The objective in a commercial restructuring is to come up with an agreement that will be approved by the creditors. The agreement is referred to as a plan of compromise or arrangement in CCAA proceedings and as a commercial proposal in BIA proceedings. For convenience, it will simply be referred to here as the plan when the discussion relates to both restructuring regimes. The plan usually separates the creditors into a number of different 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 the plan.
A debtor who enters into restructuring proceedings encounters two immediate 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 the workforce must be taken. (The problems associated with the preservation and
operation of the business have been discussed 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 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.
Restructurings are feasible when the going-concern value of a firm exceeds its liquidation value. Creditors who participate in a restructuring can therefore obtain a higher recovery than they could if the firm were liquidated in bankruptcy. Although restructuring law provides a process that permits the interested parties to capture this surplus value, it does not give much guidance on how surplus value is to be distributed among the interested parties. The division of the surplus value is a matter that is left to the parties to negotiate among themselves.
Several kinds of disagreements may arise in the course of these...