Stelco profits and CCAA protection

But are some companies now exploiting the law to their advantage?

The Toronto Star
March 19, 2005

Stelco profits and CCAA protection

Better known by its abbreviation, CCAA, the Companies' Creditors Arrangement Act originated in the Dirty Thirties to save Canadian companies from destruction by liquidation after a series of major and small bankruptcies swept across the nation and shattered the economy.

But are some companies now exploiting the law to their advantage?

Are they using any hiccup as an excuse, as some parties charge in the recent Stelco case, in which the Hamilton-based steel maker is earning huge profits while under bankrupty protection?

The questions are serious; the answers are difficult.

Originally, CCAA was devised as a lifeline to allow drowning companies time to catch their breath. CCAA gives the courts the power to hold creditors in abeyance while the firms attempt to resuscitate themselves.

Based on the belief that a viable firm is more than the sum of its parts, CCAA subjugates the narrow interests of creditors, workers and shareholders in a failing company to the broader public interest of making it whole again. It does it by requiring them to agree to a restructuring plan.

And that is how it has worked in some notable recent cases. Although Air Canada's workers, creditors and shareholders were all called upon to make significant sacrifices after the insolvent airline sought the protection of the courts in 2003, most would agree they, and Canadians in general, are better off — or in the case of shareholders, no worse off — with the lean, new Air Canada that emerged from CCAA than they would have been had the airline been liquidated and its assets sold off piece by piece.

The same is true for Algoma Steel.

But a very different view has been expressed in the case of Stelco, which sought and won CCAA protection from the courts in January 2004. The company's largest union — the United Steelworkers — a shareholders' rights group and a few Bay Street lawyers and financial journalists have argued that Stelco should have been denied protection at the outset or, at the very least, had its court protection lifted shortly after it was imposed.

They claim the company has been using CCAA as a strategic tool to stiff its economic partners. Rolf Gerstenberger, president of the Steelworkers' Stelco local, equates CCAA with "legalized theft."

These critics base their view on Stelco's return to profitability immediately after gaining CCAA protection. They say it proves the steel maker never was on the verge of bankruptcy. Their case would seem to be bolstered by the record profit levels with which Stelco ended the year.

But there is one very big hole in their argument. CCAA protection is not awarded automatically; it has to be granted by a judge.

In Stelco's case, the judge who gave it is James Farley, one of the most respected bankruptcy judges, who has an unblemished track record that includes the successful turnaround of both Air Canada and Algoma Steel. The suggestion Farley was somehow duped by Stelco's lawyers stands in sharp contradiction to his reputation as a no-nonsense judge who forces warring parties in insolvency cases to find the best approach. Even detractors, who find him overbearing, readily admit he gets the right results.

Clearly, it was not hard for Farley to find that Stelco had big problems. It had $1.3 billion in unfunded pension plan obligations that would have made the firm worthless if they had shown up on its balance sheet. At then prevailing steel prices, Stelco's mounting losses meant it would soon run short of cash to meet its bills. Also, Stelco needed cash to modernize, which it had little hope of finding, given the debt level already on its books.

But no sooner had Farley granted the steel maker protection than China's booming economy drove steel prices through the roof, making Stelco look competitive and causing its cash woes to disappear.

That is when complaints against Farley grew louder for his refusal to heed the appeals from the union and prominent shareholders to stop Stelco from hiding behind CCAA. While the shareholders claimed that court proceedings were depressing share prices unnecessarily and could ultimately rob them of their investment, the Steelworkers claimed Stelco would try to use bankruptcy protection as a club with which to beat them.

More likely, Farley saw a different problem. While Stelco might look like it was out of the woods with high steel prices, chances are it would find itself back in bankruptcy court if steel prices fell. Believing it is easier and less painful for everyone involved to solve a problem before reaching the cliff, Farley clearly leaned toward finding a permanent solution, knowing Stelco still had to become more efficient and refinance itself.

We suspect Farley will be proven right and the CCAA will again have proved its usefulness after he has had a chance to fine tune the restructuring plan that Stelco must present to him by the end of March.

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Risks: Companies' Creditors Arrangement Act, CCAA, No real penalties for abuse of federal insolvency laws, Insolvency, Canada, 20050319 Stelco profits

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