Unequal Treatment Of Creditors: Paying A Supplier's Pre-Filing Debt In A Proposal Under The Bankruptcy And Insolvency Act

• Published date: 15 April 2022
• Subject Matter: Insolvency/Bankruptcy/Re-structuring, Financial Restructuring, Insolvency/Bankruptcy
• Law Firm: WeirFoulds LLP
• Author: Mr Wojtek Jaskiewicz

We were approached by a company to assist with its restructuring. Our client's biggest problem was that its largest unsecured creditor was also its main supplier. Approximately 80% of the client's business depended on the products supplied by this supplier. This would not be a problem if the client and the supplier had an ongoing agreement to continue to supply, but there was no such agreement. The supplier could cut our client off at any time and had no legal obligation to continue to accept our client's business.

To be successful after the restructuring, the client needed continued supply from the supplier.

We hoped to negotiate favourable payment terms with the supplier. Instead, the supplier told us that if its pre-filing debt was not paid in full, it would not supply, even on a cash on delivery basis.

Clearly the supplier was a critical supplier in every sense of the word. Without the supplier, there was no business.

If the client could have used the Companies' Creditors Arrangement Act, RSC 1985, c C-36 ("CCAA"), section 11.4 would have given the court the power to order the supplier to continue to supply. However, the client did not have claims totaling more than $5 million, so the CCAA did not apply to it.

The client's only option was to use the proposal provisions in the Bankruptcy and Insolvency Act, RSC 1985, c B-3 ("BIA"). However, the BIA does not have any provisions like section 11.4 of the CCAA. There was no ability to require the supplier to supply.

We were faced with what seemed like an impossible task - negotiate favourable payment terms with a supplier demanding payment of all its pre-filing debt. And we delivered just that - an agreement with the supplier to provide payment terms together with a proposal, approved by the creditors and the court, which paid all the supplier's prefiling debt.

But how could the supplier be paid all of its pre-filing debt?

A basic tenet of the BIA and insolvency legislation in general is that all unsecured creditors are supposed to be treated equally. Sections 95 and 96 of the BIA are designed to prevent unequal treatment of creditors and to unwind transactions that offend this principle.

However, two cases - one from the Ontario Court of Appeal and the other from the Supreme Court of British Columbia - which say that treating unsecured creditors equally is the norm, but it is not always necessary or advisable.

In Contech Enterprises Inc. (Re), 2015 BCSC 129, the Court approved a proposal that provided for...