What Happened to Sears Canada?
“It is of extreme importance that provision be made to ensure that this process is fair, open and transparent.”
“Suppliers are entitled to a window on the process.”
- Lou Brzezinski, Globe and Mail, July 14, 2017
Blaneys on Sears CCAA
Sears Canada Inc. and its affiliated companies obtained insolvency protection under the Companies’ Creditors Arrangement Act on June 22, 2017. Sears Canada has locations across Canada that it intends to close as part of its restructuring efforts. Sears Canada obtained an order for a Sales Investment and Solicitation Process (“SISP”) on July 13, 2017 which allows it to sell all or part of its business assets in Canada. Court filing indicating that there may be a management bid and a shareholders bid. Given that these bids are both non-arms-length, suppliers are entitled to a window on this process to ensure the process is fair, open and transparent.
Why This Matters to You
Right now there is uncertainty. You are unsure that the amounts owed to you will be paid, partially paid or not paid at all. A robust sales process by Sears Canada will maximize the funds available to all creditors including unpaid suppliers.
Blaney McMurtry LLP urges you to engage in this website as a guide for creditors that have a stake in Sears Canada’s ongoing restructuring and liquidation proceedings. Our goal is to bring stakeholders and creditors together with a view to collaboration and to create a committee of creditors to participate in the insolvency process undertaken by Sears Canada. Strength in numbers with your input will stand to improve legal proceedings for your organization.
Background on Sears Canada
Sears Canada Inc. is a publicly traded company listed on the Toronto Stock Exchange and NASDAQ. It has 225 stores across Canada and employs approximately 17,000 people. Its head office and corporate headquarters is located in Toronto, Ontario, with the majority of its business being conducted in Ontario. Sears Canada is the parent company of several wholly-owned subsidiaries, including Corbeil Électrique Inc., a Quebec corporation that carries on the Corbeil retail stores.
Sears Canada has several retail channels, including its department stores; Sears Home stores, which carry furniture, mattresses and appliances; Sears Hometown stores, which are independently owned and operated through a network of dealers often in markets that do not have the population to support a full department store; outlet stores; and Corbeil stores. Sears Canada also has five national logistics centres, and 705 order fulfillment/pick-up locations across Canada.
Why Sears Failed
For an overview of Sears Canada’s business, and reasons for the failure of Sears Canada, please click here to refer to the Affidavit of Billy Wong, EVP and CFO for Sears Canada, filed as part of the insolvency proceedings.
Sears Canada failed for the following reasons:
- a general weakening of the traditional Canadian retail industry and the entrance of competitive key players, particularly luxury retailers and international retailers, into Canada;
- unsustainable fixed costs from an overly broad footprint;
- the decline of the catalogue business;
- lower than expected conversion of catalogue customers to online customers;
- the imposition of reduced terms by vendors supplying inventory to Sears Canada;
- challenges with respect to its pension and post-retirement benefit obligations;
- the inability to secure an agreement with a financial institution for the management of its credit and financial services operations; and
- the weakening of the Canadian dollar.
Sears is Insolvent
Between 2013 and 2016, Sears Canada attempted to address its liquidity concerns through joint ventures, sale and leaseback transactions, lease terminations and the sale of assets. The proceeds from these transactions were largely used to fund strategic initiatives, including the following:
- Sears 2.0 - Moving Sears Canada’s physical retail stores to a more productive model with respect to products, faster inventory turns and an assessment of the required square footage per store.
- Initium - A technology platform used to upgrade Sears Canada’s e-commerce experience and logistics capabilities.
- New Off-Price Business, Fast Fashion and Sears Label Essentials - Launching Sears Canada’s new off-price business (The Cut @ Sears) as well as its new fast fashion offering and rebranding Sears Canada’s private label businesses.
However, Sears Canada can no longer continue implementing its operational restructuring without additional funds. As at April 29, 2017, Sears Canada’s total assets were $1,187 million, while its liabilities were $1,108 million, consisting mostly on accounts payable, accrued liabilities, long-term debt and retirement benefit liability. Since Sears Canada requires additional funding in order to meet its obligations as they come, it is insolvent.
Sears Canada filed for insolvent protection under the Companies’ Creditors Arrangement Act on June 22, 2017. It has obtained financing for the CCAA proceeding (known as debtor-in-possession or “DIP” financing) consisting of a $300 million revolving credit facility as well as a term loan for $150 million, in order to help it operate during the CCAA.
Insolvency Protection under the CCAA
What is the CCAA?
The Companies’ Creditors Arrangement Act (commonly referred to as the “CCAA”) is a Federal Act that allows insolvent corporations with debts exceeding $5 million to restructure their affairs. The CCAA is typically used to reorganize large insolvent entities or in complex proceedings where companies continue to operate and are ultimately sold with a view to emerging as a successfully reorganized entity.
It is quite common now for there to be liquidating CCAA proceedings in which there is no successful restructuring of the business, but rather a sale of the assets and a distribution of the proceeds of the liquidation to the creditors of the business. Sears Canada is taking a hybrid approach - it is looking to liquidate 59 stores and restructure the remainder of its stores.
How does the CCAA process begin?
The process begins when the debtor company applies to the court for insolvency protection under the CCAA. The court will issue an “Initial Order” giving the company 30 days of protection from its creditors by staying all proceedings and actions against the company, and not allowing creditors to commence new proceedings or actions. Typically, the court will continue the protection offered by the stay of proceedings beyond the initial 30-day period. There is no limit on how long the stay can be extended.
What is the effect of the Initial Order for Suppliers?
The Initial Order prevents creditors from taking any collection steps against the debtor, including self-help remedies. For suppliers of products and services, this means that they are prevented from discontinuing supply arrangements with the debtor. Moreover, 30-day goods suppliers are not entitled to repossess their product once the CCAA process as commenced. Preference payments may also be clawed back.
However, set-off rights continue to exist so all rebates, refunds and returns can be retained or used to set off against the debt. All shipments after the Initial Order can also be made on a “cash on delivery” basis.
What is the Plan of Compromise or Arrangement?
The Plan of Compromise or Arrangement (“Plan”) is the proposal that the debtor company presents to its creditors, which addresses how it intends to deal with the debt that it owes to its creditors as at the time of the initial filing with the court. A meeting of the creditors is called to allow the creditors the opportunity to vote on the Plan. In order to be able to vote and receive any distribution under the Plan, a creditor must file a Proof of Claim with the Monitor.
What is the role of the Monitor?
A Monitor is an independent third party who is appointed by the court to monitor the company’s ongoing operations and assist with the filing and voting on the Plan. The Monitor is often referred to as a neutral watchdog because it is required to act in the best interests of all stakeholders.
The Monitor does not take possession or control of the debtor’s assets. The debtor company remains in control of its operations during the CCAA proceeding, but the Monitor assists and provides advice to the company regarding its restructuring efforts.
Who can vote on the Plan?
All creditors with proven claims are entitled to vote on the Plan. The debtor in conjunction with the Monitor divide the creditors into different classes for the purposes of voting on the Plan. Classes of creditors may include: (a) employees; (b) landlords; and (c) goods and services providers or suppliers.
For the Plan to be binding on each class of creditors, the Plan must be approved by: (a) a majority of the proven creditors in that class by number; together with (b) two-thirds of the proven creditors in that class by dollar value. If a class of creditors approves the Plan, it is binding on all creditors within the class, subject to the Court’s approval of the Plan.
If the Plan is passed by the requisite majority, the debtor company can then go to the court to seek the court’s approval of the Plan.
Who is given special priority?
The CCAA permits the debtor corporation to borrow funds during the protection period to assist it financially. The creditor who makes this loan is afforded special priority and is often referred to as the “DIP Lender,” with the funds advanced being referred to as “DIP financing”.
The fees of the Monitor and its counsel, and the fees of the counsel to the debtor company, are charges against the assets of the debtor, and given special priority in the proceedings.
Your Legal Team
A creditors’ committee is formed by two or more creditors having similar types of claims against the debtor, who engage a lawyer to represent them in respect of their common goals.
Why join the creditors’ committee?
A creditors’ committee represents the most cost-efficient and effective way for unsecured creditors and suppliers of Sears Canada to have a meaningful say in the CCAA proceedings. For a comprehensive article providing cogent reasons to form and join a creditors’ committee click here. There are three main benefits to forming a creditors committee, as set out below:
Collective Influence and Action
Decisions regarding the restructuring process cannot be made by Sears Canada unilaterally. A creditors’ committee can provide significant input into the Plan of Compromise and Arrangement, and Sears Canada’s orderly winding down. A committee of creditors will have more influence on Sears Canada, the court, and the outcome of the CCAA proceeding, than one creditor acting alone. Debtors are far more willing to work with a group of creditors holding substantial claims and voting power, than with individual creditors.
Control of Information
Members of a creditors’ committee will receive more detailed information on Sears Canada throughout the course of the restructuring process.
Minimizing Fees and Expenses
Acting in a group can significantly reduce the professional fees and expenses that would otherwise be incurred by creditors looking to have an input into Sears Canada’s restructuring process. In some cases, creditors’ committees may receive court-approved funding from the debtor itself.
Accordingly, a creditors’ committee comprised of suppliers to Sears Canada will have an opportunity to provide input on matters such as:
- The claims process, including a schedule for inputting claims and documents, the procedure for the determination of claims, and a dispute resolution process. A claims process is important to creditors because this process will determine the value of a creditor’s claim for distribution and voting purposes.
- The DIP financing used by Sears Canada during the CCAA proceedings.
- The sale and investment solicitation process initiated by the debtor company in order to seek out proposals for the acquisition of or investment in Sears Canada’s business, property or leases.
- Whether to proceed with a motion to the court to incorporate the repossession rights into the CCAA proceedings, which would allow suppliers to repossess their goods within 30 days of the date of the insolvency.
- The potential priority of licensees in the insolvency.
What are the next steps?
A creditors’ committee requires court recognition.
Blaney McMurtry LLP seeks suppliers of Sears Canada interested in having an input in the insolvency proceedings to join the creditors’ committee. If sufficient interest is garnered, Blaney McMurtry LLP will apply to the court for recognition of a suppliers’ committee and to have the committee’s professional fees paid by Sears Canada.
If you are interested in joining the creditors’ committee and receiving timely information with respect to Sears Canada’s ongoing insolvency process, or if you are interested in learning more about Blaney McMurtry LLP, click here.
Lou Brzezinski and Alexandra Teodorescu are your legal team, here to help guide you through this process. They possess sharp minds and direct experience with the CCAA process, including experience on another precedent-setting case in 2015 - the Target Canada CCAA.
the target experience
Suppliers achieved significant success as a result of Target creditors joining together and collectively retaining Blaney McMurtry LLP.
Target Canada formed a consultative committee - which included the Blaneys team of Lou Brzezinski and Alexandra Teodorescu - whose function was to provide guidance and advice to the Monitor. The active involvement of the suppliers led to Target USA subordinating its claims and freeing up substantial funds so that each supplier obtained a payment of 80 cents on the dollar (an amount almost unheard of) as a result for unsecured decision in an insolvency.