Restructuring of insolvent corporations, creditor rights and judicial recognition of the public interest, principles for reconciliation

Canadian insolvency law has historically been viewed as a secured creditor-friendly regime. Yet legislative debates and judicial interpretation have suggested that in determining the future of the insolvent corporation, there is an element of "public interest" in the outcome of restructuring proceedings. This "public interest" is rarely defined. The parties traditionally before the courts, the debtor corporation and secured creditors, have frequently relied on notions of public interest to advance their particular position. Yet the individuals and groups that arguably comprise part of that public interest, trade suppliers, workers, local governments and contingent creditors have historically not been active in the restructuring process. In the past several years these groups have begun to participate, necessitating a more comprehensive approach to reconciling diverse interests. Recent case law indicates that "public interest" is a "short form" for the complex balancing of interests that the court engages in when determining whether to sanction a plan of arrangement or compromise for the insolvent corporation. This "short form" must be unpacked and better defined in order for all parties to understand the factors that are relevant to the court's use of the "public interest" in its balancing with the interests of traditional creditors and the debtor corporation. The investments of non-traditional creditors such as workers, local governments and trade suppliers are interests beyond fixed capital claims. Their investments are often of a reliance or equitable nature. Moreover, these stakeholders have an interest in the future of the corporation that is not fully recognized in the structure of value and voting in the current scheme. Such non-traditional creditors may be uniquely situated to contribute informational and organizational capital in the negotiations for a viable business plan in a workout under restructuring proceedings. These investments also give rise to fiduciary obligation by directors and officers of the insolvent corporation. A central challenge of insolvency law is to accord these stakeholders participation and decision rights in a manner that recognizes their human capital and other investments, generates surplus value for the firm, and yet simultaneously controls transaction costs. The current regime is well situated to adopt a more textured approach to restructuring and recent case law suggests that the court in some instances has successfully recognized and accorded value to these diverse interests. However, changes to recognize equitable investments must ensure that these interests are properly balanced against those of secured lenders and other traditional creditors. The Companies' Creditors Arrangement Act is the key legislative vehicle through which reconciliation of such rights can occur, accompanied by a facilitative and supervisory role by the court, including clearer direction to its officers regarding participation and decision rights for all stakeholders with an interest in the insolvent corporation. A comparison amongst international insolvency regimes illustrates that while debt collection and rehabilitation regimes are not closely converging in their approach they have nevertheless recognized a policy objective of more effective balancing of interests in reorganization proceedings in order to prevent premature or deferred liquidation. However, some of the regimes suffer from prolonged proceedings, excessive transaction costs, failure to adequately balance interests, and inadequate governance controls. Canadian insolvency law offers the optimal model for addressing many of these problems. It has not been fully recognized for its contribution to international insolvency law.