Protection for suppliers

June 5, 2020 | Gordon G. Plottel, Steven Evans, Kenneth R. Rosenstein, Aliza Premji

The BC Supreme Court’s decision in Soccer Express Trading Corp. (Re), 2020 BCSC 749 shows some possible protections for critical suppliers under the CCAA

When a company files for protection from its creditors, a supplier to that company who has not been paid may understandably not wish to continue to supply to the company. However the company may argue that it depends on the supplier in order to stay in business and a cut off of supply would cause irreparable harm and would sink any prospect of a successful restructuring. In these circumstances, under the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36 (the “CCAA”), a court may declare the supplier to be a “critical supplier” and order it to continue to supply the company. However, it may also provide protection for such a supplier.

This was the subject of a recent decision, issued May 12, 2020, by the British Columbia Supreme Court, in the case of Soccer Express Trading Corp. (Re), 2020 BCSC 749 (“Soccer Express”). The decision concerned a request by the Petitioners, two sporting goods retailers, to have one of their major suppliers, adidas Canada Limited (“adidas”) declared a critical supplier and ordered to continue supplying the Petitioners with goods and services. Prior to commencing the CCAA proceedings, the Petitioners had  filed notices of intention (NOIs) pursuant to the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (the “BIA”), and sought to secure interim financing during a restructuring. However, they were unable to negotiate an arrangement satisfactory to adidas. Consequently, the Petitioners brought the CCAA proceedings to obtain a critical supplier declaration. The Petitioners argued that without this declaration, their ability to restructure would be threatened. Adidas opposed the granting of the declaration and made it clear that it had no interest in continuing the relationship, which had grown toxic.

At paragraph 56 of the reasons for judgment, the Court reviewed section 11.4 of the CCAA, which provides the Court with authority to declare a person to be a critical supplier but also to provide protection for the supplier by granting a priority charge:

(1) On application by a debtor company and on notice to the secured creditors who are likely to be affected by the security or charge, the court may make an order declaring a person to be a critical supplier to the company if the court is satisfied that the person is a supplier of goods or services to the company and that the goods or services that are supplied are critical to the company’s continued operation.

(2) If the court declares a person to be a critical supplier, the court may make an order requiring the person to supply any goods or services specified by the court to the company on any terms and conditions that are consistent with the supply relationship or that the court considers appropriate.

 (3) If the court makes an order under subsection (2), the court shall, in the order, declare that all or part of the property of the company is subject to a security or charge in favour of the person declared to be a critical supplier, in an amount equal to the value of the goods or services supplied under the terms of the order.

 (4) The court may order that the security or charge rank in priority over the claim of any secured creditor of the company.

The Court observed, at paragraph 57, that for section 11.4 to be satisfied, the following steps would need to be met:

a) The court must determine if a person is a “supplier” and if the goods and services supplied by that person are “critical” to the debtor’s continued operations. In that event, the court has the discretion to declare that person to be a “critical supplier” (s. 11.4(1));

b) If a person is declared to be a “critical supplier”, the court has the discretion to order the continued supply of goods and services on certain terms (s. 11.4(2)); and

c) If the court declares that a critical supplier must continue to supply specified goods or services, it is mandatory that the court also order security or a charge in favour of the supplier, although the court has the discretion to determine the priority of any security or charge (s. 11.4(3) and (4)). (para. 57)

The Court found that adidas was the Petitioners’ largest vendor by a wide margin and that any disruption in the continued supply of adidas products would have serious and negative repercussions to the Petitioners’ business operations, would likely cause irreparable harm to the business and would seriously jeopardize the proposed restructuring. Adidas was therefore found to be a critical supplier.

While adidas was unsuccessful in resisting the critical supplier declaration, it succeeded in securing the protection of the Court by way of a priority charge for the value of the goods and services to be supplied ranking ahead of the interim lender’s security and the pre-filing security. The Court ordered that supply be made pursuant to the arrangements in place prior to the NOI filings, in which payment was to follow supply.

The Court rejected adidas’ argument that the Petitioners be required to make payment toward the pre-filing debt – proposed by adidas. It is important to note that although these circumstances did not support the making of such an order, the Court observed that such an order was within its discretion.

The Court’s decision in Soccer Express highlights the conditions that may be imposed to protect a supplier to an insolvent company under the CCAA, including being granted a priority charge and a court order permitting payments with respect to pre-filing debts in consideration for continued supply.

Please feel free to call any member of our team if you are a supplier to a company which has filed and are in need of protection.

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