Our Response To The CRA's Position On Creditor-Proofing Reorganizations – Part 1

Background

Creditor-proofing involves improving the ranking of a corporate shareholder ("Holdco") of an operating subsidiary corporation ("Opco") from ranking behind unsecured creditors of Opco to ranking ahead of them as a secured creditor. The benefit is that in the event of a future insolvency of Opco, Holdco will be entitled to recover on its investment in Opco in priority to any unsecured creditors of Opco.

Creditor-proofing reorganizations normally involve a subsidiary operating corporation paying a dividend to, or purchasing some of its outstanding common shares from, its parent holding corporation, in order for Holdco to then use the funds received to make a secured loan back to Opco.¹ This blog post specifically assumes that no sale of any shares of Opco to an unrelated party, or acquisition of any such shares by an unrelated party, is contemplated at the time of completing a creditor-proofing reorganization.  In our view, in such circumstances