Court File and Parties

COURT FILE NO.: CV-24-00718487-00CL DATE: 20240717 ONTARIO - SUPERIOR COURT OF JUSTICE – COMMERCIAL LIST

APPLICATION UNDER section 243(1) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, as amended and section 101 of the Courts of Justice Act, R.S.O. 1990, c. c-43, as amended

RE: Metropolitan Partners Group Administration, LLC, Applicant AND: International Credit Experts Inc., Respondent

BEFORE: Peter J. Osborne J.

COUNSEL: Nicholas Kluge and Thomas Gertner, for the Applicant Mark Klaiman and Ian Klaiman, for the Respondent Jonathan Krieger, Proposed Receiver

HEARD: July 17, 2024

Supplemental Endorsement

[1] Earlier today, I granted this Application with reasons to follow. These are those reasons.

[2] The Applicant, Metropolitan Partners Group Administration, LLP (the “Applicant” or “MPG”) seeks an order appointing Grant Thornton Limited as Receiver of all of the Property of the Respondent, International Credit Experts Inc. (the “Applicant” or “ICE”) pursuant to section 243 of the BIA and section 101 of the CJA.

[3] Both parties also seek a sealing order in respect of certain material as further described below.

[4] The Applicant relies upon the Affidavit of James Sheldon sworn April 16, 2024 and the Reply Affidavit of Mr. Sheldon sworn July 10, 2024, both with exhibits thereto. The Respondent relies on the Affidavit of Giovannina Reda Dhaliwal sworn May 14, 2024, together with exhibits thereto. The Respondent also relies on the Affidavit of Tarsempal Singh Dhaliwal (“Dhaliwal”) sworn July 15, 2024 together with exhibits thereto. The Applicant submits that, as further described below, the recent Dhaliwal affidavit of July 15 should be accorded no weight.

[5] Defined terms in this Endorsement have the meaning given to them in the Application materials unless otherwise stated.

[6] The appointment of the Receiver was opposed by the Respondent, who sought a further adjournment. Both parties consent to the sealing relief sought by each of them.

[7] For the reasons that follow, I denied the request for a third adjournment and heard the Application. I am satisfied that it is not only “just or convenient” but that it is both just and convenient that the Receiver be appointed, and so ordered.

Third Adjournment Request

[8] The Notice of Application was issued on April 16, 2024 and was originally returnable on April 25, 2024. On April 19, 2024, the Respondent advised the Applicant that it had just retained new counsel, and would be seeking an adjournment to permit it an opportunity to file a responding application record. The Applicants agreed to the adjournment request and the Application was adjourned on consent to a date - agreed by both parties - for a hearing on the merits for one half day on May 30, 2024. The Respondent served and filed its responding application record, such that the matter was fully briefed for hearing on the merits as scheduled on May 30.

[9] Four days before the scheduled hearing, on or about May 26, 2024, the parties reached a tentative working settlement. The settlement was conditional on the terms being documented in a formal forbearance agreement. The Applicant provided a draft forbearance agreement to the Respondent on May 30.

[10] The Respondent did not agree to the forbearance agreement, and did not provide any comments or suggested amendments on the draft to the Applicant, with the result that the Applicant lost confidence and faith that the Respondent was willing to sign the forbearance agreement and, three weeks later, the Application came back before the Court for a scheduling case conference on June 20, 2024 to schedule a hearing date of the Application on the merits.

[11] At that case conference of June 20, the Respondent was represented by new counsel and submitted that there was no urgency, and requested a further adjournment of the Application until a date to be scheduled in the fall of this year.

[12] For the reasons set out in the Endorsement of June 20, 2024, the presiding case conference judge, Kimmel, J., observed that “given the procedural history of this matter and concerns raised by the applicant in its aide memoire, I am satisfied that this application (twice adjourned already) is sufficiently urgent that it should not be delayed until the fall to be heard. Accordingly, a half-day appointment has been booked for the hearing of this application on July 17, 2024.” Both parties have therefore been aware that the hearing would proceed on the merits today, absent a settlement, for approximately one month.

[13] Today, the Respondent is represented by new counsel, yet again (its third counsel), who advises that he was retained just last week, on July 12, 2024. After business hours in the evening of July 15, 2024, less than 48 hours ago, the Respondent delivered the Dhaliwal affidavit. The Respondent seeks another adjournment, again for one or two months (i.e., again until the fall, 2024). The basis for the adjournment request is that the Respondent should be allowed the opportunity to effect a private sale of the portfolio of loans (described below) outside a receivership and that there is no urgency.

[14] The Applicant opposes the request for an adjournment, and submits that the matter should proceed today.

[15] I agree. The matter has already been adjourned three times as noted above. Kimmel, J. already determined that, given the procedural history of this matter and the concerns raised by the Applicant, the matter was sufficiently urgent that it should not be delayed until the fall. Accordingly, not only has that issue already been determined, nothing has transpired to persuade me that that earlier order should be varied. Indeed, the concerns raised by the Applicant continue, and if anything, are heightened.

[16] For example, the Respondent now takes the position in the just-filed affidavit that the guarantee of Dhaliwal is invalid. In addition, Dhaliwal has conveyed his 50% of the personal residence he owns with his wife, who swore the first affidavit on behalf of the Respondent, a conveyance the Applicant is concerned is an attempt to insulate himself from his exposure on the guarantee and the effects of any judgment that might be made in respect of the indebtedness owed to the Applicant.

[17] These concerns are discussed in more detail below, but the Respondent was silent in the face of this scheduled hearing for a month until, less than 48 hours ago, it served another affidavit. There is nothing in that affidavit that relates to events that just transpired or that could not have been put forward in the supplementary responding application record much earlier, as was precisely the rationale for the earlier adjournment in any event.

[18] This Application has now been outstanding since late April and this hearing has been scheduled since June 20, 2024. Accordingly, the Respondent has had almost three months to put forward such evidence as it considers appropriate. It filed a substantive responding record two months ago. While I appreciate the circumstances in which new counsel for the Respondent finds himself, this hearing was scheduled one month ago, to the full knowledge of the Respondent.

[19] Accordingly, I denied the adjournment and directed the Application to proceed on the merits.

Is It Just or Convenient to Appoint the Receiver

[20] The test for the appointment of a receiver pursuant to section 243 of the BIA or section 101 of the CJA is not in dispute. Is it just or convenient to do so?

[21] In making a determination about whether it is, in the circumstances of a particular case, just or convenient to appoint a receiver, the Court must have regard to all of the circumstances, but in particular the nature of the property and the rights and interests of all parties in relation thereto. These include the rights of the secured creditor pursuant to its security: Bank of Nova Scotia v. Freure Village on the Clair Creek, 1996 O.J. No. 5088 (“Freure Village”).

[22] Where the rights of the secured creditor include, pursuant to the terms of its security, the right to seek the appointment of a receiver, the burden on the applicant is lessened: while the appointment of a receiver is generally an extraordinary equitable remedy, the courts do not so regard the nature of the remedy where the relevant security permits the appointment and as a result, the applicant is merely seeking to enforce a term of an agreement already made by both parties: Elleway Acquisitions Ltd. v. Cruise Professionals Ltd., 2013 ONSC 6866 at para. 27. However, the presence or lack of such a contractual entitlement is not determinative of the issue.

[23] As I observed in Canadian Equipment Finance and Leasing Inc. v. The Hypoint Company Limited, 2022 ONSC 6186, the Supreme Court of British Columbia, citing Bennett on Receivership, 2nd ed. (Toronto, Carswell, 1999) listed numerous factors which have been historically taken into account in the determination of whether it is appropriate to appoint a receiver and with which I agree: Maple Trade Finance Inc. v. CY Oriental Holdings Ltd., 2009 BCSC 1527 at para. 25):

a. whether irreparable harm might be caused if no order is made, although as stated above, it is not essential for a creditor to establish irreparable harm if a receiver is not appointed where the appointment is authorized by the security documentation;

b. the risk to the security holder taking into consideration the size of the debtor’s equity in the assets and the need for protection or safeguarding of assets while litigation takes place;

c. the nature of the property;

d. the apprehended or actual waste of the debtor’s assets;

e. the preservation and protection of the property pending judicial resolution;

f. the balance of convenience to the parties;

g. the fact that the creditor has a right to appointment under the loan documentation;

h. the enforcement of rights under a security instrument where the security-holder encounters or expects to encounter difficulties with the debtor;

i. the principle that the appointment of a receiver should be granted cautiously;

j. the consideration of whether a court appointment is necessary to enable the receiver to carry out its duties efficiently;

k. the effect of the order upon the parties;

l. the conduct of the parties;

m. the length of time that a receiver may be in place;

n. the cost to the parties;

o. the likelihood of maximizing return to the parties; and

p. the goal of facilitating the duties of the receiver.

[24] How are these factors to be applied? The British Columbia Supreme Court put it, I think, correctly: “these factors are not a checklist but a collection of considerations to be viewed holistically in an assessment as to whether, in all the circumstances, the appointment of a receiver is just or convenient: Pandion Mine Finance Fund LP v. Otso Gold Corp., 2022 BCSC 136 at para. 54).

[25] It is not essential that the moving party establish, prior to the appointment of a receiver, that it will suffer irreparable harm or that the situation is urgent. However, where the evidence respecting the conduct of the debtor suggests that a creditor’s attempts to privately enforce its security will be delayed or otherwise fail, a court-appointed receiver may be warranted: Bank of Montreal v. Carnival National Leasing Ltd., 2011 ONSC 1007 at paras. 24, 28-29. See also Freure Village at para. 10.

[26] Where the conduct of the debtor has led directly to a receivership application, the Court should place limited to no weight on objections from the debtor as to whether a receivership is the best remedy for the secured creditor: GE Commercial Distribution Finance Canada v. Sandy Cove Marine Co., 2011 ONSC 3851 at para. 23.

[27] Accordingly, is it just or convenient to appoint a receiver in the particular circumstances of this case?

[28] In my view, it is.

[29] ICE operates a financial debt recovery and call centre business in Vaughan, Ontario. Its assets include a consumer debt portfolio acquired from a Schedule I bank. It entered into a financing facility and security agreement as of November 29, 2021 between, among others, the Applicants MPG (as agent for certain investors), ICE as borrower, and Dhaliwal and Dhaliwal Enterprise Holding Inc. as guarantors. The advances under that financing agreement funded the acquisition by the Applicant of the debt portfolio.

[30] That agreement established a credit facility of up to $10 million. ICE granted to MPG a security interest in all of its assets. ICE is in default of its obligations under the agreement. In particular, it is currently indebted to the Applicant in the amount of approximately $2.7 million. As at February 26, 2024, the exact amount was USD $2,711,546.09, on which interest continues to accrue. That amount is not in dispute.

[31] ICE has also missed payments when due, and rendered some payments, albeit late, although as further described below, and, at least according to the late-breaking Dhaliwal affidavit, the number of missed payments (with the exception of at least one) is now apparently disputed. In any event, the total indebtedness and the fact that at least some payments have been missed is not disputed. In particular, ICE failed to remit the full amount of each Minimum Monthly Payment on each Distribution Date (terms as defined in the financing agreement) between July 15, 2022 and the date of the demand in February, 2024. ICE did not remit any amounts on account of its Minimum Monthly Payment due in November, 2023.

[32] Moreover, ICE is in default in that it has failed or refused to provide the requisite financial reporting information to MPG as required under the agreement. This documentation, including quarterly financial information, annual financial statements, compliance certificates, bank statements and forecasted financials, were required in order that the Applicant could have visibility into the financial condition of the Respondent. There is no evidence in the record as to why this default in particular has not been cured, as one might expect, given the indulgences and forbearances the Respondent has sought.

[33] As a result of these defaults, the entire indebtedness $2.7 million became, according to the terms of the agreement, due and payable. Demands and section 244 BIA notices were delivered to both the Respondent and the guarantors in February, 2024. The 10 day period has long expired.

[34] None of the defaults have been cured. The indebtedness has not been repaid, and indeed the parties are in agreement that the only way in which the indebtedness can or will be repaid, is by the sale of the loan portfolio. To be clear, both the Applicants and the Respondent agree that this loan portfolio needs to be sold. Essentially, then, the only substantive real issue is whether that is best sold by a Receiver or privately as the Applicant would prefer to do.

[35] Accordingly, there is no dispute on the record of events of default and of the fact that those continue.

[36] The Applicant has, in the circumstances, lost confidence in the Respondent, and in my view, fairly so, given the above-noted facts and the conduct of the Respondent after the demands and notices of intention to enforce were delivered.

[37] That conduct includes the following. Dhaliwal transferred his 50% interest in his personal residence in Woodbridge, Ontario to his wife, as noted above. He advanced the position for the first time after repayment of the indebtedness was demanded that his guarantee was no longer enforceable, since it was released, he submits, by the Applicant upon the Applicant having completed its due diligence for the loan. I pause to observe that there is no documentation, acknowledgement or agreement by or on behalf of the Applicant that any guarantee would be released until the indebtedness is paid in full.

[38] ICE has accrued significant source deduction liabilities owed to the Canada Revenue Agency in an amount of over $800,000. I pause to observe that those arrears would comprise a super priority claim against the property of the Respondent, in addition to the fact that these arrears constitute a further event of default under the financing agreement.

[39] The proposed Receiver is a firm well qualified to act in that capacity, and consents to do so in this case. If appointed, it intends to take control of the property and implement a sales process of the loan portfolio to maximize stakeholder recovery in connection with which it would consult with and seek the consent of the bank from which the portfolio was purchased.

[40] The proposed Receiver is in the process of negotiating a servicing agreement with a servicer pursuant to which that servicer would service the debt portfolio prior to any sale. The evidence is that the proposed servicer, General Credit Services Inc., is an established debt collection agency specializing in account receivable management. It regularly works with the Schedule I bank involved in the origination of the debt portfolio.

[41] ICE submits that it should be entitled to a further opportunity outside a receivership to conduct a private sale of the debt portfolio. In connection therewith, it proposes that Dhaliwal Holdings (one of the guarantors referred to above) would seek to sell a condominium property, and apply the proceeds to the source deduction arrears owing to the Canada Revenue Agency.

[42] I pause to observe that the full asking price of that condominium property is, itself, less than the $800,000 owed to the CRA, such that even if the property sold, and even if it sold at full asking price, the sale would not yield sufficient proceeds to pay that super priority claim. There is, of course, no certainty as to whether such a sale would occur or not, let alone when.

[43] I recognize that Dhaliwal has committed to fund the shortfall, if any. However, there is no disclosed source of funds for his ability to do so, and his disavowal of his existing guarantee together with his efforts to place at least one asset - his 50% interest in his residence - beyond the reach of the Applicant as his creditor, calls into question the ability or preparedness to pay such shortfall. In any event, there is no commitment to pay the indebtedness owing to the Applicant even if the super priority claim of the CRA were satisfied.

[44] In addition, to effect the private sale, ICE would require commitment letters sought to be required by September, 2024, meaning that a sale of the debt portfolio could not occur until after that time, and there is no commitment letter in place currently and no certainty that one will be obtained. The consent of ICE is required in any event.

[45] As noted above, the Respondent relies upon the affidavit of Dhaliwal sworn and served less than two days ago. The Applicant says that the affidavit should be inadmissible given that it represents a transparent attempt to manufacture the basis for the further adjournment requested today, since it could have been delivered at any time but was not delivered until the eve of this hearing. The Applicant submits that it has not had a chance to cross-examine on the affidavit or to file a further reply affidavit, either or both of which would require a further adjournment, and that would have the practical effect of granting the very relief that the Respondent desires in the first place.

[46] There is some merit to the position of the Applicant in the circumstances, all of which are summarized above. However, and in any event, I have reviewed the affidavit of Dhaliwal. Even if considered as part of the record, it does not answer some of the fundamental challenges facing the Respondent, and nor does it persuade me that the appointment of a Receiver is not just or convenient.

[47] Dhaliwal cites changes in the economy that have adversely affected the ability of ICE to monetize the debt portfolio as had been anticipated, and states that those difficulties “occurred through no fault of ICE”. That may be accurate, but it is not an answer to this Application.

[48] Dhaliwal also states that the company hired an operations manager in February, 2022 and that this individual is experienced and reputable and can assist in maximizing recovery on the debt portfolio, although “not in accordance with the original timeline”. This individual has therefore already been engaged for almost two years, during which time the company has not been able to regularize operations or address the challenges. I pause to observe that there is no evidence in the record from this individual.

[49] The Respondent submits that a receiver would not be able to do any better than would its existing management team, and would cause additional costs to be incurred. In my view, and particularly since both parties agree that the debt portfolio must be sold, the only question is who should sell it. Given the acrimony and lack of trust and confidence between the parties, it is both just and convenient that the sale process be conducted by a Court-appointed officer, in a fair, transparent and court-supervised manner.

[50] Dhaliwal raises a number of other issues, including what he submits is misconduct on the part of the Applicants, in his affidavit. In my view none of that conduct would, even if established (and observing that such is challenged by the Applicant who has not had an opportunity to cross-examine) would disentitle the Applicant to the relief sought.

[51] For all of these reasons, the appointment of the Receiver is approved.

[52] Both parties made submissions on the form of order which I observe is largely consistent with the Model Order of the Commercial List with appropriate amendments to reflect this particular situation. While that consistency is not determinative of the appropriateness of the terms, it is of assistance. I am satisfied that the proposed order here is appropriate.

Sealing Order

[53] Both parties seek a sealing order, and each consents and supports the sealing order sought by the other. The Respondent seeks a sealing order in respect of certain exhibits to the Dhaliwal affidavit which contain a list of approved collection agencies, third-party agencies and other persons already approved by the bank in connection with the debt portfolio, and debt buyer certification terms from the bank. The Applicant seeks to seal limited excerpts from the reply affidavit of Mr. Sheldon which also disclose the commercial terms of the debt portfolio.

[54] I am satisfied that, as submitted by both parties, that the test articulated by the Supreme Court of Canada in Sierra Club of Canada v. Canada (Minister of Finance), 2002 SCC 33 and refined in Sherman Estate v. Donovan, 2021 SCC 25 has been satisfied here. The proposed order would provide the materials are sealed only until the debt portfolio is sold, or until further order of the court. The materials proposed to be sealed clearly constitute commercially sensitive information, the public disclosure of which could and my view, likely would, negatively affect a sales process for the debt portfolio and therefore negatively affect the ultimate recovery for stakeholders. The relief is proportionate and limited, both in scope and temporally. The sealing relief is granted.

Result and Disposition

[55] For all of these reasons, the Application is granted.

Osborne J.