Anonymised, illustrative composite. A buyer bidding for a food manufacturer in proposal proceedings watched three key suppliers serve termination notices in the same week. The right diligence question was never whether they could terminate — it was what each notice said it was terminating for.
At a glance
A mid-market food group was bidding for a specialty manufacturer — sauces, dressings and private-label condiments — that had filed a notice of intention to make a proposal after losing a grocery listing worth a third of its volume. The plant and the people were still working. What the buyer was paying for was a running supply chain: eleven raw-material contracts, three of them single-sourced. Nine days into the proceedings, those three suppliers served notices of termination.
The buy-side instinct was that a stay stops creditors suing, not walking away. That is half right, and the wrong half decides the deal. A stay restrains actions and enforcement; a different provision keeps contracts alive, and it protects not the relationship but a specific list of grounds, leaving everything outside that list untouched.
So the question was not whether the suppliers could terminate. It was what ground each notice named. Notice A cited an insolvency event of default in the master supply agreement. Notice B cited the filing of the notice of intention. Notice C cited unpaid invoices from March, April and May — all pre-filing — and said nothing about insolvency at all.
The three were $4.1 million of a $10.0 million annual raw-material spend: glass and closures at $1.6 million, a vinegar grade at $1.3 million, and a proprietary spice blend used in four SKUs, single-sourced and not substitutable inside a quarter, at $1.2 million.
Supplier C's arrears were $214,000 — small beside the bid, and the number the file turns on, because reciting it is what made the notice work. The other two were owed $186,000 and $97,000 and pleaded neither. Both stayed, but moved the debtor to payment in advance, pulling roughly $240,000 of float out of the business over the eight weeks to closing.
BIA s.65.1(1), marginal note Certain rights limited, provides that where a notice of intention or a proposal has been filed, “no person may terminate or amend any agreement, including a security agreement, with the insolvent person, or claim an accelerated payment, or a forfeiture of the term, under any agreement, including a security agreement, with the insolvent person, by reason only that” — then the list: “(a) the insolvent person is insolvent; or (b) a notice of intention or a proposal has been filed in respect of the insolvent person.”
The unit the provision governs is the ground, not the counterparty. It does not freeze the relationship; it disqualifies two reasons. A delivery failure, a quality rejection, an expiry, or unpaid pre-filing invoices on an ordinary supply contract are all untouched. Reading s.65.1(1) as a blanket contract freeze is the commonest way a buyer over-values a distressed supply chain.
Two supporting rules finished notices A and B. Section 65.1(5) provides that “Any provision in an agreement that has the effect of providing for, or permitting, anything that, in substance, is contrary to subsections (1) to (3) is of no force or effect” — so the insolvency default clause was not merely unenforceable here, it was inoperative. Section 65.1(6) offers a narrow way out: the court may declare the subsections inapplicable where the applicant satisfies it that their operation “would likely cause it significant financial hardship”. Supplier A raised it on a $186,000 exposure and did not pursue it.
Supplier C is where the drafting matters. Section 65.1(2) provides that “Where the agreement referred to in subsection (1) is a lease or a licensing agreement, subsection (1) shall be read as including the following paragraph” — the added paragraph being non-payment of rent or royalties, or other payments of a similar nature, for a period preceding the filing. Parliament extended the shield to pre-filing arrears in two named cases and no others. A supply contract is neither, so Supplier C's ground was independent and its notice effective.
One more subsection shaped the commercial outcome without changing the legal one: s.65.1(4) preserves a supplier's right to be paid for what it provides after the filing and says nothing in the section is to be construed “as requiring the further advance of money or credit”. A supplier who cannot terminate can still stop extending trade terms.
The trustee wrote to suppliers A and B setting out s.65.1(1) and s.65.1(5). Both notices were withdrawn within eleven days, on cash-in-advance terms. Supplier C's termination stood, and the buyer treated the spice blend as a priced problem rather than a legal argument: it approached the supplier in its own name and bought a twelve-month transition supply agreement at a 9% premium, paying the $214,000 of arrears outside the estate as consideration for it.
The bid moved by $310,000. Treating all three contracts as lost would have taken about $1.4 million off a $6.4 million bid, which in a live auction is a losing bid. For the sibling problem, where the financing rather than the supply chain is reordered mid-proceeding, see the interim financing that outranked the existing lender.
The same architecture appears in the CCAA at s.34, with one difference that matters. Section 34(2) provides that “If the agreement referred to in subsection (1) is a lease, the lessor may not terminate or amend the lease by reason only that proceedings commenced under this Act, that the company is insolvent or that the company has not paid rent in respect of any period before the commencement of those proceedings.” The one ground that saved Supplier C is expressly closed to a landlord.
Nor is the protection mutual. Under CCAA s.32 the debtor may disclaim an agreement it is party to — “The company may not give notice unless the monitor approves the proposed disclaimer or resiliation” — with fifteen days for a counterparty to apply against it. A tenant can keep a below-market lease the landlord cannot terminate and shed an above-market one, so the lease schedule in a distressed deal is an option held by the debtor, not a fixed asset.
Both working assumptions were wrong, in opposite directions. That a filing stops counterparties walking over-values the target by treating an untested supply chain as secure. That all three contracts were gone under-values it by writing off contracts the Act had already saved. Here the second was the expensive error, and the answer sat in three PDFs read against one subsection.
The tell is unusually literal: a termination notice tells you whether it works. One reciting insolvency or the filing names a ground the Act has disqualified; one reciting arrears or a quality failure does not. The diligence version runs the other way — ask each material counterparty not whether it will stay, but what it would say its ground was.
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