CCAA Plans and Approval

• Author: Stephanie Ben-Ishai; Thomas G. W. Telfer
• Pages: 650-704

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CHAPTER 15

CCAA Plans and Approval

I. INTRODUC TION

The goal in a commercial restructuring is to come up with a plan of which the creditors will

approve. This is dierent than a private workout, which is a compromise or arrangement

between debtor and creditors concluded outside a formal insolvency restructuring regime,

and which is governed by ordinary principles of contract law. In order for a CCAA plan to

become binding on creditors, the creditors must approve it. Creditors are separated into dif-

ferent classes and the creditors in each class must vote on the plan. It is not necessary that

this consent be unanimous; rather, only a majority of creditors who hold at least two thirds

of the value of claims in the same class must approve it for it to be binding on all creditors

of that class, even the dissenting ones. If the plan is approved by creditors, it is then put

before the court to be sanctioned. This permits the court to consider the plan’s fairness — an

important check on the actions and conduct of the debtor company and the other creditors.

II. VOTING AND CLASSIFICATION OF CLAIMS

Sections  and  of the CCAA permit a court to order a meeting of creditors. The court will

issue a meeting and approval order that sets out the rules and procedure for the meeting.

Section  of the CCAA provides that the plan must be approved by a majority in number

representing two-thirds of the value of the creditors (where there is only one class of credit-

ors) or two-thirds of the value of each class of creditors (where there is more than one class

of creditors). The percentage requirements are calculated on the basis of the creditors who

actually vote on the plan, rather than on the basis of all the creditors who are aected by it.

For example, where there are seventy creditors, and fty of them vote on the plan — whether

for or against — the vote must be carried by at least twenty-six of the creditors (a majority in

number) who hold two-thirds of the value of the claims.

A creditor may be related to the debtor company — for example, a wholly or partially

owned subsidiary corporation may have made an inter-corporate loan to the parent corpora-

tion. Section () of the CCAA provides that a creditor who is related to the debtor company

may vote against but not for the plan.

The classication of claims is of fundamental importance under the CCAA. It is gov-

erned by CCAA, section , which is largely a codication of the principles that have been

developed in caselaw. Not surprisingly, the debtor company and the various creditors will

attempt to attain a classication scheme that gives them a superior bargaining position. A

creditor would ideally wish to be placed in its own separate class, because this would give it

the power to veto any plan. Failing this, a creditor would wish to be placed in a class in which

Cha pter : CCAA Plans and Approval 

it could block approval of the plan by the other creditors. For example, a creditor who holds

percent of the value of the claims of a class of creditors can prevent approval of the plan

by the class. The debtor, in developing the plan, will attempt to structure the plan in such

a way as to swamp any dissenting creditors within a class of creditors who are inclined to

approve it.

Creditors are typically grouped together based on a “commonality of interest” or a

“non-fragmentation” test, both discussed in the Norcen Energy Resources Ltd v Oakwood Pet-

roleums Ltd (),  Alta LR (d)  (QB) excerpt below. Justice Paperny, in Re Canadian

Airlines Corp (),  CBR (th)  (AltaQB), sets out the following principles for assessing

commonality of interest (at para ):

. Commonality of interest should be viewed based on the non-fragmentation test, not

on an identity-of-interest test;

. The interests to be considered are the legal interests that a creditor holds qua creditor

in relationship to the debtor company prior to and under the plan as well as on

liquidation;

. The commonality of interests are to be viewed purposively, bearing in mind the

object of the CCCA — namely to facilitate reorganizations if at all possible;

. In placing a broad and purposive interpretation on the CCCA, the court should be

careful to resist classication approaches that would potentially jeopardize viable

plans;

. Absent bad faith, the motivations of creditors to approve or disapprove are irrelevant;

. The requirement of creditors being able to consult together means being able to

assess their legal entitlement as creditors before or after the plan in a similar manner.

In Re Woodward’s Ltd (),  CBR (d)  (BCSC), TysoeJ applied a non-fragmentation

test to determine which of the holders of dierent types of unsecured claims (terminated

employees, a debenture holder, equipment nanciers, creditors holding a guarantee from

one debtor’s parent company, and lessors whose lease had been repudiated) could be joined

in a single class for voting on a plan of arrangement. The employees wished to be placed in

their own separate class for the purposes of voting on the plan. Justice Tysoe refused this

request on the ground that the employees and the other unsecured creditors had identical

legal interests. He stated (at paras –):

The legal rights of the terminated employees are the same as the legal rights of the trade

suppliers. They are both creditors with unsecured claims against the Operating Com-

pany (the secured and preferred amounts payable to employees under provincial legis-

lation and the Bankruptcy and Insolvency Act have already been paid to the terminated

employees). In a bankruptcy or other liquidation they would both receive the same pro

rata amount of their claims. They are to receive the same pro rata amount of their claims

under the Reorganization Plan.

The fact that there is a recognized dierence between contracts of employment and

ordinary commercial contracts is not relevant because the contracts of employment

of the terminated employees have come to an end. The terminated employees have

claims for damages against Woodward’s for wrongful dismissal. Once the amount of

damages for an employee has been agreed upon or determined by the Court, the dier-

ence between the two types of contracts becomes historical and the employee has the

same rights as any other unsecured creditor. The dierences between the two types of

contracts may result in the employees receiving higher amounts of damages but the

 BANKRUPTCY AND INSOLVENCY LAW IN CANADA: CASES, MATERIALS, AND PROBLEMS

dierences do not warrant the terminated employees being entitled to a higher distribu-

tion than the other unsecured creditors.

Even if the legal rights of the creditors dier, they may be placed in the same class of

creditors if the dierence in legal rights does not prevent the creditors from sharing a su-

cient commonality of interest. Justice Tysoeheld that this commonality of interest is lacking

when the plan denies some of the creditors a valuable right to which they would otherwise

be entitled. The plan proposed that the same payment (percent of the value of their claim)

would be made to creditors who held claims solely against the debtor company as well as to

creditors who in addition had been given an unsecured guarantee by an aliated company.

Justice Tysoe held that the classication scheme was unfair to the extent that both kinds of

creditors were placed in the same class. He stated (at paras –):

The Reorganization Plan ignores the fact that the holders of guarantees are unsecured

creditors of both companies. It proposes that they receive the same % proportion of

their indebtedness as the other General Creditors and their status as creditors of the

Holding Company is not reected.

In view of the fact that the holders of guarantees do have dierent legal rights from

the other members of the class of General Creditors, it is necessary to decide whether

the rights are so dissimilar that they cannot vote on the Reorganization Plan with a

common interest. It was submitted by counsel for Woodward’s that there is a common

interest because the holders of guarantees will still receive more under the Reorganiza-

tion Plan than they will be paid upon a liquidation of the two companies. I do not think

that this is sucient to create a commonality of interest with the other members in the

class of General Creditors who have lesser legal rights. To the contrary, I believe that this

is an example of what BowenLJ had in mind in the Sovereign Life case [[]  QB 

(CA)], when he used the term “conscation.” By being a minority in the class of General

Creditors, the holders of guarantees can have their guarantees conscated by a vote of

the requisite majority of the class who do not have the same rights. The holders of guar-

antees could be forced to accept the same proportionate amount as the other members

of the class and to receive no value in respect of legal rights that they uniquely enjoy and

that would have value in a liquidation of the two companies.

Sometimes a class of creditor is not brought within the plan. These creditors are typically

referred to as unaected creditors. They do not vote on the plan because their rights are not

compromised or impaired, which consequently means they are not being asked to agree to

a compromise or other alteration of their rights against the debtor company. Once the stay

of proceedings is lifted, they are entitled to exercise and enjoy their full legal rights against

the debtor company.

The ability to bind dissenting creditors applies only within a class of creditors. A court

cannot impose a plan on a class of creditors that does not approve the plan by a dual

majority. Consider the following example: A plan of compromise and arrangement creates

three classes of creditors: ()secured creditors, ()unsecured creditors, and ()lessors.

The secured creditors and unsecured creditors approve the plan by a dual majority, but the

lessors do not. The class of lessors did not vote in favour of the plan and are not bound by

it. An unresolved issue is whether the plan will nevertheless be binding on the two classes

who voted in favour of it, or if the underlying assumption is that all classes must vote

in favour of the plan for it to bind any class of creditor. A plan may contain a “drop-out”

clause providing that a class that does not approve a plan is to be treated as unaected