In Payless Holdings Inc., LLC, Re (“Payless”), an application for the approval of certain debtor-in-possession (“DIP”) financing arrangements between, among others, a US parent in Chapter 11 and its Canadian subsidiary, was rejected on the basis that the arrangements did not provide sufficient protection for all Canadian creditor parties that stood to be affected.
Payless Holdings LLC (the “Applicant”), a US entity, had filed for relief pursuant to Chapter 11 of the U.S. Bankruptcy Code. As a condition for certain DIP financing arrangements which had been conditionally approved in the US proceedings, certain Canadian subsidiaries of the Applicant (the “Canadian Entities”) were required to grant a charge to the Applicant’s lenders as well as provide guarantees. These arrangements would have made the Canadian Entities liable for the Applicant’s borrowing prior to filing under Chapter 11, as well as for the DIP financing arrangements. The Canadian Entities were not borrowers nor guarantors under the pre Chapter 11 financing.
The Applicant applied in Canada for orders pursuant to sections 46 through 49 of the Companies Creditors Arrangement Act (“CCAA”) seeking, among other things, approval for the Canadian Entities to enter into the guarantees and charging agreements (the “DIP Order”). Under the proposal, the majority of the Canadian Entities’ creditors had protection by way of a Critical Vendors’ Charge, an Unsecured Creditors’ Charge and a Prepetition Wages and Benefits Order. However, a group of landlord’s having multiple locations (the “Landlord Group”) were not similarly protected. Further, the DIP agreement specifically provided that the DIP Agents, DIP Lenders and other pre-petition lenders would not be subject to the equitable doctrine of “marshalling” or any other similar doctrine that might provide the Landlord Group with a degree of comfort in the proposal. As such, the Landlord Group opposed the application, arguing that the DIP Order was detrimental to the position of the Landlord Group and should not be granted.
The Applicant stressed that approval of the DIP Order was in the best interests of the entire corporate organization and its many stakeholders, and maintained that the Applicant would be unable to finance its operations without immediate access to the DIP financing, which would have a disastrous effect on the Canadian Entities given their heavy reliance on the Applicant. The Applicant presented two cases, Hartford Computer Hardware Inc., Re (2012 ONSC 964) (“Hartford”) and InterTAN Canada Ltd. Re, (2008 CarswellOnt 8040 (Ont. S.C.J.[Commercial List]) (“InterTAN”) as precedents for court approval in similar circumstances.
The Court rejected the proposal, stating that if the DIP Order was to be approved “there would have to be adequate protection to ensure that all Canadian creditor groups would not be adversely affected by the grant of the security” (emphasis in original). The Court noted that while the orders in Hartford and InterTAN would have subject non-borrower subsidiaries to the pre-existing debt liabilities of US parent companies, there was no opposition to those orders. Further, in Hartford, there was no indication that certain Canadian creditor groups would be prejudiced more than others. While the same was not true in InterTAN, the Court noted that the referenced decision had been made in the midst of a serious liquidity crisis in 2008. In Payless, although the DIP financing was important to the Applicant and by extension, the Canadian Entities, the cash flow statements did not evidence the same urgency as was present in InterTAN.
On the basis of the above noted factors, the Court refused to grant the DIP Order, noting that it was up to the Applicant to provide the Landlord Group with the same identifiable and quantifiable forms of protection being provided to the other Canadian creditors.
Payless reminds applicants of the discretionary nature of certain orders in CCAA proceedings and the need to pay close attention to the facts of cases being relied on as precedent. In particular, the Court’s pronouncement that all Canadian creditor groups should be afforded equal protection in circumstances similar to those in Payless signals that one should not be overly reliant on the principles of comity in making an application for court approval of cross border DIP financing and will need to demonstrate that real and detrimental implications will flow in the event that a Court rejects the proposal of an applicant.