The creation of a bankruptcy system has naturally given rise to a parallel phenomenon - arrangements between debtors and creditors under which the creditors agree to accept something less than full and timely payment of their debts. These arrangements, which in a commercial context are referred to as restructurings or reorganizations, are negotiated within a statutory framework created by federal insolvency legislation. If approved by the creditors, the arrangement operates as an alternative to bankruptcy. A successful restructuring will often permit a debtor to continue in business, although sometimes it will result in the sale of a going concern to an outside party.
The growth of restructuring law in Canada in the past twenty-five years has been an astonishing phenomenon on several levels. It has eclipsed bankruptcy law and has become the insolvency proceeding that is used by the very largest business enterprises. It has also stimulated an unforeseen creativity on the part of the judiciary in formulating new kinds of orders, many of which have had the effect of altering pre-existing contractual and property rights of third parties. Restructuring law continues to be in a state of rapid evolution, and its proper role as well as its relationship with other commercial insolvency regimes continues to be controversial.
Originally, voluntary arrangements operated in the absence of a statutory framework. A variety of different agreements were possible, and a number of different terms were used to describe the various types of agreements. An agreement under which a creditor agreed to accept a lesser amount in full satisfaction of the debt was referred to as a composition agreement. An agreement under which the time for payment of debts was postponed was called a moratorium. A deed or scheme of arrangement was employed in a wide range of situations. It could be used where the claims of the creditors were partially released or converted into other kinds of claims. In many instances, the arrangement provided for the transfer of some or all of the debtor’s assets to a trustee. Agreements between debtors and creditors that are concluded outside a statutory framework are commonly referred to as workouts or private arrangements.
It became increasingly common for such agreements to be concluded within a statutory framework. These statutory regimes addressed one or more of the following four problems associated with the negotiation of a private arrangement. First, there was no method through which the debtor could prevent creditors from enforcing their claims through judicial or extra-judicial seizure of the debtor’s assets while the debtor was attempting to negotiate with the creditors. This made negotiations more difficult, since each creditor had a strong incentive to attempt to join in the race to grab assets.1Second, the agreement bound only the creditors who agreed to the arrangement and could not be imposed on dissenting creditors.2This gave dissenting creditors the opportunity to make strategic threats to derail the whole arrangement by instituting bankruptcy proceedings against the debtor unless their claims were given preferred treatment. This type of holdout...