Developing and Approving the Plan

• Author: Roderick J. Wood
• Pages: 464-497

464

CH AP TER 16

DEVELOPING AND

APPROVING THE PL A N

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. DEVELOPING 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

BANKR UPTCY AND INSOLVENC Y LAW466

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).