The treatment in the CCAA of post-filing expenses is a loose patchwork of provisions covering taxation, rent, post-filing provision of goods and services and others. The statute creates a rough framework that has only begun to be explained by the courts. This section outlines the protections for the supply of goods or services (including employment), leases and licenses and taxation. As "Recent developments questioning the protection and scope of post-filing obligations" details below, some of these threads have begun to unravel and the boundaries of the protection for post-filing expenses have been questioned.
Unlike the U.S. Bankruptcy Code, the CCAA does not require post-filing suppliers of goods and services to be paid, nor generally does it provide such suppliers with a priority charge for obligations that are incurred by the post-filing debtor. Instead, section 11.01 specifies the court cannot prohibit a person from requiring immediate payment or require continuing financing arrangements:
11.01 No order made under section 11 shall have the effect of:
- prohibiting a person from requiring immediate payment for goods, services, use of leased or licensed property or other valuable consideration provided after the order is made; or
- requiring the further advance of money or credit.
In parallel, while the CCAA prohibits any person from terminating or amending any agreement because of the debtor's CCAA or insolvency filing, the CCAA expressly carves out a person's ability to require "payments to be made in cash for goods, services, use of leased property or other valuable consideration provided after the commencement of proceedings" under the CCAA.
The post-filing regime is fundamentally an incomplete arrangement. Suppliers are not obligated to supply services. If they choose to provide services, they are responsible for demanding immediate payment. A debtor, whose poor liquidity may be the reason for its CCAA filing, may be required to provide immediate payment for service on which it previously paid on a 30, 60 or 90-day cycle.
Yet, despite these inconsistencies, section 11.01 (previously section 11.3) has remained unchanged in the CCAA. The reason for the stagnancy is ostensibly because stakeholders have dealt with these gaps using model CCAA orders, settling the expectations of debtors and their suppliers alike. This section dissects this approach; first, discussing the history of section 11.01; second, the narrow ambit of the section 11.01 protections; and third, the interactions between section 11.01 and the CCAA's parallel protections for critical suppliers.
The origins of section 11.01—suppliers should be paid
As is well known in the mythology of the CCAA, while the statute was enacted in 1933 at the height of economic crisis in Canada, it lay largely dormant until the end of the 20th century.
When enacted, the goal of the CCAAwas to offer an alternative to premature liquidation of insolvent companies. The Bankruptcy and Insolvency Act (BIA) had become a tool of "private initiative, not public policy," and was being used primarily to liquidate companies under a trustee. As later observed by Justice Gibbs, "liquidation destroyed the shareholders' investment, yielded little by way of recovery to the creditors, and exacerbated the social evil of devastating levels of unemployment." Parliament responded with the CCAA, "to facilitate compromises and arrangements between companies and creditors." Section 11 of the CCAA gave the court powers of the stay with the goal of "keeping the status quo" until the company and its creditors could reach a compromise.
As more insolvent companies turned to the CCAA for protection in the late 1980s, courts and stakeholders began to turn their minds to what keeping the status quo meant with respect to post-filing obligations: could a stay be used to force a supplier to continue, post-filing, supply with or without payment?
The seminal point of this debate is widely considered to come from the 1990 British Columbia Court of Appeal decision in Quintette Coal Ltd v Nippon Steel Corporation. Quintette Coal Ltd was a CCAA debtor in a proceeding in which the supervising court had also barred creditors from exercising any right of set-off as part of the CCAA stay ( 47 BCLR (2d) 193).2 Nippon Steel Corp was one of 10 Japanese steel manufacturers who had received deliveries of coal from Quintette under a sales agreement. The sales agreement had fixed the price of coal at C$75 per ton, subject to an adjustment to be applied at quarterly intervals. As the price of coal rose dramatically, Quintette and the steel companies disagreed over how to interpret the adjustment provisions in the contract. As a result of arbitration, the steel companies were awarded nearly C$46 million for overcharges on past deliveries.
The steel companies were the sole customer of Quintette, and so, in order to survive as a going concern, Quintette continued to make deliveries. When Quintette failed to pay the award, the Japanese steel companies began to withhold funds owed on continuing deliveries as a way of recovering the debt. When Quintette eventually filed for CCAA protection, the steel companies sought an order declaring that the stay against set-off did not apply to the arbitration award. The Chambers judge disagreed, holding that section 11 gave the court the power to stay the steel companies' right to set-off the overpayments in paying for future coal deliveries.
The British Columbia Court of Appeal dismissed the appeal. Justice Gibbs, however, noted that it would defeat the purpose of the CCAA if the court were to make an order that would harm suppliers and prevent service providers from receiving payment for services provided to the debtor to allow it to continue its business post-filing:[I]t would appear to be that the courts have concluded that under section 11 there is a discretionary power to restrain judicial or extra-judicial conduct against the debtor company the effect of which is, or would be, seriously to impair the ability of the debtor company to continue in business during the compromise or arrangement negotiating period. The power is discretionary and therefore to be exercised judicially. It would be a reasonable expectation that it would be extremely unlikely that the power would be exercised where the result would be to enforce the continued supply of goods and services to the debtor company without payment for current deliveries, whereas it would not be unlikely when the result would be to enforce payment for goods thereafter taken from, or services thereafter received from, the debtor company, as is the case here.
In effect, Justice Gibbs highlighted a gap in CCAA provisions that appeared to defeat its stated purposes. Restructuring a debtor company was not simply inherently valuable; it prevented employees from losing jobs and suppliers from losing customers. If a court was capable of making an order forcing a supplier to continue deliveries post-filing without compensation, or an employee to continue performing labour, then the harms the CCAA sought to protect against would instead be exacerbated. Quintette was seen as an urgent demand for Parliament to address post-filing obligations. This demand was coupled with the understanding that the purpose of the CCAA was to allow the compromise of pre-filing claims. But it was not intended to allow post-filing claims against the debtor to be compromised as well.
Parliament responded by amending the CCAA to include section 11.3 (now section 11.01). Its wording remains effectively unchanged since its introduction in 1997, although Parliament added a related section regarding critical suppliers in section 11.4, which is discussed below.
Initially, courts saw section 11.3 as the codification of the Quintette principles. In Smith Brothers Contracting Ltd, decided the same year in which the amendments took effect, Justice Bauman said so expressly:
"It is interesting that Gibbs J.A. suggested that it would be unlikely that a court would exercise its section.11 jurisdiction: '...where the result would be to enforce the continued supply of goods and services to the debtor company without payment for current deliveries...' Parliament has now precluded that by adding section 11.3(a) to the CCAA.
Courts considering the analogous provision of the BIA (65.1(4)) and (84.2(4)) have similarly concluded that the provision is "an attempt to balance the interests of the debtor and creditor" and to provide protection for creditors "obligated to continue to supply" the debtor. Academics have commented that it was never parliament's intention "that the counterparty be forced to provide free services or materials to the bankrupt." 3
As recently as 2009, the Manitoba Court of Queen's Bench continued to agree, stating in Winnipeg Motor Express Inc.:
Section 11.3(a) was added to the CCAA in 1997, apparently to clarify, or address, the point made by the British Columbia Court of Appeal in Quintette... namely, that a stay under section 11, presumably, would never be used to enforce the continuous supply of goods or services without payment for current deliveries.
Despite these pellucid statements of intent, subsequent interpretations of section 11.01 have been far from clear.
A limited construction of section 11.01
As courts have continued to interpret section 11.01, it is evident that the provision has not lived up to the promise of Quintette. The failure to do so comes from both to the wording of the provision and the narrow construction given by the courts.
First, the divergence between Quintette and section 11.01 arises from Parliament's drafting choices. While Quintette was concerned with payment for post-filing goods and services, the wording of section 11.01 is mostly concerned with provision of credit for post-filing goods and services. The credit focus is made explicit in subsection 11.01(b), which bars requiring the further advance of money or credit. But even subsection (a) reveals it is less concerned with payment than credit through the inclusion of the word "immediate." Section 11.01 does not ensure that all payments are made to post-filing service providers, but rather, that no court can stop a post-filing service provider from demanding payment up front. In other words, this statutory language does not respond to the Quintette call for the protection of payment for post-filing suppliers. It does not provide for a guarantee or a charge or any priority for the payment of post-filing supply. All it does is preserve a self-help remedy of suppliers.
Courts have agreed there is a serious gap in the wording of section 11.01, effectively the same, if smaller, gap identified by Quintette. The Ontario Court of Appeal in Nortel Networks Corp, decided only a few months after Winnipeg Motor Express, landed on the truest expression of how section 11.01 operates—the "pay-as-you-go" principle:
[Section 11.01] prohibits a stay of payments for goods and services provided after the initial order, so that while the company is given the opportunity and privilege to carry on during the CCAA restructuring process without paying its existing creditors, it is on a pay-as-you go basis only.
If Parliament had wanted to enshrine Quintette, it could have adopted the words of Justice Gibbs almost verbatim. Instead, Parliament decided to impose a pay-as-you-go structure, without much further guidance to the courts tasked with issuing the orders.
Further complicating matters has been the decision to interpret section 11.01 narrowly. This development speaks to the inherent tensions in a CCAA restructuring. The rationale for section 11.01 was to create a protection for important stakeholders in a restructuring, including suppliers and employees. But section 11.01 does so by creating express restrictions on a CCAA court's general powers under section 11 and its ability to use creative solutions to further the debtor's restructuring. Courts have limited the effect of section 11.01 with the general interpretive rules regarding the narrowness of exclusions.
While this approach had been used since section 11.01's introduction, it was the Ontario Court of Appeal in Nortel that most forcefully stated section 11.01 should be interpreted narrowly when it decided to adopt the words of the trial judge: "In my view, section 11.3 is an exception to the general stay provision authorized by section 11 provided for in the initial order. As such, it seems to me that section 11.3 should be narrowly construed." Other jurisdictions have followed suit.
When the narrow construction is combined with the pay-as-you-go wording of the provision, the result is that section 11.01 no longer offers the protections desired by Quintette. Instead, section 11.01 stands on its own as a limited protection against forced provision of credit in the forms of financing, labour, goods or similar consideration. This distinction is demonstrated by the definition courts have given to the constituent components of section 11.01: "goods" "services" and "leased or licensed property." None of these terms are defined in the statute and, while courts have struggled to find a workable definition of each term, they have generally landed on a narrow result, furthering the narrow scope given to section 11.01.
Leased or licensed personal property
Protecting payment for the use of leased or licensed property seems to protect an elementary extension of the principles in Quintette: courts will not conscript the ongoing use of property of a non-debtor to assist the debtor's restructuring without payment for that property. As the Alberta Court of Queen's Bench held, relying on Quintette: "It hardly seems fair to require a person to continue to... allow the debtor corporation to continue to use leased property without that person being compensated ... Section 11.01(a) of the CCAA allows for that compensation." The extent of this protection appears to differ depending on the type of property and the nature of the lease or license with the debtor.
Real property leases appear to be the most unambiguously protected. While the CCAA is relatively quiet on the subject of post-filing obligations to pay rent, section 11.01 prevents a court from staying immediate demands for payment for the use of leased property. There are no cases of which we are aware in which a CCAA court has ordered a stay on the payment of continuing rent in the face of a demand under section 11.01.
Nonetheless, outside of real property, defining what is and is not leased or licensed personal property for the purposes of section 11.01 is one of the most frequently litigated matters under the provision4 Courts have split on the issue of what constitutes a lease. Is only a "true lease," where payment is purely for the possession and use of property, protected? Or can leases with elements of financing arrangements, whereby some of the lease payments are made towards equity, be protected?
Re Smith Brothers Contracting Ltd—a British Columbia Supreme Court case heard soon after the 1997 amendments—remains the seminal reference for the narrow construction.5 The case determined that only a true lease was protected under section 11.01 (then section 11.3), a judgment that several courts have relied on since.6 In this case, a car dealer sought to terminate the leases on eight trucks held by the debtor corporation. The leases in question included an option to purchase and the debtor corporation argued that these leases qua purchase agreements were not included in the scope of section 11.3.
The Court began with reference to Quintette, acknowledging that section 11.3 was enacted to prevent a court from exercising section 11 jurisdiction where the result would be to enforce the continued supply of goods and services to the debtor company without payment for continued deliveries. The Court nonetheless held that the only way to respect the broad powers of a CCAA court under section 11 was to adopt a narrow ambit of section 11.3: "the remedy [under section 11.3] which is preserved for creditors is a relatively narrow one; it is the right to require immediate payment for the use of the leased property."
The reference to "use" of leased property was key to the manner in which the court narrowed the provision:
By instead wording the section as it has, Parliament, to my mind, is saying it is the provision of the use of leased property, not the making of the lease itself, after the stay order, which is within the purview of section 11.3(a).
On this basis, the Court concluded that only a true lease was protected because only a true lease was concerned with payment for use:
It is only payments for the use of leased property that are excepted from a section 11 stay order under section 11.3(a). Payments for use and equity are not. Similarly payments for use and equity and an option to purchase are not. This is another reason to conclude the section 11.3(a) is not inclusive of all forms of lease.
The Court concluded that it was the substance of the lease, not its form, that governs the application of section 11.3. The leases at issue in the case were not protected.
In International Wallcoverings Ltd, Justice Blair followed the approach from Re Smith Brothers Contracting Ltd, but was open to a broader interpretation of section 11.3. Justice Blair was unwilling to say that section 11.3 only protected a true lease:
While I would not go so far as to say section 11.3 of the CCAA requires payment under all leasing arrangements, or (on the other hand) that it could never encompass a financial leasing arrangement, I am satisfied that in the particular circumstances of this case the reasoning of Smith Brothers is applicable. 7
Justice Blair did not elaborate on this aside, or provide any examples of the types of financial arrangements that might fall under section 11.3.
Neither the 2005 nor the 2009 amendments to the CCAA offered greater clarity on what types of leases are to be protected under section 11.01, nor did they offer any guidance at all. Courts for the most part have applied the reasoning in Re Smith Brothers Contracting Ltd by rote, ignoring the opening created by Justice Blair in International Wallcoverings.8 Courts appear driven by the apparent unfairness of enforcing anything but the narrowest of payments under section 11.01, when other creditors, including secured creditors, are subject to the CCAA stay with respect to monies lent to the debtor.
But disputes continue, and some courts remain open to reconsidering Smith Brothers in light of the purpose of section 11.01. For example, while Winnipeg Motor accepted the Smith Brothers distinction between a true lease and a financing lease, it also expressed its concern for the implications of that approach. In essence, even if there was not a true lease, and some of the payments were made on account of payment towards equity, the equipment was still being used by the debtor and that use had a cost to the lessor: the devaluation or depreciation of the leased equipment. The Court suggested a new standard: the prejudice suffered by an equipment supplier. There must be some payment for an equipment lease, even in the absence of a true lease:
Being financing leases, those payments were not just for use, but included some amount on account of equity. I conclude, then, that the undue prejudice suffered has been recognized, albeit not totally, perfectly or precisely.
The Court in Winnipeg Motor appeared willing, for the first time since Smith Brothers, to disaggregate the use value of the lease versus the equity component of the lease. In doing so, it may best capture the valuable consideration being provided by the lessor.
At least one court has picked up on the path suggested by Winnipeg Motor. In Royal Bank v Cow Harbour Construction Ltd, the Alberta Court of Queen's Bench, recognized in 2012 the aside form Justice Blair almost 15 years earlier: "It is arguable, however, that Blair J. in International Wallcoverings left the door open for a court to find that a financing lease could fall within CCAA section11.01(a)." Here, however, the Court offered slightly more guidance, suggesting that Winnipeg Motor might be such a case. The Court focused on the prejudice that arose from the use of the equipment, the "deteriorat[ion]" of the equipment, for free by the debtor.
When Winnipeg Motor, International Wallcoverings, and Royal Bank are taken together, it seems the scope of protections for leases is not quite answered. There may be a crack in the formerly closed door created by narrow interpretation. However, no such movement has been made in the time since, and courts continue to apply Smith Brothers as the dominant authority.
Goods and services
The heart of the concerns in Quintette was with respect to the continuing supply of goods and services without payment. Section 11.01 addresses "goods" and "services" directly, but without definition or delineation of the terms. The term goods has to date proved uncontroversial. The term services, however, has once again tested the appropriate boundaries of the section. Questions have arisen both within and outside of the employment context.
Perhaps the least controversial definition of services is the post-filing labour the employees provide to the debtor corporation.9 Protecting work performed after the date of filing is not only in keeping with labour legislation, it is also in keeping with the broad purposes of the CCAA in protecting the employees of the corporation. This protection is back-ended by section 6(5)(a)(ii) of the CCAA, which provides that all wages of employees must be paid for post-filing work before a plan of arrangement can be approved by the court.
Recently debates have emerged regarding what is included in those post-filing services, namely, whether an employer's post-filing severance and retirement obligations are covered under section 11.01. Prior to these developments, there had been "remarkably few cases expressly considering whether post-employment benefits, termination pay and severance pay [were] subject to compromise" under the CCAA. What case law there was took the position that termination and severance pay were to be considered as unsecured claims subject to compromise in the plan of arrangement, along with claims for wages owed for work performed prior to the order.
In 2009, employees who had retired from or been terminated by Nortel Networks Corp prior to the company's filing under the CCAA brought a claim arguing that retirement payments and severance payments as set out in their collective agreement should be protected from stay under section 11.3. The motion judge made two notable findings: first, that section 11.3, as an exception to the general stay provision, should be narrowly construed; second, that the payment obligations under the collective agreement did not represent compensation for a provision of service within the meaning of section 11.3. The motion judge explained:
Section 11.3 contemplates, in my view, some current activity by a service provider post-filing that gives rise to a payment obligation post-filing. The distinction being that claims from the Union for termination and severance pay are based, for the most part, on services that were provided pre-filing.
The Ontario Court of Appeal upheld these findings, noting that the benefits ultimately were connected to pre-filing labour. "The services for which these payments constitute 'payment' under the CCAA were those provided under predecessor agreements, not the services currently being performed for Nortel." Rights that arose pre-filing that were connected to post-filing work were not connected.
This reasoning was challenged the next year in Canwest Global Communications Corp, which involved terminated union members who had provided services after the date of filing. The employees relied on section 11.01 and section 33(1), added in 2005, which states that any collective agreement a company has entered into as an employer remains in force during CCAA proceedings. The employees argued that, since their effective termination occurred after filing, their severance payments under the collective agreement should be considered a post-filing obligation. The Ontario Superior Court rejected this argument. Relying heavily on Nortel, Justice Pepall held that "The essential nature of severance pay is rooted in tenure of service most of which will have occurred in the pre-filing period." As a result, the Court found it would be inappropriate to consider severance payments as a service for the purposes of s.11.01, even if some work was performed after the date of filing.
However, while courts of various levels have set out definitions for services in other contexts, they have yet to provide a workable definition for the purposes of the CCAA. Instead, similar to the concern over leases, courts have distinguished true services from services that are better described as financing agreements. In Ivaco Inc, the Court had to determine if an insurance regime constituted a service for the purposes of section 11.01. In this case, the agreement in question involved the creditor, CAFO, financing insurance premiums for commercial enterprises. While one aspect of the agreement undoubtedly involved the provision of insurance services, the Ontario Superior Court found that this aspect of the agreement had already been fulfilled prior to filing. What the creditor was concerned with was actually a financing agreement detailing the remainder of installments owed for the insurance already in place. The Court held that the agreement was "not an insurance contract but rather its "association" with the provision of insurance is purely fortuitous... It would be a devastating attack on the CCAA stay in place to allow a creditor... to cancel the insurance so as to collect the unearned premium."
However, some courts have been willing to take a broader approach and consider the value of the services to the estate itself. Take, for example, Jameson House Properties Ltd, in which a creditor that had leased the debtor builder a construction crane sought payment for the service of demobilizing the crane after the debtor filed under the CCAA. The court had to decide whether taking down the crane was a service provided after the filing date or a cost associated with the termination of the contract. A narrow interpretation, in keeping with Nortel and Smith Brothers, would suggest the latter, yet the Court reached the opposite conclusion:
Once the Jameson House Companies decided to enter into a new contract... the crane had to be removed in order for the project to go forward... Thus, removal of the crane was essential for the continued operations of the Jameson House Companies.
This decision seems to stand in opposition to the narrow treatment of leases under section 11.01 and takes a small step forward the protections envisioned in Quintette.
The potential of section 11.01 is perhaps best embodied in its final phrase: "valuable consideration provided after the order is made." This section reads as a catch-all provision, offering protection for third parties who provide post-filing assistance to a debtor that is not strictly covered by goods, services, leases or licenses. On a reading of Quintette and the language of section 11.01, the purpose of valuable consideration would appear to be to expand post-filing protections and ensure that an overly narrow interpretation did not defeat the protection offered to third parties.
This has not been the case. While there is case law analyzing the scope of goods, services, and leases, there has yet to be much discussion of what types of "valuable consideration" should be protected from the advance of credit to a debtor.
Re Mosaic Inc, a 2004 case from the Ontario Superior Court of Justice, comes closest. In this case, a collection of companies operating under the name JLL purchased a corporation from the debtor during its reorganization. At closing, JLL paid "what was essentially an estimate of the purchase price," with the parties agreeing that the actual purchase price would be calculated after the working capital statements could be finalized. At that time, a refund by the debtor or an additional payment by JLL would be made. It was later determined that JLL had overpaid by about $7 million. Only $5 million had been set aside in an escrow account, leaving JLL with a claim for nearly $2 million.
JLL argued that since the obligation to refund the overpayment was entered into post-filing, the overpayment was protected under section 11.3. The analysis in this case was superficial because JLL did not make "specific" submissions to support this argument. Indeed, the Court only assumed JLL was arguing the overpayment constituted "valuable consideration" because it did not constitute any of the other section 11.3 enumerated clauses. The court in turn was not specific in its response to this argument, simply noting that "11.3 does not operate to give JLL a charge in respect of the overpayment."
Mosaic Inc. tells us little about the meaning of valuable consideration. Given the broad scope of Canadian law to the interpretation of consideration and valuable consideration,10 the term was likely intended by Parliament to be interpreted broadly. It is not clear why creditors do not claim under each section 11.01 argument that whatever assistance provided to the debtor is, at least in the alternative, valuable consideration. However, until such time as creditors more regularly make this argument, "valuable consideration" remains the least used, and least understood, phrase within 11.01. It is only then will we understand whether courts will continue to insist on narrow interpretation of the section 11.01 protections.
The protection for critical suppliers
The one notable exception to the scheme of section 11.01 is the carve-out for "critical suppliers" in section 11.4, which reads as follows:
11.4 (1) On application by a debtor company and on notice to the secured creditors who are likely to be affected by the security or charge, the court may make an order declaring a person to be a critical supplier to the company if the court is satisfied that the person is a supplier of goods or services to the company and that the goods or services that are supplied are critical to the company's continued operation.
If a court grants an order under section 11.4(1), the court may also make an order requiring the critical supplier to "supply any goods or services specified by the court... on any terms and conditions that are consistent with the supply relationship." This would include payment terms generally far longer than the immediate payment required by section 11.01. In exchange, the court must create a charge in favour of the critical supplier "in an amount equal to the value of the goods or services supplied under the terms of the order."
In CanWest, Justice Pepall rather bluntly noted that "[s]ection 11.4 is not very clear." Interpretative problems seemed inherent in the provision, including on what conditions a charge must be ordered. For example, Justice Pepall noted that section 11.4 could be read "as requiring a charge any time a person is declared to be a critical supplier," however she held that "this provision only applies when a court is compelling a person to supply." This best met the purpose of the provision: "The charge then provides protection to the unwilling supplier."
Likewise the permissive language of the charge in subsection 11.4(4) itself is telling: "The court may order that the security or charge rank in priority over the claim of any secured creditor of the company." It is common practice to order a critical supplier charge to rank in priority to all secured creditors, but a court retains the power to force a critical supplier to supply without this priority. Depending on the makeup of the secured debt, this could put the critical supplier at significant risk of non-recovery. In such situations, the critical supplier would supply for free, the very concern of the court in Quintette.
While the statute does not contain a definition of "critical supplier," the courts have used the following criteria to determine whether a service provider should be classified as such.
- Whether the goods and services are integral to the business of the debtor.
- The debtor's dependency on the uninterrupted supply of the goods or services.
- The fact that no payments would be made without the consent of the monitor.
- The monitor's support and willing ness to work with the debtor to ensure that payments to suppliers in respect of pre-filing liabilities are minimized.
- Whether the debtor has sufficient inventory of the goods on hand to meet needs.
- The effect of the debtor's ongoing operations and ability to restructure if it is unable to make pre-filing payments to its critical suppliers.
The intersection of sections 11.01 and 11.4 is not well discussed in the jurisprudence and we analyze the sections together below. However, when section 11.04 was proclaimed into force in 2009—12 years after section 11.01—courts were quick to point out that the new provision did not limit their broad powers under the CCAA. In Canwest, decided the same year the amendments took effect, Justice Pepall described section 11.4 as merely codifying a long-standing practice under the CCAA. Justice Morawetz used much stronger language three years later:
This jurisdiction of the Court is not ousted by section 11.4... section 11.4 [does] not detract from the inherently flexible nature of the CCAA or the Court's broad and inherent jurisdiction to make such orders that will facilitate the debtor's restructuring of its business as a going concern.
It is clear then, even with section 11.01 in place, courts feel comfortable ordering the continued provision of goods and services when they are necessary for the debtor's successful reorganization.
Historically, Crown claims, including those claims derived from unpaid taxes, received priority in insolvency proceedings. See, for example, the powerful "deemed trust" and "statutory lien" provisions that ruled insolvency proceedings in the past. Connected with the prominence of Crown claims was an understanding by the courts that, after filing for protection under the CCAA, a debtor company must continue to pay taxation authorities. 11 Over time, however, the strength of Crown claims against a debtor company has waned. Following closely, case law has begun to loosen the strict requirements on post-filing obligations by debtor companies to taxation authorities. These lax obligations have created a potential lacuna in the payment of fees or taxes to entities other than the federal or provincial Crown such as municipal property taxes.
Post-filing obligations to the Canada Revenue Agency
Unique among the protections for post-filing obligations, taxation is protected outside the CCAA itself. Section 224 of the Income Tax Act (ITA) allows for "enhanced garnishment" or "super priority" confiscation of funds owing by a third party to a tax debtor who is liable to the Canada Revenue Agency. The ITA provides that the sums are owing irrespective of any order made under the CCAA. It is only subject to section 11.09 of the CCAA, under which the court may stay the powers of section 224(1.2), with respect to pre-filing tax obligations, for as long as the court considers appropriate but ending not later than:
- the expiry of the order;
- the refusal of a proposed compromise by the creditors or the court,
- six months following the court sanction of a compromise or an arrangement,
- the default by the company on any term of a compromise or an arrangement, or
- the performance of a compromise or an arrangement in respect of the company.
Section 11.09 also contains provisions protecting the debtor company from similar garnishment provisions enacted by provincial legislation. Holding onto tax remittances has long been a favoured strategy of cash-strapped companies, and this provision allows a certain amount of time in which the company can use this money without facing penalties.
Nonetheless section 11.09(2) makes it clear that a debtor must make ongoing payments post-filing to the CRA and similar provincial entities, threatening that portions of a stay will cease to be in effect as soon as a payment is missed by the debtor company.
Post-filing obligations to pay municipal taxes
None of the modern amendments to the CCAA added language clarifying debtors' post-filing obligations to municipal taxation authorities. Perhaps, considering the history of Crown priority in insolvency proceedings, legislators felt it was unnecessary, as payment of taxes went without saying. Alternatively, it is clear from arguments made by the Crown in subsequent case law12 that there was a belief among municipal taxation authorities that they were included in the definition of service providers protected under section 11.01 of the CCAA. As a result, municipal taxes were historically safe from court stays in insolvency proceedings. A discussion of more recent developments in obligations to pay municipal taxes is reserved for the section titled "Recent developments questioning the protection and scope of post-filing obligations."
1 Alfonso Nocilla, "The history of the Companies' Creditors Arrangement Act and the future of restructuring law in Canada" (2014) 56 Canadian Business Law Journal 73 at 74-76.
2 Quintette Coal Ltd v Nippon Steel Corporation et al,  47 BCLR (2d) 191 [Quintette (BCLR)].
3 L W Houlden, G B Morawetz & Janis P Sarra, Bankruptcy and Insolvency Law of Canada, loose-leaf 4th ed, Vol 2 (Toronto: Carswell, 2009), F section 187 at 3-500.
4 See e.g., Integris Credit Union v Mercedes-Benz Financial Services Canada Corporation, 2016 BCCA 231; Re Connacher Oil and Gas Limited, 2017 ABQB 769; Re Atlantica Diversified Transportation Systems Inc, 2018 NSSC 77.
7 International Wallcoverings, supra note 5 at para 4 [emphasis added].
9 Re Canwest Global Communications Corp, 2010 ONSC 1746 at para 11 [Canwest]. See also Re Nortel Networks Corp, 55 CBR (5th) 68 at para 6, 2009 CanLii 31600; Jameson House Properties Ltd, 2011 BCSC 965 at para 228 [Jameson].
10 See e.g., Gilbert Steel Ltd v University Construction Ltd (1976), 12 OR (2d) 19 (CA); Pridmore v Calvert (1975), 54 DLR (3d) 133 (BCSC), cited in Nicholas Rafferty, "Recent developments in the law of contract" (1978) 24 McGill Law Journal 236 at 252, 254.
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