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 debtor.
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 obligations.
In Cinram International Inc (Re), the applicants sought authorization to pay pre-filing invoices to suppliers essential to their business of replicating and distributing CDs and DVDs. The Court agreed that section 11.4 does not detract from the “…inherently flexible nature of the CCAA or the court’s broad and inherent jurisdiction to make orders that will facilitate the debtor’s restructuring of its business as a going concern.” The Court considered a number of factors in authorizing pre-filing payments, including whether the supplier is integral to the business of the debtor, the debtor’s dependency on the uninterrupted supply of the goods or services and the effect on ongoing operations and ability to restructure if the debtor is unable to make pre-filing payments to its critical suppliers.
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.