In broad outline, the objective of restructuring law is easy to identify. Courts have consistently maintained that the purpose of restructuring law is to provide an insolvent debtor with a limited but reasonable period of time within which to develop a plan or proposal and to put it before the creditors who must then decide to accept or reject it.16
However, the task becomes more complicated when attempting to explain exactly why this is considered to be a socially desirable goal and under what circumstances and in whose interests this objective ought to be pursued. This question is of crucial importance in Canadian restructuring law because of the role played by the court in restructuring proceedings. Courts are routinely called upon to decide whether restructuring proceedings should be allowed to proceed. A refusal by the court will almost inevitably mean that the enterprise will be liquidated through bankruptcy or receivership proceedings.
A significant shift in commercial insolvency law has taken place over the last twenty-five years in Canada. Prior to that time, the principal purpose of commercial insolvency law was to effect a liquidation of an insolvent enterprise. Today, the focus has shifted in favour of insolvency proceedings that seek to restructure the affairs of a financially distressed enterprise so as to avoid liquidation. For this reason, the objective of restructuring law is said to be the rescue and rehabilitation of financially distressed commercial enterprises, as opposed to the piecemeal liquidation of their assets.
This does not mean that bankruptcy is regarded as a bad thing and that it is always desirable to rescue a firm from liquidation. There are many reasons why firms become financially distressed. It may result from incompetent management or the inefficient use of assets. It may be due to a temporary downturn in markets. It may be that the firm has taken on too much debt or has embarked on projects that turn out to be less profitable than anticipated. Depending on the nature of the problem, the solution may be to replace the management of the firm, to get rid of unprofitable portions of the business, to cut costs, or to reschedule debt or convert some of it to equity.17A conversion of debt to equity is akin to a sale of the assets to the creditors, since they become the residual owners who take the risk of loss and the benefit of gain. However, it may be that there is no longer a realistic prospect that the firm can be made economically efficient. In that case, it is not an appropriate candidate for rescue. The best outcome is for its assets to be liquidated so that others may put them to higher-valued uses.
Restructurings are thought to be desirable because they provide a process through which creditors can obtain a higher recovery than otherwise would be available to them through bankruptcy or other liquidation proceedings. The reason for enhanced recoveries by creditors in restructuring proceedings is due to the preservation of the value of the firm as a going concern. The value of a business as a going concern is generally higher than the value that would be obtained by breaking it up and selling off the assets to individual buyers. If there is not a reasonable...