When a company tries to reorganize

Canwest Global enjoyed a share price of $15 through much of 2005 .

However, its large debt, competition from the internet and a recession-driven drop in advertising revenue have taken their toll since then. The price plunged to 23.5 cents — a drop of 98 per cent — before the media conglomerate's announcement Tuesday it would seek protection under the Companies' Creditors Arrangement Act.

On that news, the Toronto Stock Exchange halted trading and announced it would review the shares with a view to de-listing them.

Canwest's announcement puts it on a list with other famous, formerly high-flying names, including Nortel, Air Canada, Stelco, Algoma, AbitibiBowater and Eaton's. 

On Wednesday, Jan. 14, 2009, Nortel announced it was seeking bankruptcy protection in a Delaware court. The company said it would make a similar filing shortly in Ontario Superior Court.  Its shares had gone from north of $124 to about 38 cents, although the company had in that time consolidated those shares, amalgamating 10 shares into one, decimating the stock price even more.

The move came a day before the company was due to make a $107-million interest payment on its debt. Nortel said it had about $2.3 million in cash, but it owed about $4.5 billion US in long-term debt.

What is bankruptcy protection?

Canadian companies don't actually file for "bankruptcy protection" when they go to a Canadian court to seek protection from their creditors. They do file for protection from their creditors under the inelegantly named Companies' Creditors Arrangement Act. That's a federal law that basically gives a company time to try to work out its financial difficulties with its creditors.

A company files under the CCAA for permission to come up with a restructuring or reorganization plan that would give it time (often 30 to 90 days) to rearrange its affairs so that it can keep operating.

As long as a CCAA order remains in place, creditors are not allowed to take any action to collect money owed to them. They can't seize the company's property or petition it into bankruptcy.

Since a CCAA filing is made because a company is deeply in debt (under CCAA rules, a company must have more than $5 million in liabilities), the first order of business is to strike some kind of deal with the people or organizations to which it owes money. That includes lenders, unpaid suppliers and bondholders, to mention a few.

Negotiations between the company and its debtors can take weeks or even months. Essentially, the sides are trying to find a compromise with which they can live (for example, creditors might agree to accept 50 cents on each dollar of debt).

Can CCAA protection be extended?

Yes, under CCAA rules, court-ordered protection can be extended many times. After Algoma Steel filed for protection in April 2001, the company obtained eight extensions before emerging with a new ownership structure.

Who gets priority under a CCAA filing?

Not all creditors are created equal. Priority typically determines the rank of creditors in which they may be paid by a debtor.

Secured creditors, including lenders and debt-holders, typically head the list when it comes to getting back their money. Secured creditors may hold a security — such as a mortgage or other pledge — for their debt held.

Unsecured creditors are next on the list of repayment. Unsecured creditors have lent money or provided goods or services to a debtor without securing the debt.

What happens to shareholders?

Holders of common stock are typically last on the list. Quite often in CCAA proceedings, they get back none of the money they invested. Their old shares become worthless and often new shares are issued in the restructured company.

Holders of preferred shares rank ahead of common shareholders in terms of creditor priority (hence the title "preferred") but often do not get back the full value of their shares.

What happens if the court doesn't approve a CCAA application or the sides can't agree on how to restructure debt?

If a restructuring attempt is not successful, or if the courts don't approve it, a company can be petitioned into receivership or bankruptcy. The main difference between a CCAA filing and the alternative is that receivership or bankruptcy means that the company is no longer a going concern.

Do not confuse court-ordered protection from creditors (commonly referred to as bankruptcy protection) with a bankruptcy filing. Under court-ordered protection, the company is trying to continue operating. In a bankruptcy filing, an insolvent company is liquidated by a trustee.

Receivership is usually initiated by one of the secured creditors of a company. Canada's Bankruptcy and Insolvency Act requires the debtor be given at least 10 days notice before the appointment of a receiver. As soon as the receiver has been appointed, the debtor's assets are frozen and the debtor, its officers and directors are barred from exercising any control over them. The receiver will take possession of the assets and may operate the business for a short period, but the assets will ultimately be sold and the proceeds applied to the amounts outstanding to the creditors.

Creditors may also petition a debtor company into bankruptcy. In that case, the court will appoint a trustee in bankruptcy. Upon the bankruptcy, all of the debtor's assets come under the power of the trustee but are subject to the rights of secured creditors. Secured creditors are entitled to seize and sell assets of the debtor over which they have security, within certain legal limits. The trustee will then sell any leftover assets and distribute the proceeds among the unsecured creditors.

What is Chapter 11?

A filing for court-ordered bankruptcy protection in the United States comes under Chapter 11 of the U.S. Bankruptcy Code; hence the common expression of "filing for Chapter 11."

What's the difference between CCAA and Chapter 11?

While Chapter 11 and CCAA both cover corporate restructurings, differences do exist.

The main difference is that American companies under Chapter 11 are able to get labour contracts rewritten as part of their restructuring; Canadian companies under CCAA protection usually must abide by existing contracts.

Chapter 11 is a detailed piece of legislation that has specific statutory requirements. CCAA is much more general and gives a Canadian judge much more leeway.