Insolvency, Restructuring and the Critical Supplier

Financial Services

During these financially uncertain times, many businesses are faced with new debt and possible insolvency or even bankruptcy. 

The Companies’ Creditors Arrangements Act (CCAA) is a federal statute which, as an alternative to the Bankruptcy and Insolvency Act, provides an alternative statutory process by which an insolvent corporation may obtain protection from its creditors and reorganize its business affairs.

In order for a debtor company to be eligible for protection pursuant to the CCAA, the claims against the company must be greater than $5 million.

The CCAA gives the debtor company an opportunity to seek protection from creditors under court order so they can propose a plan of arrangement. If the order is granted, there will be a stay of legal proceedings for a defined period of time unless or until the stay is lifted by court order. During this period of the stay of proceedings, the debtor company can, for example, reorganize its business operations or make refinancing arrangements or sell part of the business.

An issue that may arise during the process of making a plan of arrangement is whether a supplier that is critical to the operation of the debtor business can be compelled by court order to continue to supply goods to the debtor company during the period under which the debtor is under the protection of the CCAA.

The answer is ‘Yes’, in certain circumstances the Court can designate a supplier as a “critical supplier” under section 11.4 of the CCAA and order that supplier to continue to provide supplies to the debtor.

In the recent case of Soccer Express Trading Corp., 2020 BCSC 749, the British Columbia Supreme Court considered this issue and provided guidance as to the circumstances under which a supplier may be considered as a critical supplier under the CCAA.

The debtor company in this case (and its subsidiary company) was in the business of selling multi-brand sporting equipment, apparel and accessories to individuals, institutions, and sports teams.  The supplier in question was adidas® Canada Limited (Adidas).  Adidas opposed being designated as a critical supplier under the CCAA.

In the Soccer Express case, the Court noted that Adidas was the debtor company’s largest supplier and the Monitor provided an opinion that a discontinuation of the supplies from Adidas would jeopardize the continuation of the debtor business.

Under the CCAA, the Monitor’s role is to determine with reasonable accuracy the state of the company’s business and financial affairs and the cause of its financial difficulties or insolvency. Monitors must also file reports with the Court on their findings.

The Court was satisfied on the evidence that the goods supplied by Adidas were critical to the continued operation of the debtor company and ordered that Adidas continue supplying goods and services to the debtor companies on the same terms as were done prior to the insolvency proceedings being initiated by the debtor company.

The Court also ordered that Adidas be granted security for the goods and services it provides to the debtor company.  In addition to receiving periodic payments from the debtor company, the Court ordered that Adidas receive a security charge against the assets of the debtor company.  Importantly, the Court ordered that this charge rank in priority ahead of charges of other secured creditors.  The Court noted there was evidence that the assets of the debtor company would be more than sufficient to satisfy any amounts owing to Adidas if the restructuring proved to be unsuccessful.

The CCAA can provide certain protections from creditors to a business that is seeking to restructure its financial affairs.  In circumstances where a business requires a key supplier to continue to provide its services and goods during the restructuring process, the CCAA can assist in designating critical suppliers to support the survival of the business during the stay of proceedings.

If your business is experiencing insolvency issues, a consultation with an experienced lawyer can help you consider your options.

Brad Martyniuk, Partner
Foreclosure, Bankruptcy and Asset Recovery
Lindsay Kenney LLP – Vancouver office