Does Your Corporation Need a Chief Restructuring Advisor?

Most Canadian corporations have well-documented policies and procedures regarding governance, strategy and risk management. That being said, financial distress can still occur and the corporation’s Directors play an essential role in detection and response. The Canadian Business Corporations Act (“CBCA”) contains four principals with respect to the duties of a Director of a corporation. They include a:

• fiduciary duty to the corporation,
• duty of care to the corporation,
• duty not to oppress; and
• duty to manage or supervise the affairs of the corporation.

The Directors of a corporation would be well advised to exercise due diligence and fulfill their duty of care and their fiduciary duty to their corporation pursuant to the CBCA and related provincial corporations act in reliance upon the advice of a Chief Restructuring Advisor (“CRA”) to manage the duties and interest of the corporation and its key Stakeholders and to assist the Directors and Senior Management in their decision-making by providing them with accurate, reliable and timely advice.

Why the Need for a CRA?
While the appointment of a CRA is not necessary in all corporate restructurings, in the right circumstances the impact of a CRA’s expertise in assessing, analyzing, and implementing a restructuring plan, may result in a successful and profitable turnaround for a corporation. 

When a corporation is experiencing financial losses on its operations and threats from various sources, or is lacking talented Management and reliable data and is running out of time to retain control of its restructuring, the CRA is often viewed by the secured Lender and the Stakeholders as an independent skilled professional that can help the corporation gain some level of confidence in restructuring its operations. 

The CRA is typically a Chartered Public Accountant, a Chartered Insolvency and Restructuring Professional, a Certified Turnaround Professional or a lawyer with expertise in corporate restructuring, often hired by the Directors at the request of the Lender to address the corporation’s crisis and attempt to return it to a viable and profitable business. 

Despite the fact that the Directors and Senior Management may be comprised of individuals with appropriate education, financial knowledge, and experience, the initial appointment of a CRA may be due to a governance response to Lender concerns that the Directors and/or Senior Management may not have the skills or expertise to deal with a restructuring or it may be due to lack of trust between the Directors, Senior Management, and the corporation’s Lender. A CRA may be needed to implement actions against opposing forces which may be the corporation’s own Directors, Senior Management, Employees or other key Stakeholders. 

In certain corporate restructurings there may be a special need for a skilled CRA to implement internal governance changes by reconfiguring the corporation’s existing governance processes. This can be accomplished by retaining an independent advisor such as a financial advisory firm to oversee the corporation’s existing accounting, auditing, and financial reporting systems.

Retention of a CRA is a recommended course of action where:

• the Lender is concerned about Senior Management’s capabilities;
• there has been communication breakdown between the members of the Board of Directors, Senior Management, Employees, and the other key Stakeholders; or,
• the corporation has had prolonged periods of severe cash flow difficulties.

Early intervention and allowing a corporation to restructure rather than file an assignment in bankruptcy may result in the retention of jobs for employees and the continuation of contracts for suppliers. If the CRA is ultimately successful in restructuring the corporation and returning it to profitability, the benefits of engaging a CRA should result in tremendous value to the corporation. 

The Successful CRA
Chief Restructuring Advisors may share similar personal traits yet have very different skill sets that are imperative to addressing the needs of a financially distressed corporation. An effective and successful CRA needs to be a highly skilled financial advisor and negotiator familiar with all of the techniques required to save a corporation and reduce the risk of financial distress reoccurrence. A CRA’s mandate would typically be to execute operational improvements. A CRA may:

• identify the financial and/or operational problems of the distressed corporation and communicate to the Board of Directors and to the key Stakeholders a restructuring plan that will address the underlying problems of the business;
• advise the Board of Directors as to whether or not the corporation has the resources to execute a restructuring plan and whether the corporation can be saved or whether there should be a receivership or liquidation of the corporate assets;
• maintain communications with the key Stakeholders throughout the process and ensure that the key Stakeholders have confidence in the integrity and capabilities of the Directors and of Senior Management.

Mary Plahouras is an Estate Manager within our Toronto and Markham location. To learn more about how MNP Debt can help you, contact our local office at 416.515.3921