Stelco’s CCAA Restructuring
May 31, 2006
Michael E. Barrack
James D. Gage
In April 2006, Stelco Inc. successfully emerged from its 26-month long restructuring under the Companies’ Creditors Arrangement Act (CCAA), making it one of the longest corporate restructurings in Canadian history. The Stelco matter was significant not only because of its size and complexity, but also because of several very important, ground-breaking decisions arising from the case.
The first important decision in the case resulted in a new definition of ‘insolvency’ for the purpose of determining whether a debtor company is entitled to protection under the CCAA (Canada’s primary restructuring legislation for large enterprises). The decision not only confirmed that Stelco was insolvent based on the traditional balance sheet definition of insolvency, but also held that Stelco was also insolvent for the very practical reason that often causes companies to resort to the CCAA – namely that, unless it obtained creditor protection, it was reasonably expected to run out of liquidity prior to being able to complete a needed restructuring. (Stakeholders sought leave to appeal the decision from the Ontario Court of Appeal and the Supreme Court of Canada, but Stelco was successful in resisting both leave applications.)
The Stelco proceedings also gave rise to a pair of very important Ontario Court of Appeal decisions, hotly contested by creditors and other stakeholders, that confirm that a CCAA proceeding is the company’s restructuring process and that the court should pay deference to the business judgment of the company’s board.
In the first of these decisions, at issue was the appointment of two new directors to Stelco’s board by the other directors, exercising their authority to fill vacancies. The Court of Appeal reversed the supervising judge’s decision that had removed the two directors from the board, noting that the judge’s jurisdiction under the CCAA did not extend that far and that "the Court is not entitled to usurp the role of the directors and management in conducting what are in substance the company’s restructuring efforts."
The second of these decisions arose when Stelco sought authorization to hold meetings of its creditors to enable them to consider a plan of arrangement filed by Stelco. Stelco’s senior bondholders, who did not support the plan and had sufficient votes to veto it, opposed the meeting order on the basis that the plan was doomed to fail. The Court of Appeal upheld the decision of the supervising judge that permitted the plan to be sent to creditors and established the meeting process, noting that the court’s role is not simply to preserve the status quo, but to facilitate the restructuring so that the company can successfully emerge from the process. The Court of Appeal also referred to its previous decision, confirming the role of the company in leading the restructuring efforts.
McCarthy Tétrault acted for the company during the CCAA process.