Post-filing suppliers of goods and services in CCAA proceedings

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Suppliers of goods and services to the debtor following the initial order in proceedings under the Companies’ Creditors Arrangement Act (the “CCAA”) can be in a precarious position with respect to payment for those post-filing goods and services. While section 11.01 of the CCAA permits payment to be made to post-filing suppliers, there is no specific requirement for suppliers to be paid and no statutory priority over other parties in respect of such payment.

Suppliers do have some options:

  • Require payment in advance of, or at the time of delivery of, the goods or services;
  • Obtain a collateral guarantee from a more financially reliable party in respect of the post-filing goods or services to be supplied;
  • Have the debtor obtain an order under section 11.4 of the CCAA that the supplier is a critical supplier and granting security to the supplier for the payment in priority to all other creditors; or,
  • Make their own application to the court to vary the initial order to provide the supplier with a security interest on the debtor’s assets to cover the costs of the goods or services to be provided.

Of course, these options may not be available or practical in all cases.

  • The cash flow for the debtor may be insufficient to allow payment in advance or on delivery of the services or it may be difficult to quantify the value of the goods or services prior to them being supplied.
  • There may be no financially reliable party willing to provide a guarantee.
  • The debtor may be unwilling to make the application for a declaration regarding a critical supplier, and of course, not all suppliers will meet the test for a critical supplier. However, even if the order is made, there is no guarantee that the court will place the critical supplier in number one priority over the claim of any of the secured creditors of the debtor company. For example, even if a critical supplier charge is granted, it may be subordinate to other CCAA charges such as:
  • the Administrative Charge in favour of the Petitioner’s counsel and the Monitor and its counsel;
  • the post-filing lender charge if such lender is unwilling to lend without having priority as secured creditor. Ultimately, if the assets of the debtor are insufficient to satisfy the priority charges, a critical supplier charge may be of no value.
  • For the supplier that is not a critical supplier, the cost to make an application to vary the initial order to provide a charge in the supplier’s favour may be cost prohibitive and will in any event likely face opposition on the application from the debtor and lack the support of the Monitor.

Prior to the recent decision in Arrangement relatif à Gestion Éric Savard inc., 2019 QCCA 1434, post-filing suppliers may have taken some comfort in believing that they might have a priority claim for payment, almost as of right, against funds generated from the sale of the debtor’s assets. In the decision appealed from, the court had concluded that post-filing suppliers were entitled to be paid first from the sale proceeds over the interests of secured creditors, including the interim lender in the CCAA proceedings. The decision was based on the interpretation of the initial order and a subsequent order placing sale proceeds into trust pending further application.

On appeal, however, the Quebec Court of Appeal found that absent a clear and specific order regarding priority, which was not present in the case, section 11.01 of the CCAA did not create a priority for payment of post-filing suppliers. There had been no order under section 11.4 designating any of the suppliers as critical suppliers. There was no other order in the CCAA proceeding that clearly gave the post-filing suppliers priority. In the circumstances, the appeal was allowed. Secured creditors, in particular the post-filing interim lender, were found to have priority to the sale proceeds over any claim by the post-filing suppliers of goods and services.

Accordingly, prior to supplying goods or services to the debtor following the initial order, suppliers should consider their options to secure payment before advancing further unsecured credit to the debtor.

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