Cross-Border Insolvency: Canadian Statutory Requirements

The Complicated Waters of Cross-Border Insolvency

Companies with entities in both Canada and the United States that are facing financial difficulty may seek statutory restructuring.

In this case, a clear and transparent cross-border legal protocol is not available. Each nation operates under its own laws with distinctly different rules.

For US businesses that also have Canadian operations, it is thus important to understand the Canadian statutory framework. The use of such a tool for restructuring is an important choice. While success can restore the health of a business, failure can result in liquidation.

Restructuring Laws in Canada: An Overview

Cross-border restructuring creates several distinct challenges for courts, creditors, and stakeholders. Canadian courts have the power to approve or implement arrangements in accordance with a foreign court. However, they are not required to make any order that does not comply with Canadian law.

The Canadian federal government has exclusive authority with respect to laws concerning bankruptcy and insolvency. Provincial governments have this same power with respect to civil and property rights. This includes the rights of secured creditors.

There are three federal statutes that govern statutory restructuring:

• The Bankruptcy and Insolvency Act (BIA)
• The Companies Creditors Arrangements Act (CCAA)
• The Winding Up and Restructuring Act (WURA)

The WURA is primarily intended for restructuring insurance companies, banks, and trust companies.

The BIA and CCAA are similar in their intent to Chapter 11 in the US. Most restructurings in Canada use either of these acts.

Restructuring Under The BIA

The BIA can be used for either personal or corporate insolvencies. It is a comprehensive and detailed statute. The BIA provides a process for both bankruptcy and the restructuring of debt.

Assignment of Bankruptcy

Bankruptcy involves an assignment where an insolvent individual or company voluntarily transfers all of their assets to a licensed trustee who has duties under the BIA. These duties include reporting to the court and creditors.

An assignment may be made voluntarily by the debtor or by creditors. It can also be made upon rejection of a proposal or violation of its terms.

A Proposal Under the BIA

Under the BIA, a plan of reorganization is known as a ‘Proposal.’ This is similar to a Chapter 11 proceeding. It provides a legal framework to negotiate with creditors and protection during negotiations.

Proposals may be made by a debtor company or an individual. An individual is broadly defined and may include corporations, individuals, a liquidator, or a trustee of the bankrupt.

By law, a proposal must be made to all unsecured creditors. It is not required that a proposal be made to secured creditors, although as a practical matter, it must satisfy secured creditors to be viable. Approval of a proposal is the same under the BIA and CCA, and requires:

• A majority in the number of creditors in each class,
• With approving creditors holding at least 2/3 of the total value of debt in each class.

Proposals are filed with the Office of the Official Receiver, which is the representative of the Office of the Superintendent of Bankruptcy. This is done through the trustee.

A proposal can be filed directly with the court, or it may be preceded by a Notice of Intent or NOI. This states the intention of an insolvent debtor to file a proposal and provides time to prepare it. If an NOI is filed, it must include a cash flow statement within 10 days. If a debtor chooses not to file an NOI, the cash flow statement must be included with the Proposal.

Stay of Proceedings

The filing of an NOI automatically stays proceedings by all creditors without the benefit of a court order. An initial protection period of 30 days is provided. Extensions of up to 45 days may be granted by the court. The total stay period cannot exceed six months.

A stay will not apply to secured creditors under certain circumstances if they:

• Were not named in the original NOI or proposal.
• Have taken legal possession of their collateral.
• Have delivered a notice to the debtor of their intent to enforce their security more than 10 days before the filing of an NOI or proposal.

The court may lift the stay or declare a proposal as refused by creditors if it finds that a debtor has not acted without prejudice, or with due diligence, and with good faith. When this occurs, it is deemed that the debtor has made an assignment of bankruptcy. An assignment is a legal process where an individual or company voluntarily transfers all their assets to the trustee for the benefit of the creditors.

If a debtor fails to file required cash-flow statements with the NOI, fails to file a proposal within the stay period, or fails to file a proposal, it is also deemed to file an assignment.

During the stay period, the debtor may continue operations and negotiate with creditors to form a proposal. Both the BIA and the CCAA permit debtor-in-possession (DIP) financing.

Approving or Rejecting the Proposal

Creditors vote by class and approval is the same as under the BIA.

In the US, Chapter 11 grants a bankruptcy judge the power under certain circumstances to confirm a plan that has not received the necessary votes. This is known as a cramdown. The BIA has no such provision.

If unsecured creditors refuse to approve a proposal, the debtor is bankrupt and its assets will be liquidated. If the proposal is accepted, the trustee must apply to the court for approval. The court is required to reject any proposal it does not think is reasonable. Failure to obtain approval results in bankruptcy.

Restructuring Under The CCAA

This law was originally enacted in the 1930s. The intent was to allow insolvent companies to restructure both secured and unsecured debt. It allowed a company to make arrangements with some or all creditors. At the time the CCAA was enacted, the BIA had no provision for a proposal. Thus, Canada now has two statutes that allow restructuring.

Judicial Flexibility for Larger Corporations

The CCAA is applied to debtor companies that have total claims against them of at least $5 million.The CCAA has few rules concerning procedure and has become an important tool for the reorganization of larger entities. This is because it allows much wider judicial discretion. This provides a significantly greater flexibility over the CCAA.

Stay of Proceedings

Importantly, the CCAA does not have a statutory time limit on a stay of proceedings. The stay can also be extended to parties who are not creditors of the debtor.

Under this Act, the rejection of a plan by the court or by creditors does not automatically result in bankruptcy, and the company can continue to make efforts to restructure.

Proceedings may be commenced by creditors, the debtor, the liquidator, or a trustee.

A company must apply to the court and request protection from creditors while a plan is being made. The debtor may apply to the court with limited or even no notice to its secured lenders. Where no notice is given, the court must be satisfied that the creditors’ position has not been compromised.

An initial stay cannot exceed 30 days but there is no limit to the length of extension if deemed necessary by the court. The court also has wide discretion to define the scope of the stay. It is incumbent on the creditor to satisfy the court that the stay is not warranted.

If a stay is granted, the court will appoint a monitor to oversee the affairs of the company and report to the court.

Once granted, the court may lift the stay if there is cause. This includes if it is likely to be rejected by creditors, or if the plan is not considered viable. Approval requires a majority of creditors in number for each class, and for the majority to represent at least two-thirds in the value of the claims in each class.

The classification of creditors is important, and it is more difficult to obtain approval as the number of creditor classes increases. The Act does not include specific rules concerning classification. The CCAA also does not include a provision for cramdown.

Both the CCAA and the BIA have provisions for DIP financing, which is referred to in the statutes as ‘interim’ financing.

Comparing the CCAA and the BIA

The CCAA and the BIA both contain provisions relating to international insolvencies that allow Canadian courts to approve and implement arrangements with any foreign proceeding. They also both allow interim or DIP financing.

The BIA provides for immediate protection to the debtor through an NOI. However, the stay may not apply to secured creditors under certain circumstances. Procedural rigidity allows a quick and low-cost reorganization.

The BIA requires that a plan be filed within six months. If it is rejected, then the company is bankrupt.

In comparison, under the CCAA, rejection of a plan does not automatically result in bankruptcy. The CCAA is intended for larger businesses and requires a court application to grant a stay. The court has considerable discretion, thus providing flexibility. In particular, there is no statutory limitation on the stay period.

Cross-border Insolvency Requires Strategic Implementation

For companies operating in multiple countries, understanding the complex nature of cross-border insolvency can be crucial to survival.

In Canada, the CCAA and BIA offer two different statutory vehicles for companies seeking to restructure. It is important for financially distressed companies operating in both Canada and the US to grasp the nuances of Canadian restructuring laws and their differences compared to Chapter 11 in the US. Only through the strategic use of these statutes can such companies find a pathway to successful restoration.

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[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can view at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. The Nuts & Bolts of Chapter 11 (Series I) / The Nuts & Bolts of a Chapter 11 Plan
2. The Restructuring Lawyer’s Guide To Tax: Cross Border and Multi-jurisdictional Tax Issues
3. Restructuring Insolvency & Troubled Companies: Help, My Business is In Trouble!

This article was originally published on May 19, 2025.]

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