Canada: Critical Suppliers: Court Re-Confirms The Law Regarding Payment Of Pre-Filing Obligations

Last Updated: September 12 2012
Article by Waël Rostom

The Ontario Superior Court of Justice has recently re-confirmed that a debtor subject to proceedings under the Companies' Creditors Arrangement Act (the "CCAA") may be authorized to pay pre-filing obligations owed to a critical supplier. In Re Northstar Aerospace, Inc.1 ("Northstar") the court authorized payment of pre-filing obligations owed to a critical supplier located in China, even though that supplier was subject to an order under section 11.4 of the CCAA compelling it to continue to supply goods post-filing. Northstar reaffirms cases decided prior to the amendments made to the CCAA in 2009, and confirms decisions made after the coming into force of the amendments that found that the CCAA court continues to have jurisdiction to authorize payment of pre-filing obligations to critical suppliers in certain circumstances.

In a CCAA proceeding, the general rule is that all unsecured pre-filing claims against the debtor company should be paid on a pari passu basis. Any payments made to only one creditor or a select group of unsecured creditors on account of pre-filing obligations may be found to be an improper preference.

An exception may be available where a critical supplier refuses to continue to supply goods or services unless it is paid its pre-filing invoices, and where the supplier is located outside the jurisdiction of Canadian courts. As a practical matter, attempting to enforce an order against a critical supplier in certain foreign jurisdictions could be unfeasible, cause undue delay that interrupts business operations, and jeopardize the debtor's ability to restructure. In these situations, pre-amendment case law suggests that it is open to the courts to authorize the payment of pre-filing obligations in order to ensure the uninterrupted operation of the debtor company during the restructuring. The Court in Northstar considered whether this jurisdiction was ousted with the enactment of section 11.4 of the CCAA in 2009. Section 11.4 gives courts the power to compel a critical supplier to supply on terms the court considers appropriate, in exchange for the benefit of a court ordered charge over collateral to secure payment of invoices related to supply of goods and services post-filing.

Northstar filed for CCAA protection, and was attempting to close a transaction for the sale of certain Canadian assets (the "Heligear Transaction"). A supplier located within the People's Republic of China ("Changsha") rendered two invoices prior to the date of the initial order made under the CCAA, and refused to supply any further parts until these invoices were paid. Changsha was subject to the critical supplier provisions within the initial order compelling the identified critical vendors to supply in exchange for a charge over the assets. Notwithstanding this protection for payment of its post-filing invoices, Changsha refused to supply unless its pre-filing invoices were paid. Given the circumstances, Northstar chose to bring a motion for court approval to have the two invoices paid immediately.

The court in this case affirmed its jurisdiction to permit payment of pre-filing obligations to creditors whose goods or services are critical to the ongoing operations of a debtor company.2 The court stated that this power is not ousted by section 11.4 of the CCAA, and that it is within the court's discretion. The court recited a number of factors considered by courts in the past when determining whether it is appropriate to authorize the payment of pre-filing payables:

  1. Whether the goods and services are integral to the business of the debtor company;
  2. The debtor company's dependency on the uninterrupted supply of the goods/services;
  3. The fact that no payments would be made without the consent of the Monitor;
  4. The Monitor's support and willingness to work with the debtor company to ensure that payments to suppliers in respect of pre-filing liabilities are minimized;
  5. Whether the debtor company has sufficient inventory of the goods on hand to meet their needs; and
  6. The effect on the debtor company's ongoing operations and ability to restructure if they are unable to make pre-filing payments to their critical suppliers.3

There were various facts in Northstar that favoured the payment of the pre-filing obligations rather than the debtor attempting to enforce an order under section 11.4 of the CCAA against Changsha:

a) The time sensitive nature of the Heligear Transaction, and the direct link between the supplies provided by Changsha to the closing of that transaction;

b) The lack of sufficient inventory and the inability of Northstar to find a suitable replacement for Changsha within a reasonable amount of time;

c) The potential of imminently affecting the production lines of a customer, General Electric; and

d) The location of Changsha outside the geographical jurisdiction of Canadian courts, making it difficult to enforcement of any order against them in a timely fashion.

The court therefore authorized the pre-filing payments to Changsha due to practical realities even though, in the words of the court, such an outcome "in a sense, rewards improper conduct by a critical supplier who has ignored an order of this court and has the effect of countenancing a form of hard-ball queue-jumping."

Companies planning potential reorganization proceedings should carefully assess which suppliers are critical to their operations, whether sufficient inventory banks are available, whether alternative or dual sources of supply are available, and whether cash plans take into account the possibility that pre-filing payments to certain critical suppliers may need to be made, particularly critical suppliers located in jurisdictions outside of Canada that have no offices or assets in Canada.


1 12012 ONSC 4546.
Ibid at para 11.

The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.

© Copyright 2012 McMillan LLP

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions