SUPERIOR COURT OF JUSTICE – ONTARIO

(COMMERCIAL LIST)

COURT FILE NO.: CV-13-9979-00CL
DATE: 20130214

IN THE MATTER OF 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: 2 NJ FINANCE CORP., JEUNESSE DEVELOPMENT CORP., WYGATE HOLDINGS INC., CECILE NIGHTINGALE, DAVENPORT MANAGEMENT LIMITED, BANK OF NOVA SCOTIA TRUST COMPANY IN TRUST FOR SDRRS9494-02797-16/C ERLICH, AND LVH CAPITAL INC., Applicants

AND:

RAGHUNAN DEVELOPMENT GROUP INC., Respondent

BEFORE: MORAWETZ J.

COUNSEL:
David Preger, for the Applicants
Michael Hassell, for the Respondent

HEARD & RELEASED (ORALLY): February 13, 2013

ENDORSEMENT

[1] The record was supplemented by four affidavits, which were prepared after the initial hearing this morning.

[2] If the statements in the affidavits are to be believed:

(i) earlier today, representatives of the Applicants observed a U-Haul van being driven by Mr. Raghunan arrive at the business premises and Mr. Raghunan entered the premises;

(ii) Mr. Raghunan later denied to Mr. Martone that he knew anything about the U-Haul van;

(iii) Mr. Raghunan then reversed himself and indicated that he was merely picking up personal belongings;

(iv) Mr. Raghunan swore that he rented the U-Haul truck to move out items in the event of a receivership order. Items removed included two personal computers, a vacuum cleaner and some real estate textbooks belonging to his mother. He also indicated that other items were going to be removed, however, after speaking with his father, Mr. Raghunan learned that this would be “an enormous mistake”. Mr. Raghunan swore that no property belonging to the Respondent was removed;

(v) Mr. Raghunan also swore that he spoke with Mr. Grunier, who swore the affidavit in support of the application and that Mr. Grunier told Mr. Raghunan that he was going to change the locks today to the premises at 15 Hess Street South, Hamilton, Ontario.

[3] The record establishes that the Respondent has defaulted on numerous occasions in making payments due under the loan to the Applicants including, failure to make interest payments due on June 1, 2012, September 1, 2012 and monthly thereafter. Section 244 Bankruptcy and Insolvency Act (“BIA”) notices were issued to the Respondent on July 16, October 30 and December 21, 2012.

[4] Notwithstanding delivery of the demand notices, no payments have been received by the Applicants as of September 1, 2012 on account of monies owing by the Respondent.

[5] Mr. Grunier further swears that there has been ongoing default since the loan was advanced in November 2011 and that the status quo is no longer tenable. He has a concern that, if the business ceases operations, it will greatly impact on the enterprise value of the estate.

[6] The Applicants take the position that in order to preserve enterprise value and maximize full recovery to all stakeholders, a court-appointed receiver must be appointed immediately. Further, the Applicants point out that it is difficult for a privately-appointed receiver to obtain a temporary transfer of a liquor licence unless all arrears of sales tax owing by the Respondent are paid. On the other hand, the Applicants contend a court-appointed receiver would be in a position to secure a temporary licence immediately.

[7] There is no doubt that the Applicants have established that there has been default and that a degree of supervision is required in order to protect the interests of the secured party.

[8] The Respondent acknowledges that there has been a default, but requests a short period of time to obtain new financing, which, counsel submits, will be sufficient to provide a full payout not only to the Applicants, but also the other secured creditors. This is based on what they consider to be fair value for the property as a going concern, namely $4.2 million, with secured debt of $3.575 million. On these calculations, the Respondent takes the position that there is roughly $625,000 in equity.

[9] The developments today caused the court significant difficulty from both sides. The Respondent gives the appearance that its principals are taking steps to remove certain items from the Respondent’s premises. Although representatives of the Respondent state that the items removed were just personal items, I do have concerns that, had there not been any type of intervention, there was a temptation to remove a number of items from the premises, without giving due consideration as to whether these items belong to the Respondent or were personal items. In my view, it is necessary to ensure that representatives of the Respondent will not be tempted to remove any further items. From the standpoint of the Applicants, it appears that there was a temptation to change the locks during the course of a court hearing. I find it difficult to understand how self-help remedies can be employed by the Applicants at the same time as they are seeking the appointment of a receiver on an equitable basis from the court. These actions are entirely inconsistent.

[10] From a practical standpoint, the situation cries out for an interim remedy. Even if a receiver were to be appointed today, it is highly unlikely that any significant steps could be taken to implement a realization strategy in the next 15 days. It seems to me to be in the best interests of all parties to provide the Respondent with a short period of time to see if they can secure the financing that they believe they can. If successful, the proceeds from such financing should be sufficient to address the obligations owed not only to the first-ranking secured party, but the second and third. However, it is, in my view, necessary to ensure that assets do not disappear and that assets are fully accounted for during the intervening stage.

[11] Section 47(1) of the BIA provides that if the court is satisfied that a notice has been sent under subsection 244(1), it may, subject to subsection (3) appoint an interim receiver of all or any part of the debtor’s property that is subject to the security to which the notice relates. The order can be made if it is shown to be necessary for the protection of (a) the debtor’s estate; or (b) the interests of the creditor who sent the notice under subsection 244(1).

[12] In my view, it is clear that as a result of the ongoing defaults and, in order to the protect the integrity of the assets of the debtor, the appointment of an interim receiver is necessary in order to protect the interests of the Applicants.

[13] In this case, it seems appropriate to appoint an interim receiver, but with limited powers. The interim receiver is to monitor the business of the Respondent. Operations can be maintained by the Respondent’s personnel. However, two representatives of the interim receiver are to be present during operating hours. These representatives are to monitor the receipts and disbursements and are to be provided with accurate cash counts at the conclusion of each day’s operations. Cash receipts are to be accounted for by way of deposits to the Respondent’s financial institution or confirmed on a daily basis that the cash is still on the premises. The interim receiver is also to be provided with accurate statements of inventory counts and shall be provided with copies of all orders and deliveries received from the Liquor Control Board of Ontario. Copies of orders and deliveries of all food inventory shall also be provided to the interim receiver.

[14] The application to appoint a receiver under section 243 of the BIA and section 101 of the Courts of Justice Act will be considered at a hearing on Friday, March 1, 2013. It is noted that counsel for the Respondent represented in court today that if the refinancing has not been accomplished by that date, the Respondent would be prepared to consent to the appointment of a receiver.

[15] For greater certainty, the interim receiver appointed today is SF Partners Inc. and such appointment as interim receiver shall not in any way disqualify SF Partners Inc. from being considered for the appointment of a receiver, if it becomes necessary on March 1, 2013.

[16] In the event that there are material changes between today’s date and March 1, 2013, it is expected that the interim receiver will promptly report these to the court at a 9:30 a.m. hearing.

[17] Costs in respect of this application will be considered on March 1, 2013.

[18] An order shall issue to give effect to the foregoing.

MORAWETZ J.

Date: February 14, 2013