The purpose of a formal insolvency procedure is to optimize the payment of creditors of a company in financial difficulty.
Restructuring frees up funds to restart operations by temporarily suspending the right of creditors to seize the assets of the company, all under the supervision of a professional designated by the Court.
Accordingly, a restructuring accompanied by a formal insolvency procedure provides protection to businesses, a credible supervision for the protection of creditors and flexibility for reorganization (among others things, to cancel certain leases).
Incorporated companies are given access to several ways to anticipate the end of their activities and protect the interests of their employees, directors and creditors. Among other things, a large company may, under certain conditions, apply to the Court to suspend the rights of its creditors, in order to restructure and continue operations, under the Companies’ Creditors Arrangement Act.
This law has been used for the restructuring of several large companies including Air Canada, Stelco, Boutiques San Francisco and Quebecor World.
Companies of a more limited size also have recourses to facilitate their rehabilitation and avoid liquidation of their assets under the Bankruptcy and Insolvency Act.
The legislator intended to facilitate restructuring under court supervision to facilitate business continuity and avoid all the adverse consequences related to a definitive closure.
Overall, this is intended to give a second wind to companies rather than allowing creditors to dismantle them. The possible procedures to be followed include: the immediate filing of a proposal (62 (1) BIA) or a notice of intention to make a proposal to the creditors with the Official Receiver in the “locality of the debtor” (50.4 (1) BIA).
It is also possible to restructure the company outside of formal bankruptcy procedures. Changes in the market and in financing availability, lawsuits as well as changes of directors or shareholders are all factors that can explain the need for restructuring. Restructuring of a company draws from many areas of law. For instance, it has an impact on the taxation of companies, but also on their employees.
Sometimes, dismissal of employees may be necessary to enable the company to survive. Even in these cases of legitimate dismissal, the employer must take into account the legal and financial implications related to labor law. In addition, the following actions may be required:
- recover debts owed to the company (accounts receivable, contracts, etc.);
- negotiation of settlements related to the termination of contracts;
- strategic sale of assets in difficulty;
- acquisition or merger with a competitor;
- dismissal and down-sizing of activities.