This article has been contributed to the blog by Marc Wasserman and Andrea Lockhart. Marc Wasserman is a partner in the insolvency and restructuring group of Osler Hoskin & Harcourt LLP, and Andrea Lockhart is an associate in the group.
The owners and operators of 428 KFC, Taco Bell and Pizza Hut restaurants across Canada recently filed for and received protection under the Companies’ Creditors Arrangement Act (the “CCAA”). Pursuant to his endorsement dated March 31, 2011, Justice Morawtez of the Ontario Superior Court (Commercial List), inter alia, confirmed the broad scope of the definition insolvency for the purposes of the CCAA and that a partnership could receive the benefit of a CCAA order, and granted a critical supplier charge for the first time under the newly-enacted critical supplier provisions.
The Court held that the Priszm Income Fund, Priszm Canadian Operating Trust, Priszm Inc. and KIT Finance (collectively, the “Applicants”) were companies to which the CCAA applied and that they were “insolvent” pursuant to the broad definition adopted by the court in Re Stelco. In such case, Justice Farley expanded the definition of “insolvent” in a CCAA context to reflect the rescue emphasis of the CCAA so as to include a financially troubled corporation “reasonably expected to run out of liquidity within reasonable proximity of time as compared with the time reasonably required to implement a restructuring”.
In this case, the Applicants’ sole operating entity was Priszm Limited Partnership (together with the Applicants, the “Priszm Entities”). Accordingly, the Applicants requested that the Court extend the benefit of the CCAA initial order to the partnership, including the stay of proceedings contained therein. The Court noted that the definition of an eligible company under the CCAA did not expressly include partnerships. However, the Court noted that it had exercised its inherent jurisdiction to stay proceedings with respect to partnerships and limited partnerships where it was just and convenient to do so (including, most recently, in the Canwest restructuring). Such relief has been held to be appropriate where the operations of the debtor companies are so intertwined with those of the partnerships or limited partnerships in question that not extending the stay of proceedings would significantly impact the effectiveness of the stay in relation to the debtor companies. The Court granted the requested relief in this case, recognizing that the Applicants were entirely dependent on the operations, assets and performance of the partnership.
The Applicants also requested that certain suppliers of poultry, food and restaurant consumables, and waste disposal, pest control and IT services be deemed to be “critical suppliers” within the meaning of section 11.4 of the CCAA. This newly enacted provision of the CCAA provides that a court may require a “critical supplier” to continue to provide goods and services to a CCAA debtor during the course of CCAA proceedings consistent with existing arrangements and past practice or as the court considers appropriate. Where the court makes such an order, the statute requires that the court provide the critical supplier with a charge in an amount equal to the value of the goods or services supplied under the terms of the order. In this case, the Court noted that the Priszm Entities were reliant on their ability to prepare, cook and sell products and noted that they maintained very little inventory due to the perishable nature of the products. In these circumstances, the Court was satisfied that any interruption of supply by the suppliers could have an immediate material adverse impact on the Priszm Entities’ business, operations and cash flow. Accordingly, the Court held it was appropriate to deem the suppliers to be “critical suppliers” and granted such suppliers a charge in an amount equal to the value of the goods and services supplied to the Priszm Entities after the date of initial order less all amounts paid by the Priszm Entities to such suppliers in respect of such goods and services. The Court also approved a modification of the payment terms to such suppliers, such that all suppliers in a certain category would be treated similarly to other suppliers in such category.

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