Insolvency proceedings under the Companies' Creditors Arrangement Act (CCAA) are generally practical and solution-oriented. Creativity is rewarded and, if there is a conflict between insolvency law's practical focus on achieving desirable commercial outcomes on the one hand, and the requirements—often technical in nature—under other statutes such as the Canada Business Corporations Act (CBCA) on the other, courts often apply insolvency law in a manner that gives priority to achieving those commercial outcomes.
On July 30, 2024, the Director appointed under the CBCA expressed further views on this jurisdictional issue. In a revised version of its Policy on arrangements—Canada Business Corporations Act, section 192 (the Policy), the Director expressed the view that the insolvency law provisions of the CCAA cannot be used to override the requirements of the CBCA. In other words, where a CCAA plan involves a fundamental change, the transactions must, in the Director's view, respect the requirements of the CBCA. If the fundamental change in question cannot be effected under any other provisions of the CBCA, a plan of arrangement under section 192 of the CBCA should be proposed in conjunction with a CCAA plan.
What you need to know
- The CCAA cannot supplant requirements of the CBCA. Under the revised policy, the Director expressed the view that the provisions of the CCAA cannot override corporate law requirements set out in the CBCA. If the fundamental change in question cannot be accomplished under any other provisions of the CBCA, the Director took the position that a plan of arrangement under section 192 of the CBCA should be proposed in conjunction with a CCAA plan.
- A pragmatic judicial approach. Courts will likely continue to take a pragmatic, solution-oriented approach to corporate changes and transactions under the CCAA, though it will be interesting to see how they will reconcile the practical objects of the CCAA with the often-technical requirements of the CBCA.
- Debtors may face increased scrutiny. If a debtor company in CCAA proceedings seeks a court's authorization to effect a fundamental corporate change without fully complying with the CBCA, the debtor should be mindful of the Director's views and the potential for increased scrutiny.
- A possible shift in preferred corporate statutes. While the CBCA has historically been the preferred corporate statute for developing corporate arrangements involving insolvent entities, the increased scrutiny proposed by the Director's amendments may make provincial corporate statutes increasingly attractive alternatives.
Amendments to the Director's policy on arrangementsunder the CBCA
On July 30, 2024, the Director published a revised version of its Policy on arrangements—Canada Business Corporations Act, section 192 (the Policy). The Policy was revised to reflect the Director's position that the provisions of the CCAA do not override the corporate law requirements set out in the CBCA. If a debtor company's CCAA plan involves a fundamental corporate change, the Director takes the position that such transaction must comply with the CBCA's requirements, and where such fundamental change cannot be effected under any other provision of the CBCA, a plan of arrangement under section 192 of the CBCA is required. The CCAA—including a plan under the CCAA—cannot supplant the requirements of the CBCA.
The Director pointed to corporate amalgamation as an example of a fundamental change that might be effected through a CCAA plan in which the CBCA's requirements must be met. Corporate amalgamations are available under section 185 of the CBCA only where each amalgamating corporation is able to provide a declaration that it is solvent. In CCAA proceedings, however, debtor companies are not solvent by definition; thus, they cannot comply with section 185 of the CBCA. The Director's view is that, where the CBCA's solvency requirements cannot be met (a virtual certainty in CCAA proceedings), the debtor should instead seek to effect an amalgamation by filing a separate plan of arrangement under section 192 of the CBCA and fully comply with the requirements of the CBCA.
A pragmatic judicial approach
We expect that courts will continue to take a pragmatic, solution-oriented approach to corporate changes and transactions under the CCAA. In light of the Director's position, it will be interesting to see how courts will reconcile the purposive objects of the CCAA with the often-technical requirements of the CBCA, particularly in situations where the CBCA cannot be strictly complied with, or where compliance with the CBCA would be problematic (e.g., costly or adding delay) in the circumstances facing an insolvent company.
If a debtor company in CCAA proceedings seeks a court's authorization to effect a fundamental corporate change without fully complying with the CBCA, the debtor should be mindful of the Director's views and the potential for increased scrutiny.
Potential shift in preferred corporate statute
The CBCA has historically been the preferred corporate statute—as opposed to provincial counterpart legislation—in which to effect corporate arrangements involving insolvent entities. In some instances, companies incorporated under provincial legislation have been continued under the CBCA so as to access its arrangement provision. The increased scrutiny of CCAA plans suggested by the Director's amendments to the Policy may make provincial corporate statutes—including in those jurisdictions in which there is no statutory solvency requirement, such as in British Columbia—increasingly attractive, rather than proceeding under the CBCA.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.