Model orders

Not paid today and may not be paid tomorrow: Developments in post-filing obligations of CCAA debtors

| Jacob Babad

As demonstrated, the broad, undefined wording of post-filing provisions has left a gap between presumed legislative intent and the actual operations of these provisions in court. Many provinces have attempted to fill this gap by implementing model initial orders that lay out how a court should regulate post-filing obligations. However the terms of these model initial orders have only served as a temporary salve to the issues. And in some cases have lured creditors into a false sense of confidence.

The model orders differentiate the types of payments within the pay-as-you-go regime. For some issues, like municipal taxes, the order simply requires the debtor to pay. The orders stipulate that they are to be paid, but do not give direction for how or when, leaving an implication that they are to be paid as they come due.18

Other types of payments are required, but the frequency of such payments are stipulated. For example, many jurisdictions require that rent be paid twice monthly in advance. Employees, on the other hand, are to be paid in the “ordinary course of business.”19 It is unclear why the amounts owing for the use of leased property (landlords) is treated differently than the amount for post-filing services (employees). Indeed, the requirement for employees to be paid after their services have been delivered appears to conflict with section 11.01 itself.

Even more confusingly, many orders are completely silent on when and how suppliers of goods or services are to be paid. The orders do, however, contain “Continuation of Services” clauses, which offer contradictory terms. These clauses provide that during the stay period any creditor who has an ongoing agreement or arrangement with the creditor is restrained from discontinuing the supply of goods or services, provided that the usual prices are paid “in accordance with the payment practices.”20 However, in an allusion to section 11.01, the orders then say immediately after.

Nothing in this Order has the effect of prohibiting a person from requiring immediate payment for goods, services, use of leased or licensed property or other valuable consideration provided on or after the date of this Order.

These provisions directly contradict each other. Moreover, they create confusion. If creditors are truly free to exercise their right to demand immediate payment, the provision requiring services assuming that ordinary payment practices are met should not apply.

What the provisions actually do is prevent the creditors from taking the self-help remedies Parliament provided to them through section 11.01. Given the restraints in the model initial orders, creditors will want to seek clarification, permission or direction from the court before taking action. This can be expensive—in some cases prohibitively so for smaller suppliers. In addition, it creates significant delay in contrast to the immediate payment for which Parliament provided. Section 11.01 protections in this context may prove illusory.

The problem—or at least one problem—with section 11.01 is that, if every supplier exercised its rights to immediate payment, the burden on the supervising CCAA court and on the debtor would be enormous in adjudicating what the terms of the immediate payments must be. As an Alberta Court complained:

At the stage of the initial order, it would be inappropriate for a court to attempt to draw up a contract for the parties… Not only are courts not business experts, but the cost of attempting to bring the court up to speed on the reasons that a creditor and a debtor each have for advancing a payment proposal would exhaust the financial capacity of an already insolvent debtor.

The other consequence of immediate payment would be a dramatic draw on the debtor’s liquidity, when it is lack of liquidity that in many instance forces a company to seek CCAA protection. Yet these tensions are inherent in Parliament’s drafting of section 11.01.

The Model Order is an attempt to bridge these gaps: preserving the status quo, reducing draws on liquidity and protecting the interests of creditors. But they do so in a manner that deviates from the regime provided for by Parliament. The model initial order provisions require supplier performance in the promise of future payment. This bears more resemblance to the critical supplier provisions in section 11.4 or the administrative expense provision in the Bankruptcy Code. But unlike either of those provisions, the model initial order provides for no charge or other protection for suppliers.

As expected, there are problems with using a model order regime to patch over the difficulties with section 11.01. Without statutory protections, it is open to debtors to seek to amend or modify the orders during the pendency of the CCAA or, in some circumstances, breach the order and ask for retroactive permission to do so. As the next section demonstrates, such efforts are becoming more common.

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18 Ontario Superior Court of Justice, “Model Initial Order for a plan of compromise or arrangement” at para 8(c), online (doc): Ontario Courts (accessed October 4, 2018) [Ont MIO]; Alberta Courts, “Alberta template CCAA Initial Order” at para 7(c), online (doc): Alberta Courts (accessed October 4, 2018) [AB MIO]; British Columbia Supreme Court, “Model CCAA Initial Order” at para 7(c), online (doc): Courts of British Columbia [BC MIO].

19 See Ont MIO, ibid at para 9; AB MIO, ibid at para 8; BC MIO, ibid at para 8.

20 See Ont MIO, ibid at para 17; AB MIO, ibid at para 19; BC MIO, ibid at para 19.

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

For permission to republish this or any other publication, contact Janelle Weed.

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