Governance and Supervision

• Author: Roderick J. Wood
• Pages: 419-441

419

CHAPTER 14

GOVERNANCE

AND SUPERVISION

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 are 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 mistake to think that this 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 manages 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 claimants

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 in-

evitably will be p arties who are unhappy about some of these decisions.

The governance rules establish the legal framework within which the

decision making occurs, and the recourse available to those who wish

to contest the decisions that are made. 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 mechanisms in place that provide for the free f‌low of reli-

able information.

BANKRUPTCY AND INSOLVENCY LAW420

A. THE ROLE OF THE DEBTOR

If the debtor is an individual or a partnership, the governance issues

are relatively straightforward. The individual or partner is both the

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 than 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 instances, the corporation is closely held. In these corpora-

tions, a single person or a small group 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 necessary to retain them as participants in the restruc-

tured business.

In other instances, t he shares of the corporation are publicly traded

and professional managers are responsible 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 participants in the restructured f‌irm.1 During

the restructuring 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 management 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 f‌irm, or if the managers are thought to lack the

expertise necessary to carry out a turnaround of the business.

1) The Duties of Directors of Financially Distressed

Corporations

The various stakeholders in a corporation will often have divergent

views as to the preferred direction and outcome of the restructuring.

Claimants such as secured creditors with higher-ranking 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).