Under section 11.2 of the Companies’ Creditors Arrangement Act, RSC 1985, c C-36, a court can declare that a debtor’s property is subject to a security or charge in favour of a person providing interim financing, and order that such security or charge ranks in priority over the claim of any secured creditor. The security or charge declared in section 11.2 cannot, however, secure a pre-existing or “pre-filing” obligation of the debtor.
In Medipure Pharmaceuticals Inc. (Re), 2022 BCSC 1771, a proposed interim lender argued that the prohibition in section 11.2 did not preclude the use of interim financing to repay its own pre-existing loan in priority to a deemed trust claim of the CRA and the charge of a party that previously provided interim financing in a related proposal proceeding.
The Court rejected the argument, finding that the weight of the authorities interpreting section 11.2 confirms that new money in the form of interim financing cannot be used to pay out a pre-filing loan in priority to other pre-filing charges and deemed trust claims. The intention of section 11.2 is to provide special status or priority only to money lent to the debtor in the period of distress, not to pre-filing obligations. The Court considered cases in which “creeping DIPs” have been approved, where operational receipts of a debtor company were permitted to pay pre-filing obligations. In these cases, the courts held that the interim financing did not contravene section 11.2 because advances under the interim financing were not used to pay pre-filing obligations and the interim lending charges did not secure pre-filing obligations.
The proposed interim lender also sought to rely on Re TOYS “R” US (CANADA) LTD., 2017 ONSC 5571, where interim financing was permitted to take out the debtor’s pre-filing obligations to the interim lender. The Court noted, however, that in that case the interim lender already had first priority such that the interim financing would not improve the interim lender’s position, and that the reasons emphasize that the interim financing could not reorder pre-filing priorities. The Court also distinguished another case relied on by the proposed interim lender – White Birch Paper Holding Company (Arrangement relatif à), 2010 QCCS 764 – on the basis that the interim financing in that case had been ordered initially by consent and was subsequently unopposed.
On the basis of this review of the authorities, the Court refused to approve the proposed interim lender’s financing as it contravened section 11.2, even though that result left the debtor without funds to the detriment of the stakeholders, including the debtor’s employees.
Medipure provides a useful survey of previous authorities and, importantly, clarifies the limitations section 11.2 of the CCAA imposes on interim financing. Without the consent of other parties, interim financing cannot be used to pay pre-existing obligations, even when the consequences of a debtor not receiving interim financing are dire.