As the pace of restructuring activity in Canada continues to accelerate (see the partial listing below), international creditors should be aware that there are credit risks in doing business with a company that is restructuring in either of Canada's two restructuring systems. (These are, briefly, the Bankruptcy and Insolvency Act which is generally used for small to medium sized restructurings and the Companies Creditors' Arrangement Act which is generally used for large cases and resembles proceedings under Chapter 11 of the United States Bankruptcy Code).
In the United States and many other countries, suppliers who do business with a company in a formal restructuring are given a form of priority for payment for the goods and services that they supply which has priority over the claims of ordinary unsecured creditors of the reorganizing company. The theory rests on the basis that suppliers who do business with a reorganizing entity on credit are assisting in the restructuring process by which it is hoped that the reorganizing business will emerge successfully and in a stronger and more stable financial condition. Consequently, post-filing (or "post-petition") suppliers' claims are treated as "administrative expenses" (in the United States) and are given preference over claims of unsecured creditors that existed at the date the debtor filed for bankruptcy protection.
There is no such protection in Canadian legislation. The risk arises whenever there is a possibility that a CCAA Plan of Reorganization or a BIA Proposal will not be successful. If a reorganization is unsuccessful, the unsuccessful or unfortunate debtor is usually placed in liquidation. When this happens, Canadian judicial authority, at least to this point, is to the effect that claims by post-filing suppliers to be paid for goods and services supplied to the reorganizing debtor during the reorganization will be treated as if they were pre-filing unsecured claims against the debtor. The theory must be that the supplier should have known better than to provide goods and services on credit to a reorganizing business. The standard CCAA Order that is currently widely used in fact provides that the reorganizing debtor may pay for post-filing goods and services but is not required to.
Some reorganizations have sought to avoid the worst effects of this situation by including special provisions in the CCAA First Day Order. Some cases have created a special fund to provide assurance of payment to post-filing suppliers while others have created a lien on the assets of the debtor for post-filing supplies of goods and services. These cases, however, are the exception and not the rule. Both the CCAA and the BIA provide that the supplier need not provide credit to a reorganizing customer which allows continuing suppliers to negotiate with the reorganizing debtor to supply on COD terms or on credit terms that are acceptable from a business point of view. In doing business with reorganizing Canadian companies, however, perhaps the best advice is supplier beware.