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Creditor Rights and the Public Interest

Creditor Rights and the Public Interest: Restructuring Insolvent Corporations

Janis Sarra
Copyright Date: 2003
Pages: 336
  • Book Info
    Creditor Rights and the Public Interest
    Book Description:

    Creditor Rights and the Public Interestsupports the greater representation of non-traditional creditors in the process of insolvency restructuring in Canada, concentrating particularly on restructuring under the federal Companies' Creditors' Arrangement Act (CCAA). Arguing in favour of the representation of such non-traditional creditors as workers, consumers, trade suppliers, and local governments, Janis Sarra describes the existing process of addressing their interests, analyzes four case studies that focus on non-creditor groups, and compares the Canadian approach to that of several other countries, such as Germany, France, and the United States.

    Sarra draws on a comprehensive body of academic literature that covers a broad range of issues-insolvency theory, corporate governance theory, legislative history, and bankruptcy and insolvency practice. She further surveys the relevant legislation and supplements her analysis with insights drawn from extensive primary research of court records and personal interviews with lawyers, judges, and government officials.

    Creditor Rights and the Public Interestultimately illustrates the way in which the concept of the public interest can be utilized to foreground the concerns of non-traditional stakeholders. Sarra provides a coherent account of the justification for recognizing these creditors by situating insolvency law in a legal regime that realizes a duty to maximizeallof the interests and investments at stake in the corporation. In an academic field where scholarship is currently scarce, Sarra's text will be a welcome contribution.

    eISBN: 978-1-4426-7359-5
    Subjects: Law

Table of Contents

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  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-viii)
  3. Acknowledgments
    (pp. ix-2)
  4. Introduction
    (pp. 3-9)

    The effects of corporate financial distress extend far beyond the potential losses to shareholders. Long-term employees can lose their jobs. Local suppliers face the loss of an important market for their products. The cost of commercial credit can increase and its availability lessen. Governments and communities are potentially subject to the loss of tax revenue from decreased economic activity and face the prospect of increased adjustment costs in unemployment and welfare benefits. It is little wonder that news of a corporationʹs financial distress captures the publicʹs attention. Is the publicʹs role that of a mere onlooker?

    Historically, the fate of...

  5. 1 The Existing Regime for Restructuring Insolvent Corporations
    (pp. 10-29)

    Insolvency systems are an indispensable component of commercial economies, and the particular system adopted by a jurisdiction usually reflects economic and societal choices regarding how to address firm failure.³ Insolvency law thus forms an important part of the corporate governance regime, because it regulates governance of an insolvent corporation during the key period of decision making about its future. This chapter examines the historical origins of Canadaʹs restructuring regime in order to situate the current theoretical debate and to gain insight into the underlying purposes of Canadian insolvency law. It provides an overview of the current scheme for workouts of...

  6. 2 Current Theoretical Approaches to Insolvency Law
    (pp. 30-55)

    This chapter examines the current theoretical debate regarding the purpose of insolvency and bankruptcy law, including the relevance of public policy or public interest in the context of private commercial law. The focus here is development of a sound conceptual understanding of governance of an insolvent corporation, particularly a corporation that is seeking to restructure its affairs with a view to becoming economically viable. The discussion of debt collection, rehabilitation, and enterprise wealth maximization theories sets the stage for the conceptual framework developed in chapter 3.

    Many jurisdictions have developed elaborate schemes for the determination of ranking or priority in...

  7. 3 Proposing a Conceptual Framework for Reconciling Stakeholder Interests
    (pp. 56-112)

    The courts have held that theCCAArepresents a ʹcomplexly interwoven ... exchange of economic interestsʹ² and that insolvency and bankruptcy ʹwork well into the social and economic fabric of a territory.ʹ³ Judicial interpretation has thus set the stage for an attempt to develop and clarify the relationship among the various elements of the corporate fabric. A more ʹtexturedʹ approach to insolvency law requires a clearer understanding of the way in which debt, equity, and other interests as constituent parts of the insolvent corporation can be interwoven within the corporate structure to create a viable business plan.

    Building on the...

  8. 4 Judicial Discretion under the CCAA
    (pp. 113-156)

    Judicial consideration of the public interest is a continuous theme inCCAAproceedings, but it is most evident in four key parts of the process: granting of the stay, DIP financing decisions, determination of classes, and sanctioning of the plan. This chapter examines the application of the theoretical framework set out in chapter 3 to the current statutory scheme. It explores whether the courts are engaged in purposive interpretation or overreaching their jurisdiction. Examination of key disputes decided by the court reveals that judicial interpretation has encouraged conduct that furthers the objectives of theCCAAwhile respecting the statutory hierarchy...

  9. 5 Algoma Steel Corporation: Recognition of Human Capital Investments
    (pp. 157-180)

    Algoma Steel Inc. has utilizedCCAAproceedings twice, in 1991–2 and in 2001–2.Algoma Steelprovides an important example of theCCAAprocess in its recognition of the interests of stakeholders other than traditional creditors and shareholders. It also demonstrates that a successful proceeding is dependent on the cooperation of all parties. There were important differences in the financial distress and stakeholders involved in the two proceedings, which made a difference to the outcome, including claims to a proportionate share of the value and governance of the corporation after theCCAAprocess was completed.

    Algoma Steelʹs insolvency in...

  10. 6 Judicial Recognition of ʹSocial Stakeholdersʹ in CCAA Proceedings: Anvil Range Mining Corporation
    (pp. 181-194)

    Recent cases brought under insolvency proceedings indicate that the courts are slowly moving towards a more textured understanding of their role in reorganization proceedings, particularly in discerning the inherent tensions between creditor rights and public interest considerations. Of significance is the courtsʹ recognition of the diverse nature of stakeholder interest in a corporationʹs financial distress and that such interests give rise to diverse and complex types of claims.Algoma Steel, discussed in the previous chapter, set the stage for the courtsʹ recognition of new types of stakeholders as affected parties inCCAAproceedings. Even where stakeholders do not seek a...

  11. 7 Competing Public Interest Considerations: Canadian Red Cross Society
    (pp. 195-216)

    TheCanadian Red Cross Societyinsolvency was precipitated by more than $8 billion in tort claims by thousands of Canadians ill or dying from contaminated blood products.² More than 230 actions and 10 class actions involved claimants suffering from Hepatitis C (HCV), HIV, Creutzfeld Jakob disease, or some combination of these illnesses as the result of inadequate testing and screening. As a not-for-profit corporation, the Red Cross had operated a blood donor operation since 1940 and Canadaʹs National Blood System, with funding from the federal and provincial governments, since 1977. Services of the Red Cross included supply of blood and...

  12. 8 Canadian Airlines Corporation and the Public Interest
    (pp. 217-228)

    The airline industry in Canada has been in a state of crisis in the past two years. Bankruptcy and liquidation proceedings such as that of Canada 3000 have left creditors with debts that are difficult to realize on and resulted in thousands of job losses and consumers scrambling for alternative means of travel. In 2000, Canadian Airlines Corporation, one of Canadaʹs two largest national airline corporations, filed forCCAAprotection. The Alberta Court of Queenʹs Bench ultimately endorsed a survival plan for Canadian Airlines that involved a merger with Air Canada. Driving part of the workout were notions of the...

  13. 9 International Comparisons: Creditor Rights and the Public Interest
    (pp. 229-268)

    Most industrialized countries have implemented schemes for the liquidation or reorganization of businesses in financial crisis. Depending on whether the particular jurisdiction has adopted a primarily debt collection model or rehabilitation model, the regime accords different responsibilities and obligations to traditional creditors, debtor corporations, workers, other stakeholders, and the courts and their officers. This chapter analyses the public interest theme across four comparative regimes: the United States, France, Germany, and the United Kingdom.

    To this point, the discussion has focused on how the policy objectives of enterprise wealth maximization and recognition of debt, equity capital, human capital, and other investments...

  14. 10 Conclusion: Future Development of the Public Interest within the Enterprise Wealth Maximization Model
    (pp. 269-296)

    In Canada, legislative debates and judicial interpretation have suggested that there is an element of public interest in the outcome of restructuring proceedings. I have suggested that ʹpublic interestʹ is a short form for the complex balancing of interests that the courts engage in when determining whether to sanction a plan of arrangement or compromise for an insolvent corporation. The enterprise wealth maximization model suggested in this book enables us to better understand the current trends in judicial thinking and provides a rationale for further development. The frameworkʹs key elements – recognizing the value of a workout regime; recognizing the...

  15. Notes
    (pp. 297-336)
  16. Index
    (pp. 337-340)