Real Estate Rivalry: CCAA or Receivership?
Background
The Companies' Creditors Arrangement Act (the "CCAA") is a Federal Act that provides certain financially distressed corporations with the opportunity to restructure their affairs and avoid bankruptcy.
Meanwhile, a receivership is a remedy available to secured creditors to recover amounts outstanding under a secured loan in the event the company defaults on its loan payments. The largest practical difference between the two is the level of control a creditor exercises over the proceedings.
The Victorious Application
For entities of a certain size and indebtedness, there is nothing barring a CCAA proceeding. However, in a significant majority of real estate cases, secured creditors' receivership applications have been granted instead of competing debtors' CCAA application. This eCaseNote delves into the battle between the two applications from a real estate perspective. Why does a receivership tend to be victorious?
To answer this question, modern case law has considered the following four significant factors:
- The prejudice to secured creditors under a CCAA;
- The benefits to secured creditors under a CCAA;
- The likelihood of success of a CCAA; and
- The interests to other stakeholders (or lack thereof), including public policy concerns.
In the exceptional cases where a CCAA was ordered, one or more of these factors were absent.
Additionally, when choosing between either a receivership or CCAA process, the Ontario Superior Court of Justice in AFC Mortgage Administrative Inc. v. Sunrise Acquisitions (Stayner) Inc. et al. has indicated that there must be a balance of competing interests of various stakeholders to determine which process is more appropriate. A few key factors were stated to be:
- Payment of the receivership applicants;
- Reputational damage;
- Preservation of employment;
- Speed of the process;
- Protection of all stakeholders;
- Cost; and
- Nature of the business.
Ultimately, the decision in AFC has paved the path for receivership success. If you are a debtor wanting to succeed in a CCAA proceeding, it would be strategic to present evidence of a well-developed CCAA plan that has a high likelihood of success, along with the potential to create benefits to creditors and other stakeholders.
The Determining Factors of Granting a Receivership Over CCAA
The article "Receivership versus CCAA in Real Property Development: Constructing a Framework for Analysis" provides a comprehensive analysis on the four significant factors outlined above:
The Prejudice to Secured Creditors
One of the fundamental questions at play in weighing contested receivership applications is the potential prejudice to a secured creditor seeking to bring the receivership relief if the debtors' CCAAapplication is successful. There are two forms of prejudice that largely explain the courts' proclivity to grant receiverships over CCAA orders in the context of real property development:
- Secured creditors' funds being unrecoverable, or at least put at risk, during the pendency of the CCAA; and
- Secured creditors' collateral being subordinate to the costs of the CCAA.
The Benefits to Secured Creditors
A debtor seeking to defeat a receivership application will need to show the court that there is benefit to the creditors under a CCAA proceeding. In the real property context, this is often an uphill battle: the strongest explanation for the courts' apparent preference for receiverships in the context of real property development is that it is almost universally more beneficial to secured creditors that they appoint a receiver rather than participate in a debtor-driven CCAA process.
Likelihood of CCAA Success
An important consideration for the courts in granting a CCAA application is the feasibility of a resolution under that CCAAproceeding. If the chances of a successful proposal are low, then a court may decide to order a receivership rather than spend time on a failed CCAA. In the more recent case law, courts were only willing to grant a CCAA and dismiss a receivership application in situations where:
- CCAA proposal was already well-developed by the time of the contested receivership application; and
- The debtor presented evidence showing the plan was highly likely to succeed.
Other Stakeholders and Public Policy
The final factor is a broader consideration of the effects of various insolvency options on the larger class of the corporate debtor's stakeholders and related public policy considerations. Because such considerations are often absent for real estate debtors, there is little to militate toward a CCAA. In contrast, in non-real estate cases where the preservation of jobs or an industry of public importance is concerned, this factor can play an outsized role.
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.