When will a creditor be required to continue supplying to a company under creditor protection?
On March 11, 2020, the Petitioners filed notices of intention to make a proposal pursuant to the Bankruptcy and Insolvency Act. The NOI filings were intended to allow the Petitioners to secure interim financing during a restructuring, with the Petitioners intending to present a proposal to their creditors. Since mid-March 2020, generally speaking, the Petitioners had secured the cooperation of their vendors and suppliers of product toward that end. However, the effects of the COVID-19 pandemic, including store closures and staff layoffs, created uncertainty within the Petitioners’ restructuring proceedings. In particular, the position of adidas, the Petitioners’ major supplier, was seen as threatening the potential success of the restructuring proceedings.
On April 28, 2020, the Petitioners sought relief under the Companies’ Creditors Arrangement Act (the “CCAA”). The Petitioners considered that the CCAA afforded them broader relief than that obtainable under the BIA. That broader relief included the possibility of obtaining a declaration that adidas was a critical supplier and that adidas be ordered to continue to supply product to the Petitioners. Accordingly, the Petitioners sought a declaration that adidas was a critical supplier, and that adidas be granted a charge for the supply of its goods. Adidas opposed the granting of the relief sought.
The Petitioners and adidas had a long-standing business relationship. The Petitioners’ current financial challenges caused friction in the relationship. Following the NOI filings, the Petitioners made efforts to discuss and negotiate a path forward with adidas. At that time, the Petitioners confirmed that all post-filings orders would be paid on a cash-on-delivery basis. Adidas maintained that it had no intention of continuing its supply relationship with the Petitioners, unless it is ordered to do so by the Court.
Pursuant to s. 11.4 of the CCAA, the court must determine if a person is a “supplier” and if the goods and services supplied by that person are “critical” to the debtor’s continued operations. In that event, the court has the discretion to declare that person to be a “critical supplier”. If a person is declared to be a “critical supplier”, the court has the discretion to order the continued supply of goods and services on certain terms. Finally, if the court declares that a critical supplier must continue to supply specified goods or services, it is mandatory that the court also order security or a charge in favour of the supplier, although the court has the discretion to determine the priority of any security or charge.
The Court found that adidas was the largest supplier of product for the Petitioners’ business. The Monitor also confirmed that the Petitioners had integrated adidas into their sales and purchasing processes. The Monitor was of the view that a discontinuation of the supply of adidas product to the Petitioners jeopardized the restructuring and, ultimately, the viability of the businesses. Therefore, the Court found that adidas was a “supplier” to the Petitioners and that the supply of its goods and services were critical to the Petitioners’ continued operations, within the meaning of s. 11.4(1) of the CCAA.
The relationship between the Petitioners and adidas was significant. Adidas supplied unique branded goods to the Petitioners. While the relationship was acrimonious and irreparably broken, the Petitioners did not have the capability to pivot away from the supply of adidas products in the near term to other or similar products. Any disruption in the continued supply of adidas products at this time would have serious and negative repercussions to the Petitioners’ business operations and would likely cause irreparable harm to their businesses.
In view of the above, the Court ordered adidas to continue to supply its products and provide services to the Petitioners under the arrangements in place prior to the NOI filings, until further court order. Given the current acrimonious relationship between adidas and the Petitioners, the Court held that any new arrangements would introduce further levels of complexity and risk of conflict for the parties. The Court noted that the Monitor would continue to oversee the ongoing operations of the Petitioners to determine if suppliers (including adidas) were being paid in the ordinary course. If issues arise, the Monitor can be involved to attempt to sort out the matters between the Petitioners and adidas.
Counsel: Christopher Ramsay, Katie Mak and Nicholas Carlson of Clark Wilson LLP for the Petitioners, Soccer Express Trading Corp. and Kahunaverse Sports Group Inc., Vicki Tickle and Lucy Williams of McMillan LLP for the Monitor, PricewaterhouseCoopers Inc., Kimberley Robertson of Lawson Lundell LLP for Greyrock Capital Incorporated, Ritchie Clark of Bridgehouse Law LLP, Emilio Bisceglia and Battista Frino of Bisceglia & Associates and Caitlin Fell of Weisz Fell Kour LLP for adidas Canada Limited
Judge: the Honourable Madam Justice Fitzpatrick