by Ari Sorek of Dentons
In a unanimous judgement rendered on August 27, 2019, in the matter of Gestion Éric Savard Inc. (Re), the Quebec Court of Appeal confirms the super-priority rank of an interim lender in the face of a challenge by unpaid post-filing creditors.
The Debtors, including Gestion Eric Savard Inc., which operated a group of optometry clinics in Quebec and Ontario, obtained relief under the Companies’ Creditors Arrangement Act in May 2017, including a stay of proceedings and an authorization to borrow approximately $4.5 million from Fiera FP s.e.c. (“Fiera”) as interim (“DIP”) financing. To secure the interim financing, the CCAA Court granted a priority security interest to Fiera, charging all of the Debtors’ assets, pursuant to section 11.2 of the CCAA. The order granting the interim financing charge read as follows:
DECLARES that all of the Applicants’ assets are hereby charged and secured up to a total amount of $5,750,000.00 (such charge and security constitutes the (“Temporary Lender’s Charge”) in favour of the Temporary Lender, as security for all of the Applicants’ obligations to the Temporary Lender with respect to all amounts owed (including principal, interest, and Temporary Lender’s Expenses) arising out of or related to the Temporary Financing Terms and Conditions and the Temporary Financing Documents, such that the Temporary Lender’s Chargee shall take precedence over the mortgage rights of the other secured creditors of the Applicants for the purposes of section 11.2 of the CCAA, subject, however, to the following rights: […].
In August 2017, further to the conclusion of certain transactions under the auspices of a Court-approved sales process, the Monitor presented a motion for authorization to sell certain assets of the Debtors and for the issuance of a vesting order. At the hearing, certain post-filing creditors, including certain landlords (for unpaid rent) and a bank (as creditor under a term loan) asserted rights over the proceeds derived from the realization of the Debtors’ assets, and requested that the Monitor be ordered to first distribute said proceeds to the post-filing creditors, in priority to the DIP lender and any other secured creditor. Rather than subsuming the issuance of the vesting order to the outcome of a potentially protracted debate over the eventual distribution of sale proceeds, and to avoid potentially jeopardizing the transaction in question, the Court agreed to issue the vesting order but postponed the debate on the distribution mechanisms to a later date. Pending the outcome of a future order on the distribution of proceeds, the Monitor was to reserve an amount of $750,000 in trust (the “Amount in trust”), to ensure the availability of funds at the time of final disposition.
In November 2017, the monitor sought directions from the Court regarding the distribution of the Amount in trust. The Superior Court, based mainly on its interpretation of the purpose and intent of the August 2017 order (rendered by a different judge), concluded that the Amount in trust must be distributed as follows:
- First, post-filling debts, defined as any debt incurred after May 18, 2017;
- Second, secured debts of creditors holding a security interest in the assets sold, as per their rank under the law and under court orders;
- Third, where applicable, the priority claims referred to in section 136 of the Bankruptcy and Insolvency Act; and
- Fourth, where applicable, other debts.
Fiera appealed said judgement on the grounds that, in establishing this collocation order, the judge failed to consider the super priority recognized in the initial order and in the CCAA. The post-filing creditors contended that, owing to the importance of safeguarding the rights of post-filing creditors, and to the extent that the Amount in trust was reserved by the first judge to ensure availability of funds for post-filing suppliers, these amounts ought to be distributed to them first. The Court of Appeal granted the appeal and confirmed that there is no inherent security for post-filing creditors—they are required to petition the Court in order to obtain such security. The Court of Appeal noted that post-filing creditors may avail themselves of certain recourses to safeguard their interests in respect of unpaid goods or services, including, for example, seeking an order pursuant to section 11.4 CCAA declaring them to be critical suppliers, with an order establishing payment terms or a critical suppliers’ charge. In the absence of such an order granting priority or other protection to post-filing suppliers, the Court of Appeal confirmed the super priority of the DIP lender and ordered that the distribution be made in accordance with the provisions of the CCAA and the initial order.
Perhaps implicitly applying the “building blocks” doctrine evoked by Justice Morawetz in Re Target Canada Co., 2016 ONSC 316, the Court of Appeal reaffirmed the importance for stakeholders to assert rights or otherwise participate in proceedings in a timely and transparent fashion, lest previously established modi vivendi be disturbed to the detriment of other stakeholders, who, in navigating the CCAA process, had relied on the parameters drawn up by prior Court orders. In the case at bar, the DIP lender was asked to disburse additional tranches of financing at various subsequent steps of the CCAA proceedings, relying on the protections afforded by the interim financing charge, did not suspect that its position could be jeopardized by the latent claims of certain creditors.
The ruling is noteworthy in that it appears to be the first one in Canada wherein a court was tasked with adjudicating competing claims between post-filing creditors and the beneficiary of a CCAA charge, both being categories of creditors which are otherwise habitually accorded augmented protections in CCAA processes.
It is also noteworthy that the Court of Appeal attributes the result of the impugned distribution order rendered by the Superior Court, at least in part, to the fact that more than one judge was tasked with managing the CCAA process, thereby compelling one judge to interpret prior orders and preventing any given judge from having a full and complete picture of the entire process.
The ruling will surely come as welcome comfort to DIP lenders and restructuring professionals. The sacrosanct protection that is often attributed to such lenders is reaffirmed; this protection has a direct impact on the level of risk to be managed by lenders, which risk, in turn, directly affects the availability and costs of such financing.
A copy of the decision can be downloaded below.