SUPREME COURT OF Nova Scotia
IN BANKRUPTCY AND INSOLVENCY
Citation: Atlantic Sea Cucumber Limited (re), 2023 NSSC 238
Date: 20230721
Docket: No. 45461
Registry: Halifax
Estate Number: 51-2939212
In the Matter of: The intention to make a proposal by Atlantic Sea Cucumber Limited
Registrar: |
Raffi A. Balmanoukian, Registrar in Bankruptcy
|
Heard: |
July 17, 2023, in Halifax, Nova Scotia |
Final Written Submissions: |
July 17, 2023 |
|
|
Counsel: |
Darren O’Keefe and Caitlin Fell, for the applicant Atlantic Sea Cucumber Limited (“ASC” or the “Debtor”) Joshua Santimaw, for the Trustee MSI Spergel Inc. (the “Trustee”) Gavin D.F. MacDonald and Meaghan Kells, for the objecting creditor, Weihai Tawei Haiyang Aquatic Food Co. Ltd. (“WTH”) |
Revised Decision: The text of the original decision has been corrected according to the attached erratum, dated July 25, 2023.
Balmanoukian, Registrar:
[1] On July 19, 2023, I wrote to Counsel in the form attached, dismissing the application by Atlantic Sea Cucumber Limited (“ASC” or “Debtor”) for an extension of time to file a proposal pursuant to s. 50.4(9) of the Bankruptcy and Insolvency Act, RSC 1985, c. B-3 as amended (the “BIA”), following an unsuccessful application to convert the matter to a proceeding under the Companies Creditors Arrangement Act , RSC 1985, c. C-36, as amended (the “CCAA”). This exension application also sought to abridge time for making that application, and for the matter to be heard by a Justice or by the Registrar on an emergency basis, ex parte. The Trustee, MSI Spergel Inc. (the “Trustee”) supported this application. The objecting creditor, Weihai Tawei Haiyang Aquatic Food Co. Ltd. (“WTH”) did not. This document is to put that communication in reportable form. With the exception of this introductory paragraph, and to add paragraph numbers, there have been no changes from the body of that letter, and it is so reproduced below.
[2] On Monday, July 17, 2023 at 4:00 pm, I heard this application on an emergency basis. At the conclusion of that hearing, I gave a ‘bottom line’ decision dismissing the application, with reasons to follow, in accordance with the Court of Appeal’s comments in R. v. Desmond, 2020 NSCA 1 respecting written supplements to oral decisions. As I understand an appeal has been filed (which I have not seen), I will do so in this format and in a summary fashion.
[3] On May 1, 2023, the Debtor filed a Notice of Intention to make a proposal. On May 26, 2023, Debtor’s counsel filed a first application to extend time pursuant to s. 50.4(9) of the BIA. I granted it (and an application for abridgement of time) on May 31, 2023, which was the last day of the initial stay. Mr. MacDonald, for WTH, did not object to the abridgement but did object to the extension (or in the alternative sought a shorter extension). I granted the extension for the full 45 days, given that a 30 day period proposed by Mr. MacDonald as an alternative to a refusal would coincide with the Canada Day weekend. However, I expressed significant concern both with the timing of the application, in light of the timing of the Trustee’s first report (May 24, 2023) and observed that there may have been incomplete communication between Trustee and Debtor for a period of time between the initial NOI and the Trustee’s first report. I emphasized to all parties that I would be seeking fulsome evidence of substantive progress, should a further extension be sought.
[4] On July 6, 2023, the Debtor sought to convert to CCAA proceedings. That was heard, I understand on a contested basis, before Justice Rosinski on July 13, 2023, two days before the BIA stay was set to expire. No prior application was made to extend the BIA stay. I was advised by counsel that the determination to seek to proceed under the CCAA was made in “late June” and that it was deemed to be a “no brainer” that the initial CCAA order would be granted, notwithstanding that it was to be contested.
[5] On the afternoon of July 13, 2023, Justice Rosinski heard the CCAA application and I understand that was dismissed on Friday, July 14, 2023 with reasons that are yet to follow.
[6] WTH asserts that the BIA stay expired on Saturday, July 15. It argues that the federal Interpretation Act, not the Civil Procedure Rules, applies and that Saturdays “count” for such purposes. As such, the application for extension of time that was filed and heard on Monday, July 17 was out of time. That application also sought to abridge time, and for the matter to be heard ex parte (although WTH, the Trustee, and perhaps others were in fact served).
[7] That application was filed with the Supreme Court, not with me as Rule 9(5) of the BIA General Rules require; in fairness, the cover email to the Court sought either a Justice or the Registrar, and the matter was redirected to me.
[8] I did not explicitly deal with the ex parte element of the application, as the objecting creditor and trustee in fact appeared, and I was prepared for the sake of argument to accept that the July 17 application was not out of time.
[9] I was presented with the Trustee’s second report, which was principally if not exclusively for the CCAA proceedings. I was also advised that the Trustee had completed an inventory and the report contains a cash flow projection (including $325,000 in professional fees over four months on $800,000 in sales), and obtained an opinion on the “validity and enforceability” of security granted by the Debtor to a non-arm’s length entity.
[10] WTH objects to various assumptions and elements in this opinion, including under ss. 95 and 137 of the BIA and the Statute of Elizabeth. It points out that the security was granted just after Justice Coughlan’s decision in favour of WTH against the Debtor (2023 NSSC 27), and just two months prior to the Debtor’s NOI, although it purports to secure advances made in 2018.
[11] Because of this dispute (and continuing developments in determining creditors), it is currently unclear whether WTH has a ‘veto’ on any proposal or not. Although I am cognizant of Justice Moir’s decision in Kocken (2017 NSSC 80) that adverse statements by a veto-holder with respect to a proposal are not determinative of its ultimate viability, in these circumstances I did pay some attention to WTH’s comments, for reasons to which I will return.
[12] Against that backdrop, I considered (using the assumption that the application was not in fact out of time to begin with) the three part test in s. 50.4(9) BIA, which may be summarized as present and continuing good faith and diligence, the “likelihood” of an ultimate viable proposal, and lack of material prejudice to any creditor. I further considered whether, should the test be met, granting an extension would be a proper exercise of my resultant discretion. I will discuss the 50.4(9) requirements in inverse order.
Prejudice
[13] WTH concedes that an extension would not materially prejudice it under 50.4(9)(c). I agree.
Proposal viability
[14] I was asked for a ten day extension, following Justice Rosinski’s oral decision. This was not ultimately for the purposes of getting a proposal out to creditors or before the Court, but to assemble the materials to make a further extension application. In short, the “no brainer” that the Debtor thought it had in obtaining the CCAA initial order caught the Debtor with its pants down when the application was refused at a minutes-to-midnight deadline.
[15] This is not the test under 50.4(9)(b) respecting “proposal viability” although I conclude that the application fails not for lack of viability, but under 50.4(9)(a)’s requirement for good faith and due diligence or, if I am wrong, because I would not exercise my discretion in favour of the Debtor.
[16] In Re T&C Steel Ltd. et al, 2022 SKKB 236, Justice Scherman reviewed the ”viability” test, particularly in the context of a second (or subsequent) application, as follows:
[7] In Enirgi Group Corp. v Andover Mining Corp., 2013 BCSC 1833, 6 CBR (6th) 32 [Enirgi Group], the Court said:
[66] Turning to s. 50.4(9)(b), a viable proposal is one that would be reasonable on its face to a reasonable creditor; “this ignores the possible idiosyncrasies of any specific creditor”: Cumberland [[1994] OJ No 132 (Ont Ct J)] at para. 4. It follows that Enirgi’s views about any proposal are not necessarily determinative. The proposal need not 2022 SKKB 236 (CanLII) - 4 - be a certainty and “likely” means “such as might well happen.” (Baldwin [[1994] OJ No 271 (Ont Ct J)], paras. 3-4). And Enirgi’s statement that it has lost faith in Andover is not determinative under s. 50.4(9): Baldwin at para. 3; Cantrail at paras. 13-18).
[17] The Court went on to cite my own decision in Re Scotian Distribution Services Limited, 2020 NSSC 131, drawing a distinction between a “first extension” and a subsequent one. Justice Scherman was quite critical of the dearth of information before it, granting the second extension by the proverbial skin of its teeth.
[18] In summary, the test for the likelihood of a viable proposal is an objective one: Nautican v. Dumont, 2020 PESC 15 at paras. 16-18. Chief Justice Kennedy put it this way (invoking the inimitable Justice Farley in the process) in Re Scotian Rainbow Ltd. et al, (2000), 186 NSR (2d) 154 at para. 17 et seq.:
[17] As to s. 50.4(9)(b), that the insolvent person would likely be able to make a viable proposal of the extension being applied for were granted. Counsel for the primary creditor Shur Gain, in support of the applicant, has brought to this Court’s attention the case of Re Baldwin Valley Investors Inc. (1994), 23 C.B.R. (3d) 219. In that matter Justice Farley of the Ontario Court of Justice (General Division) (which it then was), Justice Farley considers the phrase a viable proposal as set out in subsection (b) of s. 50.4(9). He says that that phrase should take on a meaning akin to one that seems reasonable, a proposal that seems reasonable on its face to the reasonable creditor. Reasonable on its face to the reasonable creditor. Justice Farley says this ignores the possible idiosyncrasies of any specific creditor. Justice Farley also examines the meaning of the word ‘likely’, and refers to the Concise Oxford Dictionary of current English where likely is defined, and I quote:
Might well happen or turn out to be the thing specified.
[18] Might well happen or turn out to be the thing specified...I am in agreement with Justice Farley’s determinations as to the meaning of these words, and I adopt his findings as to their meanings for our purposes. When I make reference to those words for our purposes, I am adopting Justice Farley’s definitions.
[19] While I have very considerable doubts in the context of a second extension of “viability,” particularly given WTH’s express loss of confidence in the Debtor and its ability to drive a proposal, given the objectivity of the test and the binding comments of Justice Moir in Kocken, I am compelled on a bare balance of probabilities for current purposes to conclude that the “viability” test, as interpreted by the caselaw, has been met.
Good faith and due diligence
[20] That leaves us with 50.4(9)(a) – the due diligence and good faith tests – and with my discretion.
[21] Mr. O’Keefe urges that in his experience, the 59.4(9)(a) inquiry is little more than a catechism – a recitation by the Trustee that good faith and due diligence are at hand. I do not accept that is appropriate. It is a determination to be made by the Court, not by the Trustee. It is also something of an exercise in “don’t ask a barber if you need a haircut.” I observed this in stark relief at the initial extension application when the Trustee’s representative (a different individual from that later involved in the file) became quite agitated when I challenged the timeline leading up to that initial (and successful) extension application and whether developments to that date passed the “due diligence” test.”
[22] The current case is something of an unusual situation in that although there were notable developments between May 31 and July 6, they were primarily if not exclusively geared towards converting the insolvency to CCAA proceedings. As I read the BIA, the “good faith and due diligence” requirement relates to the development of a viable proposal, not to other insolvency options. In Re Royalton Banquet and Convention Centre Ltd. 2007 CanLii 1970 (Ont. SC), the Court refused an extension when nothing had been done “in preparing the proposal.” While there was no indication on whether any other work had been done at all (unlike the present case), I read this as supporting the view that due diligence relates to moving the (likely viable) proposal forward – not other options.
[23] Again, it appears that the Debtor thought a Justice would “rubber stamp” an initial CCAA order, filed on the eve of the expiry of the initial BIA extension, and when it was unsuccessful was left scrambling for a second BIA extension – not having left time either for a Justice to consider the CCAA application in a timely fashion, or to make a timely application to extend the 50.4 timeline should that be unsuccessful (as it ultimately was). As I discuss below, as well, I question whether in the last 75 days, more could have been done to determine who are the creditors and what is their status. On balance, I am not convinced that what has been done, in these circumstances, are adequate to satisfy me to a civil standard of due diligence.
[24] Which brings me to good faith. There are two places where this is relevant: directly, in the 50.4(9)(a) test, and more holistically under Section 4.2(1) of the BIA.
[25] I begin by observing that a failure to prove good faith is not the same as a finding of bad faith. It does not require malice or caprice or abuse of process. It is an affirmative test – that there is good faith; not the presence or absence of bad faith.
[26] At all Court stages of this and the CCAA proceeding, there have been distinct flavours of attempts to “strong arm” the Court by compressing timelines where the upshot has been “you have to sign this or disaster will result.” It will be recalled that the initial 50.4(9) extension was filed on May 26 (together with an application for abridgement of time) and was heard on the very last possible day. The CCAA application was heard on the last juridical day before that extension expired (having been filed seven days prior). The CCAA materials make the point that if the initial CCAA order was not granted, a disastrous bankruptcy would follow; when that was rejected, the Debtor returned (arguably out of time) to this Court making the same argument, and sought to do so ex parte (although again, in fairness, having in fact given short notice to adverse parties).
[27] I was not presented with any reason for this. It is not consistent with good faith and fair dealing. It is, conversely, consistent with attempting to compel the Court to the Debtor’s agenda and objectives.
[28] Inconsistent with good faith as well is the current state of affairs. Distilled, it is this: “we were unsuccessful in the CCAA application. We don’t have any additional materials to put in front of you; we don’t even know what the creditor matrix is going to look like, given a potential substantial additional creditor and the security dispute. So give us ten days to pull that all together because we didn’t think we would fail on the CCAA application.”
[29] In Cogent Fibre Inc., 2015 ONSC 5139, Justice Penny said this, which I find completely consistent with my prior comments on "recalcitrant creditors” not being determinative but yet not relieving the Debtor of its burden under 50.4(9):
[17] In effect, Cogent says it needs more time to continue discussions with its two major creditors when at least one of those creditors (a creditor with veto power) has not engaged in any discussions with Cogent and has no intention of doing so. Cogent’s position is, I find, entirely tautological.
[18] In his factum and in oral submissions, counsel for Cogent emphasized the rehabilitative nature of the proposal sections. He relied heavily on recent Ontario and B.C. authority to the effect that a veto-empowered creditor’s statement that it will never agree to a proposal is not dispositive of whether to terminate or refuse to extend a stay. I quite agree with this position and the supporting law. Creditors often, for strategic reasons, say they will never agree.
[19] Nevertheless, it seems to me there must be a certain forthrightness on the part of the debtor about what is sought to be achieved. There must also be an air of reality about the likelihood of any proposal being viable. [emphases added]
[30] In this case, the Debtor is essentially saying, “we need more time to get a third extension request in front of you, because we didn’t get what we wanted under the CCAA. We know there will be a sale, but we can’t tell you yet what that is going to look like or who is going to be voting in what proportions on it.” I cannot consider that, on a balance of probabilities, to be “forthright….about what is to be achieved,” or in furtherance of good faith. It is at least questionable whether it meets the test of due diligence as well.
[31] In making these comments, I wish to be clear that I am not making negative aspersions as to any individual. I am not privy to the communications among Debtor, Trustee, or Counsel. I am aware that the Debtor’s principal is in China and that this posed logistical and perhaps language barriers. This was not a new development and existed at least from the original NOI onward. What is clear is that, for whatever reason, the Debtor found itself in a situation that was awkward at best and out of time at worst, and expected the Court essentially as a matter of right or rote, to fix it.
Discretion
[32] Finally, I turn to my discretion. 50.4(9) is permissive, not mandatory. It states that I “may” grant an extension (assuming it to be made in time) if the three part test is met. I have assumed the application was timely, and concluded the test was not met. If I am right on the first point and wrong on the second, however, I would not exercise my discretion in favour of the Debtor.
[33] The case law recognizes that a 50.4(9) extension is a discretionary order, if the conditions for its exercise have been met: see Re Dynamic Transport 2016 NBCA 70 at paras. 4 and 9; Re Entegrity Wind Systems Inc. 2009 PESC 25 at para. 30; Re Entegrity Wind Systems Inc. 2009 PESC 33 at para. 36; Royalton Banquet and Convention Centre Ltd. 2007 CanLii 1970 (Ont. SC).
[34] Thrice in this insolvency has the Debtor come forward on an “emergency” basis, in effect seeking forgiveness not permission. There are circumstances when that comes with the territory of insolvency. The subject can be on occasions sedate, in others it can develop in real time. However, here it was known both that there was a substantial adversarial and opposing creditor, that the Court was concerned with the prior timelines, and that the Creditor would be seeking to convert to CCAA proceedings no later than late June. It frankly appears that the Creditor did indeed consider such an application to be what counsel described to me as a “no brainer” and got caught flat-footed when (again at the last possible moment) the initial CCAA order was refused.
[35] It was argued that while this may have been a strategic or procedural mistake, the Debtor should not be held to account for that, given the alleged inimical consequences of a bankruptcy. While both the CCAA and BIA 50.4(9) arguments focused on this alleged destruction of value, no evidence of that was presented to me. I pointed out that a bankrupt can make a proposal (50(1) BIA), and this was argued to be undesirable given the dynamics of who would be “driving the bus” in a bankruptcy proposal versus an insolvency proposal. I did not find that persuasive in convincing me to exercise my discretion if I am wrong in finding that the 50.4(9) “good faith and due diligence” tests have failed. Indeed, it may well be that a change of drivers is exactly what is needed to move the sale process forward, given the other disputes in the file.
[36] As I have said, I am aware that my “bottom line” decision is under appeal, on grounds that I have neither seen nor heard. These reasons will illustrate the basis upon which that decision was made.
[37] Costs were not argued before me. In the circumstances, that issue should it arise is best left to the appellate Justice.
[38] Mr. O’Keefe, solicitor for the Debtor, is to provide a copy of this decision to the service list forthwith.
Balmanoukian, R.
SUPREME COURT OF Nova Scotia
IN BANKRUPTCY AND INSOLVENCY
Citation: Atlantic Sea Cucumber Limited (re), 2023 NSSC 238
Date: 20230721
Docket: No. 45461
Registry: Halifax
Estate Number: 51-2939212
In the Matter of: The intention to make a proposal by Atlantic Sea Cucumber Limited
ERRATUM
Registrar: |
Raffi A. Balmanoukian, Registrar in Bankruptcy
|
Heard: |
July 17, 2023, in Halifax, Nova Scotia |
Final Written Submissions: |
July 17, 2023 |
Erratum Date: |
July 25, 2023 |
Counsel: |
Darren O’Keefe and Caitlin Fell, for the applicant Atlantic Sea Cucumber Limited (“ASC” or the “Debtor”) Joshua Santimaw, for the Trustee MSI Spergel Inc. (the “Trustee”) Gavin D.F. MacDonald and Meaghan Kells, for the objecting creditor, Weihai Tawei Haiyang Aquatic Food Co. Ltd. (“WTH”) |
Erratum:
[1] Meaghan Kells was added as co-counsel for the objecting creditor.
[2] Additional underlining was included in paragraph 29.
[3] The word “Debtor” was added the counsel section on the title page and added to the decision in paragraph 1.