InterTAN Canada Ltd. ("InterTAN") is
a wholly owned subsidiary of U.S. based Circuit City Store, Inc.
("Circuit City"), a consumer electronics
retailer. In Canada, InterTAN operates retail stores under the
trade name "The Source by Circuit City". Prior to Circuit
City's filing under Chapter 11 of the United States
Bankruptcy Code, InterTAN was a borrower under a syndicated
credit facility between Circuit City, certain U.S. affiliates,
InterTAN, Bank of America NA, as agent, and certain other loan
parties (the "Secured Credit Facility").
Under the Secured Credit Facility, InterTAN was not a guarantor and
was not liable for the borrowings of the U.S. debtors.
The Chapter 11 filing by Circuit City terminated the Secured
Credit Facility. This in turn prevented any further borrowings by
InterTAN under the Secured Credit Facility, even though at the time
of Circuit City's filing the value of InterTAN's combined
assets greatly exceeded its borrowings. Since InterTAN could no
longer access financing, and therefore purchase inventory and
fulfill its financial obligations in the ordinary course of
business, on November 10, 2008, InterTAN sought protection from its
creditors under the Companies Creditors Arrangement Act
The parties to the then cancelled Secured Credit Facility sought
to enter into a DIP facility (the "DIP
Facility"). The issue before Morawetz J. at the
Ontario Superior Court (Commercial List) was whether a cross-border
guarantee in connection with the DIP Facility was appropriate
because Circuit City's access to replacement financing was
conditional upon, among other things, the lenders under the DIP
Facility having security over all of InterTAN's assets, as well
as a guarantee by InterTAN in connection with the obligations of
U.S. borrowers under the DIP Facility.
Morawetz J. assessed the impact approving the guarantee would
have on the various stakeholders. If the restructuring failed,
Canadian unsecured creditors would have received less meaningful
recovery than they might otherwise have received in an immediate
liquidation. In approving the guarantee, he reasoned that the
benefits of a going-concern restructuring under the DIP Facility,
which included continued employment of over 3,000 employees and
maintaining stakeholders in the business, ultimately outweighed the
benefits of an immediate liquidation.
The Indalex Principles
Following InterTAN, on April 8, 2009, Indalex Ltd.
("Indalex") brought a motion for
approval of certain DIP financing, as well as approval of a secured
guarantee granted by the Canadian arm of Indalex in favour of the
DIP lenders guaranteeing the obligations of Indalex's
U.S.-based affiliates under a DIP loan facility. Morawetz J.
approved the guarantee and, further to his ruling in InterTAN and
other similar cases, set out a list of factors relevant to
determining the appropriateness of authorizing a guarantee in
connection with a crossborder DIP loan facility.
These factors are referred to in the restructuring community as
the Indalex principles and are as follows:
the need for additional financing by the Canadian debtor to
support a goingconcern restructuring;
the benefit of the breathing space afforded by CCAA
the availability (or lack thereof) of any financing
alternatives, including the availability of alternative terms to
those proposed by the DIP lender;
the practicality of establishing a standalone solution for the
the contingent nature of the liability of the proposed
guarantee and the likelihood that it will be called on;
any potential prejudice to the creditors of the entity if the
request is approved, including whether unsecured creditors are put
in any worse position by the provision of a cross-guarantee of a
foreign affiliate than as existed prior to the filing, apart from
the impact of the super-priority status of new advances to the
debtor under the DIP financing;
the benefits that may accrue to the stakeholders if the request
is approved and the prejudice to those stakeholders if the request
is denied; and
a balancing of the benefits accruing to stakeholders generally
against any potential prejudice to creditors.
DIP financing is often a critical lifeline for a debtor entering
creditor protection under any regime. In crossborder proceedings,
stakeholders whose rights and interests are affected can look to
these cases for useful guidance to assess the circumstances under
which the courts will approve cross-border DIP financing
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The Canadian bankruptcy regime was designed with two key purposes in mind – provide options to ‘honest but unfortunate' debtors struggling with an unmanageable financial load and create an orderly means for creditors to recover amounts owed them.
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