November 26, 2012
Restructuring offers a solution for insolvent construction companies
While it may sound like a death knell for companies, insolvency isn't the end of the world if it's caught early enough, according to one expert.
Walker Macleod, an associate at McCarthy Tetrealt, has spent the last four years of his career dealing with insolvent companies and bringing them back from the brink of collapse.
“I’ve dealt with several this year where people come in and they’re too far down the line to be saved,” he said. “Sometimes restructuring ends well and people go on and are able to recover, sometimes they don’t.”
Insolvency can come about for many reasons, though the most common reason Macleod sees is cyclical.
“The cycle you see is: The inability to pay trades leads to liens, (which) leads to operating lenders refusing to make further advances, (which) leads to receivership,” he said.
To avoid bankruptcy, restructuring is an option.
Although, construction companies facing restructuring need to recognize the issue early on and get professional advice.
Canadian companies that recently restructured include Unity Builders Group, Air Canada and Cow Harbour Construction Ltd.
In the restructuring process, staff may be cut, expenses reduced, priorities shifted, assets sold and operations trimmed, to fund payment to creditors.
The twists and turns of the process can be confusing and frustrating.
Companies can become subject to intense negotiations as creditors push to get money owed.
The Companies’ Creditors Arrangement Act (CCAA) is the preferred process, Macleod said, because it gives companies flexibility.
“There are few limits to achieve a restructuring under the CCAA,” he said.
“Companies must have $5 million in debt to file for CCAA protection, so the threshold will cut off some companies.”
Generally, the company applies for an initial order, which starts a 30-day stay of proceedings.
It will stop all creditors from suing or enforcing security against the company’s assets. Creditors aren’t prevented from filing liens to secure their trade payables.
“There is no limit on the amount of time that the stay can be subsequently extended after the initial 30 days,” he said.
“And to get the extension, the debtor company must satisfy the courts that it is working in good faith and with due diligence.”
In line with the initial order, a monitor is appointed which typically is a large accounting firm.
“The purpose of the monitor is to oversee and assist with the restructuring,” he said.
“The monitor operates as an officer of the court, not as an advocate of the debtor.”
Court-ordered charges are levied as part of the initial order, which pays for professionals working on the files, the lawyers, accountants, financial advisors, the monitor and the monitor’s counsel.
When companies go through a restructuring process, they’ll want to have their operating lender and major creditors in support.
“Your lender does not have an obligation to advance new credit. That’s not part of the stay,” he said.
“If that happens, your restructuring will end quickly because you have no cash...”
The next step in the course of restructuring is a claims process, which will be established by the court. A notice is sent to creditors by the monitor, requesting all claims be submitted by a certain date.
The notice is also circulated in newspapers and other media. Claims are resolved through the court.
“The intent in this part of the process is to identify all the claims against the debtor and give creditors a right to submit their claims, and to effect a compromise of their claims,” Macleod said.
Then, companies file a Plan of Arrangement, which must be approved by a majority of creditors.
“If the plan is approved, the company applies to have the plan sanctioned by the court, the court sanctions it, the plan becomes binding upon implementation and the debtor company has successfully restructured.”
That finishes the process for some. For others, there are restructuring provisions under the Canadian Bankruptcy and Insolvency Act (BIA), which is often used when companies don’t have time to go to court.
“The BIA operates under the same concept with a stay of proceedings, same ability to disclaim contracts, to obtain charges to secure obligations,” he said. “You make a proposal as opposed to a plan of arrangement.”
The big difference between the CCAA and the BIA is time.
Companies don’t go through the court to file a notice of intention. They only need to find a trustee and file documents.
Companies are allowed a 30-day stay of proceedings and are able to extend that by 45 days, for a maximum of six months.
“And if you have not put forth a proposal by the end of that period or your proposal is rejected by the creditors, you’re automatically bankrupted,” Macleod said.
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