Anonymised, illustrative composite. A buyer had diligenced a first-ranking security position and priced its bid off it. Four weeks into the CCAA proceeding the court put a new charge ahead of that security — and the buyer's real question became which dollars the new charge actually secured.
At a glance
An oilfield-services business filed under the CCAA after a customer concentration problem and a covenant breach arrived in the same quarter. It owned a rental fleet and held twenty-three master service agreements. A strategic buyer wanted both, and had built its bid on a diligence pack showing one secured creditor of substance: a term lender with a first-ranking general security agreement over everything. That security was the buyer's whole map of the capital structure — what a credit bid would have to clear, and therefore what the estate could be expected to accept. Four weeks in, the map changed.
The company applied for interim financing — a $6,000,000 revolving facility to fund payroll, fuel, insurance and the sale process itself — and asked the court to secure it by a charge ranking ahead of the term lender. The order was granted.
The buyer's model treated that as a $6,000,000 reduction in what its bid could recover for the term lender, and therefore as $6,000,000 of new leverage in the negotiation. That was wrong twice over. It assumed the whole authorised amount would be drawn, and, more seriously, it assumed a priming charge elevates the lender who holds it. It does not. It elevates the money advanced under it, and only the money advanced after the order.
Fleet appraisal: $18,400,000 orderly liquidation, $23,100,000 in-place. Term-lender exposure: $16,900,000. The interim facility was authorised at $6,000,000 but drawn against a court-approved cash-flow forecast; actual draws over the eleven weeks to closing were $4,100,000.
On the buyer's first model, $18,400,000 less a $6,000,000 charge left $12,400,000 for a $16,900,000 claim — a 73% recovery and a badly damaged senior lender. On the facts, the charge secured $4,100,000 of new advances and nothing of the term lender's own pre-filing debt, leaving $14,300,000 against $16,900,000, or 85%. The difference between those two numbers is the difference between a senior lender that will support a low bid and one that will fight it.
CCAA s.11.2 carries the marginal note Interim financing. Subsection (1) empowers the court, on application by a debtor company and on notice to the secured creditors likely to be affected, to declare that property is subject to a charge in favour of a person “who agrees to lend to the company an amount approved by the court as being required by the company, having regard to its cash-flow statement”. It then closes with the sentence that decided this file: “The security or charge may not secure an obligation that exists before the order is made.”
The unit is the advance, not the lender and not the facility limit. Two consequences follow, and both are commercial. An existing secured creditor who steps up as interim lender cannot roll its pre-filing exposure into the priming charge — a point that changes who is willing to fund. And an authorised facility is a ceiling, not a claim; what primes is what is drawn, which is why the cash-flow forecast attached to the order is a more useful document to a bidder than the order's headline number.
The priority itself comes from subsection (2), which is short and unconditional: the court “may order that the security or charge rank in priority over the claim of any secured creditor of the company”. Whether it should is governed by subsection (4), which directs the court to consider, among other things, how the business is to be managed during the proceedings, “whether the loan would enhance the prospects of a viable compromise or arrangement being made in respect of the company”, the nature and value of the property, “whether any creditor would be materially prejudiced as a result of the security or charge”, and the monitor's report.
One further constraint applies when interim financing is sought at the very outset. Subsection (5) provides that on or during an initial application no order shall be made “unless the court is also satisfied that the terms of the loan are limited to what is reasonably necessary for the continued operations of the debtor company in the ordinary course of business during that period”. Day-one interim financing is therefore sized to keep the lights on, not to fund a restructuring plan.
The buyer applied to be the interim lender. It had the cash, it wanted the information rights that come with funding the forecast, and it wanted the position: a charge ranking ahead of $16,900,000 of term debt on every dollar advanced. Over eleven weeks it drew $4,100,000 and, on the sale approval, credit-bid that amount into the purchase price rather than funding it twice. The term lender did not oppose: funding the facility itself would have added fresh exposure to a $16,900,000 problem and, because of the last sentence of s.11.2(1), moved no part of the existing debt up the queue.
The same mechanic exists under the BIA for a debtor in proposal proceedings, at s.50.6, but the numbering and the plumbing differ and it is worth getting right in a pleading. There the marginal note is Order — interim financing; the priority over secured creditors is in s.50.6(3), not (2); the factors are in s.50.6(5) and refer to the trustee's report rather than the monitor's; and s.50.6(2) limits an individual debtor to property acquired for or used in relation to a business. What has no BIA equivalent is the general discretion in CCAA s.11 sitting behind the CCAA version.
The second fork is a veto. Both statutes provide that a later charge may outrank an earlier one only with consent: CCAA s.11.2(3) allows the court to rank a charge ahead of one arising from a previous order under subsection (1) “only with the consent of the person in whose favour the previous order was made”, and s.50.6(4) is in the same terms. Whoever funds first therefore holds a veto over the deal's later financing — which is a reason to be the first interim lender that has nothing to do with interest rates.
On its first model the buyer would have bid a number premised on a senior lender recovering 73 cents and being grateful for it. The lender was recovering 85 and had a monitor's report behind the sale process. A bid built on the wrong recovery assumption does not merely under-clear; it reads as opportunistic, which costs credibility in a process where the estate chooses among bidders on more than price.
The tell was the phrase ‘$6 million DIP’ being used, in the buyer's own model, as a single figure. A priming charge has three numbers, not one: the authorised amount, the drawn amount, and the pre-filing exposure of the lender who holds it — which is always zero inside the charge. Any model that carries only the first is measuring the ceiling and calling it the claim.
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