The Evolution of Corporate Rescue in Canada and the United States

Research Handbook on Corporate Restructuring Edited by Paul J. Omar, Jennifer L.L. Gant Edward Elgar Publishing, 2021

19 Pages Posted: 28 May 2021

See all articles by Jassmine Girgis

Jassmine Girgis

University of Calgary, Faculty of Law

Date Written: August 1, 2021

Abstract

This chapter explores the evolution of corporate rescue in both Canada and the U.S. The
timing and specific circumstances surrounding the legislation’s enactment were different in
each country, but the underlying concepts and goals within the broader context of bankruptcy
legislation were the same. Both countries had experienced the profound effects of business
failure on directly impacted stakeholders, as well as on surrounding communities, and they
recognized that saving companies would protect investments, preserve jobs, maintain the
supplier and customer base, and prevent the wider impact of bankruptcy on society. To that
end, both countries devised proceedings to restructure and rehabilitate financially distressed
companies, allowing them to re-emerge with new debt or equity structures and continue operating
as going concerns.

Historically, traditional restructurings – that is, proceedings in which the debtor company
engages in lengthy negotiations with its creditors to restructure its debt obligations and business
operations, all under the supervision of the court – were used extensively. In a sense,
traditional restructurings are simply ‘hypothetical sales’, whereby the existing creditors
trade their debt for cash or equity in the reorganized company. This reflected the creditors’
judgment that the reorganized company would be worth more to them than to a third-party
buyer. Successful companies emerge and continue operating, while unsuccessful companies
are dissolved.

Over the years, the tide turned against traditional restructurings, for being slow, expensive
and cumbersome. At the same time, changes in technology, firm assets, the economy and
financial instruments were modifying the ways companies operated, and globalization was
altering the way companies did business and interacted with each other and with the community.
The combination of these factors led to the emergence of a different process, one that
liquidated debtor companies or merged them with other companies, instead of rescuing them
through traditional restructuring proceedings. Although traditional restructuring continued to
occur, and still occurs in the current marketplace, it has, in large part, given way to sales or
liquidations. Importantly, these emerging liquidation proceedings did not occur under bankruptcy
or receivership regimes, but under the statutes that governed restructurings. They also occurred without meaningful consideration as to how this shift affects the public interest goals
of the legislation.

The first part of this chapter discusses what happened: the history of these statutes, the
reasons traditional restructurings emerged, and the eventual move to liquidations. The second
part explores the three broad reasons liquidation plans replaced restructuring. First, an increase
in secured debt left secured creditors in control of the financially distressed debtor corporations,
and secured creditors typically prefer liquidation over restructuring. Second, the decline
in the manufacturing and industrial era and growth of a service-oriented economy impacted
firm assets; assets became less firm-specific and more fungible. Finally, increasingly complex
financial instruments altered the composition of creditors; creditors at the table now include
hedge funds and other non-traditional lenders, and they may be motivated by factors beyond
saving the distressed company or maximizing its asset value.

The third part of this chapter addresses the consequences of using rescue legislation to
liquidate companies. First, the governing legislation was not meant to be used in this way, and
stakeholders in these expedited sales do not have the benefit of the procedural and substantive
safeguards that arise in restructuring proceedings. Second, it is arguable that these liquidation
proceedings do not fulfil the public policy goals of restructuring legislation. Finally, embedded
within public policy is the concept of value-maximization, but what ‘value’ means and how it
can be maximized, is not static, and may have different connotations under traditional restructurings than under liquidations.

The last part considers the most feasible way forward for each country: where does corporate
rescue go from here? This section examines whether the bankruptcy forum should be
abandoned in favour of non-bankruptcy legislation or private contracts, or whether the answer
lies in improving the current legislative schemes. Although many do not want to see restructuring
legislation overhauled, they do recognize that this legislation was enacted under different
circumstances, in a different market, when corporations looked vastly different than they do
today, and that to remain relevant, it must come to reflect today’s society and corporations.
Doing so requires reconceptualizing how liquidation fits into the public policy goals of the
statute and reassessing the concept of value to determine what it should encompass.

Keywords: corporate restructuring, companies' creditors arrangement act, ccaa, chapter 11, corporate rescue,

Suggested Citation

Girgis, Jassmine, The Evolution of Corporate Rescue in Canada and the United States (August 1, 2021). Research Handbook on Corporate Restructuring Edited by Paul J. Omar, Jennifer L.L. Gant Edward Elgar Publishing, 2021, Available at SSRN: https://ssrn.com/abstract=3854063

Jassmine Girgis (Contact Author)

University of Calgary, Faculty of Law ( email )

Murray Fraser Hall
2500 University Dr. N.W.
Calgary, Alberta T2N 1N4
Canada

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