SUPERIOR COURT OF JUSTICE – ONTARIO

COMMERCIAL LIST

RE: IN THE MATTER OF A PLAN OF COMPROMISE OR ARRANGEMENT OF NORTHSTAR AEROSPACE, INC., NORTHSTAR AEROSPACE (CANADA) INC., 2007775 ONTARIO INC. AND 3024308 NOVA SCOTIA COMPANY, Applicants

BEFORE: D. M. Brown J.

COUNSEL: M. Konyukhova, for the Applicants

Craig J. Hill, for Ernst & Young Inc., Court-Appointed Monitor

S. Weisz, for Fifth Third Bank as Pre-filing Agent and DIP Lender

C. Prophet, for Boeing Capital Loan Corporation

HEARD: August 7, 2012

REASONS FOR DECISION

I. Motion under the CCAA to authorize payment to critical supplier of pre-filing costs

I. Motion under the CCAA to authorize payment to critical supplier of pre-filing costs

1Northstar Aerospace, Inc. (“Northstar Inc.”), Northstar Aerospace (Canada) Inc. (“Northstar Canada”), 2007775 Ontario Inc. and 3024308 Nova Scotia Company (collectively, the “CCAA Entities”) applied for and were granted protection under the Companies’ Creditors Arrangement Act (the “ CCAA ”) pursuant to an Initial Order of this court dated June 14, 2012 (the “Initial Order”). Ernst & Young Inc. was appointed as Monitor (the “Monitor”) of the CCAA Entities and FTI Consulting Canada Inc. (“FTI Consulting”) was appointed Chief Restructuring Officer (“CRO”) of the CCAA Entities.

2Certain of Northstar Canada’s direct and indirect U.S. subsidiaries (the “Chapter 11 Entities”) commenced insolvency proceedings (the “Chapter 11 Proceedings”) pursuant to Chapter 11 of the United States Bankruptcy Code on June 14, 2012 in the United States Bankruptcy Court for the District of Delaware (the “U.S. Court”). The CCAA Entities and the Chapter 11 Entities are sometimes collectively referred to herein as “Northstar”.

3Northstar supplies components and assemblies for the commercial and military aerospace markets, and provides related services. Northstar provides goods and services to customers all over the world, including military defence suppliers, as well as the U.S. army. Northstar’s products are used in the Boeing CH-47 Chinook helicopters, Boeing AH-64 Apache helicopters, Sikorsky UH-60 Blackhawk helicopters, AgustaWestland Links/Wildcat helicopters, the Boeing F-22 Raptor Fighter aircraft and various other helicopters and aircraft.

4The history of this proceeding is set out in previous endorsements of Morawetz J., most recently his Reasons dated July 30, 2012 ( 2012 ONSC 4423 ) approving the Heligear Transaction, vesting all of the Canadian Purchased Assets in the Canadian Purchaser free and clear of all restrictions, and authorizing and directing the Monitor, on the closing of the Heligear Transaction, to make distributions to the DIP Agent for the DIP Lenders and to the Lenders in accordance with their legal priorities.

5The Heligear Transaction has not yet closed.

6Changsha Zhongchuan Transmission Machinery Co., Ltd., a manufacturer of gears located in Hunan, The People’s Republic of China, is the exclusive supplier to Northstar Canada of the gears that make up the components in gearboxes sold by Northstar to General Electric Company on an on-going basis. According to Nigel Meakin, a senior managing director of the CRO, the gears provided by Changsha are essential to Northstar’s continued supply of gearboxes to GE on a timely basis in accordance with the Revenue Sharing Agreement between Northstar Canada and GE.

7Changsha rendered two invoices to Northstar Canada totaling US$ 135,226.06 prior to the Initial Order. Those invoices remain unpaid. Notwithstanding that paragraph 17 of the Initial Order requires Changsha to continue supplying goods to Northstar Canada, Changsha has informed the CCAA Entities that until the two invoices are paid, it will not supply further materials to Northstar Canada. The evidence discloses that re-sourcing the gears would take approximately 12 months, and the inability of Northstar to deliver gearboxes “may imminently impact GE production lines”.

8Under the Heligear Transaction the amounts owing under the Changsha invoices might be treated as Cure Costs, making them payable by the CCAA Entities on closing. The CRO deposed, however, that given the urgency of obtaining supply from Changsha, it is necessary for payment of the invoices to be made whether or not the amounts are Cure Costs and, in any event, payment is required earlier than the closing date.

9The CCAA Entities therefore move for an order authorizing them to make a payment of US$ 135,223.06 to Changsha in respect of those amounts owing for supplies delivered prior to the commencement of these CCAA proceedings.

II. Positions of the parties

II. Positions of the parties

10The Monitor supports the relief requested. Fifth Third Bank does not oppose the relief sought; Boeing Capital supports the motion. All wish to see the Heligear Transaction close quickly. No interested person appeared to oppose the motion or communicated its opposition to the CCAA Entities or the Monitor.

III. Analysis

III. Analysis

11In Cinram International Inc. (Re) [1] Morawetz J. accepted, as an accurate summary of the applicable law on this issue, the following portions of the applicant’s factum in that case:

Entitlement to Make Pre-Filing Payments

67. There is ample authority supporting the Court’s general jurisdiction to permit payment of pre-filing obligations to persons whose services are critical to the ongoing operations of the debtor companies. This jurisdiction of the Court is not ousted by Section 11.4 of the CCAA , which became effective as part of the 2009 amendments to the CCAA and codified the Court’s practice of declaring a person to be a critical supplier and granting a charge on the debtor’s property in favour of such critical supplier. As noted by Pepall J. in Re Canwest Global , the recent amendments, including Section 11.4 , do not detract from the inherently flexible nature of the CCAA or the Court’s broad and inherent jurisdiction to make such orders that will facilitate the debtor’s restructuring of its business as a going concern.

Canwest Global supra , at paras. 41 and 43; Book of Authorities, Tab 1.

68. There are many cases since the 2009 amendments where the Courts have authorized the applicants to pay certain pre-filing amounts where the applicants were not seeking a charge in respect of critical suppliers. In granting this authority, the Courts considered a number of factors, including:

a. whether the goods and services were integral to the business of the applicants;

b. the applicants’ dependency on the uninterrupted supply of the goods or services;

c. the fact that no payments would be made without the consent of the Monitor;

d. the Monitor’s support and willingness to work with the applicants to ensure that payments to suppliers in respect of pre-filing liabilities are minimized;

e. whether the applicants had sufficient inventory of the goods on hand to meet their needs; and

f. the effect on the debtors’ ongoing operations and ability to restructure if they were unable to make pre-filing payments to their critical suppliers.

Canwest Global supra , at para. 43; Book of Authorities, Tab 1.

Re Brainhunter Inc. , [2009] O.J. No. 5207 (Sup. Ct. J. [Commercial List]) at para. 21 [ Brainhunter ]; Book of Authorities, Tab 13.

Re Priszm Income Fund (2012), 75 C.B.R. (5 th ) 213 (Ont. Sup. Ct. J.) at paras. 29-34 ; Book of Authorities, Tab 14.

12In the present case the evidence disclosed that the materials supplied by Changsha are integral to the business of the CCAA Entities, they depend on the uninterrupted supply of those goods, and they lack a sufficient inventory of the goods on hand to meet their needs, with the potential of imminently affecting the production lines of GE, one of their customers.

13The Monitor supports the order sought; no party opposes the motion.

14Although Changsha is subject to the critical supplier provisions of the Initial Order, the simple reality of the situation is that Changsha is located outside the jurisdiction of this court and the courts in the parallel U.S. Chapter 11 proceedings. Enforcement of the Initial Order against Changsha could not occur in a timely fashion. In my view, this practical reality weighs heavily in favour of granting the order sought, although granting the order, in a sense, rewards improper conduct by a critical supplier who has ignored an order of this court and has the effect of countenancing a form of hard-ball queue-jumping.

15That said, in light of the support by interested parties for the order sought, business realities must prevail in order to ensure the continued operation of Northstar Canada pending closing of the Heligear Transaction. Accordingly, I grant the order requested by the CCAA Entities and authorize them to pay Changsha the amount of US$ 135,223.06 in satisfaction of the two invoices.

D. M. Brown J.

Date : August 7, 2012

12012 ONSC 3767