Governance and Supervision

AuthorRoderick J. Wood
The debtor does not usually lose control over the management of the
business during the period in which restructuring proceedings are on-
going. In this respect, restructuring proceedings a re unlike other com-
mercial insolvency proceedings, such as bankruptcy and receivership,
in which an insolvency administrator assumes control of the business.
However, it would be a grave mist ake to think that th is means that
the debtor will simply carry on business as usual. The initiation of
commercial restr ucturing proceed ings radically alters the environment
within which the debtor man ages and operates the business. The debt-
or must work closely with insolvency professionals and expert legal
advisors and must engage in a series of negotiations with claimant s
in order to develop an acceptable plan or to implement a sales process.
There are a multitude of decisions that must be made, and there i n-
evitably will be p arties who are unhappy about some of these decisions.
The governance rules establi sh the legal framework within which the
decision making occur s, and the recourse available to those who wish
to contest the decisions that are m ade. In order to make properly in-
formed decisions, the participants in the process must have accurate
and timely information available to them. Therefore, it is also neces-
sary to put mechani sms in place that provide for the free f‌low of reli-
able inform ation.
If the debtor is an individual or a partnership, the governance issues
are relatively straightforward. The individual or partner is both t he
owner and the manager of the business and is subject to unlimited
liability for claims arising out of the operation of the business. The
debtor will attempt to negotiate a deal in which the outcome for both
the debtor and the creditors is better th an if the debtor’s assets were
liquidated in bankr uptcy proceedings.
The matter is often more complex when the debtor is a corporation.
In many instance s, the corporation is closely held. In these corpora-
tions, a single person or a small g roup of persons holds a controlling
interest in the corporation. The controlling shareholders manage the
business and the sha res they hold are not traded on an exchange. These
individuals sometimes possess f‌irm-specif‌ic knowledge and expertise,
which makes it necessa ry to retain them as par ticipants in the restr uc-
tured business.
In other instances, t he shares of the corporation are publicly traded
and professional managers are re sponsible for the management of the
business. Here, there is a division between ownership and control. The
shareholders are the residual owner s of the f‌irm, but they do not active-
ly participate in its ma nagement. It is often the case t hat the total value
of the creditors’ claims exceeds the going-concern value of the f‌inan-
cially distre ssed f‌irm. The shareholders’ interests will u sually be wiped
out and they will not be part icipants in the restructured f‌irm.1 During
the restructur ing proceedings, the corporate directors must recognize
that it is no longer appropriate for them to focus upon the interests of
shareholders when making their decisions. It may also be advisable to
replace or augment the existing ma nagement team. This may be neces-
sary if the cre ditors have lost trust in the managers, if some or all of the
managers have left the f‌ir m, or if the managers are thought to lack the
expertise necessary to car ry out a turnaround of the busines s.
1) The Duties of Directors of Financially Distressed
The various stakeholders in a corporation wi ll often have divergent
views as to the preferred direction and outcome of the restructuring.
Claimants such as secured creditors with higher-ranki ng claims may
press for an immediate sale of the a ssets. Claimants wit h lower-ranking
1 Re Stelco Inc (2006), 17 CBR (5th) 78 (Ont SCJ).

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