In a series of cases in 2009 culminating in the decision of the Honourable Mr. Justice Morawetz in Re Indalex Limited (“Indalex”), the CCAA Courts have considered the appropriateness of approving the granting of a guarantee in connection with a cross-border DIP facility. This issue has been at the forefront – with varying results – in a number of recent CCAA cases in which DIP financing was dependent on the CCAA debtor providing a secured guarantee of the obligations of the parent or affiliate company’s DIP financing in its own Chapter 11 case.
In Indalex, Mr. Justice Morawetz set out the following factors to be considered in deciding whether to approve a cross-border DIP guarantee:
- the need for additional financing by the Canadian debtor to support the going-concern restructuring;
- the benefit of the breathing space afforded by CCAA protection;
- the availability (or lack thereof) of any financing alternatives, including the availability of alternative terms to those proposed by the DIP lender;
- the practicality of establishing a stand-alone solution for the Canadian debtors;
- the contingent nature of the liability of the proposed guarantee and the likelihood that it will be called on;
- any potential prejudice to the creditors of the entity if the requested relief is approved, including whether unsecured creditors are put in any worse position by the provision of the cross-guarantee of a foreign affiliate than as existed prior to the filing, apart from the impact of the super priority status of new advances to the debtor under the DIP financing;
- the benefits that may accrue to the stakeholders if the request is approved and the prejudice to those stakeholders if the request is denied; and
- a balancing of the benefits accruing to stakeholders generally against the potential prejudice to creditors.
Although not always expressly stated, the cases also demonstrate the importance of the views of the Court-appointed Monitor with respect to the cross-border guarantee and the impact on Canadian stakeholders. For example, in the Indalex case, the Monitor would not have supported a request that would have resulted in a transaction that gave a priority charge in respect of the pre-filing guarantee. Thus the debtor and lender ultimately agreed to maintain the status quo with respect to the pre-filing guarantee, which the Monitor recommended and the Court ultimately approved.
Given the Court’s reliance on the views and recommendations it is questionable whether the Court in that case would have – or will ever – grant approval in the face of objections of the Monitor.