ONTARIO
SUPERIOR COURT OF JUSTICE
IN BANKRUPTCY and INSOLVENCY
COURT FILE NO.: BK-33-1718184
DATE: 2013/03/25
IN THE MATTER OF THE BANKRUPTCY OF
OVG INC.
OF THE TOWN OF RENFREW
IN THE PROVINCE OF ONTARIO
BEFORE: Mr. Justice Stanley J. Kershman
HEARD IN OTTAWA: March 12, 2013
APPEARANCE:
J. Fogarty and P. Masic for the Debtor
M. Rouleau for the Proposal Trustee
C. Peddle for the Royal Bank of Canada
reasons for decision
Introduction
[1] OVG Inc., (“Company” or “OVG”) is a glazing and glass manufacturing company that was established in 1978. The Company filed a Notice of Intention to Make a Proposal (“NOI”) under the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (“BIA”) on February 22, 2013. Doyle Salewski Inc. (“DSI”) was appointed as the proposal trustee. OVG moves under section 50.6 of the BIA for authorization to borrow under a credit facility from Waygar Capital Inc. (“Waygar”) as well as the granting of an Interim Financing Charge (“IFC”) against its property in favour of Waygar .
[2] It also seeks an order to extend the time to file its Proposal to May 8, 2013.
[3] The motion was brought on short notice. Based on the affidavit of service filed, the Court is satisfied that notice was given to the interested parties.
Debtor and its Creditors
[4] The Company was established 1978 and is located in Renfrew, Ontario and employs approximately 60 people.
[5] According to the affidavit of Shawn McHale, president of OVG Inc., the Company has struggled to maintain workflow while financing 10% construction lien holdbacks on larger projects.
[6] In addition, the Company has suffered significant losses on 2 projects in the fiscal years 2011 and 2012, further constraining cash flow. These constraints in cash flow have caused the Company difficulty in maintaining sufficient levels of materials to complete work in process.
[7] OVG has one secured creditor namely the Royal Bank of Canada (“RBC”) which is owed in the range of between $3,200,000.00 and $3,400,000.00. The Bank opposes the granting of a DIP lending facility. It does not oppose the extension of time for filing for the proposal.
[8] Based on the creditor list prepared by DSI, secured creditors are owed in excess of $3,400,000.00. CRA is owed approximately $55,000.00 for source deductions. In addition, CRA is owed other monies for HST of approximately $250,000.00. The claims of unsecured creditors, while not totaled on the list of creditors, are approximately $6,800,000.00.
[9] The Company has prepared cash flow statements for the period of February 25, 2013 to May 24, 2013, in conjunction with Welch and Co. Business Advisors.
The Proposed DIP Facility
[10] The RBC is no longer providing credit to OVG. The Company’s account was transferred to the Special Loans Division on May 1, 2012. On May 24, 2012 the Bank entered into a letter agreement wherein it changed the rate of interest on the operating and demand loans to RBC Prime + 4.5%. On September 21, 2012 the Bank retained the services of Ernst and Young Inc. to assist in the analysis of the viability of the Company.
[11] In his affidavit, Peter Gordon of the Bank states that he met and spoke with representatives of the Company numerous times to discuss its financial difficulties. According to the Bank, financial reporting provided by the Company shows that it is losing substantial amounts of money and is projected to lose even more money in the future.
[12] On February 12, 2013 demand letters and Notices of Intent to Enforce Security were sent by email to counsel for the Company and the guarantors. As of that date, the Company was indebted to RBC in the amount of $3,454,155.81.
[13] The Bank claims that based on the information provided by Ernst and Young Inc., that there will be a substantial shortfall to the Bank after collection of the accounts receivable and sale of the assets. The Court notes that the document of the estimate of realizable assets provided by Ernst and Young Inc. in the motion of record did not include the accompanying notes and assumptions mentioned therein.
[14] The Bank does not believe that the Company can be viably restructured.
The Proposed DIP Facility
[15] By a letter dated March 11, 2013 prepared by Waygar to OVG and signed by OVG, there is an offer of DIP financing. The Court notes that the letter specifically states that it is not a commitment letter. It has not been signed by Waygar. The Court believes that it has not been signed by Waygar due to the short timeframes involved. The letter includes a primary lending facility of $250,000.00 including $100,000.00 to “fund payroll this Thursday March 14, 2013.”
[16] The letter also provides for a secondary lending facility of $250,000.00 as necessary to finance additional working capital requirements.
[17] The interest rate for the primary facility is 18%. The standby rate for the secondary facility is 9%, which increases to 18% once it is drawn down. There is a closing fee of $25,000 payable when the first funds are drawn down.
[18] Furthermore, two deposits are required to be paid by the Company to Waygar. The first is for $12,500.00 and is chargeable against the lender’s field examination, financial analysis and appraisal expenses.
[19] The second deposit is for $12,500.00 which will be required to apply against legal and closing expenses.
[20] At the hearing of the motion, Company counsel indicated that $12,500.00 worth of the deposit was already in hand. This would mean that out of the initial $100,000.00 advance, $25,000.00 would be held back for the closing fee and $12,500.00 would be held back for the deposit described above. This would mean that there would be $62,500.00 available to the Company ($100,000.00 - $25,000.00 - $12,500.00),
[21] The Court is aware that the March 11, 2013 letter is not a commitment letter but it is satisfied that on the basis of the oral representations made by Mr. Fogarty at the motion, that Waygar is committed to the DIP Facility.
[22] As to the primary DIP amount, it is set up for two tranches, one for $100,000.00 and the second for $150,000.00. The Court notes that the purpose for the money set out in the letter is for payroll. In reality, based on the information provided at the hearing, $42,000.00 is for payroll and the balance is for purchase of equipment. The Court has advised of a case in Ontario dealing with DIP financing: (Re) P.J. Wallbank Manufacturing Co., [2011] ONSC 7641 (Ont. Comm. List).
[23] The case has been reviewed by the Court and the Court bases its analysis in part on the Wallbank case.
Analysis
Statutory provisions
[24] Section 50.6 of the BIA, in part, provides as follows :
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.
Priority
(3) The court may order that the security or charge rank in priority over t he claim of any secured creditor of the debtor.
Factors to be considered
(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.
Consideration of the Various Factors
1) Likely Duration of the NOI Proceedings
[25] The evidence does not show when the Proposal will be filed. The Court has been asked for an extension of the Proposal to May 8, 2013. The Company requires the DIP facility to continue operating.
2) Management of OVG’s Affairs
[26] The current management will continue to operate OVG.
[27] There are 60 employees at OVG in Renfrew, Ontario which is an economically depressed area.
3) Report of the Proposal Trustee
[28] In its March 8, 2013 report, the Proposal Trustee stated that it was satisfied that OVG is proceeding in good faith with its proposal, and supported the need for DIP financing.
4) Would the Loan Enhance the Prospects of a Viable Proposal
[29] According to the Proposal Trustee, OVG is developing a restructuring plan which may either involve :
identifying a strategic partner,
restructuring its debts, or
an orderly liquidation of its assets.
[30] OVG has filed cash flow projections for the period ending May 24, 2013. The cash flow projections support Mr. McHale’s statement that without the proposed DIP financing, the Company will not be able to fund its ongoing business operations and restructuring efforts during the NOI proceedings. The Proposal Trustee concurs with this assessment saying as follows:
“In the event that the DIP loan is not approved by the Court, the Proposal Trustee is of the view that this may result in a material adverse change and furthermore, that the Company may be required to cease operations which will severely compromise the Company’s ability to complete its proposal to its Creditors.”
[31] The evidence is clear that if the DIP financing is not approved, OVG will close its doors.
4) Nature and Value of OVG’s Property
[32] While OVG filed evidence about its current indebtedness, it did not file any detailed historical evidence about its balance sheet or profit and loss position. The current value of its assets is unclear. The evidence suggests that OVG has been operating at a loss for at least 2011-2012.
5) Confidence of Major Creditors
[33] The only major creditor in attendance at the motion was the Bank who opposed the DIP financing. There is no evidence that any other creditors either opposed or approved of the DIP financing request. The Court notes that only 4 or 5 creditors were advised of the motion.
6) Prejudice to Creditors as a Result of the Interim Financing Charge
[34] Like any DIP financing, the Interim Financing Charge will impact all of the creditors’ positions to some degree and will potentially reduce the amount recoverable by the RBC. In the event that OVG’s business would close because of the failure to approve the DIP financing and the Interim Financing Charge, on balance, the benefit to stake holders of the proposed DIP facility significantly outweighs any prejudice to the Bank.
[35] While the Bank would be prejudiced by the advance of $100,000.00, the Court considers the prejudice to be minimal.
Conclusion
[36] Having considered all of the factors involved with the DIP financing, the Court is satisfied that it is appropriate to authorize OVG to enter into the DIP Facility with Waygar Capital Inc. to the extent of the first tranche of $100,000.00 and to grant the proposed Interim Financing Charge to the extent of $100,000.00.
[37] This Court orders that the closing fee of $25,000.00 should be payable as follows:
$15,000.00 upon the drawdown of the first tranche of $100,000.00;
$10,000.00 if there is a second tranche under the primary facility and provided that the second tranche drawdown is allowed by the Court.
[38] The authority for dividing the payment of the closing fee is the case of Dessert & Passion Inc. (Proposition de) c. Banque Nationale du Canada, 2009 QCCS 4669, 58 C.B.R. (5th) 224.
[39] In addition, in the event that there would be a drawdown of the secondary facility of $250,000.00 as contemplated by the March 11, 2013 letter, Court approval would have to be obtained.
[40] The time to file the Proposal is extended to May 8, 2013 based on the information contained in the Proposal Trustee’s report and based on the submissions made at the motion.
[41] The following documents will be sealed as they contain information prepared by Ernst and Young Inc. that may be prejudicial to the Company if it becomes public record.
Affidavit of Peter Gordon Sworn, paras 18-21;
Exhibit P of the Affidavit of Peter Gordon Sworn, March 5, 2013;
Respondent’s Factum dated March 8, 2013, paras 10-12.
[42] I will remain seized of this matter.
[43] The matter will be brought back on next week on a date, time and place to be advised.
[44] Motion materials for the motion next week are to be served on all of the parties set out in the notice of motion brought by the Company.
[45] Order accordingly.
Mr. Justice Stanley J. Kershman
Date: March 25, 2013
COURT FILE NO.: BK-33-1718184
DATE: 2013/03/25
ONTARIO
SUPERIOR COURT OF JUSTICE
IN BANKRUPTCY and INSOLVENCY
IN THE MATTER OF THE BANKRUPTCY OF
OVG Inc.
OF THE TOWN OF RENFREW
IN THE PROVINCE OF ONTARIO
BEFORE: Mr. Justice Stanley J. Kershman
HEARD IN OTTAWA: March 12, 2013
APPEARANCE: J. Fogarty and P. Masic for the Debtor
M. Rouleau for the Proposal Trustee
C. Peddle for the Royal Bank of Canada
REASONS FOR DECISION
Kershman J.
Released: March 25, 2013