Collecting arrears from tenants seeking protection or bankruptcy

Commercial landlords with tenants in arrears should be mindful of the possibility of tenants seeking protection under the Companies' Creditors Arrangement Act (CCAA) or filing for bankruptcy, as the process for recovering those arrears may be significantly more complicated.

One remedy available to commercial landlords in BC before CCAA protection is sought is the right of rent distress. Commercial landlords in BC have the right of rent distress when a tenant falls into arrears, which means they can, in specific circumstances, seize a defaulting tenant's saleable goods in a leased premises to secure unpaid rent. However, once an insolvent tenant seeks protection under the CCAA or files for bankruptcy, the landlord's rights to engage in rent distress will be stayed and the saleable goods will be dealt with in the insolvency process, in the context of the entire insolvent company's reorganization or eventual liquidation.

Commercial landlords should carefully monitor the business of defaulting tenants and consider acting before tenants seek protection under the CCAA or file for bankruptcy under the BIA. Landlords should also be careful about providing rent deferral agreements without further securing the unpaid amounts through personal guarantees or security agreements over tenants' equipment or other goods. If COVID-19 causes tenants to become insolvent and seek the protection of the court before deferred rent is due, landlords may find collecting very difficult.

Whether distress is available without a court order (which can be difficult to get while courts are still closed or open on a limited basis) depends on the terms of the lease. Securing court orders while the courts are still closed or open on a limited basis is difficult or in some cases impossible.

Rent distress and lease termination remedies are also not available to landlords whose tenants are eligible for Canada Emergency Commercial Rent Assistance (CECRA) during the period CECRA is available (currently April-June, 2020) and the state of emergency. Landlords should consider all available government assistance programs, as not taking advantage of such programs may limit their remedies.
When taking advantage of government assistance programs, landlords should ensure that the proper procedures are complied with and formal approvals received.

Seek legal advice about your rights if you are considering deferring rent or have a tenant in significant arrears.

Companies' Creditors Arrangement Act: An Overview for Canadian Creditors

The governmental restrictions and social customs implemented to combat the spread of COVID-19 have led to significant fallout throughout the economy. Many companies, particularly those with significant retail, hospitality and personal services operations, may become insolvent and may have to consider their options for avoiding bankruptcy. Creditors looking to recover from insolvent companies may find their claims subject to a debtor's reorganization proceedings under the Companies' Creditors Arrangement Act, RSC 1985, c-36 ("CCAA").

The CCAA is federal legislation that allows a debtor company to reorganize the debtor company's debts through an agreed plan of arrangement while the debtor company continues to operate. The CCAA is a more flexible mechanism allowing for greater business and judicial discretion than a proposal under the Bankruptcy and Insolvency Act, RSC 1985, c. B-3 ("BIA"). However, it is a complicated legal process that can involve significant costs and impair the ability of unsecured creditors to collect money from a debtor company.

Scope and Application

The purpose of the CCAA is to avoid bankruptcy by allowing a court-supervised attempt to reorganize a debtor company's financial affairs.

A debtor company may make an application under the CCAA when it is insolvent and the total secured and unsecured claims against it and its affiliates exceed $5 million. The application may also be brought by an interested party such as a creditor, the bankruptcy trustee, or the liquidator of the debtor, although in practice this is rare. The application is made in superior court, generally in the province where the head office or chief place of business of the debtor company is located. The CCAA applies to most companies aside from banks, insurance companies, trust and loan companies, and railways.

Powers of the Court

Once an application is accepted, the CCAA grants wide-ranging discretionary powers to the court to craft orders and remedies appropriate to the particular reorganization before it. In making orders, the court will do so at the instance of the company, with the support of its monitor, and in accordance with the purpose of the CCAA, often over the objections of creditors.

The CCAA mandates the court to appoint the monitor, who must be a trustee within the meaning of subsection 2(1) of the BIA, to monitor the business and financial affairs of the debtor company during the reorganization.

The standard initial order in a CCAA proceeding is to stay enforcement actions by creditors to allow the debtor company’s business to continue. The initial stay order is usually for 30 days and can be extended. Other often-used steps are:

Prohibiting parties from terminating agreements with the debtor company.
Disclaiming or terminating existing contracts entered into by the debtor company.
Authorizing post-filing security for debtor in possession financing or super-priority charges on the debtor company’s assets when necessary to allow debtor company to continue to do business during the reorganization.
Establishing the existence of creditors' claims by way of a time-limited claims process, then creating a process to determine creditors' claims which may be disputed by the debtor company.
Approving a plan of arrangement created by the debtor company to compromise or arrange the debts owed to some or all of its creditors, including, importantly, any claims against directors and officers for their statutory liabilities.

Whether any particular step occurs in a reorganization under the CCAA will depend on agreement between the debtor company, the monitor and creditors, or in the absence of agreement, by court order over the objections of one or more creditors.

There are, however, limits to the powers of the court, which may limit a debtor company's creditors ability to collect on their legitimate claims. An order made under the CCAA cannot compel third parties to advance any further money or credit to the debtor company or prohibit creditors from requiring immediate payment for services provided to the debtor company during a CCAA proceeding.

As well, if the reorganization is unlikely to be successful the stay of proceedings may be lifted by the court, which would terminate the CCAA proceedings and lead to bankruptcy proceedings under the BIA. In rare cases, there may be liquidation proceedings within the CCAA proceedings.

Concluding CCAA

There are three ways of concluding a CCAA reorganization:

The initial stay of proceedings may provide the debtor company with sufficient room to restore solvency, in which case a full CCAA reorganization does not occur and the process ends;
The plan of arrangement is accepted by the creditors and the reorganized debtor company emerges solvent from the CCAA proceedings; and
The plan of arrangement fails or is seen to be doomed to fail, so either the debtor company or a creditor(s) apply to liquidate the company’s assets under the applicable provisions of the BIA or to place the debtor company into receivership.

For more information regarding specific concerns about the CCAA or debt contact Claire Immega or Dan Barber at Singleton Urquhart Reynolds Vogel LLP.