Developing and Approving the Plan

• Author: Roderick J. Wood
• Profession: Faculty of Law University of Alberta
• Pages: 421-453

421

chaPter 16

DEVELOPING AND

APPROVING THE PLAN

The objective in a commerci al restr ucturing i s to come up w ith an ag ree-

ment that will be approved by the creditors. The agreement is referred to as

a plan of compromise or arrangement in CCAA proceedings and a s a com-

mercial proposal in BIA pro ceedin gs. For conve nience, i t will s imply be r e-

ferred to here as the plan when the discussion relates to both restructuring

regimes. The plan usually separates the creditors into a number of differ-

ent classes. It is not binding on any class of creditors unless the class of

creditors approves it. Unanimous consent of all the creditors within 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 that 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

the debtor and obtain in their place the rights specif‌ied in t he plan.

a. deveLOPing the PLan

A debtor who enters into restructuring proceedings encounters two im-

mediate diff‌iculties. First, the debtor must attempt to maintain business

operations in a vastly different environment. Extensive negotiations

with lenders may be required. Worried suppliers must be reassured.

Steps to terminate contracts, close units, and reduce t he workforce

must be taken. (The problems associated with the preser vation and

BANKR UPTCY A ND INSOLVENCY L AW422

operation of the business have been disc ussed in Ch apter 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 creditors before initiating restructuring proceedings. The

debtor therefore is faced with the considerable challenge of negotiating

a deal under severe time constraints 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 f‌ir m ex-

ceeds its liquidation value. Creditors who participate in a restructuring

can therefore obtain a higher recovery than they could if the f‌irm were

liquidated in bank ruptcy. Although re structuring law provides a pro-

cess that perm its the interested parties to capture thi s surplus value, it

does not give much guidance on how surplus value is to be distr ibuted

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 disagreements may arise in the course of these ne-

gotiations. Disagreements may ari se between the debtor and the credit-

ors. The debtor may propose to pay the creditors a certain percentage of

their claims. The creditors may take the view that they ought to recover

a higher percent age than that which is offered. Disagreements may

arise between different clas ses of creditors over the respective amounts

that should be given. Creditors in one class may believe that their class

is receiv ing too little and t hat another class is being given too much.

Conf‌licts may also occur wit hin a class of creditors over the amount or

kind of propert y t hat they should receive. Some creditors may prefer

to be paid ca sh, while others m ight be satisf‌ied with a distribution of

shares in satisfaction of their claims.

The decision whether to implement a liquidation plan is also highly

signif‌icant in the negotiation proce ss. Liquidation settles uncertainty

over the going-concern value of the f‌i rm. When liquidation is avoided

and the f‌irm continues in busine ss, junior classes of claimants are able

to use uncert ainty over the value of the f‌irm to arg ue for more favour-

able treatment. The uncertainty over value explains why classes of

claimants that have a lower priority rank ing are often able to recover

something under a plan despite t he fact that higher-ranking classes do

not fully recover their claims.1

1 D. Baird & D. Bernste in, “Absolute Priorit y, Valuation Uncertai nty, and the

Reorganiz ation Bargain” (2006) 115 Yale Law J. 1930.

Developing and Approv ing the Plan 423

2) Pre-Packaged Plans

Very often a business commences restructuring proceedings in order to

give it the necess ary breath ing room to negotiate a dea l with its credit-

ors. But t his i s not always the case. The debtor may have been able to

work out the major term s and conditions of the plan with its creditors

prior to the initiation of restructuring proceedings. Sometimes the plan

can be implemented as a private workout wit hout any need to initiate

restructuring proceedings. But sometimes it may be necessary to invoke

restructuring proceedings even though the terms of the deal have been

settled. It may be nece ssary to do so in order to bind dissenting credit-

ors to the plan. It may also be necessary to invoke restructuring pro-

ceedings in order to obt ain some advantage th at is not avai lable outside

restructuring law. For example, it may be necessary to invoke rest ruc-

turing proceeding s in order to disclaim or assign certai n contracts.

A “pre-packaged” plan is one in which the debtor obtains the

consent and support of the m ajor creditors before restructuring pro-

ceedings are commenced. Courts have t aken t he view that the use of

pre-packaged plans is a healthy and effective practice that should be

encouraged.2 Pre-packaged plans have the advantage of shorten ing the

time needed to complete the restructuring and reducing the costs of re-

structuring. However, the use of pre-packaged plans does not provide a

justif‌ication for running roughshod over the interests of those creditors

who have not been consulted.

3) Amendment of the Plan

Many restructur ings involve intense negotiat ions between the debtor

and the creditors. During the course of these negotiations, the draft

plan may be signif‌icantly modif‌ied. There is no limitation on the

amendments or modif‌ications that can be made during the negotiation

stage, since this is essential ly a matter of contractual bargaining. Once

the plan is suff‌iciently developed, a meeting of creditors is c alled and

the creditors have the opportunity to vote on the plan.3 Further amend-

ments or modif‌ications to the plan may be proposed at this stage.4 Both

the CCA A and the BIA contemplate that a mendments may be made at

the meeting of creditors.5 Under the CC AA , the court has only a very

2 Re Royal Oak Mines Inc. (1999), 6 C.B.R. (4th) 314 (Ont. Ct. Gen. Div.).

3 Companies’ Creditors Arrangement Act , R.S.C. 1985, c. C-36, ss. 4 & 5 [CCAA];

Bankruptcy an d Insolvency Act, R.S.C. 1985, c. B-3, s. 51(1) [BIA].

4 See Re Wandlyn Inns Ltd. (1992), 15 C.B.R. (3d) 316 (N.B.Q.B.).

5 CCAA, ab ove note 3, s. 6(1); BIA, above note 3, s. 54(1).