Operating the Business

• Author: Roderick J. Wood
• Profession: Faculty of Law University of Alberta
• Pages: 353-381

353

cha Pter 13

OPERATING

THE BUSINESS

Restructur ing law imposes a st ay of proceedings on the actions and

remedies of t he creditors. It doe s so in order to g ive the debtor an op-

portunity to develop a plan to put before the creditors for their approval.

During t his inter im period, the debtor will continue to carry on busi-

ness. However, a dramatic change occurs when restructuring proceed-

ings are commenced. Suppliers of goods and services may no longer be

prepared to extend credit to the insolvent f‌irm. Signif‌icant admin istra-

tive costs are incur red in a restructuring, and insolvency professionals

will not be prepared to provide their ser vices unless pay ment of their

fees is assured. The restructuring plan may involve a dow nsizing in

which only the more prof‌itable portions of the business are retained. It

may be necessar y to reduce t he workforce, break leases, and terminate

other contractual arrangements. Rest ructuring law provides a number

of devices to addre ss these and other dif f‌iculties that arise dur ing this

interim period.

a. inter im Financing

1) The Position of Post-Filing Creditors

There is a fundamental difference between cred itors who extend credit

prior to the commencement of the restructuring proceedings (pre-f‌iling

creditors) and those who extend credit after its commencement (post-

BANKR UPTCY A ND INSOLVE NCY LAW354

f‌iling creditors). The claim s of pre-f‌iling creditors are subject to the

plan,1 and these creditors are given a n opportunity to vote to accept it

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

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

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

turing is successful, their claims will be fully enforceable again st the

debtor. Claimant s who have entered into pre-f‌iling contracts that are

later dis claimed by the debtor after the commencement of restructur-

ing proceedings are tre ated as pre-f‌i ling creditors in respect of their

damages claims against the debtor for breach of contract.3

This does not mean that post-f‌iling creditors should blithely extend

credit to the debtor w ithout a worry or c are. The fact remai ns that t he

debtor is insolvent and the success of the restructuring is by no means

assured. If the restructuring fails, the post-f‌iling creditors w ill be in

the same position as the pre-f‌iling creditors.4 They will share pari passu

with all the other unsecured creditors a fter the secured creditors have

withdrawn their collateral or its value from the pot of realizable assets.

For this reason, post-f‌iling creditors are often unwi lling to grant credit

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

(1) refuse to supply the goods or services; (2) supply the good s and

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

creditor’s cha rge on the debtor’s assets to secure the payment obliga-

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

Some of the earlier orders granted under the CCA A required post-

f‌iling creditors to continue to supply goods or s ervices to the debtor

while restr ucturing proceedings were under way.6 The legislation wa s

subsequently amended to make it cle ar that a creditor could not be

1 Companies’ Creditors Arrangement Act , R.S.C. 1985, c. C-36, s. 19(1) [CCAA];

Bankruptcy an d Insolvency Act, R.S.C. 1985, c. B-3, s. 121(1) [BIA].

2 It is possible to leave s ome of the pre-f‌iling creditors out of the pl an or proposal.

When this occ urs, their rights are u naffected. See Chapter 16, Sect ion C(3).

3 BIA, above note 1, s. 65.11(8); CCA A, above note 1, s. 32(7).

4 See Chapter 16, Section H for a d iscussion of the position of po st-f‌i ling creditors

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

performance.

5 ICR Commercial Real Estate (R egina) Ltd. v. Bricore Land Group Ltd. (2007), 33

C.B.R. (5th) 50 (Sask. C.A.). Under the CCAA , a court wil l sometimes create a

fund in favour of post-f‌i ling suppliers who extend cred it to the debtor. See Mol-

son Canada v. O-I Canad a Corp. (2003), 43 C.B.R. (4th) 172 (Ont. C.A.).

6 See L. Lopucki & G. Tri antis, “A Systems Approach to Comparing US a nd

Canadia n Reorganization of Fina ncially 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.