Bizarre Love Triange: Insolvent Owners, Contractors & CCAA

Insolvent Owners & CCAA

If you work in construction, there’s a good chance that you have your own story about those projects—the large-scale builds that went bust, leaving the contractors and subcontractors waving their unpaid invoices and asking, “What now?”

The common scenario is an owner that runs out of money before the project is finished, the abandoned construction abandoned like steel skeleton against the landscape. In such circumstances, it doesn’t make sense for the owner to assigned into bankruptcy. The initial effort will be to restructure the owner’s business in order for operations to continue. A continuing business concern is seen as creating value not just to pay off debts but to support the economy overall. It is for this reason that proceedings are usually commenced under the Companies’ Creditors Arrangement Act (CCAA).

CCAA proceedings are optimistic; underlying a proposal under the CCAA is the belief that with some help, an insolvent company can continue business. The Court acts as gatekeeper, monitoring the actions of the insolvent company and keeping creditors at bay until a final agreement can be reached to pay of the debts.

The priority of creditors is changed in a CCAA proceeding. The insolvent company needs money to continue operations—this is provided by the Debtor in Possession or “DIP” financer. Since the DIP financer is essentially saving the project, it is given super priority over all other creditors. So, if and when the insolvent company starts to make money again, the DIP lender gets paid first.

Next in line are secured creditors. For construction projects, they would include any contractor or subcontractor that registered a lien before the date of the CCAA proposal.

Unsecured creditors rank at the bottom when it comes to repayment, behind the DIP lender and the secured creditors. Unsecured creditors include any contractor or subcontractor that did not register a lien. This means that most trades and suppliers on these types of projects rank last.

Often, contractors and subcontractors will be asked to continue their contract work to complete the project. Anything done after the date of a CCAA proposal is considered to be under a new contract. As part of the CCAA proposal, the insolvent company has an obligation to ensure that payments are made for any new work supplied. Further, a contractor or subcontractor retains the right to lien or claim for any unpaid amount.

So, what can a contractor or subcontractor do? If a CCAA proposal has been made, the answer is, not much. It is very important that the contractor or subcontractor—by itself or through counsel—monitor the CCAA proceedings to make sure that it is counted as a creditor. That way, when the Court makes a distribution of the owner’s assets, the contractor’s or subcontractor’s debt will be included. Before that time, the options are limited—in some cases, holdback funds may be pursued or a trust claim may be brought.

The most important thing is for a contractor or subcontractor to take action before a CCAA proposal is made. If there’s a delay in payment, it is important for the contractor or subcontractor to find out why. Acting quickly can make all the difference. The take away here is to keep on top of what’s happening on the project and to get the right help when you think there might be a problem.

CCAA proceedings in the course of construction projects are complex. The above is a general overview of proceedings and should not be considered legal advice. It is recommended that you seek legal counsel to discuss your options. If you have any questions relating to this article or wish to discuss your particular concerns, you may reach the author at ahatsios@kmblaw.com or (905) 276-0420.