The Foundations of Commercial Restructuring Law
| Author | Roderick J. Wood |
| Profession | Faculty of Law University of Alberta |
| Pages | 307-325 |
307
CHAPTER 11
THE FOUNDATIONS
OF COMMERCIAL
RESTRUCTURING LAW
The creation of a bankruptcy system has natur ally given rise to a paral-
lel phenomenon — arrangements between debtors and creditors under
which the creditors agree to accept something less than ful l and timely
payment of their debts. These arrangements, which in a commercial
context are referred to as restr ucturings or reorganiz ations, 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. A successful restr ucturing will often permit
a debtor to continue in business, although sometimes it will result i n
the sale of a going concern to an outside party.
The growth of rest ructuring law in Canada in t he 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 a lso stimu-
lated an unforeseen creativity on the par t of the judicia ry in formulat-
ing new kinds of orders, many of which have had the effect of altering
pre-existing contractual and property rights of t hird pa rties. Restruc-
turing l aw continues to be in a state of r apid evolution, and its proper
role as well as its relationship with other commercial insolvency re-
gimes continues to be controversial.
BANKR UPTCY A ND INSOLVENCY L AW308
A. A SHORT HISTORY OF RESTRUCTURING
L AW
1) Voluntary Arrangements
Original ly, voluntary arrangements operated in the absence of a statu-
tory framework. A var iety of different agreement s 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 i n full satisfaction of the debt was referred to as a com-
position agreement. An agreement under which the time for payment
of debts was postponed was called a moratorium. A deed or scheme
of ar rangement was employed i n a wide range of situations. It could
be used where the clai ms of the creditors were partially released or
converted into ot her kinds of claims. In many instances, the ar range-
ment provided for the tra nsfer of some or all of the debtor’s assets to a
trustee. Ag reements 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 conclud-
ed within a statutor y framework. These statutory regimes addressed
one or more of the following four problems a ssociated with t he 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-judicial seizure of the debtor’s as sets while
the debtor was attempting to negotiate with the creditors. Thi s made
negotiations more difficult, since each creditor had a st rong incentive
to attempt to join in the race to grab assets.1 Second, the agreement
bound only the creditors who agreed to the arrangement and could not
be imposed on dissenting creditors.2 This gave dissenting creditors the
opportunity to m ake strategic t hreats to derail the whole ar rangement
by instituting ban kruptcy proceedings aga inst the debtor unless their
claims were given prefer red treatment. This type of holdout threat has
a corrosive effect, since it les sens the 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 deci sions. Fourth, there were concerns t hat private
arrangements might not be properly administered 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 Va. L. Rev. 507.
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