Governance and Supervision

AuthorRoderick J. Wood
Pages419-441
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).

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