On September 8, 2020, Groupe Dynamite Inc. (“Dynamite”) filed for creditor protection under the Companies’ Creditors Arrangement Act (“CCAA”) in Quebec. Dynamite operates over 300 retail stores in Canada and the US.
Paragraph 22(b) of the Initial Order granted by the Quebec Superior Court reads as follows:
“Orders that the Debtors shall remit, in accordance with legal requirements, or pay: (…) all goods and services, harmonized sales or other applicable sales taxes (collectively “Sales Taxes”) required to be remitted by the Debtors in connection with sale of goods and services by the Debtors, but only where such Sales Taxes are accrued or collected after the date of this Order, or where such Sales Taxes were accrued or collected prior to the date of this Order but not required to be remitted until on or after the date of this Order.” [emphasis added].
At the filing date, Dynamite owed the Province of British Colombia (“B.C.”) approximately $993,000 of sales taxes collected since March 2020 but not remitted at the filing date. The obligation owing to B.C. was significant as a result of, inter alia, the enactment by B.C. of the Economic Stabilization (COVID-19) Act, SBC 2020 c 19 (the “Stabilization Act”), which as a result of the pandemic provided more time for debtors to pay to B.C. unremitted sales taxes beyond the normal course monthly remittance deadlines. Dynamite also owed other provinces a total of approximately $3.5 million in unremitted sales taxes that were collected prior but payable after the filing date.
Perhaps because Dynamite conducted business in most common law jurisdictions, Dynamite used the wording for Section 22(b) of the Initial Order, verbatim, of Paragraph 8 of the Ontario Commercial List CCAA model order rather than the Bar of Montreal’s model order.
The reason the Ontario model order has this wording may be to provide directors and officers of a filing debtor protection from governmental claims for unpaid sales tax obligations at the time of the filing; as those obligations typically attract personal liabilities for directors and officers.
On December 9, 2020, B.C. advised Dynamite of the pre-filing sales tax obligation and, in accordance with the wording of Section 22(b), issued a request for payment.
As a result of B.C.’s request for payment, on March 26, 2021, Dynamite brought an application, under Section 11 of the CCAA, to amend the Initial Order. The request was to modify the last part of the sentence in Section 22(b), whereby Dynamite would not have to pay pre-filing sales tax obligations that were collected before but payable after the filing date.
In its application, Dynamite principally relied on the general objectives of the CCAA to assist debtors to restructure their affairs. Dynamite also referred to the need for fairness amongst creditors as a reason not to pay B.C. its pre-filing obligations.
Dynamite pleaded that paying all unpaid pre-filing sales taxes would have a material adverse affect on its cash flow which was not contemplated in any cash flow projections filed with the court.
Dynamite maintained that the CCAA Application materials, including the form of Initial Order, was prepared on an emergency basis and its management did not realize the implications of Section 22(b).
Accordingly, Dynamite sought an amendment to the Initial Order such that pre-filing sales taxes payable to B.C. and all other provinces would be considered unsecured claims in the CCAA proceeding. The court-appointed Monitor supported Dynamite’s application.
In response, B.C. raised several objections to Dynamite’s application, including that:
- it was Dynamite that chose to use the wording in Section 22(b) in the Initial Order - the wording was clear and unambiguous;
- the court should not allow Dynamite to correct its mistake at the expense of B.C.; and
- the amendment sought was neither fair nor equitable as it will cause harm to a third party (i.e., B.C.).
On April 19, 2021, the court granted Dynamite’s application and amended the Initial Order to remove the sentence requiring Dynamite to pay B.C. unremitted pre-filing sales taxes. In its decision, the court discussed several issues:
- first, the court ruled that Dynamite acted in good faith and the drafting of the Initial Order did not reflect Dynamite’s intentions;
- second, the court felt the amendment sought was in keeping with the principal policy objectives of the CCAA, being to assist companies in restructuring their affairs. The consequences of not amending the Initial Order in this case would be detrimental to Dynamite’s chances of crafting a viable restructuring plan;
- third, the court noted that sales taxes accrued or collected prior to an Initial Order do not have priority under the CCAA; and
- fourth, the court felt that amending the Initial Order put B.C. into the position that Dynamite had intended at the time of the filing. It distinguished this situation from one where a party relied on the wording of an Initial Order and was prejudiced by, say, incurring post-filing liabilities in doing so.
For the authors, the key practice points and takeaways of the Dynamite situation include the following:
- Section 8 of the Ontario model order requires the payment of sales taxes collected before but not due until after the filing date. This is an obligation of the debtor, not simply authorizing the debtor to make these payments, as is the case in the B.C. model order. There may be differences regarding sales taxes in other provinces. Practitioners should make sure they are employing the intended wording in drafting the Initial Order;
- Should there be a more uniform model order used across Canada to limit any differences between using one Province’s model order vs. another? The Dynamite case uncovered a material difference in a provision that potentially had a very significant impact on the contemplated restructuring. Are there any others?
- As part of its pre-filing planning with a debtor company, proposed monitors should consider the potential for unremitted sales tax obligations that have already been collected but not due until after the filing date and highlight the issue for parties to consider the appropriate treatment of those unremitted sales taxes in the Initial Order; and
- Seeking an amendment to an Initial Order, however immaterial it may seem, should never be minimized. In Dynamite’s situation, the application was opposed and the court reserved judgment for nearly one month. This underscores the importance of considering all provisions of the order sought at the initial CCAA application, whether it is sourced from the model order or otherwise.