Can post-filing suppliers claim priority on the proceeds of an asset sale in CCAA proceedings?
The Debtors operate a network of 48 optometric clinics under different banners, 12 of which are owned by franchisees. In October 2016, the Debtors acquired several clinics in Quebec and Ontario and, as a result, experienced cash flow problems. Unable to meet their financial obligations, they sought protection under the Companies’ Creditors Arrangement Act (the “CCAA“) in May 2017.
The Initial Order contained provisions that allowed the Debtors to borrow $4,500,000 in exchange for the Lender obtaining an encumbrance and security interest that would take precedence over the rights of other secured creditors. Since then, post-filing creditors, including landlords of real estate and equipment lenders, have complained about providing services and not being paid.
On August 31, 2017, the Court received a request from the Monitor to approve transactions for the sale of certain property outside the normal course of business. The Court ordered the Monitor to hold in trust $750,000 from the sale price of the transactions to pay the claims of post-filing creditors. The amount could not be paid to anyone other than by court judgment. On October 11, 2017, the Monitor sought guidance from the Court regarding the distribution of the funds held in trust. It proposed that secured creditors receive payment first, followed by priority creditors referred to in s. 136 of the Bankruptcy and Insolvency Act the (“BIA“) and any remaining claims (including post-filing creditors) receive payment pro rata.
The Court defined the post-filing debt as a debt that arose after the Initial Order was made. Such claims may arise as a result of the performance of a benefit for the benefit of the debtors through the supply of goods, rental of space, provision of services, sale or rental of movable property, loan of money or interest on loans, as well as damages as a result of the termination of a contract during the restructuring period.
- post-filing claims of the landlords for unpaid rent since May 18, 2017;
- the secured claims of creditors holding a security interest in the goods sold, according to their ranks and the Orders of the Court;
- where applicable, the priority claims referred to in s. 136 of the BIA; and
- where appropriate, other claims.
The Lender appealed from the trial judgment, arguing that the trial judge erred when it removed its priority over the other creditors. Pursuant to s. 11.02 of the CCAA, the effect of the Initial Order was to suspend any existing or new proceedings against the Debtors. However, with respect to suppliers, the CCAA provides that an order may not prevent creditors from requiring immediate payment for the supply of goods and services, the use of leased or licensed goods or the supply of any other valuable consideration that occurs after the order is made.
The CCAA does not assign priority to post-filing creditors. It is up to the creditors to obtain a judgment to amend an original court order. It is also possible, pursuant to s. 11.4 of the CCAA, for post-filing creditors to have their claims secured by a priority if the Debtors obtain a court order declaring them to be critical suppliers. No such requests were made in this case.
A priority cannot be granted implicitly. CCAA orders are the road map for the proceedings that follow, and they must be drafted with clarity and precision. The trial judge’s decision cannot be interpreted as giving priority to post-filing creditors and thereby altering the priorities set out in the Initial Order. The trial judgment expressly provided that the rights and remedies of the parties were not compromised or altered by the depositing of money in trust.
Since the Initial Order was not amended to change priorities, no security had been awarded to the post-filing creditors and no critical supplier statement appeared on the record. The trial judge could not change the order of priority of secured claims. The Appellate Court allowed the appeal, and held that the Lender can assert its rights arising from its DIP lender super-priority.
Counsel: Ari Sorek and Roger Simard of Dentons Canada LLP for Fonds de financement d’entreprises Fiera FP s.e.c., Alain Tardif of McCarthy Tétrault for Raymond Chabot inc., Alexandre Forest of Gowling WLG (Canada) for Corporation FCHT Holdings (Québec) inc. / FCHT Holdings (Québec) corporation inc. and Société de gestion Place Laurier inc., Roberto De Minico of De Minico, Petit Guarnieri for the Bank of Nova Scotia and Laurent Debrun of Spiegel Sohmer inc. for Optical Vision of Canada Ltd., 9130217 Canada inc. et Antranik Kechichian