Section 11.4 of the CCAA requires that persons
identified as critical suppliers to a debtor company continue to
provide goods and services on terms and conditions with the
existing supply relationship. The policy rationale underlying
section 11.4 of the CCAA is simple: a business is dependent on the
ongoing supply of important products and services, an interruption
in such supply could adversely impact going concern operations,
impair a restructuring and cause significant losses to creditors
and other stakeholders. When the court makes such an order it is
obligated to grant a charge in favour of the suppliers in an amount
equal to the value of the goods or services supplied. The suppliers
are prevented from insisting on immediate payment but obtain
security for their post-filing extensions of credit to the
Prior to amendments to the CCAA in 2009, there was no express
statutory authority within the CCAA to allow a court to direct a
person, however critical to the operation of a business, to
continue to supply goods and services to a debtor company. There
was clear case authority that permitted a debtor company to make
payment of pre-filing obligations when doing so would maximize the value of the business. The making
of pre-filing payments often represents the simplest and most
straightforward way of ensuring continued supply from vendors, who
will understandably be more receptive to supplying after receipt of
an anticipated payment as opposed to interpreting and complying
with a court order. Although section 11.4 of the CCAA has been
given a broad interpretation to compel continued
supply, the case law subsequent to the passage of the 2009
amendments is also very clear that the court has retained the
inherent jurisdiction to permit the payment of pre-filing
In Northstar Aerospace Inc (Re), the
court authorized pre-filing payments to prevent a critical supplier
from cutting off a debtor. The debtor provided components for
commercial and military aircraft and was reliant on a Chinese-based
supplier for gearboxes. Notwithstanding that the initial order
designated this supplier as a critical supplier for the purposes of
section 11.4 of the CCAA and therefore obligated continued supply,
the vendor threatened to end shipments unless two pre-filing
invoices were paid. Citing the principles articulated in
Cinram, including the length of time to source a new
supplier, the integral nature of the product to the debtor's
business and the foreign location of the supplier, the court
permitted the payment because the "...practical reality weighs heavily in
favour of granting the order sought".
Pre-filing payments have also been authorized in Smurfit-Stone Container Canada Inc
(Re), Cline Mining Corporation (Re) and Target Canada Co. The continued ability to
make pre-filing payments in appropriate circumstances offers relief
to debtor companies looking for a way to better secure cooperation
with their critical suppliers during a restructuring and shows the
court's continued willingness to apply the CCAA in a flexible
and practical manner.
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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