September 5, 2017

The Companies’ Creditors Arrangement Act (CCAA) provisions are facilitated by a trustee in bankruptcy working in conjunction with lawyers and the courts.

In layman’s terms a CCAA is essentially a large dollar value proposal filed as an adjunctive provision of the Bankruptcy & Insolvency Act (“BIA”) through a bankruptcy trustee.   Some trustee’s specialize in filing CCAA proceedings, and because of the size and complexity of the files they tend to work very closely with equally specialized legal professionals.

Consumer Proposals (and Corporate Proposals) which are filed under either Division One or Division Two of the BIA are more codified that CCAA proceedings.  Rather than following strict rules, CCAA files are far more court driven.  Essentially that means the time lines for acceptance of the proposal can be a little fuzzy and the nature of the relief sought and granted by the courts can be far more flexible than under the more strict regimes of Divisions I & II of the BIA.

So what does all of that mean for the creditors?

First of all keep in mind that creditors will come in all shapes and sizes from large manufacturers supplying big ticket items right down to the local plumber who was called in to unblock the toilets.  Some creditors may hold security interests in goods supplied while others may hold a priority status in the proceeding – such as for underfunded pensions or employees for unpaid wages and CRA for source deductions and excise tax.

As the file progresses the trustee will ask the courts and the creditors to agree to postpone collection activity pending the calculation of what the dollar value of a proposal offering would look like.  The trustee in conjunction with legal counsel will determine the grouping of creditors into classes.  For example all the landlords holding unexpired leases may constitute one group, unpaid company employees another, clothing suppliers, furniture suppliers, and so forth.  Once the classes have been formed a formula for the division of asset proceeds will be determined.  The creditors will have the opportunity to vote on the acceptance of the proposal which must be ratified by the court long before funds are disbursed.

The whole process of administering a CCAA file from the original court application appointing the trustee and granting of the initial stay of proceedings, through to the formulation and approval of the proposal itself, including court appearances, to the final distribution of money to the last of the creditors may take several years.  So if you are hoping to receive some money as a creditor do not expect that it will paid out quickly after the trustee has been appointed.

Of course some of the larger creditors will be able absorb the shock of loss because they have so many other corporate customers and sufficient margins on their sales.  But smaller local suppliers will take the hardest hit.

The future and indeed the very existence of small local companies can be determined by the behaviour of big box stores.  Imagine for instance there is a producer of a widget that retails for $40.00 who produces and sells the product to regular local customers for $20.00 per part.  They produce and sell about 100,000 widgets every year that are sold to twenty customers the company generates gross revenue of $2 million.  The company has enough revenue to cover its overhead and make a modest profit.

Then along comes a big box store similar to Target and they offer to buy 100,000 widgets per month from the company, but they want a break on the price so that they can sell it for a discount.  After doing the math and talking to suppliers about discounts the company figures that if it buys a new widget stamping machine it can get the price down to $10.00 per part at that volume.

The company’s banker is pleased with the freshly inked contract and they agree to fund the purchase of the widget stamping machine and provide an operating line.  The company goes ahead and hires new staff and away it goes, cranking out widgets.  At first things seem to be going according to plan and the Big Box Company (“BBC”) pays as agreed, a month or two later than the other customers but they are buying bigger volume and the bank has extended its line of credit to carry the company over the extra wait time.

Initially it looks like the company has “arrived” – all those years of hard work building and refining widgets has finally paid off.   Until, the purchasing department from BBC calls and advises that the widgets are selling reasonably well but they need a better price.  The company sharpens its pencil before getting the next BBC order and manages to shave a few more dollars off in return for a larger order.  After all at these volumes how can it miss?

The next call the company gets is form the legal department of BBC – they want to negotiate another amendment to the contract so that they can have a longer tail on paying the company’s invoices.  At first the company balks at the prospects of waiting longer for its money until the legal team reminds it that there was a wiggle clause in the contract and if it went to litigation it could be very costly.  In the alternative to not agreeing to the amended contract terms the company is welcome to pick up its widgets and sell them to its old customers.

Now for the bad news that is not an imaginary scenario that type of thing actually happens in the supply chain to big box stores.  In fact Walmart has recently been receiving some bad press on the very topic of renegotiating with their suppliers.  A recent piece on CBC Radio about Target’s and Walmart’s bullying negotiating tactics sounded very similar to the scenario played out above.

At this point if you are Target’s number one widget supplier and you have built your company on the basis of the contract with that firm you are in deep trouble.  You still have to pay for your widget stamping machine, you still have to deal with all the other aspects of your expansion but your market has gone.  Now what?  Will you be talking with a bankruptcy trustee and will your employees?

While your contract may have increased the revenue of your company, on paper at least, by a significant value the absence of that one single contract may put you out of business and your employees out of work.  As a creditor in the estate you are only a bit player, you can vote in your class to accept or reject the proposal offering which will undoubtedly be, at best, pennies on the dollar.  However, your vote is not enough to change the structure of the proposal and even if you got together with the other aggrieved small suppliers to mitigate your legal costs you will find the court considering the big picture (broader impact) of the proposal offering and not necessarily the effect on smaller suppliers exclusively.  In short “you’re cooked”.

If you happened to be “Franz the Plumber” and you received a call to replace fifteen toilets at BBC, don’t just view that as a great opportunity to get your foot in the door.  You should rather view that as a risky venture that may soak up many, or even all, of your resources, inhibiting your ability to conduct other business as usual.   Would you want to restructure your business practices to inure to the benefit of just one client, BBC?

The initial conversation in the media about Target has been focused on gross mismanagement and the loss of 18,000 jobs.  But as the dust settles on the CCAA file the repercussions will be felt by many more people along and across the supply chain, including suppliers of all types of goods and services from widgets to repairs and even professional services.  And we haven’t even touched on the losses in pension portfolios.

The takeaway from this story is “be careful what you wish for”.  There can be great rewards from getting into bed with BBCs but the risks are immense too.  Caveat emptor.