The Foundations of Commercial Restructuring Law

• Author: Roderick J. Wood
• Pages: 333-354

333

CH AP TER 11

THE FOUNDATIONS

OF COMMERCIAL

RESTRUCTURING LAW

The creation of a bankruptcy system h as naturally given rise to a paral-

lel phenomenon — arrangements between debtors and creditors under

which the creditors agree to accept something less than full and ti mely

payment of their debts. These ar rangements, which in a commercial

context are referred to as restr ucturings or reorganizat ions, are negoti-

ated within a statutory framework created by federal insolvency legis-

lation. If approved by the creditors, the arrangement operates as an

alternative to bank ruptcy or receivership. A successful restructuring

will often perm it 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 three dec-

ades has been an astonishing phenomenon on several levels. It has

eclipsed bankr uptcy law and has become the insolvency proceeding

that is used by the very largest business enterprises. It has also st imu-

lated an unforeseen creativ ity on the part of the judiciar y in formulat-

ing new kinds of orders, many of which have had the effect of altering

pre-existing contractual and property rights of th ird parties. Restr uc-

turing law continues to be in a state of rapid evolution, and its proper

role as well as its relationship with other commercial insolvency re-

gimes continues to be controversial.

BANKR UPTCY AND INSOLVENC Y LAW334

A. A SHORT HISTORY OF RESTRUCTURING

L AW

1) Voluntar y Arrangements

Original ly, voluntary arra ngements operated in the absence of a statu-

tory framework. A variety of di fferent agreements were possible, and a

number of different terms were used to describe the various t ypes of

agreements. An agreement under which a creditor agreed to accept a

lesser amount in full sat isfaction of the debt was referred to as a com-

position agreement. An agreement under which the t ime for payment

of debts was postponed was ca lled 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 relea sed or con-

verted into other kinds of claims. In many instance s, the arrangement

provided for the transfer of some or all of the debtor’s assets to a t rustee.

Agreements between debtors and creditors t hat are concluded outside

a statutory framework are commonly referred to as workouts or private

arrangements.

It became increasingly common for such agreements to b e conclud-

ed within a statutory framework. These statutory regimes addre ssed

one or more of the following four problems associated with the nego-

tiation of a private arrangement. First, there was no method through

which the debtor could prevent creditors from enforcing their claims

through judicial or extra-judicia l seizure of the debtor’s assets while

the debtor was attempting to negotiate with the creditors. This made

negotiations more diff‌icult, since each cred itor had a strong incentive

to attempt to join in the race to grab asset s.1 Second, the agreement

bound only the creditors who agreed to the ar rangement and could not

be imposed on dissenting creditors.2 This gave dissenting creditors the

opportunity to make str ategic threats to derail the whole arrangement

by instituting bankruptcy proceedings again st the debtor unless their

claims were given preferred t reatment. This type of holdout threat has

a corrosive effect, since it lessens t he likelihood that any arrangement

will be negotiated. Third, creditors generally lacked suff‌icient infor-

mation concerning the aff airs of the debtor and therefore were unable

to make informed decisions. Fourth, there were concerns that private

arrangements might not be properly admin istered and that, through

1 See Chapter 1, Sect ion A(2).

2 See I Treiman, “Major ity Control in Compositions: Its H istorical Origin s and

Development” (1938) 24 Virginia Law Review 5 07.