In October 2012, The Futura Loyalty Group Inc.
("Futura") commenced proceedings under the Companies'
Creditors Arrangement Act (the "CCAA"). On November 13,
2012, Justice Brown of the Ontario Superior Court of Justice
(Commercial List) (the "Court") considered Futura's
request to permit pre-filing, pre-payment obligations to its key
Futura's primary business is the provision of a customer
rewards program. Approximately 70% of Futura's total business
is accounted for through the sale of Aeroplan Miles to merchants
who, in turn, provide the Aeroplan Miles to their customers. Some
merchants pre-pay for Aeroplan Miles at a discount to the price
they would normally pay. Any claims related to the pre-payment for
Aeroplan Miles by merchants would be considered unsecured claims
and those merchants would not receive any benefit or payment ahead
of Futura's secured creditors.
With the support of its secured creditors and the
Court-appointed monitor, Futura requested the Court's approval
to honour the existing commitments to Futura's pre-paid
merchants. The result would be to maintain the status quo of
Futura's business by preserving its relationship with important
customers and safeguarding its brand in the marketplace.
Citing both Eddie Bauer of Canada Inc.2 and
EarthFirst Canada Inc.,3 Justice Brown found that the
request by Futura was analogous to permitting payments to critical
suppliers – a practice made possible under section
11.4 of the CCAA. In each of those cases, payment to
critical suppliers was permitted in order to prevent disruption to
the business and to maximize the value of the company for its
creditors. Justice Brown noted that these cases employed a
proportionality test, which analyzed the cost of the payments to
the critical suppliers against the benefits to the debtor company
and its creditors.
Justice Brown employed a similar cost-benefit analysis in
determining whether to permit Futura to honour its commitments to
the pre-paid merchants. The expected revenues from these customers
totaled approximately $440,000, whereas the cost of honouring the
pre-paid commitments was approximately $108,000. Brown J. also
considered the significant proportion of Futura's total
revenues generated through the sale of Aeroplan Miles and noted
that a failure to meet existing commitments would likely jeopardize
the operation of the company as a going concern.
In the result, Justice Brown found that the benefit to Futura
and its creditors from maintaining relationships with Futura's
key customers outweighed the costs to its creditors associated with
honouring the pre-paid commitments. Accordingly, Justice Brown
approved the request to honour pre-filing, pre-paid obligations to
Futura's key customers.
The consideration of honouring pre-filing obligations to key
customers was not necessarily a novel issue for the Court. Justice
Morawetz considered pre-filing obligations, including those to key
customers, in Cinram International Inc. (Re),4 where he held that
honouring pre-filing obligations to customers would maximize the
value for all creditors. However, Morawetz J. did not articulate
how he reached that conclusion. The reasons provided by Justice
Brown in Futura provide clarity and is authority for the
proposition that certain pre-filing obligations to a debtor
company's key customers may be approved in the context of CCAA
proceedings if the overall benefits of doing so outweigh the costs
to the debtor company and its creditors.
*  O.J. No. 5362 (ONSC).
2 2009 CanLII 32699 (ONSC).
3 2009 ABQB 78.
4  O.J. No. 3034 (ONSC)
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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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