LAW The Importance of the Canadian Insolvency System to Chinese Investors LAW Canada has a strong insolvency system. Some would say that it is state of the art compared to other systems around the world. Chinese companies should be interested in the Canadian system for two main reasons: • • • C anada’s insolvency system should be of great interest to Chinese investors. Not only does it represent the framework for protecting Chinese investments in Canada, it can also provide a vehicle for Chinese investors to acquire Canadian businesses perhaps at advantageous prices and with agreements that are more attractive to Chinese investors compared to typical North American acquisition transactions. Regardless of whether the sale is conducted through a receivership, a CCAA proceeding or a BIA proceeding, the typical Canadian sale process will involve these features: • • Receiverships. Most receiverships are now done under court supervision, although private receiverships are still sometimes seen. Typically, a receivership is initiated when a CANADA CHINA FORUM BUSINESS 2014-2015 ccbc.com 56 There will be a court-supervised process, usually run by a receiver or a CCAA monitor or a trustee in bankruptcy as an officer of the court, in which as many potential buyers as possible will be notified of the opportunity. • A detailed discussion of the many considerations which are possible in any given sophisticated insolvency case – and the Canadian approach to dealing with those considerations – isn’t possible in this brief article. However, the main insolvency procedures which are repeatedly encountered in Canada are as follows: 55 Bankruptcy & Insolvency Act proceedings. Bankruptcy under the Bankruptcy and Insolvency Act (BIA) is roughly the equivalent of a Chapter 7 liquidation proceeding under the U.S. Bankruptcy Code, although, again, there are important differences between the two regimes. The BIA also provides for a reorganizational process and sometimes active or inactive businesses are also sold through BIA proceedings. It is also the system by which many operating business change hands. There is a very real opportunity for Chinese companies to acquire Canadian businesses through participating in that process. One of the reasons why the Canadian insolvency system is viewed favourably is that historically, Canada has done a good job of maintaining the going concern value of insolvent business while allowing for a transition to new ownership and/or a restructured financial structure. While some cases seem to go on for a long time (Nortel filed for CCAA protection in January 2009 and the case is still unresolved in summer 2014), that track record has been based on an approach that sees these sales occur in a relatively quick manner. In simple terms, under the Canadian system, assets with going concern value are often converted into money relatively quickly. The various stakeholders can subsequently fight over the biggest possible pool of funds while the buyer can move ahead with the purchased business, knowing that he or she will not get dragged back into the insolvency after closing has occurred. Powerful vesting orders can be used to convey clear title in even very complicated or messy situations. by JEFFREY CARHART Companies’ Creditors Arrangement Act proceedings. The Companies’ Creditors Arrangement Act – or CCAA – is roughly the equivalent of Chapter 11 of the U.S. Bankruptcy Code, although there are important differences between the two systems. The CCAA is typically used by large/ debtor companies, and the process is often used as a structure to sell large businesses. The author was involved in the Opti CCAA case, for example, in which a member of the CNOOC Limited Group of Companies – China’s largest producer of offshore crude oil and natural gas – acquired the shares and assets of Opti Canada, an oil sands company, for just over C$2 billion. The Opti Canada CCAA case was combined with a plan of arrangement under the Canada Business Corporations Act. The system protects any investments made by Chinese companies in Canadian operating companies, should those companies run into adversity. • debtor is in default in its loan arrangements with a major secured lender and the secured lender wants to see the assets sold as quickly as possible. There will usually be some kind of middle stage where interested parties can gain access to sensitive information pertaining to the business but only after signing a strong confidentiality agreement.