Since the 1990s, Companies' Creditors Arrangment Act (CCAA) filings were the preferred legal avenue by which companies large and small — including household or former household names as Eaton's, Air Canada, Stelco and Abitibi — bought the time necessary to continue operations while they restructured.
But the thinking is different these days, says Tony DeMarinis. "In 2008, we saw at least two major Canadian restructurings — Ainsworth Lumber and Tembec Inc. — implemented under the Canada Business Corporations Act (CBCA). There were also others that were informally negotiated and more are likely to come as both debtors and creditors try to avoid costly and protracted proceedings, or are pushed to alternatives by the drying up of DIP funding."
But insolvent companies cannot restructure under the CBCA, which means that organizations anticipating cash flow problems must act proactively. Many are doing so. "The severity of the economic problems we face is forcing all businesses to review their financial condition to determine whether they can weather the storm" says Tony. "We're seeing more pre-emptive steps than we have in the past and less of the unhealthy states of denial that characterized previous recessions and resulted in companies failing to act until their backs were to the wall."
The Ainsworth and Tembec restructurings were very successful, says Tony. "They were very fast, much more manageable than CCAA proceedings, and remained in the control of sophisticated parties at the table."
The CBCA also works from a reputational standpoint. "You're not acknowledging insolvency, so there isn't any of the stigma or real damage, like contractual default, that's associated with it. There are no court-ordered restrictions on operations, you don't have creditors and monitors watching every move, and the company remains in much greater control than it would under the CCAA."
If the process fails, the company has not taken any backward steps other than incurring relatively small costs. "By contrast, if you don't come up with a plan under the CCAA, it's game over," says Tony.
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