Interim Financing Under the CCAA and “Roll-ups”
Section 11.2 of the Companies’ Creditors Arrangement Act (“CCAA”) gives the Canadian court explicit authority to grant a priority charge for amounts advanced by a lender to a CCAA debtor after the CCAA filing (a “DIP Loan”); however, the section provides that the charge may not be granted to secure an obligation that exists before the order is made. Section 11.2 effectively prevents a roll-up of pre-petition debt into a DIP Loan. A “roll-up” is an arrangement where all or a portion of pre-petition loans provided by a lender are “rolled-up” into the post-petition DIP Loan provided by the same lender, effectively giving the DIP lender the benefit of the DIP Loan charge for pre-filing obligations.
Roll-up Approved in Recent Cross-Border Proceeding
In the recent decision in Re Hartford Computer Hardware, Inc. et al., the Canadian court recognized an order of the United States Bankruptcy Court for the Northern District of Illinois Eastern Division (the “US Court”) granting a roll-up in a cross-border proceeding despite the prohibition on roll-ups in s. 11.2 of the CCAA.
Hartford Computer Hardware, Inc. and certain of its affiliates (collectively, “Hartford”) were subject to Chapter 11 proceedings in Illinois and those proceedings had been recognized in Canada as foreign main proceedings pursuant to Part IV of the CCAA.
Hartford had previously obtained from the Canadian court recognition of an Interim DIP Facility Order that had been granted by the US court. In a motion heard on February 1, 2012, Hartford sought approval of the Final DIP Facility Order. The Final DIP Facility Order contained a partial roll-up, whereby all cash collateral in the possession of Hartford on the day of the Chapter 11 filing or acquired afterward was deemed to have been remitted to the pre-petition secured lender for repayment of the pre-petition secured loan and a corresponding loan was deemed to have been made under the DIP Facility.
The Canadian court approved the Final DIP Facility Order despite the roll-up. In reaching this conclusion, the Canadian court considered the following facts:
- the motion was for recognition of an order made in a foreign main proceeding;
- the US Court had found that there was good cause to approve the Final DIP Facility Order despite hearing certain objections to it;
- the Final DIP Facility Order was supported by the Unsecured Creditors’ Committee; and
- the Canadian unsecured creditors would be treated no less favourably than US unsecured creditors.
One of the most significant factors in the decision was the fact that the order had been granted by the US Court in a foreign main proceeding.
After noting the prohibition on roll-ups in s. 11.2 of the CCAA, the Canadian court observed that s. 49 of the CCAA permits a Canadian court to make any order that it considers appropriate when recognizing an order of a foreign court, provided that the Canadian court is satisfied that the order is necessary for the protection of the interests of the debtor, a creditor or creditors.
The Canadian court also noted that s. 61(2) of the CCAA permits the Canadian court to refuse to recognize the orders of a foreign court where doing so would be contrary to public policy. The Canadian court decided that s. 61(2) of the CCAA should be interpreted restrictively, in light of the Guide to Enactment of the UNCITRAL Model Law on Cross-Border Insolvency. The Canadian court relied on the report of the Information Officer which it had appointed, which stated that there would be no material prejudice to Canadian creditors if the Canadian court recognized the Final DIP Facility Order, and that nothing was being done that was contrary to the applicable provisions of the CCAA. The Canadian court therefore found that the Final DIP Facility Order did not raise any public policies issues and recognized the Final DIP Facility Order.
It could be argued that the roll-up of Hartford’s pre-petition debt provided for in the Final DIP Facility Order was only a roll-up in theory, and not a roll-up in fact. The Canadian court observed that the cash collateral on hand as of the date of the Chapter 11 petition was effectively spent during the Chapter 11 proceedings and replaced with advances under the DIP Loan, so that all of the cash collateral available as of the date of the Final DIP Facility Order was cash advanced by the DIP Loan lender.
Co-operation Between Courts in Cross-Border Insolvencies
This case provides a window into the distinction between the orders that are available in a plenary case under the CCAA compared with the orders that can be recognized under Part IV. Clearly, the Canadian courts are very sensitive to the need for close cooperation between the US and Canadian courts in cross border insolvency matters.