judgment is enforceable in Canada as though it were domestic.
To obtain standing for protection under the BIA, a debtor corporation must have a physical presence in Canada, which may include residence, property, or business operations within the country. A corporation is deemed to carry on business in Canada if it has debts or obligations arising from Canadian business activities. Under the CCAA, a debtor does not need to physically reside in Canada but must have significant assets or conduct significant business within the country. Non-resident debtors must also meet general eligibility thresholds under the CCAA, including insolvency or bankruptcy status and debts exceeding CAD 5 million. The term “company” under the CCAA is broadly defined to include corporations incorporated in Canada, foreign corporations with assets or operations in Canada, and income trusts. This flexible definition ensures broad applicability of the CCAA to complex cross-border insolvency cases.
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