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Law Times • march 22, 2010 FOCUS Restructuring process evolves BY JULIUS MELNITZER For Law Times I ing Labour, government involvement among key changes in CCAA filings Th e key dynamic here, of n the 1980s, insolvency was most often a bilateral pro- cess involving the debtor and one fi nancial institution. Not surprisingly, receivership and secured creditor remedies drove the process. "At the time, the [Compa- nies' Creditors Arrangement Act] wasn't being used, and if there were other stakeholders around, they weren't involved in the process," says Michael MacNaughton of Borden Lad- ner Gervais LLP. With the emergence of lend- syndicates in the 1990s, however, the dynamics became more complex as multiparty considerations arose. At the same time, the lender community be- came more specialized, making control of a distressed situation a more diff use proposition. "We had asset-based lend- ers for current assets, real estate lenders, leasing companies, and others, all of whom may have had a substantial stake in a com- pany," says Kevin McElcheran of McCarthy Tétrault LLP. Organized labour stepped in as well. "Ever since the steel com- panies got into diffi culty, the unions have been more active, and the judges have been more concerned about employees," says Jay Swartz of Davies Ward Phillips & Vineberg LLP. "So employees' rights, pension issues, and post-retirement benefi ts be- came key drivers in the process." In the most recent recession, government involvement rose dramatically. "What we've seen is that gov- ernment has been a lot more willing to step in and fund bail- outs in circumstances where they wouldn't have touched a situa- tion in the past," Swartz says. Also complicating the situ- ation is the increased activism shown by boards. "Directors are taking a larger role on the restructuring com- mittee. Th ey've come to un- derstand the confl icts that may exist and they're more willing to replace management and deal with serious governance issues," Swartz says. In December 2008, for ex- ample, Pierre Karl Péladeau, son of Quebecor World Inc.'s founder, and three other direc- tors who were also on the par- ent company's board, stepped off the subsidiary's board, cit- ing a confl ict of interest. So as the restructuring phe- nomenon has evolved, it has become apparent that the rela- tively simple processes of receiv- ership and insolvency weren't suited to accommodating the host of disparate interests now likely to be involved. Instead, beginning in the 1990s, the CCAA became the fl avour-of- the-day solution. "Lenders initially resisted the CCAA approach but eventually became its greatest supporters because they grew to appreciate its utility in getting optimal val- ue from a distressed situation," McElcheran says. "And what we all learned from the process was how to manage the multiparty restructuring process and move forward on consensus." By all accounts, however, that consensus was a little hard- er to achieve in the most recent recession. Even worse, the sheer scope of the underlying eco- nomic problems threatened to trump consensus, obfuscating the fundamental soundness of an enterprise and leaving it at the mercy of the liquidators. "Th e key departure from previous downturns was that potential purchasers didn't have access to fi nancing to buy businesses in distress even if these businesses were funda- mentally sound," says Aubrey Kauff man of Fasken Martineau DuMoulin LLP. Strategic buyers with cash were the one bright light in the exit scenario. Witness, for example, Abu Dhabi's Interna- tional Petroleum Investment Co.'s friendly takeover in Feb- ruary 2009 of Nova Chemicals Corp. for US$2.3 billion, four times its market value. Otherwise, Kauff man con- trasts his experience with Bow- ring, the gift shop and specialty chain that was restructured and sold as an operating business several years ago, and the fate of Linens 'n Th ings, whose recent troubles ended in a liquidation. But it's not just the exit fi nanc- ing that was hard to come by. "[Debtor-in-possession] fi - nancing was also scarce," says Swartz. "And even when it was available, it was usually on a very short timeline, so it was hard to do a true restructuring." course, was that lenders were at much greater risk themselves. "Th e last things lenders worried about their own situ- ation wanted to fi nance were distressed assets," McElcher- an says. Even when lenders com- mitted, there was almost always at least a shadow of doubt about whether they would close. "If you needed a letter of credit to backstop a settle- ment, for example, you might start asking yourself whether you could accept it from any American bank," Kauff man says. "If Bear Stearns, Merrill Lynch or Lehman Brothers were behind the credit a few years ago, you wouldn't even have asked the question." Th en there's the widespread nature of the most recent down- turn and the almost unprecedent- ed pace at which it emerged. "Other downturns have been more focused," Kauff man says. "We've had the likes of real estate busts and the dot-com bubble burst but nothing like at identifying an exit strategy and more at shifting everyone to surviving this terrible situ- ation, preserving the business, and hopefully keeping the existing stakeholders in place long enough to fi nd a better solution," McElcheran says. Ironically, the wide swath Unions have become more involved in insolvency proceedings ever since Canada's steel companies got into trouble, says Jay Swartz. the last one where the pain was so pervasive and we went from a position of unlimited liquidity to no liquidity so fast." As a result, restructuring lawyers' eff orts had to shift ground. "We were looking a lot less accorded to third-party releases by the Ontario Court of Appeal in the asset-backed commercial paper situation may have been instrumental in keeping stake- holders in place. "Th ere were circumstances in which people were contrib- uting money to buy them- selves a release," Swartz says. Th e scope of the process has also changed, as evi- denced by fi lings involving companies such as Nortel Networks and Quebecor. "Many more companies have extensive U.S. and in- ternational operations, so we're seeing a lot of dual fi lings with joint jurisdiction," Swartz says. "But if you're dealing with the U.S., that imports a lot of the cost and delay that's inherent in Chapter 11 proceedings." LT PAGE 13 At Kent Legal we know not just anybody can do the job. That's why we've taken extensive measures, like using the latest technology, tools and top recruiters to ensure we not only match the right applicant for your position, but that we do it in the best response time. 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