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.
