How do I buy a distressed business in Canada?

A distressed business can be bought from an owner who is already in a formal federal insolvency process, or from an owner who has filed nothing and is simply short of cash. This guide covers the first case, where the Bankruptcy and Insolvency Act (BIA) and the Companies’ Creditors Arrangement Act (CCAA) decide who may sell, what a court must authorize and which contracts can be moved to a buyer. A sale outside any process is an ordinary negotiation and is not covered here. Start by finding out which process applies, because each one has a different seller, a different court test and different limits on what a person other than you can be made to answer for.

Find out which process the business is in

The Office of the Superintendent of Bankruptcy (OSB) says that in a bankruptcy the debtor gives all of its non-exempt property to a Licensed Insolvency Trustee, who sells it and distributes the money to creditors. A proposal is a different BIA process: the OSB says it may begin with a notice of intention, and under BIA s.50.4(8), if the proposal is not filed within thirty days after the day the notice of intention was filed, or within any extension granted under s.50.4(9), the insolvent person is deemed to have made an assignment in bankruptcy. A debtor company under an order of the CCAA is a third route, and a secured creditor can ask a court to appoint a receiver under BIA s.243. Ask the seller’s representative to name the process, the court and the person running the sale.

When a court has to authorize the sale

Under BIA s.65.13(1), an insolvent person who has filed a notice of intention or a proposal may not sell or otherwise dispose of assets outside the ordinary course of business unless a court authorizes it. CCAA s.36(1) says the same of a debtor company that is under an order of that Act. For a CCAA sale, s.36(3) lists what the court considers, including whether the sale process was reasonable, whether the monitor approved it, how far the creditors were consulted and whether the consideration is reasonable and fair given market value. Under s.36(7), the court may grant the authorization only if it is satisfied that the company can and will make the payments that would have been required under paragraphs 6(5)(a) and 6(6)(a) if the court had sanctioned the compromise or arrangement. BIA s.65.13(4) sets out its own factors, and s.65.13(8) has a parallel condition tied to paragraphs 60(1.3)(a) and 60(1.5)(a). Ask whether your offer will be conditional on court authorization and who will file the application.

Sales to people connected to the debtor

If the buyer is related to the company, CCAA s.36(4) lets the court authorize the sale only if it is satisfied that good faith efforts were made to sell to persons who are not related to the company, and that the consideration is superior to any other offer made in accordance with the process. Section 36(5) says a related person includes a director or officer of the company, a person who has or has had, directly or indirectly, control in fact of the company, and a person related to either of them. BIA s.65.13(5) and (6) set a parallel rule for the BIA. If you or a partner have any connection to the seller, say so early and ask counsel how that rule applies to you.

Sales free and clear of security

CCAA s.36(6) allows the court to authorize a sale free and clear of any security, charge or other restriction. If it does, it must also order that other assets of the company, or the proceeds of the sale, be subject to a security, charge or other restriction in favour of the creditor whose interest is being affected. Under s.36(8), such a sale does not affect another party’s right to use intellectual property under an agreement the company was party to on the day the CCAA order was made, during its term, as long as that party keeps performing its obligations under the agreement in relation to that use. BIA s.65.13(7) and (9) are the parallel rules. What your purchase carries or leaves behind is therefore set by the order, not by the agreement alone. Read the order, and confirm with counsel which registered claims it clears.

Moving contracts to the buyer

Check how each lease or supply contract you need can move to you; the BIA and the CCAA give a court power to assign some of them. Under BIA s.84.1(1), on application by a trustee and on notice to every party to the agreement, a court may assign the bankrupt’s rights and obligations under it to any person who is specified by the court and agrees to the assignment; for an individual, s.84.1(2) limits this to rights and obligations in relation to the business. Under CCAA s.11.3(1), the debtor company applies, with notice to every party and the monitor. Both sections exclude rights and obligations that are not assignable by their nature or that arise under an eligible financial contract, a collective agreement, or an agreement entered into on or after the date of the bankruptcy (BIA) or the day CCAA proceedings commence. The court may not make the order unless it is satisfied that all monetary defaults will be remedied by the day it fixes, other than those arising only from the bankruptcy or insolvency (BIA), the insolvency or the start of CCAA proceedings, or a failure to perform a non-monetary obligation. Among other things, it considers whether you can perform the obligations and whether the assignment is appropriate, and under the CCAA whether the monitor approved it.

What the trustee is, and is not, liable for

Under BIA s.14.06(1.1), a trustee in these subsections includes an interim receiver and a receiver within the meaning of s.243(2). BIA s.14.06(2) says a trustee is not personally liable in that position for an environmental condition that arose or damage that occurred before the appointment, or after it unless it is established that it resulted from the trustee’s gross negligence or wilful misconduct (in Quebec, gross or intentional fault); s.14.06(3) keeps any duty to report or disclose. Under s.14.06(1.2), a trustee that carries on the business or continues the employment of the debtor’s employees is not, by reason of that fact, personally liable, including as a successor employer, for liabilities in respect of the employees or former employees or a pension plan for them that exist before the appointment or are calculated by reference to a period before it. Section 14.06(1.4) adds that this does not affect the liability of a successor employer other than the trustee. The section is written about the trustee, so do not assume it protects you. Section 14.06(7) also secures a claim by the Crown in right of Canada or a province against the debtor for the costs of remedying an environmental condition or damage affecting the debtor’s real property, by security on that property and on the debtor’s contiguous real property related to the activity that caused it, ranking above any other claim, right, charge or security; ask counsel whether any such claim touches the property you are buying. Employee claims are covered in what employee liabilities come with a distressed business.

What to put to the seller’s side

• Which proceeding this is, in which court, and who is running the sale process.
• Whether the sale needs authorization under BIA s.65.13 or CCAA s.36, and whether your offer will be conditional on it.
• Which leases, supply contracts and licences you need, and whether each needs an assignment order or only the other party’s consent.
• Whether the sale is to be free and clear, and what the order says about the proceeds and other assets.
• Whether anyone on your side is related to the debtor, and what the order requires if so.

For the wider question of whether an insolvent company can be bought at all, see buying a company in liquidation or insolvency.