Restructuring Flashcards
What are the three primary solutions for companies in financial difficulty?
- Restructuring
- Orderly Liquidation
- Forced Liquidation
What are the two main types of restructuring?
- Operational Change (Income statement restructuring)
- Financial Structure Change (Balance sheet restructuring)
List the primary tools for restructuring.
- CCAA plan of arrangement
- BIA proposal
- Canada Business Corporations Act (CBCA)
Under which acts can orderly liquidation occur?
- Winding-up and Restructuring Act (WURA)
- Canada Business Corporations Act (CBCA)
- Relevant Provincial Legislation
When are receivership or bankruptcy proceedings typically initiated?
For forced liquidations.
What should an insolvency professional focus on in restructuring?
The preservation of the business enterprise, ensuring it becomes economically viable.
Why might a business sale be seen as restructuring rather than liquidation?
If the sale is necessary to turn the business into a viable entity, it’s more of a restructuring process.
How can a financial advisor or monitor assist a debtor company during insolvency?
- Preparing cash flow forecasts
- Arranging for/conducting valuations
- Preparing a communication plan
- Meeting with key stakeholders
- Obtaining Interim (or “DIP”) financing
What is the difference between informal and formal proceedings?
Formal proceedings involve restructuring under statutes like the BIA or the CCAA. Informal proceedings involve the company restructuring without such legislation, entering into private arrangements with creditors and stakeholders.
What are two essential elements needed for an efficient insolvency system?
- A process that prevents creditors from attacking the debtor’s assets while discussions are ongoing.
- A system that can compel creditors to act collectively.
When might an informal proceeding be efficient?
In small, non-complex situations and when dealing with a single or small group of creditors with similar interests.
What are some conditions that might make an informal restructuring viable?
- Few creditors with common interests
- Early identification of financial difficulties
- Detailed business and restructuring plan
- Supportive secured creditors
- A credible management and communication plan
What can be achieved through informal proceedings?
- Revising lending arrangements
- Compromising or deferring amounts to unsecured creditors
- Revising lease obligations
- Negotiating new labour agreements
List some advantages of informal proceedings.
- Potentially lower costs
- More flexibility in dealing with creditors
- Less drastic impacts of a default
What are the primary disadvantages of informal proceedings?
- No protection against creditors taking action
- Not binding on all creditors
- Perception of unfair treatment
- Absence of a trustee or administrator
- Consensus challenges
When does an informal proceeding have the best chance of success?
When restructuring debts of one or a small group of creditors. As the number of creditors grows, the feasibility of informal proceedings decreases.
What are other terms for Limited Business Reviews?
“Look-sees,” viability studies, and monitoring engagements.
Why are business reviews generally initiated?
Initiated by a lender who is concerned about the debtor’s financial difficulty and wants to understand the situation better before deciding on further action.
List some factors prompting a business review.
- Significant losses or deteriorating shareholders’ equity
- Negative trends in financial ratios
- Loss of key personnel or large customers
- Lack of financial information from debtor
- Constant credit line overages
What actions might a lender consider post-business review?
- Informing the debtor to find another lender
- Supporting debtor in a workout or restructuring
- Appointing a receiver
- Maintaining the status quo
- Requesting a shareholder funds injection
Why is maintaining a high standard of care crucial in business reviews?
Because the time is limited and recommendations can severely impact the debtor.
How can a debtor benefit from a business review?
The review helps in preparing vital information, identifying problem areas, and making recommendations to address them.
Who typically initiates look-see reviews?
The debtor, especially when they are experiencing financial issues. These reviews consider the lender’s security position and the debtor’s financial projections.
Who is generally considered the consultant’s client in a business review?
The lender, as they usually prompt the review, focus on their security position, and use the findings to assess their alternatives concerning the debtor.
What is the primary purpose of an engagement letter?
To set out clear and specific terms of reference on how the engagement will be conducted, ensuring no misunderstandings about the process or stakeholder expectations.
Source: CAIRP Standard of Professional Practice No. 3
Who typically appoints the consultant for a business review, and what is the role of the debtor in this appointment?
Typically, the lender appoints the consultant, with the debtor consenting to the appointment and the terms of the engagement by signing the engagement letter.
Source: CAIRP Standard of Professional Practice No. 3
Why might a consultant consider entering an indemnity agreement with the lender?
To safeguard against potential actions brought against them as a result of the engagement, especially to avoid unreasonable or unwarranted claims.
Source: CAIRP Standard of Professional Practice No. 3
What core elements are typically covered in a business review concerning the company’s background?
The review covers organizational structure, company type, management structure, history, financial difficulties, and a SWOT analysis.
Source: CAIRP Standard of Professional Practice No. 3
What are the primary considerations when analyzing a company’s management during a business review?
The review focuses on management’s adequacy, their remuneration, and any potential succession issues.
Source: CAIRP Standard of Professional Practice No. 3
In analyzing a company’s operations, which areas are of utmost importance to consider?
It is crucial to look at recent results, business/restructuring plans, industry information, major customers/suppliers, industry risks, and capital asset reviews.
Source: CAIRP Standard of Professional Practice No. 3
How does a consultant contribute to the “Analysis of financial forecasts and projections”?
The consultant assists in developing forecasts, evaluating the company’s chances of profitability, determining the viability, checking assumption reasonableness, and conducting sensitivity analyses.
Source: CAIRP Standard of Professional Practice No. 3
Why is it deemed beneficial for consultants to share a draft report with debtors before finalizing?
Sharing the draft allows the debtor to review and inform the consultant of any discrepancies, ensuring recommendations are grounded on accurate information.
Source: CAIRP Standard of Professional Practice No. 3
When concluding a business review, what key aspects should the consultant’s report encompass?
The report should cover the consultant’s findings on the company’s viability and suggest a recommended course of action for the lender.
Source: CAIRP Standard of Professional Practice No. 3
What risks of liability are associated with business reviews for a consultant?
Risks include claims for trespass due to wrongful appointment, claims of providing negligent advice, third parties relying on alleged representations by the consultant, and potential privacy issues.
Source: CAIRP Standard of Professional Practice
How can a consultant avoid claims of trespass during an engagement?
The consultant should obtain the debtor’s consent to the engagement, which is a common practice, to avoid claims arising from wrongful appointments.
Source: CAIRP Standard of Professional Practice
Why should a consultant be cautious about third-party reliance on their representations regarding a business’s viability?
The consultant should avoid making representations to creditors or other parties as this is management’s role. The engagement letter should state the consultant isn’t part of management and won’t be involved in decision-making.
Source: CAIRP Standard of Professional Practice
What should a consultant consider regarding privacy during an engagement?
The consultant should be aware of privacy laws, either federal or provincial, that protect personal information and privacy rights of individuals.
Source: CAIRP Standard of Professional Practice
How does a monitor’s role differ from a consultant during a business review?
A monitor is appointed to review and report on a debtor’s business but does not manage or control the operations. The terms of their engagement can arise from an engagement letter, court order, or statutory provisions.
Source: CAIRP Standard of Professional Practice
What types of monitoring appointments exist?
- Private appointment by a secured lender or stakeholder.
- Court appointment under the CCAA.
- Trustee under a notice of intention to make a proposal or proposal under the BIA.
Source: CAIRP Standard of Professional Practice
In what scenarios might the debtor not be involved in the selection of the monitor?
In cases such as the private appointment by a secured lender or other stakeholder, the debtor may not participate in selecting the monitor. However, the monitoring agreement will usually require the debtor’s consent for access to premises.
Source: CAIRP Standard of Professional Practice
What typically triggers a private appointment by a secured creditor for a monitor?
Often follows a business review revealing concerns about the business’s viability or the security position. Reasons might include severely eroded working capital, doubts about management’s integrity or competence, or the need for temporary support, like completing a season or seeking alternative financing.
Source: CAIRP Standard of Professional Practice
Under what circumstances might a monitoring engagement be initiated?
When continued support of the business is justified, but the lender or another third party desires prompt, independent updates about the business’s progress compared to its plans or projections.
Source: CAIRP Standard of Professional Practice
How does a “soft” monitoring mandate differ from a “hard” one?
In a “soft” mandate, the monitor offers periodic updates about the company, generally post-event. In a “hard” mandate, the lender anticipates more hands-on involvement from the monitor, real-time reporting, and understanding the rationale behind major business decisions to protect the lender’s position.
Source: CAIRP Standard of Professional Practice
What risks are associated with a hard monitoring mandate for the monitor?
If the monitor takes control of assets or partakes in managing operations, they might fit the definition of a receiver under BIA s. 243. Moreover, third parties could claim the monitor’s decisions caused them harm.
Source: CAIRP Standard of Professional Practice
How can the hard monitoring mandate be leveraged without stepping into management’s decision-making territory?
The mandate becomes informational, supplying in-depth details in real time. Instead of tagging transactions as “approved” or “unapproved”, they’re seen as meeting or not meeting the agreed parameters. This way, the lender can react if needed, while management retains full decision-making control.
Source: CAIRP Standard of Professional Practice
Why is legal consultation recommended when considering a hard monitoring engagement?
Due to the risk of liability to third parties and the possibility of the monitor being considered a receiver within the meaning of the BIA.
Source: CAIRP Standard of Professional Practice
What is the purpose of the engagement letter in a monitoring engagement?
The engagement letter outlines the scope of the monitor’s role. It includes identifying the company, monitoring duration, report frequency, cash flow/statements to produce, asset sales program, arrangements with creditors, accounting assistance, long-term action plans, and whether the monitor operates as an “observer” or in a “control” function.
Source: CAIRP Standard of Professional Practice
What are the primary responsibilities of a monitor in the “observer” role?
The monitor acts as the lender’s “eyes and ears,” relaying information regularly. In this role, the monitor should avoid managerial duties, signing on bank accounts, negotiating further credit, or engaging in dialogues with customers/suppliers.
Source: CAIRP Standard of Professional Practice
What actions might a monitor take under the “control” function?
Approving purchases, sales orders, and disbursements, and undertaking certain general managerial roles, such as directing staff. The control is limited to what the debtor and its management consent to and is often based on influence rather than legal decision-making power.
Source: CAIRP Standard of Professional Practice
Why is it crucial for a monitor operating in the “control” function to stay close to the operations?
To minimize the possibility of a transaction occurring without the monitor’s knowledge. Management’s decision-making power is not typically relinquished in this mandate, so unauthorized transactions can happen without the monitor’s awareness.
Source: CAIRP Standard of Professional Practice
What are the potential risks if a monitor exceeds observer duties and the business becomes insolvent?
Creditors might argue that the lender controlled the business, not the owners, leading to liability, litigation, and negative publicity for the lender. They might also claim that the monitor, as a receiver, failed to act honestly and in good faith as per BIA s. 247.
Source: CAIRP Standard of Professional Practice
Why is it essential to consider the position of suppliers when starting a monitoring engagement that goes beyond an observer role?
Suppliers may perceive losses arising or worsening under tight control by the lender, leading to potential claims against the lender and/or monitor. Ensuring supplier positions don’t deteriorate while the lender’s position improves can prevent potential conflicts or liabilities.
Source: CAIRP Standard of Professional Practice
What changes might a monitor recommend to return a company to profitability?
Restructuring existing financing, selling off significant inventory, closing a division or branch, and replacing certain senior personnel are potential recommendations.
Source: CAIRP Standard of Professional Practice
What is the monitor’s role during a company’s restructuring process?
The monitor acts as a liaison between the company and its lenders, ensures recommended changes are implemented, advises on obtaining financing, provides advice on resolving problem areas, and compares actual results with projections, addressing variances.
Source: CAIRP Standard of Professional Practice
Why might a monitor recommend the sale of a business?
If a company possesses the elements to be profitable but lacks the necessary management expertise, continuing operations under current management may lead to failure. Selling the business can prevent receivership or bankruptcy.
Source: CAIRP Standard of Professional Practice
In situations where a business sale is recommended, what role might a monitor play?
The monitor will oversee the company’s operations while efforts are made to sell all or part of the business as a going concern. Additionally, the monitor might assist in negotiations with potential buyers.
Source: CAIRP Standard of Professional Practice
What is the primary purpose of a private appointment as a monitor?
A private appointment aims to allow the debtor to secure alternative financing, sell the business (fully or partially), or restructure its operations. It can also be a precursor to appointing a receiver to understand the business better before such an appointment.
Source: CAIRP Standard of Professional Practice
Why is it essential for the monitor to maintain an unbiased or conflict-free position throughout the monitoring process?
To ensure fairness and avoid improving the secured lender’s position at the expense of other creditors, especially as the monitoring role moves away from a strict observer function.
Source: CAIRP Standard of Professional Practice
What is a recommended risk management practice when reporting to the lender during a monitoring engagement?
The insolvency professional should involve the debtor, review draft reports with them before reporting to the lender, and obtain their consent for any significant procedures or actions. Recommendations can typically be kept private between the insolvency professional and the lender.
Source: CAIRP Standard of Professional Practice
What are the potential liability areas for a privately appointed monitor, and how can they limit this liability?
The privately appointed monitor can face various liabilities. To limit these, they should consider obtaining an indemnity agreement from the appointing creditor. However, this indemnity differs from the protection granted to monitors under the CCAA or BIA. It’s also essential to ensure the indemnity aligns with ethical or professional conduct rules.
Source: CAIRP Standard of Professional Practice
What is the importance of the indemnity agreement for an insolvency professional, especially considering the Québec Order of Chartered Professional Accountants (“OCPAQ”)?
An insolvency professional who is an OCPAQ member must assume full personal civil liability. While they can obtain an indemnity from third-party claims unrelated to negligence, they cannot be indemnified or obtain a waiver against a claim by the appointing party.
Source: CAIRP Standard of Professional Practice
What is the consequence of an improper appointment of a monitor?
An improper appointment can lead to a claim by the debtor for trespass. While debtor consent reduces this risk, it’s not full-proof. The debtor can still argue consent was obtained under conditions like duress, insufficient notice, or misrepresentation.
Source: CAIRP Standard of Professional Practice
What was significant about the Pax Management case regarding monitor appointment?
The debtor managed to obtain damages by convincing the court that the real intention behind the monitor’s appointment was for the bank to gather evidence for a receiver’s appointment. The receiver was appointed before the monitor’s final report.
Source: CAIRP Standard of Professional Practice
Why should a debtor obtain independent legal advice before agreeing to a monitor’s appointment?
To reduce the risk of a trespass claim and ensure that they fully understand their rights and the implications of the agreement.
Source: CAIRP Standard of Professional Practice
What duty of care does a monitor owe, and to whom?
Monitors, as insolvency professionals acting as consultants, may owe a duty of care to parties that rely on their reports or advice. This duty stems from their expertise and the specialist knowledge required for their engagements. They also need to ensure privacy and avoid interference with the debtor’s contractual relations.
Source: CAIRP Standard of Professional Practice
How can a statement made by a monitor to a third party result in liability?
If the monitor provides incorrect information that they should have known was wrong or were careless about its accuracy, and a third party relies on this to their detriment, liability can arise. This is particularly relevant when discussing the debtor’s future viability or the likelihood of creditors being paid.
Source: CAIRP Standard of Professional Practice
What can happen if the monitor exceeds the authority given in their appointment?
The monitor can be held liable for damages if the debtor and/or the appointing creditor alleges a breach of contract. This stems from not adhering to the terms of the engagement letter.
Source: CAIRP Standard of Professional Practice
Why should the monitor avoid interfering with the debtor company’s contractual situations?
Interfering, directly or indirectly, risks the monitor being seen as taking a management role. This can lead to personal liability since private monitors don’t have the same statutory provisions or protections as court-appointed ones.
Source: CAIRP Standard of Professional Practice
How might monitors be perceived by third parties if they become actively involved in company management?
They may appear as the managing force of the company, potentially becoming personally liable for contracts with third parties.
Source: CAIRP Standard of Professional Practice
In what scenarios might monitors face liabilities with unsecured creditors?
Monitors can face liabilities for breach of contract or interference with contractual relations when they’re actively involved in management decisions, like paying certain creditors over others or ordering unpaid merchandise.
Source: CAIRP Standard of Professional Practice
How can monitors minimize risks associated with their role?
- Lender and debtor should pre-establish objectives and criteria for creditor payment.
- Make only essential payments required for operations.
- Avoid incurring new trade-debts.
- Monitor should restrict their role in creditor payments to reviewing and reporting.
Source: CAIRP Standard of Professional Practice
Under what circumstances might a lender also face liability in a monitoring situation?
The lender could face liability if they decide which creditors are to be paid or if the monitor acts as an agent of the lender.
Source: CAIRP Standard of Professional Practice
What does the CCAA s. 11.7 state regarding the appointment of a monitor?
The CCAA requires the mandatory appointment of a monitor when a company is under its protection. The monitor oversees the company’s business and financial affairs while it formulates a plan of compromise or arrangement, reporting periodically as dictated by the court order and the CCAA.
Source: Companies’ Creditors Arrangement Act (CCAA) s. 11.7
What are the qualifications for a monitor under the CCAA?
The monitor must hold a trustee license under the Bankruptcy and Insolvency Act. Historically, the debtor’s auditor often acted as the monitor, but this is no longer standard practice.
Source: CCAA s. 2 and 11.7, CAIRP Rules of Professional Conduct No. 4
What are the restrictions and guidelines on monitor independence under the CCAA?
There are minimum guidelines of independence, such as the monitor not being related to the company or having served as its director, officer, employee, auditor, accountant, or legal counsel within the last two years. Exceptions can be made at the court’s discretion in special circumstances.
Source: CCAA s. 2 and 11.7
How does the CCAA define a “related” person?
The concept of a “related” person in the CCAA is defined by reference to the provisions of the Bankruptcy and Insolvency Act.
Source: Companies’ Creditors Arrangement Act (CCAA)
What is the liability threshold for a company to file under the CCAA?
The CCAA applies to companies or a group of companies with liabilities exceeding $5 million. Typically, such restructurings involve larger companies or those with a complex corporate structure, and the restructuring process can vary in complexity and duration.
Source: CCAA s. 3
What’s the key principle regarding the role of monitors under the CCAA?
Monitors must be independent and free from conflicts of interest.
Source: CCAA s. 23 – 25
How do the courts view monitors under the CCAA?
Monitors act as the “eyes and ears” of the court, overseeing the debtor company’s Monitors act as the “eyes and ears” of the court, overseeing the debtor company’s affairs.
Source: CCAA s. 23 – 25 affairs.
What is the monitor’s responsibility in terms of updating the court?
Monitors provide information on restructuring progress, including disputes, milestones, and significant events.
Source: CCAA s. 23 – 25
Why does the court value the monitor’s opinion in CCAA proceedings?
The monitor offers a business perspective and financial analysis on new developments.
Source: CCAA s. 23 – 25
How influential are the monitor’s recommendations to the court?
While not bound, the court often gives weight to their recommendations due to their expertise.
Source: CCAA s. 23 – 25
Beyond supervision, what other responsibilities do monitors have under the CCAA?
They handle some of the CCAA’s administrative aspects and have defined statutory duties.
Source: CCAA s. 23 – 25
In what capacity can a monitor assist the debtor?
They may help in preparing a Plan of Compromise and Arrangement and aid in negotiations with stakeholders.
Source: CCAA s. 23 – 25
Can a monitor’s role expand during a case?
Depending on the case, monitors might assume additional roles, e.g., powers similar to an interim receiver.
Source: CCAA s. 23 – 25
What skills should a monitor possess to effectively manage restructuring situations?
Rapid adaptability to changing conditions and effective risk management.
Source: CAIRP Standard of Professional Practice No. 10
According to CAIRP’s Standard of Professional Practice, what is crucial for a monitor?
Maintaining independence. Their ultimate responsibility is to the court and fulfilling the CCAA’s objectives.
Source: CAIRP Standard of Professional Practice No. 10
Where are the monitor’s duties and functions primarily sourced from?
From the court order (e.g. Initial Order) and provisions of the CCAA.
Source: CCAA s. 11.2, 11.3, 23, 32 and 36
What is the publication requirement after an order is made?
Notice should be published once a week for two consecutive weeks in a Canadian newspaper specified by the court.
Source: CCAA s. 11.2, 11.3
How must creditors be notified of an Initial Order?
Through various means like mail, e-mail, or fax. Documents should be made publicly accessible, typically on a website maintained by the monitor.
Source: CCAA Regulations s. 6 – 10
What is the monitor’s duty related to the company’s cash flow statements?
Review for reasonableness and file a report with the court on findings.
Source: CCAA s. 11.2, 11.3
What should the monitor determine about the company?
The cause of financial difficulties and the current state of business and financial affairs.
Source: CCAA s. 11.2, 11.3
When must the monitor report to the court on the company’s business and financial affairs?
As ordered by the court, 45 days after the fiscal quarter ends, and upon any material change in cash flow or financial circumstances.
Source: CCAA s. 23, 32
When must the monitor report on the reasonableness of excluding certain recourses in the plan?
When preferences, transfers at undervalue, or excessive payments to key personnel are involved..
Source: CCAA s. 36
How does the monitor keep creditors informed?
By making specific reports and documents publicly available and notifying creditors of filed reports.
Source: CCAA s. 11.2, 11.3
What’s the monitor’s role if they believe the BIA is a better proceeding option?
Advise the court to proceed under the BIA.
Source: CCAA s. 23
When might a monitor attend court hearings and meetings?
When they deem it necessary for their functions.
Source: CCAA s. 11.2, 11.3
In what scenarios may the monitor comment or give consent on restructuring?
In cases of DIP borrowing/lending, selling assets, or assigning/resiliating agreements.
Source: CCAA s. 23, 32
Can the court assign additional duties to the monitor?
Yes, the duties can include other functions directed by the court depending on the case circumstances.
Source: CCAA s. 23
How might a monitor assist with the Plan of Compromise and Arrangement?
By providing notices, managing claims, and overseeing the voting process, akin to a trustee in a BIA proposal.
Source: CCAA s. 11.2, 11.3, 23
Where are the monitor’s powers defined?
In a typical CCAA order.
Source: CCAA s. 24
What power does the monitor have regarding access to information?
Can access information beyond the statutorily defined right in s. 24 of the CCAA.
Source: CCAA s. 24
What powers does the monitor have related to external assistance?
Can retain legal counsel, other advisors, and assistants such as appraisers.
Source: CCAA s. 24
What powers does the monitor have over the company’s operations and decisions?
Overseeing operations, approving retention of professional advisors, approving sales of assets, and approving actions outside the ordinary course of business.
Source: CCAA s. 24
How does the monitor assist in the Plan of Arrangement?
Assisting in its development, controlling receipts/disbursements, managing claims, chairing creditor meetings, and reporting to the court.
Source: CCAA s. 24
What legislation provides protection to the CCAA monitor?
The CCAA and BIA provide some protective provisions for the monitor.
Source: BIA s. 14.06, 50, 50.4; CCAA s. 11.52, 11.8, 23
Under what conditions is the monitor not liable for loss or damage?
Monitors acting in good faith are not liable for loss/damage from reliance on their report.
Source: BIA s. 14.06, 50, 50.4; CCAA s. 11.52, 11.8, 23
What are the typical indemnity provisions for monitors?
Coverage for pre-appointment liabilities, environmental liability, and specific provisions in court orders limiting their potential liability.
Source: BIA s. 14.06, 50, 50.4; CCAA s. 11.52, 11.8, 23
What is the purpose of the “administrative charge” related to monitors?
To protect the monitor and others involved in the restructuring for their professional fees and actions. It may rank in priority to other claims against company assets.
Source: CCAA s. 11.52, 11.8, 23
Besides the monitor, who else can benefit from the administrative charge?
Financial, legal, and other experts retained by the monitor, the debtor company, and specific third parties in certain circumstances.
Source: CCAA s. 11.52, 11.8, 23
What is the primary purpose of CCAA s. 11.8?
It provides protection for a monitor against certain claims and environmental liabilities when involved with the business or employment of the debtor.
Source: CCAA s. 11.8
What protection does CCAA s. 11.8 offer regarding environmental conditions or damage?
The monitor is shielded from environmental liabilities affecting the debtor or the debtor’s property. However, the monitor must still adhere to environmental reporting requirements.
Source: CCAA s. 11.8
Apart from statutory protection, how else might a monitor be protected?
The order appointing the monitor can include clauses that protect the monitor from specific liabilities. But, this protection might be of little value if the indemnity’s provision is later ruled beyond the court’s authority.
Source: CCAA s. 11.8
How often does a monitor typically need to rely on the protection in CCAA s. 11.8?
It’s unusual for a monitor to rely on this protection. The provisions mainly apply when the monitor is directly involved in business operations or faces environmental issues with the property. In most cases, the debtor manages assets or operations, not the monitor. The statute’s protections seem to cater to special situations.
Source: CCAA s. 11.8
How do the roles of trustee under the BIA and monitor under the CCAA compare?
Both roles involve monitoring activities during restructuring. They must remain independent and adhere to minimum guidelines of independence unless the court grants permission to deviate. Both roles serve to ensure the objectives of their respective statutes are fulfilled.
Source: BIA s. 13.3, 50 and 50.4; CCAA
Who cannot be appointed as a trustee without the court’s permission?
A person related to the trustee under a trust indenture issued by the company, someone who has been associated with the company in roles like director, officer, or employee in the past two years, or the company’s auditor, accountant, or legal counsel (or their partners/employees).
Source: BIA s. 13.3
What is the trustee’s responsibility and stance regarding the debtor?
While chosen by the debtor, the trustee must remain impartial and independent. They can assist the debtor but always with detachment. Their primary responsibility is to the objectives of the BIA, not the debtor or creditors.
Source: BIA
What are the trustee’s reporting responsibilities under the BIA?
The trustee must report any significant adverse changes in the debtor’s cash flow or financial status to the Official Receiver, creditors, and the court. There’s no set format for this report.
Source: BIA s. 50 and 50.4; BIA Rule 90
What are the shared duties of a trustee and a CCAA monitor?
Both advise the debtor on filing proposals, assist with cash flow statements, monitor financial affairs, investigate financial matters, and occasionally chair the first meeting of creditors. They must ensure their independence is maintained throughout.
Source: BIA s. 50 and 50.4; CAIRP Standard of Professional Practice No. 10
What guidance has CAIRP provided regarding monitoring the debtor’s affairs?
CAIRP issued a Standard of Professional Practice on Monitoring the Debtor Company’s Business and Financial Affairs in appointments under the BIA, detailing the minimum practice standards required.
Source: CAIRP Standard of Professional Practice No. 10
How does the indemnity protection of a trustee under the BIA compare to that of a CCAA monitor?
Both trustee and monitor are shielded against:
- Liability from loss or damage resulting from reliance on their reports, given they act in good faith.
- Pre-appointment liabilities.
- Environmental liabilities.
Both can request a charge on assets for their fees, usually ranking it as a priority against all other claims. This charge, the “administrative charge,” safeguards the trustee/monitor and others in the restructuring process.
Source: BIA s. 14.06, 50, 50.4, 64.2, and 215
What’s the significance of the administrative charge?
The administrative charge is a court-ordered charge on the assets to cover the trustee’s or monitor’s professional fees and expenses. It ensures that they and other professionals involved in restructuring are protected. But, its protection isn’t unlimited—it’s bound by a set amount, necessitating prudent management of unpaid fees.
Source: BIA s. 14.06, 50, and 50.4
What added legal protection does a trustee get in BIA proceedings?
Legal proceedings cannot be initiated against a trustee for any report or action under the BIA without the court’s permission. This protection, however, is limited. The court acts as a gatekeeper, only needing a basic indication of a viable claim against the trustee. If the claim is evidently baseless or groundless, the court will not let it proceed.
Source: BIA s. 14.06 and 215
What is the Sarbanes-Oxley Act (SOX)?
SOX is a U.S. law implemented in 2002 to protect investors by enhancing the accuracy, reliability, and ethics of corporate disclosures of public companies. It affects all public companies with securities registered in the U.S., including foreign companies. It arose from major corporate scandals to improve the auditing and reporting processes.
Source: SOX s. 201
What services does SOX prohibit for auditors of SEC-registered entities?
SOX bans auditors from providing non-audit services such as:
- Bookkeeping related to client’s financial records.
- Designing financial information systems.
- Appraisal/valuation and actuarial services.
- Outsourcing internal audits.
- Management functions.
- Broker, dealer, and investment services.
- Legal/expert services.
- Any services the board deems unfit.
All prohibited services disqualify the auditor from their audit role if rendered.
Source: SOX s. 201
What are the three fundamental principles of SOX?
- An auditor cannot audit their own work.
- An auditor cannot perform management roles.
- An auditor cannot advocate for their client.
Source: SOX s. 201
How has the SEC responded to the Sarbanes-Oxley Act?
The SEC has significantly revised the auditor independence rules for its registrants due to SOX. The SEC supervises a board responsible for registering accounting firms dealing with public companies and setting controls and ethical standards to enhance audit reports.
Source: SOX s. 201
What’s the Canadian counterpart to the Sarbanes-Oxley Act?
While SOX applies to entities with securities listed in the U.S., Canada has implemented similar rules for its public companies. These rules are encapsulated in Rule 204 of the Harmonized Rules of Professional Conduct by the Chartered Professional Accountants Canada. This standard, in effect since December 9, 2010, provides codified rules concerning auditor independence and offers guidelines on permissible services to audit clients.
Source: Rule 204 of the Harmonized Rules of Professional Conduct
What primary legislation limits the ability of auditors to act as trustees or monitors?
The Canada Business Corporations’ Act (CBCA), CCAA, and BIA.
According to the CBCA, when is a person deemed not to be independent?
A person is deemed not to be independent if they have acted as a licensed insolvency trustee providing services as a receiver, receiver-manager, liquidator, or in bankruptcy for the corporation or its affiliates within the past two years.
Do SOX and Rule 204 only address the restrictions already present in the CBCA, CCAA, and BIA?
No. SOX and Rule 204 address a broader range of situations and are not limited to the scenarios covered by the CBCA, CCAA, and BIA.
Can an auditor act as a monitor appointed to report to a lender for an audit client according to SOX or Rule 204?
It’s indirect. While there’s no specific prohibition, the principles in SOX and Rule 204 can indirectly address this situation. The engagement may not be permissible if it includes prohibited services like bookkeeping, appraisal, or assuming a management function. Prior authorization from the audit committee is also required if the client is a reporting issuer.
If a lender is an audit client but the debtor company is not, can one accept an engagement as a privately appointed receiver according to SOX or Rule 204?
Possibly not. If, for example, the receiver ultimately holds and manages the assets of the audit client lender, it could be a prohibited service under SOX and/or Rule 204.
Why is it crucial to plan ahead and consider potential changes in scope for engagements under SOX and Rule 204?
Because it’s not just the initially contemplated scope that matters. The actual work performed throughout the engagement is what’s important. Any changes in scope during the engagement that involve prohibited services can impact the permissibility of the engagement.
What does the Bankruptcy and Insolvency Act (BIA) allow for individuals or businesses facing financial difficulties?
The BIA allows an insolvent person or a bankrupt to file a proposal to address and resolve their financial difficulties.
Source: Bankruptcy and Insolvency Act, Part III.
Where can one find provisions addressing proposals in the BIA?
The provisions addressing proposals are located in Part III of the BIA.
Source: Bankruptcy and Insolvency Act, Part III.
How is Part III of the BIA subdivided with regards to proposals?
Part III of the BIA is subdivided into Division I and Division II. Division I provides a general scheme for various types of debtors, while Division II is specific to consumer debtors.
Source: Bankruptcy and Insolvency Act, Part III.
How does the BIA define “good faith”?
The BIA doesn’t provide a specific definition for “good faith.” However, it might be interpreted as a spectrum of behaviors, from the absence of bad faith to taking positive steps for the best outcome for others.
Source: Bankruptcy and Insolvency Act, s. 4.2.
What actions might be taken if the duty of good faith is determined to be lacking?
If the court determines that the duty of good faith is lacking, it can make any order it considers appropriate for the situation.
Source: Bankruptcy and Insolvency Act, s. 4.2.
When is a proposal generally deemed appropriate for a corporate debtor?
A proposal is appropriate when the corporate debtor has a viable business but cannot meet its obligations due to its current debt load or structure. The objective is to give the debtor a chance to restructure its obligations and potentially its business operations.
What is the primary aim of filing a proposal?
The main aim is to provide an opportunity for the debtor to restructure its obligations. For corporate debtors, it helps save the business and employment, offering creditors and shareholders a higher return than a bankruptcy would.
Can a proposal be used for businesses that are not viable?
Yes, a proposal might be suitable for liquidating a non-viable business if it provides more value to stakeholders than other liquidation methods.
What are some key considerations to determine if a proposal can succeed?
Factors include obtaining continued financial support from lenders, stakeholders’ willingness to inject funds, identifying and addressing causes of difficulties, the credibility of management, the proposal’s terms, tax considerations, impact on customers, and comparison of returns between the proposal and bankruptcy.
Why is the support of the company’s bank and secured lenders crucial for a proposal?
If the lender is not supportive or alternative financing isn’t available, it’s unlikely the proposal can succeed or that the business can continue.
Why is the credibility of the management essential for a proposal’s success?
The strength and credibility of management play a pivotal role in the decision of the creditors regarding whether or not to support the company.
What does a proposal encompass in the BIA?
A proposal in the BIA context includes a composition, scheme or arrangement, or an extension of time for a debtor to settle obligations they otherwise can’t discharge. It’s made to the debtor’s creditors.
Source: BIA s. 2 and 50.
Who are the possible parties that can make a proposal under Division I?
Parties that can make a Division I proposal include the debtor as an insolvent person or bankrupt, the trustee of the estate of a bankrupt, the receiver of the property of an insolvent person, the liquidator of an insolvent person’s property, and occasionally an interim receiver.
Source: BIA s. 2, 50, and 243.
Which corporations are excluded from filing a proposal under the BIA?
Corporations such as banks, authorized foreign banks as per the Bank Act, insurance companies, trust companies, loan companies, or railway companies are excluded from filing a proposal.
Source: BIA s. 2.
Can a consumer debtor under Division II make a proposal under Division I?
No, a consumer debtor who has filed under Division II cannot make a proposal under Division I until the administrator of the Division II proposal has been discharged.
Source: BIA s. 2 and 50.
Why is the procedural aspect crucial in restructuring proceedings under the BIA?
Procedures are vital as failure to adhere to specific timelines or methods can have significant consequences, such as considering the debtor to have made an assignment in bankruptcy.
Source: Time frames and procedures section.
What does “prescribed” mean in the context of the BIA?
“Prescribed” refers to what’s specified in authoritative sources like the BIA, the Bankruptcy or Insolvency General Rules, or directives from the OSB.
Source: Time frames and procedures section.
How are days counted under the BIA?
The counting depends on the delay length. Delays of six days or more use calendar days, while less than six days exclude Saturdays and holidays. Holidays mean days the court doesn’t sit, Sundays, or legal holidays in the proceedings’ province.
Source: BIA Rules s. 4.
How can an insolvent person start proceedings under Division I?
By either:
- filing a notice of intention to make a proposal (NOI) with the official receiver in their locality, or
- filing a proposal with a licensed trustee.
Source: BIA s. 50 and 50.4.
When is a NOI suitable?
A NOI is suitable:
- When creditors have taken (or are about to take) action that might hinder the debtor’s capacity to present a plan or continue business.
- When the insolvent person needs time to restructure activities, negotiate with creditors, or formulate a plan.
What should be included in the NOI?
The NOI must state:
- The intention to make a proposal.
- Name and address of the licensed trustee who agreed to act as trustee (with a copy of the consent).
- Names of creditors with claims of $250 or more and the amounts they’re owed.
For corporate debtors, a copy of the board of directors’ resolution authorizing the NOI is also required.
Source: BIA s. 50.4, 62 and 69, BIA Rule 7.
What is the typical initial period for a proposal after filing a NOI?
Initially, 30 days. Within the first 10 days, a cash flow statement, representations, and the trustee’s report should be filed. This period can be extended by court order for up to 45 days at a time, with a maximum of five months, totaling six months.
Under what conditions can the court grant an extension for the proposal filing?
If the court is satisfied that the debtor:
- Is acting in good faith and with due diligence.
- Will likely make a viable proposal with the extension.
- No creditor will be materially prejudiced by the extension.
- All these conditions must be met.
On what grounds can creditors or other parties request the court to terminate the period for a proposal?
If they can prove any of the following:
- The debtor isn’t acting in good faith and with due diligence.
- The debtor won’t be able to make a viable proposal before the deadline.
- The debtor can’t make a proposal that creditors will accept.
- Creditors will face material prejudice if the termination request is denied.
Only one of these conditions needs to be proven.
What happens if the insolvent person doesn’t file a proposal within the given time frame?
The stay of proceedings ends, and the BIA considers the debtor to have made an assignment in bankruptcy. The trustee then reports that no proposal was filed, leading to the Official Receiver issuing a Certificate of Assignment.
When should an insolvent person file a projected cash flow statement after filing a NOI?
Within 10 days.
Source: BIA s. 50.4; BIA Rule 90.
What should the projected cash flow statement include?
It should present financial information on at least a monthly basis, and should ideally cover the period of the stay, maybe even longer. Both the insolvent person and the trustee should sign it.
Source: BIA s. 50.4; CAIRP Standards of Professional Practice No. 9.
Apart from the cash flow statement, what other documents need to be filed?
- A report with the insolvent person’s representations about the preparation of the cash flow statement.
- A report from the trustee on the reasonableness of the projected cash flow statement.
Both reports need to be signed by their respective authors.
Source: BIA s. 50.4; BIA Rule 90.
Can creditors access the projected cash flow statement?
Yes, creditors can request a copy from the trustee. However, the court might permit non-disclosure to certain creditors if releasing the statement would unduly prejudice the insolvent person and withholding it wouldn’t unduly prejudice the concerned creditor(s).
Source: BIA s. 50.4.
What happens if the insolvent person doesn’t comply with the requirements for filing the projected cash flow statement?
The insolvent person is deemed to have made an assignment in bankruptcy.
If the debtor asks for an extension for the proposal filing, is there a need to revise the cash flow statement?
Potentially. It might be necessary to revise and re-file the cash flow statement, along with related documents, depending on the court’s requirements and the relevance of the initially filed cash flow statement.
How does a debtor commence proposal proceedings?
By filing a proposal with a licensed trustee, which is effective upon receipt by the Official Receiver.
Source: BIA s. 50, 50.4, 51, 62, 69, 158, and 187.
In case of a bankrupt debtor, when can the trustee take action regarding the proposal?
Only after the inspectors have approved the proposal.
Which documents must be filed with the trustee to start proposal proceedings?
- The proposal itself.
- A statement of affairs sworn by the debtor.
- A projected cash flow statement signed by both the debtor and trustee.
- A report with the debtor’s representations about the cash flow statement.
- A report from the trustee on the cash flow statement’s reasonableness.
Source: BIA Rules 6, 7, 89, and 90; CAIRP Standards of Professional Practice No. 9.
If the debtor is a corporation, what authorization is needed to file a proposal?
Directors must pass a resolution. However, bylaws or shareholder agreements may require shareholders to pass the resolution.
When must the trustee call a meeting of creditors post-proposal filing?
Within 21 days after the filing of the proposal. The court can extend this deadline.
What protection does the debtor receive upon filing a proposal or NOI?
The debtor gets a stay of proceedings against its creditors during the proposal process.
Under what circumstances can a court deem the proposal to have been refused by the creditors?
The court can deem the proposal refused if applied before the meeting of creditors. This results in the stay of proceedings ending and the debtor being deemed to have made an assignment in bankruptcy.
What is the purpose of the stay of proceedings in the Bankruptcy and Insolvency Act (BIA)?
The primary purpose of the stay of proceedings in the BIA is to prevent creditors from taking legal actions or remedies against the debtor or the debtor’s property upon the filing of a Notice of Intention (NOI) or a proposal. This stay of proceedings helps maintain a status quo and prevents individual creditors from pursuing their claims separately, ensuring that there is a fair and collective process for addressing the debtor’s financial difficulties.
Source: Bankruptcy and Insolvency Act (BIA) - Sections 69, 69.1, and 69.3.
How long does the stay of proceedings typically last under the BIA for different proceedings?
The duration of the stay of proceedings depends on the type of proceeding. For a Notice of Intention (NOI), the stay remains in effect until a proposal is filed or the debtor becomes bankrupt. In the case of a proposal, the stay persists until the trustee is discharged or the debtor becomes bankrupt. The stay also applies differently in bankruptcy and restructuring proceedings, with distinct scopes and objectives.
Source: Bankruptcy and Insolvency Act (BIA) - Sections 69, 69.1, and 69.3.
What essential elements must a restructuring regime, governed by the BIA, provide for according to its intended purpose?
A restructuring regime under the BIA should include essential elements to achieve its intended purpose, which typically includes:
- A process to prevent creditors from pursuing their claims against the debtor while discussions and negotiations are ongoing. This helps maintain a status quo and prevents a “race of the swiftest” among creditors to seize the debtor’s assets.
- Mechanisms to compel a minority of creditors to be bound by decisions made by the majority, promoting collective action rather than individual actions by creditors.
These elements are crucial to ensure the efficiency and fairness of the restructuring process.
Source: Bankruptcy and Insolvency Act (BIA) - General principles.
What are the limitations to the stay of proceedings under Division I proposal proceedings in the BIA?
The stay of proceedings in Division I proposal proceedings does not apply to all parties in all circumstances. Some limitations include:
- When a secured creditor took possession of its security before the restructuring proceedings began.
- When a secured creditor provided notice of its intention to enforce its security more than 10 days before the proceedings began (or a shorter period as agreed upon by the debtor).
- If a proposal does not address a particular category or class of secured creditors, those creditors are not subject to the stay.
- When the proposal is filed but fails to gain approval from a specific category or class of secured creditors.
- It does not affect the rights of counterparties to eligible financial contracts to terminate contracts.
- It does not apply to certain government entities, including the CRA or Revenue Québec, in specific circumstances.
- These limitations ensure that certain parties are not subject to the stay or have limited application of the stay.
Source: Bankruptcy and Insolvency Act (BIA) - Sections 65.1, 69, 69.1, 69.4, 69.41, 69.42, 69.5, 69.6, 244, and 254.
Can the court declare that the stay of proceedings does not apply to a specific creditor or person under the BIA?
Yes, the court has the discretion to declare that the stay of proceedings does not apply, or no longer applies, to a particular creditor or person. This declaration can be made if the court is satisfied that the creditor or person is likely to be materially prejudiced if the stay continues, or if it is equitable on other grounds to relieve the creditor or person from the stay. Such a declaration may be subject to conditions and qualifications set by the court. Material prejudice is typically interpreted as a profound level of hardship, not just a financial loss.
Source: Bankruptcy and Insolvency Act (BIA) - Sections 65.1, 69, 69.1, 69.4, 69.41, 69.42, 69.5, 69.6, 244, and 254.
Are there specific limitations to the stay of proceedings related to regulatory bodies under the BIA?
Yes, regulatory bodies, as defined by the BIA, are subject to a limited stay. While they are stayed from enforcing payments or rights as creditors, they are not stayed from pursuing investigations, actions, or suits against a debtor in the context of their regulatory functions. However, the court has the authority to order a stay of these regulatory actions or investigations if it believes that a viable proposal cannot be made without such a stay and that it would not be against the public interest. Such court orders can only be made upon application by the debtor after providing notice to the regulatory body and affected parties.
Source: Bankruptcy and Insolvency Act (BIA) - Sections 65.1, 69, 69.1, 69.4, 69.41, 69.42, 69.5, 69.6, 244, and 254.
What is the purpose of limitations in the stay of proceedings related to aircraft objects in the BIA?
The limitations in the BIA that prevent owners or lessors of aircraft objects from obtaining possession of the aircraft object in cases of insolvency serve to fulfill Canada’s obligations under international conventions. These limitations are necessary to ensure compliance with international agreements, and the specific details of such limitations are described in the statute that implements the relevant international convention.
Source: Bankruptcy and Insolvency Act (BIA) - Aircraft object limitations.
What is the purpose of the automatic stay of proceedings under the Bankruptcy and Insolvency Act (BIA)?
The automatic stay of proceedings in the BIA is designed to protect the assets of an insolvent debtor and provide a temporary reprieve from creditor actions, allowing for a fair distribution of assets among creditors during insolvency proceedings.
Source: BIA s. 69, 69.1, 69.3
How does the BIA’s automatic stay of proceedings differ from the stay under the Companies’ Creditors Arrangement Act (CCAA)?
The BIA’s stay is automatic upon commencing insolvency proceedings, while the CCAA’s stay is discretionary and set by court order. The CCAA’s stay can be more flexible, tailored to specific situations, but the BIA’s stay is predefined by legislation.
Source: BIA s. 2, 65.1, 69 to 69.6; CCAA s. 11, 11.02
What specific situations does the BIA’s automatic stay of proceedings cover?
The BIA’s automatic stay prevents creditors from pursuing remedies against the insolvent debtor or their property. It also prohibits the commencement or continuation of proceedings related to claims provable in bankruptcy. The scope may vary for secured creditors and the Crown’s garnishment rights for payroll deductions.
Source: BIA s. 2, 65.1, 69 to 69.6, 183, 187
How can parties dealing with an insolvent debtor potentially circumvent the BIA’s automatic stay?
The BIA may not prevent certain actions like a customer arbitrarily canceling orders. However, other BIA sections, such as s. 65.1, could restrict actions motivated by insolvency. In special circumstances, parties can seek specific relief from the court to address limitations of the automatic stay.
Source: BIA s. 65.1
Who is covered by the stay of proceedings in respect of third parties under the BIA?
The BIA’s stay of proceedings applies to directors (including de facto directors) of an insolvent corporation when a Notice of Intention (NOI) or proposal is filed for that corporation. It also extends to persons managing the affairs of the corporation.
Source: BIA s. 69.31
Under what circumstances can the court terminate the time for filing a proposal and the stay of proceedings granted after the filing of a Notice of Intention (NOI)?
The court may terminate the stay of proceedings under a NOI if it is demonstrated, through an application by the trustee, interim receiver, or a creditor, that:
- The debtor is not acting in good faith and with due diligence.
- The debtor is unlikely to create a viable proposal within the prescribed time.
- The proposal is unlikely to be accepted by the creditors.
- The creditors, as a whole, would face material prejudice if the stay is not terminated.
Source: BIA s. 50.4, 57.1, 69
What actions can the court take if it terminates the period for making a proposal under a NOI?
If the court terminates the time for making a proposal under a NOI, it may also:
- Remove the trustee and appoint a new one if it is deemed in the best interest of the creditors.
Source: BIA s. 50.4, 57.1, 69
When can the court terminate the stay of proceedings granted after the filing of a proposal under the BIA?
The court may terminate the stay of proceedings after the filing of a proposal but prior to the meeting of creditors if it can be demonstrated, through an application by the trustee, interim receiver, or a creditor, that:
- The debtor is not acting in good faith and with due diligence.
- The proposal is unlikely to be accepted by the creditors.
- The creditors, as a whole, would suffer material prejudice if the stay period is not terminated.
Source: BIA s. 50, 57, 57.1, 69.1
What happens if the court declares a proposal as deemed to be refused by the creditors under the BIA?
When the court declares a proposal as deemed to be refused by the creditors:
- The insolvent person is considered to have made an assignment.
- The trustee must file a report of the deemed assignment with the Official Receiver.
- The Official Receiver will issue a certificate of assignment.
- The trustee is required to call a meeting of creditors.
Source: BIA s. 50, 57, 57.1, 69.1
What authority does the court have regarding the appointment of an interim receiver under the BIA?
The court has the authority to appoint an interim receiver of all or part of the debtor’s property after the filing of a NOI or a proposal. The interim receiver’s role includes monitoring the debtor, taking possession of property, exercising control over property or business, taking conservatory measures, and disposing of perishable or rapidly depreciating property.
Source: BIA s. 47.1, 50, 50.4, 243; CAIRP Standard of Professional Practice No. 10
What are some examples of actions where the trustee’s obligations may conflict with the debtor’s interests?
Examples include making determinations of material adverse changes, reporting such changes to the court, and recommending the rejection of a proposal if it’s not in the creditors’ best interest.
What are the key responsibilities of a trustee during the Notice of Intention (NOI) stage under the BIA?
During the NOI stage, the trustee must notify known creditors, report on cash flow projections, monitor the debtor’s financial affairs, report material adverse changes to the Official Receiver and creditors, report to the court on extension requests, and advise on the preparation of the proposal.
Source: BIA s. 50.4, 50.5, 50.6, 65.11 – 65.13, 66, 69, 69.6, and 84.1; BIA Rule 6
What additional tasks might the trustee perform during the NOI stage in anticipation of preparing a proposal?
The trustee may be required to participate in various restructuring-related activities, such as reporting on financing applications, agreements, collective bargaining efforts, sale processes, and agreement transfers.
Source: BIA s. 50.4, 50.5, 50.6, 65.11 – 65.13, 66, 69, 69.6, and 84.1; BIA Rule 6
What are the primary responsibilities of a trustee during the Proposal stage under the BIA?
During the Proposal stage, the trustee is responsible for filing the proposal and cash flow statements, calling a meeting of creditors, notifying creditors of the meeting, providing necessary documents to creditors, investigating the debtor’s financial situation, reporting to creditors, monitoring the debtor’s affairs, and more.
Source: BIA s. 50, 50.6, 51, 58 – 60, 65.11 – 65.13, 65.3, and 84.1; BIA Rules 89 and 90, Directive 20
What must the trustee do after creditors accept the proposal?
After creditor acceptance, the trustee must apply to the court for approval, notify relevant parties of the court hearing, report on the proposal to the Official Receiver and the court, receive and distribute payments under the proposal, and issue a Certificate of Full Performance once the proposal is completed.
Source: BIA s. 50, 50.6, 51, 58 – 60, 65.11 – 65.13, 65.3, and 84.1; BIA Rules 89 and 90, Directive 20
How does the trustee’s role in the Proposal stage relate to restructuring efforts by the debtor?
If the debtor implements or continues restructuring measures during the Proposal stage, the trustee will participate in these activities, similar to their role during the NOI stage.
Source: BIA s. 50, 50.6, 51, 58 – 60, 65.11 – 65.13, 65.3, and 84.1; BIA Rules 89 and 90, Directive 20
Why is the projected cash flow statement important in bankruptcy proceedings under the BIA?
Creditors often rely on the projected cash flow statement to assess the proposal and decide whether to accept it. It helps determine whether restructuring efforts will succeed or lead to greater losses. If the trustee acts in good faith and with reasonable care in reviewing the statement, the BIA protects them from liability for any losses suffered by those relying on it.
Source: BIA s. 50 and 50.4
How does the trustee’s careful review of the cash flow statement benefit creditors?
A trustee’s thorough review helps ensure the accuracy and reliability of the cash flow statement. This, in turn, helps creditors make informed decisions about the proposal and assess their risk in the restructuring process.
Source: BIA s. 50 and 50.4
What obligations does the BIA impose on trustees regarding the cash flow statement’s content and format?
The BIA requires the filing of a cash flow statement within 10 days after a Notice of Intention (NOI) is filed or concurrently with a proposal. The BIA, however, does not specify the exact content or format of the statement.
Source: BIA s. 50 and 50.4
What guidance exists regarding the content and format of the cash flow statement in bankruptcy proceedings?
While the BIA and CAIRP’s Standard of Professional Practice provide limited guidance, CAIRP’s Rules of Professional Conduct state that a member must not associate with false or misleading financial information. The cash flow statement should cover the relevant period and disclose assumptions clearly.
Source: CAIRP Standard of Professional Practice No. 9
What considerations should the trustee and debtor take into account when preparing the cash flow statement?
The cash flow statement should serve creditors in assessing risk. It may cover more than the stay period before a proposal is filed. The trustee and debtor must balance providing information for creditor confidence with the risk of disclosing sensitive competitive information.
Source: CAIRP Standard of Professional Practice No. 9
Why is it crucial for the trustee to ensure the information in the cash flow statement remains relevant?
Relevance is essential to prevent the cash flow statement from becoming false or misleading. The trustee should continuously assess the information provided to maintain accuracy.
Source: CAIRP Standard of Professional Practice No. 9
Why is monitoring and reporting on the debtor’s affairs critical in Division I proposals under the BIA?
In Division I proposals, unlike in bankruptcy, the debtor retains control over their property unless specified otherwise in the proposal. Trustees play a crucial role in monitoring and reporting on the debtor’s business and financial affairs during the period from the filing of an NOI or proposal until court approval or bankruptcy.
Source: BIA s. 47.1, 50, 50.4, and 71
What limitations should trustees adhere to when monitoring debtors in bankruptcy proceedings?
Trustees should not exercise managerial control or engage in customer or supplier dealings or credit negotiations. They should avoid becoming authorized signing officers on bank accounts, except when necessary, and document the reasons for such involvement.
Source: BIA s. 47.1, 50, 50.4
To whom are trustees required to report on the state of the debtor’s business and financial affairs in bankruptcy proceedings?
Trustees must report to the Official Receiver, the court, and the creditors regarding the debtor’s business and financial affairs. They should establish a monitoring program and discuss with the debtor what constitutes a material adverse change.
Source: BIA s. 47.1, 50, 50.4
What is a material adverse change, and what are the trustee’s obligations in case of such a change in bankruptcy proceedings?
A material adverse change, in the trustee’s opinion, significantly affects projected cash flow, impairs operations, jeopardizes proposal success, or prejudices creditors’ rights. Trustees must promptly report it to the Official Receiver, the court, and creditors and discuss with the debtor the appropriate course of action, which may include annulling the proposal, terminating the stay, or appointing an interim receiver.
Source: BIA s. 50 and 50.4
What are the trustee’s responsibilities regarding funding requirements in a BIA proposal?
The trustee administers the proposal and fund distribution but isn’t responsible for credit extended to the debtor after the proposal is filed. Liabilities arising post-proposal are managed by the debtor in the ordinary course of business.
Source: BIA s. 50.6
Can the debtor borrow new funds and provide security during the proposal or NOI period in bankruptcy proceedings?
In certain circumstances and with court approval, the debtor may secure new advances through borrowing to finance operations during the proposal or NOI period.
Source: BIA s. 50.6
What does the BIA aim to achieve with regard to the relationship between the debtor, creditors, and suppliers during bankruptcy proceedings?
The BIA strives to create a stable environment for the debtor to present and execute its proposal. It employs stay of proceedings and other provisions to maintain the status quo while the debtor formulates its proposal. The court has the authority to vary these provisions as needed.
Source: BIA s. 65.1, 69, 69.1
How long does the debtor’s protection against creditors last if the proposal is accepted and approved in bankruptcy proceedings?
If the proposal is accepted by creditors and approved by the court, the debtor’s protection against creditors in the proposal continues until the trustee is discharged or the debtor becomes bankrupt.
Source: BIA s. 65.1, 69, 69.1
How does the BIA regulate the conduct of co-contracting parties in bankruptcy proceedings?
The BIA imposes a code of conduct that restricts certain rights of creditors, suppliers, lessors, licensors, public utility companies, and other co-contracting parties. They are prohibited from terminating or amending agreements with the debtor, claiming accelerated payments, or forfeiting the term due to the debtor’s insolvency or the commencement of BIA proposal procedures.
Source: BIA s. 65.1
Are there specific provisions in the BIA that protect agreements with licensors, lessors, and public utility companies during insolvency proceedings?
Yes, the BIA specifies that licensors, lessors, and public utility companies cannot terminate agreements based on unpaid arrears prior to the commencement of BIA proceedings. While not explicitly stated, other co-contracting parties are also prevented from terminating agreements due to insolvency or the commencement of BIA proceedings.
Source: BIA s. 65.1
Can co-contracting parties demand immediate payment for goods and services provided after the NOI or proposal in bankruptcy proceedings?
Yes, co-contracting parties have the right to request immediate payment for goods and services, such as cash-on-delivery (COD) terms, for transactions occurring after the NOI or proposal in bankruptcy proceedings.
Source: BIA s. 65.1
What happens if a contract contains a provision that allows termination in a manner prohibited by the BIA?
If a contract includes a termination provision that contravenes the BIA, that provision is invalid, and the creditor cannot rely on it to cancel or terminate the agreement.
Source: BIA s. 65.1
Under what circumstances can a co-contracting party request the court to override the prohibition on contract termination in bankruptcy proceedings?
A co-contracting party may ask the court to override the prohibition if they can demonstrate that adhering to the BIA provisions would result in significant financial hardship.
Source: BIA s. 65.1
Does the code of conduct regarding contracts and agreements also apply to public utility companies in bankruptcy proceedings?
Yes, the code of conduct applies to public utility companies, which supply essential services like fuel, water, electricity, telecommunications, garbage collection, pollution control, or postal services. The same provisions, including the right to request court intervention in cases of significant hardship, are applicable.
Source: BIA s. 2, 65.1
How does the BIA treat “eligible financial contracts” in bankruptcy proceedings?
The filing of a Notice of Intention (NOI) or proposal under the BIA does not impact “eligible financial contracts,” as defined by the BIA. The BIA’s Eligible Financial Contract General Rules provide details on what constitutes an eligible financial contract, which may include derivative agreements.
Source: BIA s. 2, 65.1, 65.11; Eligible Financial Contract General Rules (BIA), 1 and 2
Why is it important to stabilize the operations of a business during the early stages of a restructuring attempt under the BIA?
Stabilizing operations is crucial because the initial phase of a restructuring may involve disruptions, cash constraints, pressure from suppliers, employee concerns, and uncertain management. To achieve a successful restructuring, financial resources are often required to stabilize the business.
Source: BIA s. 50.6, 64.1
