Operating the Business

• Author: Roderick J. Wood
• Pages: 384-418

384

CHA PTER 13

OPER ATING

THE BUSINESS

Restructur ing law imposes a stay of proceedings on the actions and

remedies of the creditors. It does so in order to keep the assets intact

and the business ongoing while the debtor attempts to develop a plan

to put before the creditors for their approval (in the case of traditional

restructuring proceedings) or while a sales process is being dev ised

(in the case of a liquidating rest ructuring proceedings). During this

interim period, t he debtor will continue to carr y on business. However,

a dramatic change occurs when restructuring proceedings are com-

menced. Suppliers of goods and services m ay no longer be prepared

to extend credit to the insolvent f‌ir m. Signif‌icant administrative costs

are incurred in a restructuring, and insolvency professiona ls will not

be prepared to provide their ser vices unless payment of their fees is

assured. The restructuring plan may involve a downsizi ng in which

only the more prof‌itable portions of the business are ret ained. It may

be necessar y to reduce the workforce, break leases, and ter minate other

contractual arra ngements. Restructuring l aw provides a number of

devices to address t hese and other diff‌iculties that arise during th is

interim period.

Operating t he Business 385

A. INTER IM FINANCING

1) The Position of Post-f‌iling Creditors

There is a fundamental di fference between creditors who extend credit

prior to the commencement of the restructur ing proceedings (pre-

f‌iling creditors) and those who extend credit after its commencement

(post-f‌iling creditors). The claims of pre-f‌iling creditors are subject to

the plan ,1 and these creditors are g iven an opportunity to vote to accept

it or reject it.2 If the plan is accepted, their claim s will be compromised

or otherwise affected in the manner specif‌ied in t he plan. The post-

f‌iling creditors are not affected by the plan. In the event that the re-

structuring i s successful, their claims will be fully enforceable again st

the debtor. Claimants who have entered into pre-f‌iling contract s that

are later disclai med by the debtor after the commencement of restruc-

turing proceeding s are treated as pre-f‌iling creditors in re spect of their

damages claims against the debtor for breach of contract.3

This does not mean that post-f‌iling c reditors should blithely extend

credit to the debtor without a worry or care. The fact remains that the

debtor is insolvent and the success of the rest ructuring is by no mean s

assured. If the restructuring fail s, the post-f‌iling creditors will be in

the same position as the pre-f‌ili ng creditors.4 They will share pari pa ssu

with all the other un secured creditors after the secured creditors have

withdrawn t heir collateral or its value from the pot of realizable as sets.

For this reason, post-f‌iling cred itors are often unwilling to grant credit

to the debtor. The post-f‌iling creditor has four options in this situation:

(1) refuse to supply the goods or serv ices; (2) supply the goods and

services on a ca sh-on-delivery basis; (3) negotiate a post-f‌iling trade

creditor’s charge on the debtor’s assets to secure the pay ment obliga-

tion; or (4) take the risk of supplying goods or ser vices on credit.5

Some of the earlier orders granted under the CC AA required post-

f‌iling creditors to continue to supply goods or serv ices to the debtor

1 CCAA, s 19(1); BIAs 1 21(1).

2 It is possible to lea ve some of the pre-f‌iling creditors out of the pl an or proposal.

When this occ urs, their rights are un affected. See Chapter 16, Section C(3).

3 BIA, s 65.11(8); CCAA, s 32(7).

4 See Chapter 16, Section H for a di scussion of the position of post-f‌il ing creditors

where a proposal is ap proved and later annulled by rea son of a default in its per-

formanc e.

5 ICR Commercial Real Estate (Regin a) Ltd v Bricore Land Group Ltd (2007), 33

CBR (5th) 50 (Sask CA). Under the CCAA, a c ourt will sometimes cre ate a fund

in favour of post-f‌ilin g suppliers who extend credit to the de btor. See Molson

Canada v O-I Cana da Corp (2003), 43 CBR (4th) 172 (Ont CA).

BANKR UPTCY AND INSOLVENC Y LAW386

while restructur ing proceedings were under way.6 The legislation wa s

subsequently amended to make it clear t hat a creditor could not be

compelled to do so.7 Both the CCAA a nd the BIA now provide t hat a

post-f‌iling creditor is not prevented from requiring i mmediate payment

for goods, services, use of lea sed property, or other valuable considera-

tion, and neither statute requires a cred itor to make a further advance

of money or credit.8 The supplier may exercise this right even if the

agreement provides a later date for payment.9

A debtor who is contemplating restructuring proceedings must

therefore devise a strategy to ensure that it will be able to operate

the business and pay post-f‌iling obligations during the restructuring

proceedings. A failure by the debtor to put into place some means of

f‌inancing the operations of the business during the restructuring pro-

ceedings may result in the termination of the proceedings by a cour t.10

Once restructur ing proceedings are commenced, the debtor will

suspend any further payment to the pre-f‌iling creditors.11 The cla ims

of these creditors will be compromised or otherwise af fected in the

manner specif‌ied in the plan. The suspension of these payment s is

sometimes suff‌icient to free up suff‌icient ca sh f‌low to pay the post-

f‌iling creditors and the insolvency professionals. However, often it is not

enough, and the debtor must search out some other source of f‌inancing

for these expenses.

2) Interim (DIP) Financing

The term “debtor-in-possession” (DIP) f‌inancing has been used to de-

scribe the interim f‌inancing required for the ongoing operations of the

business during restructuring proceedi ngs. The term originates in the

United States and is used in American bankr uptcy law to describe a

debtor who remains in posse ssion of the property under Chapter 11

6 See L Lopucki & G Trianti s, “A Systems Approach to Compar ing US and

Canadia n Reorganization of Finan cially Distress ed Companies” in J Ziegel, ed,

Current Developme nts in International an d Comparative Corporate Insolvency Law

(Oxford: Clarendon Pre ss, 1994) 109 at 132.

7 The change was f‌i rst introduced in 1997.

8 CCAA, ss 11.01 and 34.4; BIA, s 65.1(4). And see Re 728835 Ontari o Ltd (1998), 3

CBR (4th) 211 (Ont Ct Gen Div), aff’d (1998), 3 CBR (4th) 214 (Ont CA).

9 Re Cosgrove-Moore Bindery Services Ltd (200 0), 17 CBR (4th) 205 (Ont SCJ).

10 Re Bargain Harold’s Discount Ltd (1992), 10 CBR (3d) 23 (Ont Ct Gen Div); Re

SLMSoft Inc, 2003 Car swellOnt 4402 (SCJ).

11 Under the CCA A, the initia l order will usually prohi bit the debtor from paying

pre-f‌iling cred itors. See New Skeena Forest Products Inc v Kitwanga Lumb er Co

(2007), 34 CBR (5th) 94 at para 50 (BCSC).