Creditors wishing to acquire the assets of a debtor in CCAA proceedings may weigh the respective merits of a credit bid or reverse vesting transaction

Under a credit bid, which allows existing secured creditors to bid up to the full face amount of their secured debt claim as currency for the acquisition of the debtor’s assets, the secured debt may be transferred by the secured creditors to a newly-established “CreditBidCo” in consideration for equity, so that CreditBidCo then acquires the debtor’s assets (and assumes some operating liabilities), with the full amount of its secured debt claim being extinguished.

In the absence of s. 79, the better view is that the acquisition by CreditBidCo is to be considered as a barter exchange, so that the proceeds of disposition to the debtor, the tax cost of the assets to CreditBidCo, and the repayment of the secured debt for s. 80 purposes reflect the assets’ current FMV.

Where s. 79 applies on a credit bid, the debtor would likely have proceeds of disposition exceeding the assets’ FMV and no forgiven amount, whereas the creditor would likely have tax cost in the assets exceeding their FMV. S. 79 may not apply based on the narrow meaning of "in consequence of" (see, e.g., Hallbauer) in s. 79(2) and the (Brill-based) proposition that “where property is acquired by a creditor under an agreement with the debtor for a fixed price, section 79 should not be applicable.”

Greater certainty on s. 79 not applying may be achieved with a three-party arrangement under which CreditBidCo would directly acquire the debtor’s assets, and in consideration it would issue its shares to the secured creditors who would agree to the extinguishment of their debt claims against the debtor.

In a “reverse vesting transaction”, the obligations of the debtor which are to be settled without payment are vested out of it and assumed by a new corporation (“ExcludedCo”), with the debtor corporation (owing only those debts to be retained or satisfied) being acquired by the new owner(s) (which could be secured creditors), and with ExcludedCo then being wound-up or placed into bankruptcy. The new equity owners effectively acquire the debtor’s tax losses and other tax attributes subject to the s. 80 grind (being the amount of the debt assumed by ExcludedCo) and the ss. 111(4) and (5) restrictions (and also may enjoy a high historic PUC in the debtor’s shares) - whereas an asset acquisition transaction generally would entail the assets being acquired at a FMV cost substantially less than the debtor’s existing tax attributes.

The interest stops rule (that interest on unsecured provable claims stops accruing at the commencement of relevant proceedings) does not appear to apply to secured creditors. If so, this accords relevance to the CRA position that the initial stay order in a CCAA proceeding means that any creditor cannot enforce payment, so that the “legal obligation” requirement in s. 20(1)(c) is not met.

This position appears to confuse a stay of the right to enforce payment and the termination of that right.

Neal Armstrong. Summaries of Janette Pantry, Carrie Smit, "Tax Considerations in Restructuring under the Companies’ Creditors Arrangement Act", draft 2020 CTF Annual Conference paper under s. 128(1)(g), s. 80(1) – forgiven amount, s. 80(1) – forgiven amount - para. (i), s. 79(2), s. 20(1)(c)(i).