The Priority of Unpaid Post-Filing Creditors in a CCAA Proceeding

Written By Kelsey Meyer and Stephanie Gagne

On August 27, 2019, Quebec's Court of Appeal overturned the Quebec Superior Court's decision to give post-filing claims priorities over secured creditors' claims, stating that section 11.01 of the CCAA does not give automatic priority to post-filing creditors.

Background

In May 2017, Gestion Éric Savard and other numbered companies (the debtors) sought protection under the Companies' Creditors Arrangement Act (CCAA). The Initial Order allowed the debtors to borrow $4.5 million from Fiera. In return, Fiera was granted an interim lender's charge against the assets of the debtors, with priority over other secured creditors, in accordance with section 11.2 of the CCAA.

On August 31, 2017, the Superior Court granted an Order approving the sale of certain assets of the debtor. Post-filing creditors then requested the Monitor to distribute proceeds.

The Monitor applied to the Superior Court to receive instructions on two questions: the definition of post-filing creditors, and the order of priority upon which the funds should be distributed. On the first question, Justice de Blois defined post-filing claims as a claims arising after the Initial Order. On the second question, the Superior Court gave post-filing creditors priority over secured creditors.

Fiera appealed to the Court of Appeal, alleging that the lower court erred in establishing the order of priority and overriding its priority as interim lender.

The Decision

The Court of Appeal found that the Superior Court made a reviewable error.

While section 11.01 provides that no order made under section 11 or 11.02 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 after the order is made, it does not provide post-filing creditors with a priority per se. If post-filing creditors want to obtain security, they must obtain an order modifying the initial order, because such a priority cannot be implicit.

In the case at hand, post-filing creditors had not obtained such an order. Since the initial order had not been amended to modify the priorities, the post-filing creditors' claims were unsecured, and no order declaring the post-filing creditors to be critical suppliers had been sought, the Superior Court could not modify the order of priority of the post-filing creditors' claims.

As a result, the Court of Appeal overturned the Superior Court's decision and confirmed Fiera's super-priority as interim lender.

Takeaway

The decision establishes the steps post-filing creditors must take to obtain a priority over secured creditors. Post-filing creditors can obtain priority over secured creditors, if they obtain an order modifying the priorities of creditors, including as set out in the initial order. Considering this, it is advisable for suppliers to ensure prepayment for goods and services supplied to a company in CCAA proceedings, as post-filing creditors may not be paid if there are insufficient funds for the company to do so, given the priorities of the claims of other creditors.

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