New legislation makes the restructuring of not-for-profit corporations feasible
As of October 17, 2014, the period for transitioning to the new Canada Not-for-profit Corporations Act will expire, although Corporations Canada will give both notice and a further grace period before dissolving non-compliant corporations.
This new legislation is intended to modernize the statutory framework for the governance of not-for-profit corporations, and does so. One of the ways in which it does this is by revamping the parts of this statutory framework that govern "reorganizations" and "arrangements" for the restructuring of a corporation's capital or membership structure.
We have seen not-for-profit corporations collapse under the strain of financial legacy issues. Sometimes these issues arise from "debt" problems – the corporation simply has incurred too much debt to remain viable without a restructuring. Other times these issues arise from an inability to alter legacy rights. For example, some classes of membership may have perpetual rights that reduce the corporation's revenue and increase its costs, or restrict the corporation's ability to raise additional capital. The prior governing legislation did not give not-for-profit corporations much flexibility in dealing with legacy issues.
The new Canada Not-for-profit Corporations Act contains provisions similar to the legislation governing other (for-profit) corporations in Canada, which permits a corporation in financial distress to propose compromises to creditors and alter shareholder rights. In cases of severe financial distress, these rights can be altered by the court without the approval of shareholders. This approach has for many years given Canadian for-profit corporations the flexibility to take definitive steps when those steps are required for the survival of those companies.
Now, with the new statutory framework found in the Canada Not-for-profit Corporations Act, this flexibility is also available to not-for-profit corporations in financial distress, when dealing with creditor, shareholder and member issues.
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