Ontario Court of Appeal Confirms Pre-Filing Debts May Be Paid in Proposal Proceeding to Ensure Continued Critical Supply

On December 3, 2019, the Ontario Court of Appeal (the “OCA”) released its decision in 1732427 Ontario Inc. v. 1787930 Ontario Inc.¹ At issue was a pre-authorized debit payment processed by a supplier after a debtor filed a notice of intention to file a proposal under the Bankruptcy and Insolvency Act (the “BIA”). The motion judge had found this payment to be an exercise of a creditor remedy prohibited by the stay provisions of subsection 69(1) of the BIA. The judge did not examine whether the payment may have been consideration for continued critical supply pursuant to a bona fide post-filing agreement between the debtor and the supplier.

The OCA held that the BIA stay provisions are not a blanket prohibition against payment of pre-filing debts. Subject to the preference and transfer at undervalue provisions of BIA sections 95 and 96, the validity of a bona fide payment by a debtor is preserved by section 97 of the Act, even where such payment satisfies a pre-filing debt. Such transactions are often essential to a debtor’s restructuring as a going concern, and thus serve the primary purpose of the BIA’s commercial proposal provisions.

Because it was not clear from the record whether the motion judge had heard argument for the existence of a bona fide post-filing agreement for critical supply, the OCA remitted the matter back for a new hearing.

The Financial Services Group at Aird & Berlis regularly advises a broad range of stakeholders on proceedings initiated pursuant to the Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act. Details are available at our Financial Services webpage.