Supreme Court

SUPREME COURT OF Nova Scotia

IN BANKRUPTCY AND INSOLVENCY

Citation: Chester Basin Seafood Group Inc (re), 2023 NSSC 388

Date: 20231201

Docket: No.  45611

Registry: Halifax

Estate Number: 51-3007018 

 

 

 

Registrar:	Raffi A. Balmanoukian, Registrar in Bankruptcy
Heard:	November 24, 2023, in Halifax, Nova Scotia
Final written submissions:	November 24, 2023
Counsel:	-         Sharon Kour, for Chester Basin Seafood Group Inc. -         Joshua Santimaw, for Grant Thornton Limited, Proposal Trustee -         Stephen Kingston and Graham Headley (articled clerk), for 4519497 Nova Scotia Limited, proposed debtor-in-possession lender -         Gavin D.F. MacDonald, for the Toronto-Dominion Bank, secured creditor -         Dennis Clarke, for Pluto Investments Inc., secured creditor

 

 

By the Court:

[1]             I heard this multi-faceted application by the consent of the parties, pursuant to Section 192(1)(j) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 as amended (the “BIA”).  That is a tribute to the numerous participating counsel; by coming to that consent, this matter was heard on an expedited basis and included matters over which I otherwise would not have had jurisdiction.  All stakeholders conducted themselves, to each other and to the Court, with the utmost courtesy, professionalism, and candour.  The Court is grateful.

[2]             At the conclusion of the hearing, I granted the Order as sought and as drafted, with reasons to follow.  These are they.

[3]             Chester Basin Seafood Group Inc. (“Chester Basin” or “the Company”) has seen better days.  On November 7, 2023, it filed a Notice of Intention to Make a Proposal under the BIA.  Its initial 30-day period has not yet expired, however, despite considerable initial activity to which I will return, it is apparent that it would not be in a position to make that proposal before the initial period expired. It is to the credit of the parties that they did not wait until the last minute to ask for an extension under s. 50.4(9) of the BIA, and in fact brought the Court “into the loop” as early as November 14 (by correspondence from Mr. Santimaw asking for a date assignment in anticipation of filing).  Although documentation came in up to and including the day of hearing, the bulk of it came on November 21, allowing the Court adequate time for review (it also allowed some “breathing room” for the matter to be referred to a Justice on such issues over which I did not have non-consensual jurisdiction, if it turned out a party did not consent to my hearing such items[1]).  It also appeared that other major creditors were kept apprised as matters developed – in other words, this application was not “dropped” on them at the last minute.  That, too, reflects prudence and mutual respect.

[4]             The initial application sought the following, which I have rearranged for the order in which I will address them in this decision:

•        An abridgment of notice and service periods pursuant to Rule 6 of the BIA General Rules;

•        Approval of a $100,000 Administration Charge pursuant to s. 64.2 of the BIA;

•        A 45-day extension for the time in which to make a proposal, pursuant to s. 50.4(9) of the BIA; and

•        Approval of a $1.1 million dollar debtor-in-possession (“DIP”) priority charge pursuant to s. 50.6 of the BIA.

[5]             At the hearing, I again confirmed that all consented to my hearing all of these matters on the merits[2].

Abridgement of time and service, and a note on CRA

[6]             No party objected to the application for abridgement of time.  For the reasons noted above, I considered it appropriate as well.[3]

[7]             I was satisfied that secured creditors had been served, subject to the abridgement noted above.  I expressed concern that the Canada Revenue Agency was not on the service list, given that some of the relief I was being asked to provide had the potential to take priority to debt that may be owing to them.  In this, I cited the comments of Justice Moir in Re Rosedale Farms Limited et al, 2017 NSSC 160.  I agree wholeheartedly with his comment at paragraph 45:  “We do not take rights away from people without giving them an opportunity to be heard.”  He went on to say:

[50]        Section 50.6 of the Bankruptcy and Insolvency Act was created by S.C. 2007, c. 36, s. 18. Subsection 50.6(2) empowers the court to order “priority over the claim of any secured creditor” for DiP financing security. Subsection 50.6(1) allows for the financing and its security but only “on notice to the secured creditors who are likely to be affected by the security or charge”. These clear words answer any notion there may have been that secured creditors may lose their rights without having an opportunity to be heard.

[51]        The Canada Revenue Agency received no notice of the motion for DiP financing. Therefore, even if the Income Tax Act did not give the deemed trust for unremitted holdings priority over all security including that for DiP financing, the charging order would not bind Revenue.

[52]        The parties supporting priority for the DiP charge complain that they were unaware of the debt for unremitted withholdings. Again, there is a narrow and a broader response.

[53]        The statute does not require notice only to the secured creditors of which the party seeking a charging order is aware.

[54]        More broadly, an insolvent business with employees might well be in default of their obligation to remit funds withheld from employees. While the exact amount may not be known right away, the fact of a sizable default was ascertainable through a review of bank records by the interim receiver. Those would show when payrolls were met and whether payments were remitted to Revenue. [emphases added]

[8]             I went on to note that the balance sheet in evidence shows an HST receivable, and that the corporate accumulated deficit makes it unlikely that there are net income taxes owing.  The Proposal Trustee represented to the Court that there are no other (known) CRA obligations (i.e., payroll remittances, excise).  In a leisurely situation, I may well have adjourned the matter for this to be properly proven[4]; however, given this representation coupled with my own reading of the balance sheet and the amount sought to be placed in priority, I accept in these narrow circumstances that it was appropriate to proceed, including counsel’s representation that CRA will be served on a go-forward basis.

The Administration Charge

[9]             Section 64.2 of the BIA reads:

64.2 (1) On notice to the secured creditors who are likely to be affected by the security or charge, the court may make an order declaring that all or part of the property of a person in respect of whom a notice of intention is filed under section 50.4 or a proposal is filed under subsection 62(1) is subject to a security or charge, in an amount that the court considers appropriate, in respect of the fees and expenses of

(a) the trustee, including the fees and expenses of any financial, legal or other experts engaged by the trustee in the performance of the trustee’s duties;

(b) any financial, legal or other experts engaged by the person for the purpose of proceedings under this Division; and

(c) any financial, legal or other experts engaged by any other interested person if the court is satisfied that the security or charge is necessary for the effective participation of that person in proceedings under this Division.

(2) The court may order that the security or charge rank in priority over the claim of any secured creditor of the person. [emphasis added]

[10]         Just prior to the hearing, counsel for The Toronto-Dominion Bank (“TD”) advised that the affected stakeholders agreed to amend the amount of the Administration Charge from $100,000 to $50,000.  My canvass of the Courtroom confirmed this. 

[11]         Once again, that consensus is helpful.  But it does not bind the Court.  I am in concert with no less an authority than Ontario’s Chief Justice Morawetz that one of the weakest arguments in favour of issuance of an order is “because we agree.”  It is but a factor to be taken into consideration in the proper and judicial exercise of the Court’s discretion.

[12]         The affected known commercial stakeholders whose priority would be affected were served; my comments with respect to CRA are above. 

[13]         Upon my review of the work done and which is expected immediately to be done by the Company’s professional advisors and Proposal Trustee, and in my own review of the size of the Company’s balance sheet and enterprise, I believe the $50,000 is fair and reasonable, and I approve it.

The 50.4(9) Extension

[14]         Once again, there was consensus that I should grant the requested extension of time to make a proposal pursuant to 50.4(9) of the BIA, which reads:

(9) The insolvent person may, before the expiry of the 30-day period referred to in subsection (8) or of any extension granted under this subsection, apply to the court for an extension, or further extension, as the case may be, of that period, and the court, on notice to any interested persons that the court may direct, may grant the extensions, not exceeding 45 days for any individual extension and not exceeding in the aggregate five months after the expiry of the 30-day period referred to in subsection (8), if satisfied on each application that

(a) the insolvent person has acted, and is acting, in good faith and with due diligence;

(b) the insolvent person would likely be able to make a viable proposal if the extension being applied for were granted; and

(c) no creditor would be materially prejudiced if the extension being applied for were granted.

[15]         And, once again, that consensus is helpful and of guidance, but is not binding and does not fetter the Court’s discretion.

[16]         With that said, I was and am satisfied that the tests of lack of material prejudice and the likelihood of the development of a viable proposal were cleared with room to spare.  In particular, the evidence was that the Company is moving into its most active part of the year (the silver hake harvest) and that the prospects of financial viability to the benefit of creditors will increase, not decrease, in the immediate future as its vessels are put back into service (as I will discuss under the DIP application).  I heard nothing to indicate a present lack of confidence from senior lenders in the current management.

[17]         I wish to add a word on the remaining branch of the test, namely good faith.  Counsel for the Company cites the decision of Justice Goodfellow in Re H&H Fisheries, 2005 NSSC 346 for the proposition that good faith is, in effect, the absence of bad faith.  He said, at para. 17:

The converse of good faith is bad faith and bad faith requires a motivation and conduct that is unacceptable.

[18]         Respectfully, I don’t think that Justice Goodfellow’s comment goes that far.  To the extent it might, however, I believe those 2005 comments have been superseded by at least two developments:  The addition of Section 4.2 of the BIA which requires all proceedings to be conducted in good faith; and the pronouncements of the Supreme Court of Canada on good faith in such cases as Bhasin v. Hrynew, 2014 SCC 71; C.M. Callow Inc. v. Zollinger, 2020 SCC 45; and Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7.

[19]         While these cases deal with the good-faith exercise of contractual rights and obligations, they go further and speak of “honest performance” and “appropriate regard” for the other party (while recognizing that legitimate self-interest does not contradict those obligations).  Put another way, I read the good faith requirements in the BIA as a positive obligation, not as the “absence of negatives.”  I further emphasize that this test is not a mere catechism, to be satisfied by a bald statement that “we are acting in good faith and with due diligence.”  The Court should have sufficient material upon which to make that evaluation, itself.

[20]         I leave for another day, and perhaps for a more close-run thing, a more fulsome and robust discussion of this point.  For current purposes, it is adequate to observe the steps taken by the Company in the last three weeks.  Mr. Teixeira outlines these at paragraph 76 of his affidavit, and the Proposal Trustee at Paragraph 29 of its First Report.  In summary, these include discussions with major stakeholders (which as this decision illustrates, have been at least partially fruitful), arrangement of DIP financing (to be discussed), continuance of operations (including dealing with suppliers), and at least some activity to solicit new investment.[5]  Both of these documents are both comprehensive and candid and were of considerable assistance.

[21]         Having found that the 50.4(9) test is met, I must turn to whether I should exercise my discretion in granting the extension.  There is no juristic reason in this instance of a first extension not to do so.  The application is granted.

The DIP Financing

[22]         Finally – and the only matter of disagreement among participants for current purposes – was the application to approve $1.1 million in debtor-in-possession priority financing in favour of 4519497 Nova Scotia Limited, a company controlled by Mr. Teixeira.  That loan is in two tranches - $450,000 to repair two of the company’s three vessels, currently both out of commission; and $600,000 for working capital.  It is worth noting that Mr. Teixeira claims he has advanced another $200,000 to get the third vessel back in the water (no retroactive priority is, or could be, claimed from the Court for this advance – BIA 50.6).  Other shareholders also apparently have direct or indirect investments in, or loans to, the Company.

[23]         Section 50.6 of the BIA reads, in part:

50.6 (1) On application by a debtor in respect of whom a notice of intention was filed under section 50.4 or a proposal was filed under subsection 62(1) and on notice to the secured creditors who are likely to be affected by the security or charge, a court may make an order declaring that all or part of the debtor’s property is subject to a security or charge — in an amount that the court considers appropriate — in favour of a person specified in the order who agrees to lend to the debtor an amount approved by the court as being required by the debtor, having regard to the debtor’s cash-flow statement referred to in paragraph 50(6)(a) or 50.4(2)(a), as the case may be. The security or charge may not secure an obligation that exists before the order is made.

…

(3) The court may order that the security or charge rank in priority over the claim of any secured creditor of the debtor.

…

(5) In deciding whether to make an order, the court is to consider, among other things,

(a) the period during which the debtor is expected to be subject to proceedings under this Act;

(b) how the debtor’s business and financial affairs are to be managed during the proceedings;

(c) whether the debtor’s management has the confidence of its major creditors;

(d) whether the loan would enhance the prospects of a viable proposal being made in respect of the debtor;

(e) the nature and value of the debtor’s property;

(f) whether any creditor would be materially prejudiced as a result of the security or charge; and

(g) the trustee’s report referred to in paragraph 50(6)(b) or 50.4(2)(b), as the case may be.

[emphasis added]

[24]         TD, through counsel, objects to the terms of the proposed loan, namely a 15% interest rate and a 1.5% commitment fee, for a six month term (resulting in an effective interest rate somewhere north of 18%, depending on the timing and amount of drawdown).  I share those concerns, and invited submissions on whether I have authority to modify the terms, or only the “amount” as contemplated by s. 50.6(1) of the BIA.

[25]         I was referred to Re Crystallex International Corp (2016), 43 CBR (6^th) 250 (OSC) , a CCAA proceeding.  Justice Newbould varied several provisions in the proposed DIP loan.  No authority was cited for the Court’s ability to do so.  Leaving aside the scope of CCAA authority versus BIA authority[6], and the inherent jurisdiction of the Supreme Court versus the statutory authority of the Registrar, it was common ground (and I agree) that even if I could vary the terms, I could not compel Mr. Teixeira’s company to accept those amendments, or to disburse pursuant to them. 

[26]         Put another way, this term sheet is “take it or leave it” insofar as this Court is concerned, in such matters as rate and length of loan term. My authority is to approve it or not, subject to my authority to vary the amount secured and its priority (in which case, again, such modifications would not compel a lender to accept those changes).

[27]         There is no competing lender offering alternate financing, at present.  I saw no provisions in the term sheet that would preclude it from being paid out without notice or penalty (and counsel for the Proposal Trustee said there are none) – so quite aside from any anti-deprivation considerations that might arise which could have caused the Court concern with such a penalty, if a better deal comes along, the Company is free to take it.

[28]         I am satisfied that the priority sought is appropriate in relation to the balance sheet of the Company; this is particularly so given that Mr. Teixeira has an existing investment in the Company; and more germanely, $450,000 will be an immediate investment in repairing two necessary vessels, which will in turn enhance their inherent value and value-in-use.

[29]         The cash flow statement satisfies me that the net cash burn expected over the next 13 weeks will consume all or substantially all of the remaining $600,000.  I considered whether it was more appropriate to vary the amount to provide for enough cash for the period of the extension – 45 days.  The cash flow statement satisfies me that the cash burn over that month and a half is sufficiently front-loaded as to make that an academic exercise.

[30]         In argument, I referred stakeholders to Nautican v. Dumont, 2020 PESC 15, in which Justice Gormley declined DIP financing in favour of the insolvent’s sole shareholder; that non-arm’s length relationship distinguished the case, according to Justice Gormley, from Re Colossus Mineral Inc., 2014 ONSC 514.  He said, at para. 30:

I have come to the conclusion that this is not an appropriate situation to order a DIP Loan for a number of reasons. First of all, the DIP Loan is being offered by the sole shareholder of the debtors and the terms requested include a super priority over the interest of all creditors.  In other words, the management of the debtors is offering the loan.  It is not being offered by a creditor or an arm’s length party. This differentiates this situation from the decisions referred to by the debtors including Colossus Mineral Inc., Re, 2014 ONSC 514 (hereinafter “Colossus”) decision. [emphasis added]

[31]         However, he goes on in the same and the next paragraph to link that non-arm’s length relationship with an important factor:  the lack of confidence of senior lenders in existing management, who of course were one and the same.  That is not the case here, at least at present.  As well, it is worth noting that Mr. Teixeira is (indirectly) a minority shareholder and has already advanced some $200,000 to the Company, and other shareholders appear to have done so, directly or indirectly, as well.

[32]         I am satisfied that this distinguishes the Nautican case.  I would be very concerned if a sole or controlling shareholder sought to lend money to an insolvent company on onerous terms including a “superpriority,” if the Court had the suspicion that the end game was to scoop up the assets on a distressed basis, and leave the other stakeholders out to dry.  That is not the impression I have here.

[33]           Section 50.6(5) directs me to consider a non-exhaustive list of factors.  I can consider others that I deem relevant, and I have discussed some of them above.  To continue with interpolated comments, subsection five provides:

(5) In deciding whether to make an order, the court is to consider, among other things,

(a) the period during which the debtor is expected to be subject to proceedings under this Act;

•        This is currently unknown, as an initial extension application; however, the loan is due in six months and as noted, can be paid out if a better deal comes along, including by an existing secured lender who deems it prudent to protect their position.

(b) how the debtor’s business and financial affairs are to be managed during the proceedings;

•        The company is in obvious immediate need of cash, to get its vessels back in the water and for working capital.  There is no suggestion that these are improvident or speculative or exaggerated.  Although TD asks the rhetorical question of “where did the money go,”[7] it also does not currently suggest any improper financial conduct.

(c) whether the debtor’s management has the confidence of its major creditors;

•        As discussed above, I neither heard nor suspected a lack of confidence from participating stakeholders.

(d) whether the loan would enhance the prospects of a viable proposal being made in respect of the debtor;

•        The ability of the Company to repair and put three vessels in the water during “peak harvest season” speaks for itself, both as to value and value-in-use.  This can only enhance the prospects of a viable proposal; the working capital “cash burn” in evidence makes it clear to me that bankruptcy would be both quick and inevitable without that additional tranche of funding.

(e) the nature and value of the debtor’s property;

•        The corporate balance sheet shows the book value of assets of some $13 million.  About a quarter of that is unspecified “Goodwill, transaction costs, and incorporation.”  Another $4.3 million is the book value of quota and licenses (their fair market value of this, or anything else, was not in evidence).  Against that, the two vessels under repair may safely be said to be distressed and perhaps the subject of other disputes if not put back into use, quickly.

(f) whether any creditor would be materially prejudiced as a result of the security or charge; and

•        While I have concern that the priority sought pushes TD and Pluto down the line to this extent, as I have noted they (or others) could ‘cash out’ this loan and redeem their place in the creditor hierarchy at will.  I can take judicial notice that TD, as a Schedule I bank, would have the easy wherewithal so to do.  I have no information on Pluto.

(g) the trustee’s report referred to in paragraph 50(6)(b) or 50.4(2)(b), as the case may be.

•        The Trustee supports the transaction and outlines that the terms, while perhaps somewhat above a running average among peer insolvencies, is not so egregious as one may suspect, particularly in light of recent rapid escalation in market interest rates. 

[34]         I grant the DIP charge, in the amount and on the terms, and with the priority, set out in the proposed lender’s term sheet.

[35]         No party sought costs.  None are ordered.

[36]         Once again, I extend my thanks to all counsel, and to attending stakeholders, for their professionalism.

Raffi A. Balmanoukian, Registrar in Bankruptcy