The Alberta Court of Queen's Bench recently permitted a debtor to establish a "hardship" fund to pay obligations incurred prior to the debtor's CCAA filing to local suppliers operating in the debtor’s community.

The debtor was a renewable wind energy developer whose primary project was a wind farm under construction in northeast British Columbia. The project involved local suppliers some of whom had significant accounts receivable owing by the debtor and some of whom faced bankruptcy or other immediate financial difficulty including the inability to meet payroll obligations as a result of the debtor’s insolvency.

With the support of the CCAA Monitor, the debtor proposed the creation of a $1.5 million "hardship" fund to make payments to suppliers who were in significant financial trouble and whose services were “essential to keeping the lights on”. Payments would be made at the discretion of the debtor’s Chief Restructuring Officer and would be subject to the Monitor's approval. The payments would be considered an interim distribution under a future plan of arrangement and would be reflected in any final distribution to creditors. The Monitor would not disclose the names of the recipients on the basis that this could provoke the financial embarrassment and hardship that the fund was trying to prevent.

The debtor and the Monitor argued that the local suppliers depended on the project, that they were vulnerable and at risk unlike the debtor’s other creditors and that the failure to make payments to such suppliers would have "dire and harsh consequences" on the surrounding communities (e.g. as a result of not being able to meet payroll obligations). They also argued that the payments would contribute to the "necessary goodwill" and cooperation and support of the local community which was necessary to the completion of the project and the preservation of its value and which, in turn, would benefit all of the debtor’s creditors,

The Court approved the establishment of the hardship fund holding that the payment of such pre-filing obligations in a limited amount in order to preserve the value of the debtor’s primary asset was fair and reasonable and in accordance with the objectives of the CCAA. The Court held that, although the payments were relatively modest, they were of considerable benefit to the debtor and the estate as a whole. There was little opposition from the debtor’s creditors to the establishment of the hardship fund including from its main secured creditor.

The decision is noteworthy in several respects. First, the establishment of the hardship fund may not be as contentious as it appears on first glance. The hardship fund payments were to be treated as advance payments against the claims of the creditors who received payment from the hardship fund: the payments would be considered an interim distribution under a future plan of arrangement and would be reflected in (e.g. deducted from) any final distribution to such creditors. Second, there was no discussion as to whether the creditors to be paid from the hardship fund actually had provable claims in the CCAA proceedings. Third, there was little explanation of how the objectives of the CCAA supported the establishment of the hardship fund. Finally, the hardship fund was the creation of very specific facts - vulnerable creditors in remote communities on the verge of the possibility of bankruptcy, a limited fund and little creditor opposition – meaning it might be difficult to expect this pattern to reoccur with any degree of frequency.