Developing and Approving the Plan

AuthorRoderick J. Wood
The objective in a traditional commercial re structuring is to come up
with an agreement th at will be approved by the creditors. The agree-
ment is referred to as a plan of compromise or arr angement in CCAA
proceedings and as a commercia l proposal in BIA proceedings. For con-
venience, it will simply be referred to here as t he plan when the discus-
sion relates to both restructuring regimes. The plan often separate s
the creditors into two or more classe s. It is not binding on any class of
creditors unless the cl ass of creditors approves it. Unanimous consent
of all the creditors with in a class is not needed in order to bind the
creditors. It is suff‌icient if a majority of creditors who hold at least two-
thirds the value of the claims vote in favour of it. A court must then
review the plan to ensure t hat it is not unfair. If the court approves it,
the plan becomes binding on all the creditors who are affected by its
terms. The creditors relinquish their former claims against t he debtor
and obtain in their place t he rights specif‌ied in the plan.
A debtor who enters into restructuring proceedings encounters two im-
mediate diff‌icultie s. First, the debtor must attempt to maintain business
operations in a vastly di fferent environment. Extensive negotiations
with lenders may be required. Worried suppliers must be reassured.
Steps to terminate contract s, close units, and reduce the workforce
Developing and Approv ing the Plan 465
must be taken. (The problems associated with t he preservation and
operation of the business have been d iscussed in Chapter 13.) Second,
the debtor must attempt to negotiate and develop an acceptable plan.
The debtor often will not have had an opportunity to hammer out a
plan with the cred itors before initiating re structuring proceedings. The
debtor therefore is faced with the considerable chal lenge of negotiating
a deal under severe time constra ints and pressure. The process is made
more diff‌icult by the fact that the creditors do not speak with one voice
and their interests are often in conf‌lict with one another.
1) Bargaining over Surplus Value
Restructur ings are feasible when the going-concern value of a f‌irm ex-
ceeds its liquidation value. Creditors who par ticipate in a restructuring
can therefore obtain a higher recovery than they could if the f‌irm were
liquidated in bankr uptcy. Although restructuring law provides a pro-
cess that permits the interested parties to capture this surplus va lue, it
does not give much guidance on how surplus value is to be di stributed
among the interested parties. The division of the surplus value is a mat-
ter that is left to the par ties to negotiate among themselves.
Several kinds of di sagreements may aris e in the course of these ne-
gotiations. Disagreements may arise between the debtor and the credit-
ors. The debtor may propose to pay the creditors a certain pe rcentage of
their claims. The cred itors may take the v iew that they ought to recover
a higher percentage than that which is offered. Disagreements may
arise between d ifferent classes of creditors over the respective amounts
that should be given. Creditors in one class m ay believe that their class
is receiving too little and that another class is being g iven too much.
Conf‌licts may also occur within a class of creditors over the amount or
kind of property that they should receive. Some creditors may prefer
to be paid cash, while others might be satisf‌ied with a distr ibution of
shares in satisfaction of their claims.
The decision whether to implement a liquidation plan is also high ly
signif‌icant in the negotiation process. Liquidation settles uncertainty
over the going-concern value of the f‌irm. When liquidation is avoid-
ed and the f‌irm continues in bu siness, junior classes of cl aimants are
able to use uncertainty over the va lue of the f‌irm to argue for more
favourable treatment. The uncertainty over value ex plains why classes
of claimants t hat have a lower priority rank ing are often able to recover
something under a plan despite the fact that higher-ranking classes do
not fully recover their claims.1
2) Pre-packaged Plans
Very often a business commences restr ucturing proceedings in order to
give it the necessar y breathing room to negotiate a deal with its credit-
ors. But this is not always the ca se. The debtor may have been able to
work out the major terms and conditions of the plan with its creditors
prior to the initiation of restr ucturing proceedings. Sometimes the pla n
can be implemented as a private workout without any need to initiate
restructuring proceedings. But sometimes it may be necessa ry to in-
voke restructuring proceed ings even though the terms of the deal have
been settled. It may be necess ary to do so in order to bind dissenti ng
creditors to the plan. It may also b e necessary to invoke restructuring
proceedings in order to obtain some advantage that is not available
outside restructuring law. For example, it may be necessar y to invoke re-
structuring proceedings in order to disclaim or as sign certain contracts.
A “pre-packaged” plan is one in which the debtor obtains the
consent and support of the major creditors before restruct uring pro-
ceedings are commenced. Court s have taken the view that the u se of
pre-packaged plans is a healthy a nd effective practice that should be
encourage d.2 Pre-packaged plans have the advant age of shortening the
time needed to complete the restructur ing and reducing the costs of re-
structuring. However, the use of pre-packaged plans doe s not provide a
justif‌ication for running rough shod over the interests of those cre ditors
who have not been consulted.
3) Amendment of the Plan
Many restructur ings involve intense negotiations between the debtor
and the creditors. During the course of these negotiations, the draf t plan
may be signif‌ica ntly modif‌ied. There is no limitation on the amendments
or modif‌ications that can be made during the negotiation stage, since
this is es sentially a matter of contractual bargaining. Once the plan is
suff‌iciently developed, a meeting of creditors is ca lled and the credit-
ors have the opportunity to vote on the plan.3 Fur ther amendments
1 D Baird & D Ber nstein, “Absolute Priority, Valuation Uncertai nty, and the Reor-
ganizat ion Bargain” (2006) 115 Yale Law Journal 193 0.
2 Re Royal Oak Mines Inc (1999), 6 CBR (4th) 314 (Ont Ct Gen Div).
3 CCAA, s s 4–5; BIA, s 51(1).

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