Governance and Supervision

• Author: Roderick J. Wood
• Profession: Faculty of Law University of Alberta
• Pages: 382-402

382

CHA PTER 14

GOVERNANCE AND

SUPERVISION

The debtor does not usually lose control over the management of the

business during t he period in which restr ucturing proceedings a re on-

going. In this respect, restr ucturing proceeding s are unlike other com-

mercial insolvency proceedings, such as b ankruptcy and receivership,

in which an insolvency adm inistrator assumes control of the business.

However, it would be a grave mistake to th ink that this means that t he

debtor will simply carry on business as usual. The initiation of commer-

cial restr ucturing proceed ings radically alters the environment with in

which the debtor manages and operates the busine ss. The debtor must

work closely with insolvency professionals and expert legal advisers

and must engage in a series of negotiations with cla imants i n order to

develop an acceptable plan.

There are a multitude of decisions that must be made, and there in-

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

The governance rules establish the legal framework within which the

decision making occurs, and the recourse avai lable to those who wish

to contest the decisions t hat a re made. In order to make properly in-

formed deci sions, t he p articipants in the process must have accurate

and timely information available to them. Therefore, it is also necessary

to put mechanisms in place that provide for t he free f‌low of rel iable

inform ation.

Governance a nd Supervision 383

A. THE ROLE OF THE DEBTOR

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

relatively straightforwa rd. The individual or par tner is both the owner

and t he m anager of the busi ness and is subject to unlimited liability

for claims ar ising 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 t he debtor’s assets were liquidated in

bankruptcy proceed ings.

The matter is often more complex when the debtor is a corporation.

In m any instances, the corporation is closely held. In t hese corpora-

tions, a single person or a sm all g roup of persons holds a controlling

interest in the corporation. The controlli ng sh areholders m anage the

business and the shares they hold are not traded on an exchange. These

individuals sometimes possess f‌irm-specif‌ic knowledge and expertise,

which makes it necessar y to retain them as par ticipants in the rest ruc-

tured business.

In other instances, the 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 owners of the f‌irm, but they do not active-

ly participate in its management. It is often the case that the total value

of the creditors’ claims exceeds the going-concern value of the f‌inan-

cially distres sed f‌irm. The shareholders’ interests will usually be wiped

out and they will not be participants in the restructured f‌irm.1 During

the restr ucturing proceedings, the corporate di rectors must recognize

that it is no longer appropriate for t hem to focus upon the intere sts of

shareholders when maki ng their deci sions. It may also be advi sable to

replace or augment the existing management team. This may be neces-

sary if the creditors have lost trust in the managers, if some or all of the

managers have left t he f‌irm, or if the managers are thought to lack the

expertise necessary to carry out a tur naround 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 assets. Claimants with lower-ranking

1 Re Stelco Inc. (2006), 17 C.B.R. (5th) 78 (Ont. S.C.J.).