Goldman Sloan Nash and Haber LLP
“Study the past if you would define the future.” Confucius’ quote is a favourite of Michael Rotsztain, who has been practising insolvency and restructuring law for over 40 years. Beginning his career at the legendary insolvency firm of Harries Houser, where he had the good fortune of being mentored by a bankruptcy law dream team, Michael spent the major part of his career at a leading Bay Street firm and since 2014 has been the chair of GSNH’s five-lawyer Restructuring and Insolvency Group. Michael recounts how insolvencies and restructurings have evolved over his career and shares what he thinks are the next steps in the evolution.
1) What was the consensus approach to handling insolvencies when you began your practice?
In the late seventies, insolvency practice was dominated by the major banks and other lenders since there were few checks and balances on their rights to enforce their security. At the time secured creditors were largely unaffected by the Bankruptcy Act (as it was then known) and the filing of a proposal did not have the effect of staying secured creditors’ rights, except in very limited circumstances. The Companies’ Creditors Arrangement Act, a Great Depression era statute, had fallen into disuse, largely because of the trust deed qualification requirement. DIP charges for interim financing and administrative charges for professional fees were unknown. Therefore, a debtor defaulting under its credit facilities and experiencing a cash flow deficiency had little recourse against a lender exercising its powers, typically via the appointment of a receiver. The debtor’s toolkit was limited to negotiations with the lender in an attempt to obtain concessions and, failing that, technical challenges; e.g., contending that the lender did not provide reasonable time for repayment prior to its commencing enforcement.
As a result, it was difficult for most debtors to save their businesses through a financial restructuring and the profession was focused on assisting secured lenders and their receivers in liquidating assets or in some cases selling businesses as going concerns. “Debtor-in possession” restructurings of the type that dominate the practice today were virtually unknown because of the dearth of remedies available to debtors.
2) When did you see the shift to more debtor-driven proceedings and was it a gradual shift? What factors, including legislative changes, led to this?
The shift to more debtor-driven proceedings commenced gradually in the mid-eighties and then accelerated in the early to mid-nineties as first, the Bankruptcy and Insolvency Act (as it was renamed) was amended to apply to secured creditors, and then the CCAA was amended, in part to dispense with the trust deed qualification requirement. These amendments facilitated restructurings and the rescuing of viable businesses. It’s difficult in pin down a precise cause and effect. By the mid-eighties, increasingly sophisticated insolvency professionals were experiencing the limitations of existing restructuring tools in a cyclical economy where, for the first time, large enterprises were routinely facing financial difficulties. Both legal and financial advisers became more activist in the new environment and, supported by such industry groups as the newly-formed Insolvency Institute of Canada, adopted a two-pronged approach: (1) making the best of existing restructuring remedies by pushing them to their limits (e.g., creating the “instant trust deed” in order to qualify for a CCAA filing), and (2) appealing to Parliament to reform insolvency legislation in order to facilitate restructurings, eventually leading to the legislative changes of the nineties needed to mitigate the damaging effects of major business failures.
From the mid-eighties until the Bankruptcy Act was amended in 1992 so as to apply to secured creditors, the restructuring regime of choice, especially for larger companies, was the rediscovered CCAA, which had fallen into disuse after the end of the Great Depression, partly because of the trust deed entry requirement (legislatively dispensed with in 1997). Out of desperation, insolvency professionals took the CCAA off the shelf in order to make restructurings possible, and the instant trust deed was invented so as to satisfy the entry qualification. Some practitioners reacted with horror and disbelief at the brazenness of instant trust deeds but the Courts eventually sanctioned them, as long as monies were actually advanced by the instant lenders and required formalities were complied with.
Perhaps the first restructuring case that took advantage of the rediscovered CCAA was Wynden Canada Inc. in 1982 (Quebec). After that case became known, others followed such as Re United Co-operatives of Ontario in 1984 (Ontario), Re First Investors Corp. in 1987 (Alberta), and Re United Maritime Fisherman Co-op in 1988 (New Brunswick). The re-emergence of the CCAA really gathered momentum in 1990 after Justice Doherty of the Ontario Court of Appeal wrote his powerful and often adopted dissent in the case of Nova Metal Products Inc. v. Comiskey. There, he famously observed that the CCAA “…is remedial in the purest sense in that it provides a means whereby devastating social and economic efforts of bankruptcy- or creditor-initiated termination of ongoing business operations can be avoided while a court-supervised attempt to reorganize the financial affairs of the debtor is made’ and “…that [t]he Act must be given a wide and liberal construction so as to enable it to effectively serve this remedial purpose”. This dissent was a major catalyst to courts, particularly in Ontario and Alberta, being prepared to permit novel insolvency profession-devised solutions to unprecedented problems years before these solutions were embodied in legislation by Parliament. Prior to the enactment of such legislation, using their statutory discretion and, in some cases, inherent jurisdiction, the courts approved the use of extremely effective restructuring tools such as the appointment of monitors, priority DIP financing and sales of assets without a plan. Permitting asset sales under the CCAA without a plan was particularly important since it enabled many viable business to continue even where submitting a plan of compromise or arrangement to creditors was not feasible.
Another enabling factor was the establishment of Commercial Lists or Divisions, starting with the Commercial List in Toronto in 1991, to hear restructuring and other insolvency cases. As a result, judges were able to acquire specialized knowledge in the area and become familiar with the practicalities involved in overseeing restructurings. In addition, for the first time stakeholders had ready access to the courts. Empowered by Justice Doherty’s eloquent dissent and similar pronouncements by other judges, and encouraged by an increasingly activist insolvency bar and accounting profession, Commercial List judges and their counterparts in other provinces became prepared to push the envelope in order to save businesses and the employment they provided. Some observers complained that the courts pushed the envelope too far, but eventually the rescue culture and jurisprudence were almost universally adopted.
3) Are there any companies that exist today that went through a restructuring, which may not have survived had they been playing under the “old rules”?
I think it’s fair to say that there are scores, if not hundreds, of companies and businesses that would not have survived had, first, the CCAA not re-emerged as a restructuring tool and the BIA not been subsequently amended so as to enable proposal and notice of intention filings to affect secured creditors. Large and well-known companies tend to file under the CCAA. Notable ones that restructured under the CCAA include AbitibiBowater (now Resolute Forest Products), Air Canada, Cadillac Fairview, CanWest, Cineplex Odeon, the Ottawa Senators and Quebecor.
4) Vice versa? Any companies that may have had a chance to turn things around had they had a better environment to restructure?
Even before the insolvency law reform in the nineties, major corporations heavily indebted to financial institutions tended to have greater success than smaller companies in negotiating informal workouts with these institutions, who were often motivated to avoid or at least defer significant write-offs that might result from enforcement against borrowers owing large amounts. Failing a workout, these corporations had access to the CCAA or the arrangement remedy available under corporate statutes. It’s in the realm of mid-market and smaller companies that turnaround opportunities were lost because of the inadequacy of the Bankruptcy Act at the time and the significant costs associated with a CCAA or arrangement filing (the latter typically not being an available remedy for mid-market companies). Financial institutions tended to be more aggressive in enforcing their rights against mid-market and smaller companies since the write-offs involved were more manageable and less adverse publicity was likely to result from shutting down such companies than major enterprises with a large numbers of employees. Therefore, although I cannot provide statistics, it’s my impression that a large number of mid-market and smaller companies ceased operations because there was no effective way to successfully restructure at a reasonable cost in situations where the secured lender was not willing to negotiate a consensual workout.
5) What do you see as the next step in the evolution of insolvency work?
I honestly believe that virtually every aspect of insolvency practice has improved in recent times, where we’ve had the benefit of much more facilitative legislation and both the legal and accounting professions, assisted by the courts, have adopted a rescue rather than liquidation approach to businesses experiencing financial difficulties. Creative thinking has vastly increased and sophisticated and intelligent professionals have been attracted to the field. In major cities, there is quick and easy access to knowledgeable and experienced judges, further improving the chances of successful restructurings.
In terms of next steps, in my opinion, regular and even infrequent users of the insolvency system are becoming more discriminating in how to effectively accomplish their goals in a predictable and cost-efficient manner. While they usually appreciate that absolute certainty of a particular outcome is impossible, they now tend to insist on pre-filing planning and negotiations (if feasible) that minimize risks and costs. An example of this is the pre-pack sale, where a company arranges to sell all or some of its assets to a buyer before a trustee or receiver is appointed to facilitate the sale. While I can’t offer specific evidence that the use of pre-packs in restructurings and asset sales has become more prevalent in Canada, I think that companies and key stakeholders will increasingly look to them in an attempt to meet the objectives I’ve described.
One other area that I think also needs to evolve is the approval of professional costs in formal restructurings, especially under the CCAA, as well as the costs of other types of insolvency cases such as BIA proposals and receiverships. There is a risk that filings will become prohibitively expensive, leading to more restructurings being attempted informally, often a challenging alternative and one that could lead to a decline in the work opportunities for insolvency professionals. In addition, a perception in some quarters that there is sometimes a lack of transparency in the procedures for assessing the costs payable by the debtor or out of the estate could lead to a public lack of confidence in the insolvency system, especially among employee and pensioner groups who often bear the burden of high costs. The current practice even in large cases is for costs to be assessed summarily by the court on the basis of affidavit evidence. The courts have a great deal of discretion in this area. The establishment by Parliament of specific insolvency fee approval guidelines and procedures is worthy of serious consideration as a means to foster public confidence in the methodology used to assess costs borne by the debtor or estate. This approach, consistent with increased codification of the law in the last few rounds of CCAA amendments, has potential advantages over the current discretionary regime. These advantages include: certainty for stakeholders and professionals; more discipline by professionals in discharging mandates; greater transparency; heightened consistency in fees awarded; and increased public confidence in the fairness of the process. Possible specific suggestions include: the codification of the factors to be considered in approving fees; the mandatory appointment by the Court of representative counsel for creditors or committees on fee approvals; limitations on interim fee payments prior to Court fee approval; and mandatory fee budgets.
6) What is one thing that most people you work with would not know about you?
It’s mostly the fact that I revel in experiencing the urban sights and sounds of Toronto, especially on my own two feet or using pedal power. I have seen dramatic changes in the city since moving here as a law student and marvel at the transformations that continue to occur. It gives me great energy to live and work in such a dynamic place, and am especially pleased that my children have also become enthusiastic participants in Toronto’s fascinating urban milieu.