Podcast 42 Transcript: Protection from creditors

Written by Ian Portsmouth

Ian: Welcome to the Business Coach Podcast, an advice-oriented series that tackles the top issues and opportunities facing Canada’s small businesses.  I’m your host, Ian Portsmouth, the Editor of PROFIT Magazine and we’ve developed this podcast in cooperation with BMO Bank of Montreal.

A weak economy spells trouble for any business that doesn’t manage its finances closely.  On one hand, suppliers begin to demand quicker if not up front payment and on the other hand, customers begin to stretch their payables or stop buying all together.

In the middle of this is the cash-starved entrepreneur who can’t make ends meet and ends up sometimes in bankruptcy.  It doesn’t have to be that way however.  When otherwise strong companies run into cash flow problems, they usually just need to buy themselves some time to get their fiscal house in order and there are laws that exist for that very reason.

In this episode of the Business Coach Podcast, we’ll discuss the protections available to companies with Michael MacNaughton, a Toronto-based partner in the Insolvency and Restructuring group of Borden, Ladner, Gervais which at present is Canada’s largest law firm.  Michael, welcome to the Business Coach Podcast.

Michael: Good to be here.

Ian: So Michael, quickly, what are some of the most common treats that companies face in tough times like these?

Michael: Well I think you have touched on two of them already.  Customers will often delay payment.  In the current economy where there is difficulty across the board, one of the issues is not simply delaying payment but cutting orders that is a decline in revenues.  On other hand, on the supply side, suppliers of goods, services and importantly of credit as well are going to look at their customers much more closely.  Suppliers of credit, lenders are going to play a more intense focus on performance, are going to be particularly concerned about compliance with financial covenants.  Especially again in the current economy if a business is in the need of refinancing or additional financing, that’s going to be a real challenge.  On the purchasing side, while the decline in the Canadian dollar is probably good for some businesses, those that are buying off shore are going to find a real challenge.

Ian: So when they are looking at their financial statements, what are the red flags that will tip off a business owner that their fiscal situation is becoming dire?

Michael: I honestly am not sure that there are particular red flags.  The kinds of issues that I outlined a minute ago are in themselves red flags.  If you see that kind of things then you know you have a problem.  I think rather then worrying about red flags, I think in the current economy, every business owner ought to side down perhaps with the assistance of an advisor but certainly on their own, sit down and honestly examine where their business is.  This is not a legal point, businesses need to honestly analyze their strengths and weaknesses today because there are going to be challenges across the board.

Ian: So when should an entrepreneur finally seek relief from his or her creditors?

Michael: In a way, that’s a question about when to use formal proceedings.  When people talk about relief from creditors, they often mean filing a notice of intention to make a proposal under the Bankruptcy and Insolvency Act or for a larger business, because you have to have debt of at least million dollars, making an application for relief under the Companies’ Creditors Arrangement Act.  But as I tried to say earlier, the focus from a business owner’s perspective ought to be pro-active.  Because there are many situation that can be resolved consensually, short of proceedings whether that’s through re-negotiation of terms with lenders, whether that’s operational changes, sales of non-core assets and the like, many of those things can be dealt with outside proceedings.  Often I find, it’s the business that doesn’t address its issues early on that is forced into proceedings and those situations can be unfortunate, they can result in the liquidation of a business.

On the other hand, if you are pro-active about addressing issues, identifying issues, finding a solution that makes sense in a business financial and operational context, then the next step is what kind of structure do I need to put in place to get to the end game.  And sometimes, as I said, that can be done outside formal proceedings, sometimes formal proceedings are very useful to get you to where you want to go.

Ian: So, speaking of formal proceedings, you can go through a CCAA or you can make, I think it’s a Division 1 proposal under the Bankruptcy Act.  You mentioned earlier there is a five million dollar debt threshold with CCAA, is that the only really note where there is a difference between the two?

Michael: The basic principles underlying each statute are the same, they allow an insolvent person to obtain a stay of proceedings that is to stop creditors from exercising remedies or commencing or continuing legal proceedings to give the business a breathing space in order to try to come up with a plan that will be acceptable to a majority of the businesses creditors.  Where the two statutes differ is on the flexibility spectrum.  The more complex, the more issues that need to be dealt with, the more a business would be better served by using the CCAA.  The CCAA, that is the Companies’ Creditors Arrangement Act, is a much more court driven process, it’s necessarily more expensive but proceedings under the CCAA can be tailored more and better to the particular circumstances of a business.  That’s the biggest difference between the two.

Ian: Now in essence, the protection essentially is time to get your fiscal house in order.  So how exactly do these things work?  What’s the process?

Michael: Well, let’s talk about a proposal under the Bankruptcy and Insolvency Act to start with.  It is a very simple process, a business must file in order to start the process a notice of intention to make a proposal to creditors under the Bankruptcy and Insolvency Act.  There needs to be a trustee, a trustee in bankruptcy, a licensed trustee will be the trustee in respect of the proceedings.  As soon as the notice of intention is filed, there is automatically without the need to go near a court room, a stay of proceedings.  So the creditors who are owed money or have security are prevented from taking further action unless they go to court and get an order lifting the stay of proceedings.  The initial stay is for a limited period, for 30 days, if more time is needed to come up with a proposal, more time to negotiate with creditors and others, then an application can be made to the court for a further 45-day extension and successive extensions can be obtained on appropriate grounds so that the process can last essentially up to about 6 months.  CCAA is different in that a stay of proceedings can be obtained but it’s obtained on application to the court.  The court will make an order staying proceedings and as I said, that stay can be tailored to some extent to fit the particular circumstances of the situation.  Just as there is a proposal trustee in a BIA proposal situation, the court in a CCAA case will appoint a monitor, usually again a licensed trustee in bankruptcy who will be there to assist the business in coming up with a restructuring plan and assisting with the negotiation with creditors and also providing information to creditors and to the court.  In a CCAA case, there are likely more possible outcomes that is, it’s easier to sell assets, sell a business, entirely restructure a balance sheet or do combinations of those things.  Some of those things can be accomplished in a BIA proposal of proceedings but as I said, the more complex the case, the more likely you are going to want to be under the CCAA.

At the end of the piece, assuming the business has come up with a plan in either case, there will be a meeting or meetings of creditors to vote on the plan and assuming the necessary majority of creditors vote in favor of the plan, vote a number of creditors voting and amount of claims voting, so there is a double majority, 50% in number, 2/3 in value then the plan or proposal goes to court for approval.  Once approved by the court, it’s binding on the business and it is binding on all the creditors who are affected by the proposal.  So for example, you could say, all creditors should give more time to pay or creditors should receive 50 cents on the dollar instead of 100 cents dollar or creditors should take an equity stake in the company and reduce their debt claim or give up their debt claim entirely.  Any number of possibilities are available.

Ian: Thanks.  And finally, would it be fair to say that your general council might be able to get you through a BIA proposal where as you probably need to bring in a specialist like yourself for a CCAA proposal?

Michael: I would actually say not.  I think that both in bankruptcy situations, proposal situations, restructuring situations, there are particular issues and laws that you may be best served dealing with a specialist not only frankly on the legal side but on the financial advisory side as well, and frankly on the operational side.  There are people out there with special skills both operationally, financially and legally to deal with what I often call distress situations.

Ian: It’s certainly a complicated situation to be in and you want all the help you can get.  Michael, thanks for joining the Business Coach Podcast.

Michael: My pleasure.

Ian: Michael MacNaughton is a Toronto-based partner in the Insolvency and Restructuring group of law firm Borden, Ladner, Gervais.

That’s it for another episode of the Business Coach Podcast.  Be sure to check out other episodes which you can download from BMO.com, profitguide.com or iTunes.  If you have any comments or suggestions about the podcast, please send them to me at ian.portsmouth@profit.rogers.com

Until next time, I am Ian Portsmouth, the Editor at PROFIT Magazine, wishing you continued success.

Originally appeared on PROFITguide.com