Court File and Parties
COURT FILE NO.: CV-24-00717340-00CL DATE: 2024-03-28 SUPERIOR COURT OF JUSTICE - ONTARIO
RE: IN THE MATTER OF THE COMPANIES’ CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. C-36, AS AMENDED AND IN THE MATTER OF A PLAN OF COMPROMISE OR ARRANGEMENT OF PRIDE GROUP HOLDINGS INC. and those entities listed in Schedule “A” hereto
APPLICANTS
BEFORE: Chief Justice Geoffrey B. Morawetz
COUNSEL: Leanne Williams, Rachel Nicholson and Puya Fesharaki, for the Applicants Pamela Huff, Chris Burr and Daniel Loberto, for the Proposed Monitor, Ernst & Young Inc. Stuart Brotman and Daniel Richer, for the Syndicate Leaders Marc Wasserman and Harvey Chaiton, for Mitsubishi Raj Sahni, for the Directors and Officers Lee Nicholson, for Move Trust John Salmas, for the Bank of Montreal
HEARD and DETERMINED: March 27, 2024 REASONS: March 28, 2024
Endorsement
INTRODUCTION
1At the conclusion of this hearing, an order was granted with reasons to follow. These are the reasons.
2This application is brought by Pride Group Holdings Inc. and the other applicant companies (together, the “Applicants”), certain limited partnerships (the “LPs”) and other related non-Applicant entities (the “Additional Stay Parties”) set out in Schedule “A” hereto (collectively, the “Pride Group”) for an initial order (the “Initial Order”) and related relief under the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36, as amended (the “CCAA”).
3The Proposed Initial Order provides for, among other things:
(i) a stay of proceedings until April 6, 2024 in respect of the Pride Group, together with Sulakhan, Jasvir and Amrinder Johal (collectively, the “Personal Guarantors”); (ii) the appointment of Ernst & Young Inc. (“EYI”) as the Court-appointed Monitor (in such capacity, the “Proposed Monitor”); (iii) the appointment of RC Benson Consulting Inc. (“RCB”) as the Chief Restructuring Officer (the “CRO”); (iv) the approval of an Administration Charge and Directors’ Charge (as each term is defined below); (v) subject to the Governance Protocol (as defined below) which the Pride Group is required to comply with, the authority to (a) continue selling used or new trucks and trailers, and (b) remit proceeds of vehicle sales and lease collections from customers to the Pride Group’s secured lenders in repayment of pre-filing indebtedness, each in the ordinary course of business; (vi) the authority for Sulakhan Johal and the CRO to act as foreign representative in an application to recognize these proceedings under Chapter 15 of Title 11 of the United States Code (the “Bankruptcy Code”); and (vii) an order sealing the unredacted copy of the CRO Engagement Letter, as defined and attached as a confidential appendix to the Proposed Monitor’s Pre-Filing Report.
4The Pride Group is a privately held cross-border trucking and logistics conglomerate operating from more than fifty leased and owned facilities across Canada and the U.S. The Pride Group is responsible in some manner for the management of, or logistics in respect of, over 20,000 trucks across North America and has 558 employees, the majority of which are based in Ontario.
5The Applicants submit that the North American trucking and logistics industry is facing a prolonged downturn which can be traced to the COVID-19 pandemic and major geopolitical events.
6While the Pride Group has made significant efforts to manage its limited liquidity and sustain ordinary course operations, it has been forced to implement restructuring measures and to cease paying certain obligations to its lenders.
7Due to such non-payment, a majority of the Pride Group’s lenders have begun to take enforcement measures and exercise self-help remedies. The Pride Group has been unable to negotiate an acceptable standstill arrangement with its principal lenders.
8The Applicants state that without the relief requested, the Pride Group will be forced to cease operations.
FACTS
9The facts are set out in the Affidavit of Sulakhan Johal sworn March 26, 2024 (the “Johal Affidavit”).
10The Pride Group was founded by two brothers, Sulakhan and Jasvir Johal, as a used-truck dealer in 2010 operating from the back of a tractor-trailer in Mississauga, Ontario. The brothers remain involved with the Pride Group as directors and officers, shareholders and personal guarantors.
11Since its founding, the Pride Group has grown into a multi-national conglomerate with many different business lines, including:
(i) logistics and brokering services; (ii) selling and leasing new and used trucks, principally to entrepreneurial owner-operators (the “Owner-Operators”); (iii) providing trucking parts, servicing and fuel sales services to the Owner-Operators and others; and (iv) owning and operating more than forty real estate properties, which include dealerships, truck stops and other services and solutions.
12The Applicants consist of the operating companies, real estate holding companies and certain other holding companies that are either insolvent in their own right or have been rendered insolvent as a result of the Pride Group’s inability to continue to provide financial support to them. Many of the Applicants are borrowers and/or guarantors under the Pride Group’s various credit facilities with its lenders and are integral to its operations.
13The LPs and the Additional Stay Parties are entities that do not qualify as applicants under the CCAA by virtue of being limited partnerships or not being insolvent, but which are intertwined with the Applicants and the Pride Group’s operations. The Applicants submit that the LPs and the Additional Stay Parties require some of the same protections, including the stay of proceedings, in order for the Pride Group to continue to operate as a going concern.
14The Pride Group has numerous credit facilities, including the following:
(a) Operating Facilities - these facilities provide working capital to the Pride Group; (b) Floorplan Facilities – these facilities permit the acquisition of trucks that are subsequently made available for sale by the Pride Group; (c) Wholesale Leaseline and Lease Facilities – these facilities permit the leasing of trucks to end customers and include the financing arms of major truck manufacturers among others; (d) Securitization Facilities – several Pride Group entities are parties to securitization arrangements, whereby certain of the Pride Group entities sell “packages of leases” to securitization lenders, while continuing to service the transferred lease assets for the benefit of the Securitization Lenders who purchased the lease receivables; and (e) Real Estate and Mortgage Facilities – several lenders provide real property mortgages to certain of the Applicants.
15Each of these types of financing are used regularly in the business of the Pride Group and are necessarily intertwined to permit it to operate its various lines of business.
16The Applicant’s financial position has materially deteriorated as a result of the industry-wide downturn. The Pride Group has made significant efforts to improve its bottom-line, including winding-down unprofitable business lines, re-financing available equity, and selling excess assets.
17The Applicants state that higher delinquency rates, combined with additional strains on the Pride Group’s human resources and its financing flow-through structure, may have contributed to certain trucks having been pledged more than once and more than one lender now claiming an interest in the same collateral, a significant concern for all stakeholders.
18The Pride Group has not been able to mitigate the post-pandemic industry downturn. As a result, the Pride Group stopped paying its lenders in the ordinary course which caused those parties to begin to exercise their rights and remedies against the Pride Group and the Personal Guarantors.
19The Pride Group engaged EYI as its financial advisor and RCB as its CRO to assist it in addressing its financial and operational challenges and the multiple-pledging of truck assets. Among other things, EYI and RCB have assisted the Pride Group in developing a more robust governance structure and creating controls (the “Governance Protocol”) to ensure that the Pride Group’s various creditors’ security interests are protected.
20The Pride Group states that the protection of the CCAA is required in order to give it the breathing room it needs in order to:
(i) stabilize and continue its business operations; (ii) preserve jobs and serve its customers; (iii) collect outstanding receivables, maximize realizations on its inventory of trucks, excess real estate and other assets; and (iv) develop a restructuring plan with the goal of maximizing the ongoing value of the business for the benefit of its creditors, employees, customers, suppliers and other stakeholders and the communities affected by the Pride Group’s business activities.
ISSUES
21The principal issues on this Application are whether:
(a) the Applicants meet the criteria to obtain relief under the CCAA; (b) the stay of proceedings should be granted to the Applicants and extended to the LPs, Additional Stay Parties and Personal Guarantors; (c) the Applicants should be authorized to make certain pre-filing and post-filing payments; (d) the appointment of the Monitor, the CRO and the Foreign Representatives should be approved; (e) the Administration Charge and Directors’ Charge should be granted; and (f) the sealing order should be granted.
22The CCAA applies to a “debtor company” or affiliated debtor companies where the total of claims against the debtor or its affiliates exceeds five million dollars.
23I am satisfied that the Applicants are insolvent. They are facing a significant liquidity crisis and cannot satisfy their liabilities as they come due. Each of the Applicants is an “insolvent person” and a “debtor company” to which the CCAA applies.
24Subsection 9(1) of the CCAA provides that an application for a stay of proceedings under the CCAA may be made to the court that has jurisdiction in the province in which the head office or chief place of business of the company in Canada is situated.
25While certain of the Applicants include U.S. affiliates of the Pride Group, the Applicants’ chief place of business is Ontario, and its head offices are in Mississauga, Ontario. All of the U.S. members of the Pride Group report to the Canadian head office and the Canadian entities, and the Canadian employees provide operational and administrative functions for the Pride Group as a whole.
26If the proposed Initial Order and related relief is granted, the Pride Group has advised that it intends to commence recognition proceedings under Chapter 15 of the U.S. Bankruptcy Code in Delaware (the “Chapter 15 Proceedings”).
27Section 11.02(1) of the CCAA permits this Court to grant an initial stay of up to 10 days on an application for an initial order.
28The Applicants submit that they require the stay of proceedings and the other relief set out in the Initial Order to preserve the status quo and provide them with the breathing room necessary to advance their restructuring efforts. I am satisfied that this relief should be granted.
29The Applicants request that the benefit of the stay be extended to the LPs, Additional Stay Parties and Personal Guarantors.
30This Court has found it just and reasonable to extend the protection of the stay of proceedings to non-applicant limited partnerships and non-applicant affiliates where such parties are integrally and closely interrelated to the debtor companies’ business in order to ensure that the purposes of the CCAA can be achieved. (See: Re Canwest Publishing Inc., 2010 ONSC 222 at paras. 33-34; Target Canada Co. (Re), 2015 ONSC 303 at paras. 42-43; Re Just Energy Corp., 2021 ONSC 1783 at para. 116; Bed Bath & Beyond Canada Limited (Re), 2023 ONSC 1014 at para. 28; 4519922 Canada., Re, 2015 ONSC 124 at para 37).
31The Applicants submit that it is just and reasonable in the circumstances to extend the stay of proceedings to the LPs and Additional Stay Parties. The business and operations of the Applicants, the LPs and the Additional Stay Parties are heavily intertwined, and the stay of proceedings needs to be extended to the LPs and the Additional Stay Parties to maintain the overall stability of the Pride Group and preserve value for its stakeholders. I am satisfied that this relief is appropriate.
32The Applicants further submit that it is just and reasonable for this Court to exercise its discretion to extend the stay of proceedings in respect of the Personal Guarantors, who granted personal guarantees in respect of the indebtedness of the Pride Group to certain of its lenders, and against whom certain lenders have threatened personal proceedings.
33Section 11.04 of the CCAA provides that a stay pursuant to section 11.02 of the CCAA will not affect claims against third party guarantors of an applicant company, and section 11.03(2) provides that a stay pursuant to section 11.02 does not affect an action against a director on a guarantee given by the director relating to the company’s obligations or an action seeking injunctive relief against a director in relation to the company.
34Notwithstanding sections 11.04 and 11.03(2) of the CCAA, this Court has found that it has broad inherent jurisdiction under section 11 to grant stays in favour of third-party guarantors, including director guarantors, to ensure that the intent and purpose of the CCAA proceedings are not frustrated. (See: Balboa Inc. et al. (Re), (January 23, 2024), Toronto, CV-24-00713254-00CL at para. 32; Nordstrom Canada Retail, Inc., 2023 ONSC 1422, at paras. 40-42).
35This Court has granted stays in favour of non-applicant director guarantors where their involvement in defending potential claims would unduly strain the Applicants’ resources and be a significant distraction from the restructuring efforts to the detriment of all stakeholders.
36In the circumstances of this case, I am satisfied that this relief is appropriate to include in the Initial Order.
37The Applicants seek the Court’s authorization to make payments of certain (i) pre-filing amounts owing to independent contractors and subcontractors (including those providing office support as well as truck drivers) that provide services to the Pride Group incurred in the ordinary course of business and consistent with existing payment arrangements; and (ii) pre-filing amounts owing to fuel suppliers that are integral to the Pride Group’s ability to operate during the restructuring period.
38The Applicants submit that case law demonstrates that a supplier is considered critical when the uninterrupted supply of goods and/or services is sufficiently integral to the debtor’s business that it would be prejudicial to the debtor’s restructuring efforts for supply to be interrupted. (See: Target at paras. 62-65)
39The Applicants also submit that, given the nature of the Pride Group’s business, the fuel suppliers and independent contractors’ continued services are critical to the Pride Group’s ability to operate its business in the ordinary course during the CCAA proceedings. The Pride Group’s independent contractors should be afforded the same rights to payment for their services as its employees.
40I am satisfied that it is appropriate to provide this relief.
41The Applicants seek authorization to remit the proceeds from the sale of vehicles and the receipts of lease receivables from its customers in the ordinary course of business to the applicable lenders in reduction of such lenders’ pre-filing indebtedness, in accordance with the Governance Protocol. I am satisfied that this relief is appropriate.
42I am satisfied that EYI is qualified to act as Monitor.
43I am also satisfied that the approval of the Governance Protocol is appropriate in the circumstances, and in the best interests of all stakeholders. The Proposed Monitor helped design the Governance Protocol and is agreeable to performing the proposed duties thereunder.
44Prior to the filing of this application, the Pride Group, at the request of certain of its lenders, engaged RCB to provide the services of Randall Benson to act as CRO. The Applicants seek an order approving the engagement of the CRO pursuant to the terms set out in the CRO Engagement Letter they entered into with RCB. The Applicants state that they require the CRO’s expertise in order to successfully develop and implement a successful restructuring.
45The CRO has consented to act in these proceedings, and the Proposed Monitor has reviewed the CRO Engagement Letter and supports the appointment of the CRO. I am satisfied that it is appropriate to approve of the engagement of the CRO.
46As noted above, the Applicants intend to seek recognition of these proceedings in the U.S. Section 56 of the CCAA grants the Court unfettered authority to appoint “any person or body” to act as a representative for the purpose of having CCAA proceedings recognized in any jurisdiction outside of Canada, including the U.S.
47The Pride Group submits that it is appropriate for this Court to exercise its jurisdiction to authorize Mr. Johal and the CRO to act as the foreign representatives of the Pride Group. In my view, the appointment of two individuals as foreign representatives could give rise to an undesirable ambiguity and should be avoided. It seems to me that, given the role of the CRO, the CRO should be the foreign representative.
48The Applicants propose that the Proposed Monitor, its counsel, Canadian and U.S. counsel to the Applicants, the CRO and Canadian counsel to the Pride Group’s board of directors be granted a Court-ordered charge on the Applicants and LP’s Property as security for their respective fees and disbursements relating to services rendered in respect of the Pride Group (the “Administration Charge”). With the concurrence of the Proposed Monitor, the Applicants are proposing that the Administration Charge for the first ten days be limited to $2.0 million and will be seeking to increase the charge at the comeback hearing.
49I am satisfied that the Administration Charge is reasonable in the circumstances.
50The Application was brought on an ex parte basis and accordingly, the Administration Charge does not have any super priority.
51In light of the potential liabilities and insufficiency of available insurance, the directors and officers have indicated to the Applicants that their continued service to the Pride Group and involvement in this proceeding is conditional upon the granting of a charge in the amount of $4.1 million on the Applicants and LPs’ Property (the “Directors’ Charge”).
52I am satisfied that a Directors’ Charge should be created. However, due to the ex parte nature of this application, such charge does not have any super priority.
53The proposed Initial Order provides that the Confidential Appendix “A” to the Monitor’s Pre-Filing Report, consisting of an unredacted copy of the CRO Engagement Letter, be sealed and not form part of the public record until further Order of the Court.
54Pursuant to section 137(2) of the Courts of Justice Act, R.S.O. 1990, c. C.43, the Court has the jurisdiction and the discretion to order that any document filed in a civil proceeding be treated as “confidential, sealed and not form part of the public record”.
55The Supreme Court of Canada set out the applicable test for a sealing order in Sierra Club of Canada v. Canada (Minister of Finance), 2002 SCC 41, at para. 53, as subsequently refined in Sherman Estate v. Donovan, 2021 SCC 25 at paras. 37-38, wherein the Supreme Court held that a person asking a court to exercise its discretion in a way that limits the open court presumption must establish that: (i) court openness poses a serious risk to an important public interest; (ii) the order sought is necessary to prevent this serious risk to the identified interest because reasonably alternative measures will not prevent this risk; and (iii) as a matter of proportionality, the benefits of the order outweigh its negative effects.
56The unredacted CRO Engagement Letter includes a breakdown of the CRO’s monthly fees and expenses and success fee, which the Applicants seek to keep confidential and not part of the public record. The Applicants submit that the CRO in this case is an individual, and individuals have the reasonable expectation that their personal and financial information will be kept confidential and not form part of the public record.
57In the CCAA proceedings of MJardin Group, Inc. et al. (June 2, 2022, Toronto, CV-22-00682101), I granted a sealing order in order to keep confidential the fees and expenses attributable to the individuals working for a chief restructuring company.
58The Applicants submit that there are no satisfactory alternatives to the sealing order in the circumstances. Further, no stakeholders will be materially prejudiced by sealing the unredacted CRO Engagement Letter, and the salutary effects of granting the sealing order outweigh any deleterious effects.
59In my view, the request for a sealing order is appropriate with one caveat. The monthly fees should not be redacted. The success fee details are to be sealed on the basis that it could impair realization efforts which affect all stakeholders.
DISPOSITION
60The CCAA protection is granted. The Order has been signed. Due to the ex parte nature of this application, a “true” comeback hearing will be scheduled.
Chief Justice G.B. Morawetz
Date: March 28, 2024