Similarly, under a CCAA reorganization, a very broad stay of proceedings is imposed on both secured and unsecured creditors. While the initial period of the stay is limited to 30 days, the stay period can be extended by the court if the debtor is working constructively toward a suitable reorganization plan.  The CCAA contains no specific provisions for relief from the stay, but in general, stays have been lifted if a company’s plan was likely to fail or when the company showed no progress in developing a plan.

If a company defaults on a payment to a secured creditor, the secured creditor has the right to take possession of assets pursuant to the security contract, sell off the collateral and sue the company for any amount still owing. This principle is referred to as the ‘Seize or Sue’ rule.

Under BIA rules, in case the trustee fails or is unable to find solutions that would benefit a creditor, the creditor can attempt to provide solutions, subject to the approval of the court. Any benefit thus received would belong to that creditor and other participating creditors. Creditors who do not participate in these proceedings are not eligible to receive any share from the recoveries.

Shareholder Vs Creditors

As mentioned above, shareholders are the last in the list claims. Moreover, the current legislation offers very little protection to shareholders and does not favor shareholders of an insolvent company. Despite the company’s articles of incorporation or a shareholders agreement clearly stipulating that the shareholders approval is necessary prior to initiating a bankruptcy or reorganization proceeding, the BIA and CCAA allow proceedings to be initiated without due consideration to their interests.

It is a well known fact that the interests of shareholders and creditors of a company are at odds with one another, especially during the liquidation and reorganization proceedings. Given the inherent nature of equity, during insolvency, shareholders will not mind making high-risk choices since their investment is virtually worthless and they have nothing more to lose. According to legal experts, giving the shareholders of an insolvent company a say in the reorganization process invariably works against the creditor. Hence, interests of shareholders are subordinated to creditors until all their interests have been satisfied; and they are not permitted to vote on a restructuring plan. An insolvent company is permitted to change its capital structure without the shareholders’ approval. However, the court may provide relief to a shareholder if he is able to prove that his shares had some value at the time of bankruptcy protection filing.

What happens when a company goes bankrupt?
The process of Bankruptcy
Different types of creditors
Priority of claims in a business liquidation
Secured and unsecured creditors
Amendments to the BIA and CCAA

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