B. Critical Suppliers

Author:Roderick J. Wood
Profession:Faculty of Law. University of Alberta

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A supplier may hold a monopoly on goods or services critical to the operation of the debtor’s business. It may be impossible to restructure the business without an assurance that the product or service will continue to be made available. A supplier is not compelled to extend credit

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to a debtor in restructuring proceedings but is entitled to demand cash on delivery.48However, a critical supplier may take the position that this is not enough. The supplier may be unwilling to furnish any further goods or services unless some or all of the pre-filing arrears are paid. In this respect, the critical supplier is adopting the same strategy as a DIP lender who seeks to cross-collateralize. The supplier is attempting to use its bargaining power to avoid having to participate in the plan as an unsecured creditor in respect of its pre-filing claims.49There are two approaches to the problem of the critical supplier. The first involves a stick; the second involves a carrot. The first approach is put into operation by ordering the supplier to continue to supply goods or services to the debtor. The second involves negotiating a deal with the critical supplier under which some or all of its pre-filing claim is satisfied in order to assure the future availability of the critical goods or services. The first approach has never been employed in Canada. Although a supplier may be prevented from terminating a pre-filing supply contract, courts have not gone so far as to force the supplier to enter into new contracts where none exist.50

The second approach has occasionally been employed in Canada. Courts have designated certain suppliers as critical to the success of the restructuring and approved payment of their pre-filing obligations in order to ensure the continuation of the supply of goods or services. In Re Air Canada,51the court approved an agreement between Air Canada and Lufthansa under which pre-filing obligations were satisfied in order to maintain a strategic alliance with a key international partner that was vital to Air Canada’s business. The court concluded that it would not be feasible to enter into a similar arrangement with some other airline, and that the future benefit was in excess of the pre-filing debt that was to be paid. The court also took into account the fact that the agreement had the general support of a majority of the creditors, and that the pre-filing claims owed to the critical supplier were to be paid from...

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