Copyright 2009, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Restructuring & Insolvency, April 2009

The dominant theme in recent judicial discussions in connection with the approval of cross-border DIP financing is the appropriateness of approving cross-border guarantees in connection with DIP financing; particularly when the court is asked to approve re-financing or a roll up of pre-filing indebtedness.

The most recent pronouncements on the subject were made in the CCAA proceedings of Indalex Limited, and certain of its affiliates (Indalex Canada). Indalex Canada brought a motion for approval of debtor-in-possession financing, as well as approval of a secured guarantee granted by Indalex Canada in favour of the DIP lenders guaranteeing the obligations of Indalex Canada's U.S.-based affiliates (Indalex US) under the DIP credit agreement.

The guarantee was determined to be appropriate in this case and, in his reasons, Justice Morawetz set out a list of factors relevant to the determination of the appropriateness of authorizing a guarantee in connection with a cross-border DIP facility (the Indalex Principles):

(a) the need for additional financing by the Canadian debtor to support a going concern restructuring;

(b) the benefit of the breathing space afforded by CCAA protection;

(c) the availability (or lack thereof) of any financing alternatives, including the availability of alternative terms to those proposed by the DIP lender;

(d) the practicality of establishing a stand-alone solution for the Canadian debtors;

(e) the contingent nature of the liability of the proposed guarantee and the likelihood that it will be called on;

(f) any potential prejudice to the creditors of the entity if the request is approved, including whether unsecured creditors are put in any worse position by the provision of a cross-guarantee of a foreign affiliate than as existed prior to the filing, apart from the impact of the super-priority status of new advances to the debtor under the DIP financing;

(g) the benefits that may accrue to the stakeholders if the request is approved and the prejudice to those stakeholders if the request is denied; and

(h) a balancing of the benefits accruing to stakeholders generally against any potential prejudice to creditors.

In the case of Indalex Canada, the court noted, inter alia, that it was unlikely that the guarantee would be called upon, that the benefits to stakeholders far outweighed the risk associated with the guarantee and that a stand-alone solution was impractical given the integrated nature of the business of Indalex Canada and Indalex US. The Indalex Principles were derived from recent judicial pronouncements on the subject, and create a unified roadmap that will be of assistance in future insolvency cases involving the approval of similar cross-border guarantees.

Blakes acted on behalf of Indalex Canada in connection with these proceedings.

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