June 30, 2012
CRO: “Chief Restructuring Officer” or "Cost-effective Restructuring Option"
The appointment of a chief restructuring officer (“CRO”) is on the rise in Canada in the context of both court supervised insolvency proceedings and informal restructurings. The CRO’s role is to oversee the restructuring of a distressed company. This may entail the restructuring of not just the balance sheet but the company’s operations as well. Incumbent management often finds the process of tending to both day to day operational issues as well as the demands of the restructuring process overwhelming. The CRO can offer a new perspective and is equipped with the relevant turnaround experience and resources to provide crisis management to deal with these challenges.
The CRO’s mandate usually entails the following steps (i) taking formal control of the restructuring of the distressed company; (ii) identifying the causes of the distressed company’s financial difficulties; (iii) identifying solutions and business opportunities; (iv) formulating a restructuring plan; and (v) executing the restructuring plan. The ability of the CRO to see “the forest from the trees” is one of the most important roles in any restructuring, whether within or outside of a court-supervised proceeding.
There are three common instances in which a CRO may be retained by a distressed company or appointed by the Court. Firstly, it may be required by the senior lender. Creditors are often in favour of the appointment of a CRO as it can assist in establishing transparency and credibility during the reorganization. Secondly, the appointment may be at the direction of incumbent management, which recognizes that it is not equipped or has insufficient time to deal with both the management of the ongoing business as well as the implementation of a restructuring. Lastly, it may be required if the debtor company’s directors and officers resign or are removed by the Court, leaving no one to direct the restructuring process.
Often a distressed company will require a Court ordered stay of proceedings to provide the time necessary to either formulate or execute upon a restructuring plan, which may ultimately include a sale of the company’s assets. The appointment by the Court of a CRO has become an increasingly common feature of proceedings under the Companies’ Creditors Arrangement Act (Canada) (the “CCAA”). The functionality and flexible nature of the CCAA facilitates a wide variety of creative ways in which to maximize value for all stakeholders. Canadian Courts have relied upon their inherent jurisdiction under the CCAA, when appropriate, to appoint a CRO to the distressed company. In Re ICR Commercial Real Estate (Regina) Ltd1, Justice Koch found, among other things, that one means to achieve a successful restructuring is the appointment of an objective officer to oversee a restructuring2.
The appointment of a CRO is not duplicative of the mandate of a Monitor with a CCAA proceeding. The Monitor is a neutral Court officer, the “eyes and ears” of the Court with a statutory mandate under the CCAA to monitor the CCAA proceeding, facilitate information flow to the creditors and other stakeholders and report to the Court on the reasonableness and fairness of the various steps taken by the debtor company within the CCAA proceeding. A CRO, on the other hand, is an advocate for the company, with a narrower mandate to formulate and execute a restructuring plan to the benefit of the debtor company.
Although sometimes viewed as yet another expense in an already expensive process, an effective CRO can bring tremendous value to a restructuring. The appointment of the CRO is an efficient means to lift the burden of the restructuring mandate from incumbent management, which is then free to focus on operations. It also ensures that the restructuring strategy is formulated from a view independent of existing management, which may not see the changes which are required or may be too conflicted to execute the necessary restructuring plan.
Once it is determined that a CRO should be appointed, it is important to properly define the scope and financial terms of the engagement, typically in an engagement letter which should be approved by the Court if the restructuring takes place within a Court proceeding. The engagement letter will include a fee structure which provides transparency to the Court and assists the debtor company in forecasting total costs in light of the CRO’s obligations and liabilities. In the context of a Court supervised restructuring, the CRO’s compensation should be included as part of any administration which typically ranks in priority to existing security interests. Typical powers granted to a CRO in a Court supervised restructuring include:
- Taking any and all steps on behalf the debtor company necessary to carry out a restructuring;
- Having full access to the property of the debtor company, to the extent that it is necessary to adequately assess the business and the debtor company’s financial affairs or to perform its duties;
- Evaluating restructuring, sale or recapitalization alternatives that may be presented to the debtor company;
- Formulating and implementing any necessary process to market and sell some or all of the business and property;
- Representing the debtor company in negotiations with third parties, including creditors, customers and other stakeholders of the debtor company;
- Communicating with and providing information to the Monitor, senior lenders, DIP lender(s) and other stakeholders regarding the business and affairs of the debtor company;
- Reporting to the Court or seeking direction from the Court; and
- Being at liberty to engage independent legal counsel and other advisors.
It is also essential to ensure that the CRO is protected from liability in a Court supervised restructuring. The Courts have held that CROs should be granted protection from liability similar to that provided to Monitors in a CCAA proceeding. In Re Collins & Aikman Automotive Canada Inc., Justice Spence held that the Court had jurisdiction to grant the CRO protection from liability and noted that without the limitations on liability it would be difficult to engage professionals to step into the role3. The order appointing the CRO should include the following provisions limiting liability and providing the requisite powers and authority to allow the CRO to carry out its mandate4:
- Neither the CRO nor any officer, director, employee, or agent of the CRO shall be deemed to be a director or officer of the debtor company;
- Neither the CRO nor any officer, director, employee or agent of the CRO shall incur any liability or obligation as a result of its appointment or the carrying out of its mandate;
- The debtor company should indemnify and hold harmless the CRO and any officers, directors, employees or agents of the CRO who may assist the CRO with the exercise of its powers and obligations. This indemnity should be secured by a charge on the debtor company’s assets, usually as part of the directors and officers charge;
- Any actions or other proceedings against the CRO should be stayed except with leave of the Court; and
- The CRO should be permitted to resign or the debtor company should be permitted to seek an order terminating the appointment of the CRO at any time.
While the appointment of a CRO may not be necessary in all restructurings, in the right circumstances the CRO’s expertise can go a long way toward streamlining the restructuring process and minimizing long term costs.
1 ICR Commercial Real Estate (Regina) Ltd. v. Bricore Land Group Ltd., (Re) (2007), 33 C.B.R. (5th) 39 (Sask. Q.B.).
3 Re Collins & Aikman Canada Inc. (2007), 37 C,B,R. (5th) 282 (Ont. S.C.J.) at paras. 134-138.
4 Re Northstar Aerospace, Inc. et al. Initial Order of Justice Morawetz, June 14, 2012, issued and entered on June 14, 2012 at paras. 32 to 38.