C. Approval by the Creditors

Author:Roderick J. Wood
Profession:Faculty of Law. University of Alberta
Pages:425-434
 
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Page 425

1) The Meeting of Creditors

The BIA contains a set of rules that govern the calling of a meeting of creditors. The trustee must call the meeting within twenty-one days from the filing of the proposal with the official receiver.16The official receiver or his or her nominee chairs the meeting.17The rules contained in the BIA governing meetings of creditors are applicable.18The chair may adjourn the meeting to permit further investigation or examination.19

The CCAA provides that a court may order a meeting of the creditors but provides very little guidance on the process. The detail is supplied by the court in a meeting and approval order that establishes the procedure for the calling and holding of a meeting of the creditors to vote on the plan. The CCAA provides that the court may adjourn a

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meeting of creditors if an alteration or modification of the plan has been proposed after the court has ordered a meeting.20

2) The Threshold for Creditor Approval

The CCAA and the BIA set out the rules that govern creditor approval of the plan. Both statutes provide that the plan must be approved by a majority of the creditors representing two-thirds of the value of the claims.21Where creditors are classified into different classes of creditors, each class of creditors must approve it by this dual majority in order for the plan to be binding on that class of creditors. This means that, within a class of creditors, a majority of creditors of that class may bind a dissenting minority to the terms of the plan.

The percentage requirements are calculated using the number of creditors within the class who voted on the plan, as opposed to the total number of creditors in the class. Suppose that there are ten creditors within the class and that the total value of the claims is $1 million. At the meeting, seven of the creditors vote on the plan. Four vote in favour, and three against. The four who voted in favour have claims that amount to $600,000. The three who voted against have claims of $200,000. The dual-majority threshold is satisfied in this case. The creditors have a majority in number of those who voted (four out of seven) even though they do not have a majority of the total number of creditors within the class. They also have more than two-thirds of the amount of claims of those who voted (75 percent of the value) even though they have less than two-thirds of the value of all the claims within the class.

The ability to bind dissenting creditors to a plan operates only within each class of creditor. Suppose that a plan has three classes of creditors. Two approve the plan by a dual majority, while the other does not. The vote of the two classes that approved cannot bind the class that did not.22Nor does it matter if, in the aggregate, the creditors who approve the plan possess a majority in number representing two-thirds of the value of all claims.23Each class has a veto and cannot be forced to accept the plan.24There is nothing equivalent to the "cram down"

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power that permits a court in the United States to bind a dissenting class to a plan even though the class has voted to reject the plan.25

3) Unaffected Creditors

A plan does not need to embrace all creditors. Some creditors may be left outside it. These creditors are unaffected by the plan and therefore do not have any right to vote on it. Unaffected creditors enjoy their full legal rights once the restructuring is complete and the stay of proceedings is lifted.

Under the BIA, a proposal must be made to all unsecured creditors, either as a mass or divided into classes.26It is therefore not possible to leave a class of unsecured creditors outside a proposal as unaffected parties. The BIA provides that a proposal may be made to secured creditors. This means that some or all of the secured creditors may be excluded from the proposal.27If they are left outside the proposal, their rights are unaffected and they do not vote on the plan.28If they are affected by the proposal, they will be placed into one or more class of affected secured creditors, and each class must approve the proposal by a dual majority in order for the proposal to be binding on that class of secured creditor.29

The CCAA does not contain an equivalent restriction on the kinds of parties who may be designated as unaffected parties under a plan.

Both the CCAA and the BIA provide that certain types of claims, such as fines, awards for damages for bodily harm intentionally inflicted, and liability for fraud while acting in a fiduciary capacity are not affected unless the plan explicitly provides for the claims compromise and the creditor votes in favour of acceptance.30

4) The Effect of Partial Approval

Some but not all classes of affected creditors may have given their approval to the plan. Classes that did not vote to approve the plan cannot

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be bound by it. However, it is also necessary to consider the effect of their rejection on the other classes of creditors who voted to approve it. If the plan is viewed as severable, it will nonetheless bind those classes who voted in favour of it. If it is viewed as an entirety, no class of creditor is bound unless all classes of creditors agree to approve it.

Under the BIA, all classes of unsecured creditors must approve the proposal.31A vote against the proposal by any class of unsecured creditor will cause it to fail, and a court will be unable to approve the proposal. The BIA does not require the approval of secured creditors. It provides that the proposal is binding only on secured creditors if they approve it by a dual majority. A proposal may therefore satisfy the statutory requirements for creditor approval even if one or more classes of secured creditors have voted against it. Although approval by secured creditors is not essential, a court may decide not to approve a proposal if the rejection by the dissenting class of secured creditors renders the proposal unviable.

The CCAA is silent on the question of partial acceptance. In Olympia & York Developments Ltd. v. Royal Trust Co.,32the plan specifically provided that if a class of creditors voted against the plan that class would drop out of the plan and become unaffected creditors. The court held that the unanimity of all classes was not required in order to bind the consenting classes to the plan. Therefore, the classes of creditors who voted in favour of the plan were bound, while the classes of creditors who did not approve it were not bound. The matter was made easier because the plan expressly dealt with the effect of partial approval. The more difficult case is where the plan is silent on this question and the court must determine the intention of the parties.

The Olympia & York case involved a restructuring of a massive real estate empire. The company’s viability was not intractably tied to any one piece of property, so that the failure of some of the classes of creditors to approve the plan did not result in an overall loss of viability of the plan. The situation may well be different where the assets are integrated so that a failure to bind a class of creditors to the plan would threaten the plan’s viability. A court could respond by refusing to approve the plan because of its non-viability. Alternatively, a court under these circumstances might conclude that the parties would have intended that approval by all classes was needed before any class was bound by the plan.

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5) Voting by Related Parties

A debtor may have entered into intercorporate transactions with related corporations. These related parties have claims against the debtor that entitle them to vote on the plan. The non-related parties may be concerned that the related party will vote in favour of the plan and thereby swing the vote in favour of approval, whereas the exclusion of the related-party votes would result in a rejection of the plan.

The BIA establishes a set of relationships that are defined to be between related persons.33If a creditor is related to the debtor, the creditor may vote against but not for the acceptance of the proposal.34The restriction against related person voting does not apply if the claim of the related...

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