I attended last Friday a panel discussion held by the Toronto Chapter of the Turnaround Management Association. The topic was the evolution and challenges of the role of Monitor in CCAA proceedings. It was an excellent event, with a well qualified and distinguished panel including a current and former judge and other representatives of the legal and financial community.
CCAA Monitors are required to balance a significant conflict of interest. On one hand, the Monitor is engaged and paid by the insolvent company as its financial advisor. The Monitor is heavily relied on by its client to, for example, assist with evaluating restructuring options, negotiate with various stakeholders and generally prepare the company for the demands of an unfamiliar and fast moving process. The company clearly has an expectation that their financial advisor is working in their best interest.
At the same time however, the Monitor is also an officer of the court. In this role, the judiciary expects the Monitor to be a gatekeeper, someone to present, interpret and guide on increasingly complex financial information, in an objective manner for the benefit of the judge and therefore all stakeholders.
The Monitor’s two roles are often at conflict and guess which one the judiciary believes takes precedence. As a result, it is clear (at least to me) the insolvent company simply does not receive independent financial advice.
When considering the above, you would think the Monitors would be uncomfortable with their balancing act and be seeking a solution. From the panel discussion however, this doesn’t seem to be the case. Rather, the Monitor representatives appeared to embrace the dual role because it creates a situation in which they are the one party in the proceedings with the clout (and financial know-how) to most effectively negotiate the restructuring.
In short, they believe the system works largely because of the dual role, not despite it. Certainly insolvency professionals that are readers of this site can confirm for us that there are other examples of these conflicts in the insolvency world, such as Proposal Trustees, and that in these instances the conflicts are also tolerated and the system generally works.
Since none of this is particularly new, why did I find it sufficiently interesting for a post? Because the question was asked: how can we improve the process?
The answer, as provided by the Honourable James Farley, Q.C. (a wonderful thinker of whom I am a big fan), was that we may see in the future a separation of the roles of advisor and monitor. It was further suggested that this separation does not require codification, but rather could simply just be done at the outset of the process.
Understandably this idea met with resistance from the financial participants on the panel, on the premise that it would lessen their ability to drive a restructuring solution (don’t throw the baby out with the bath water was the response, I believe). I couldn’t disagree more.
We have advised many troubled and insolvent companies. As a result, we have a fairly strong view and have witnessed first hand that companies in this situation simply do not get the independent advice they require from a CCAA Monitor. Bad advice leads to bad deals.
For the sake of the debtors, it is exciting to think the door may be open, at least a crack, for a truly independent financial advisor as part of the CCAA process.
Posted by Scott Sinclair, Range Corporate Advisors