SUPERIOR COURT OF JUSTICE – ONTARIO

COURT FILE NO.: 32-1763935

DATE: 20130712

IN THE MATTER OF SECTION 47.01 OF THE BANKRUPTCY AND INSOLVENCY ACT, R.S.C. 1985, C. B-3, AS AMENDED

RE: IN THE MATTER OF THE NOTICE OF INTENTION TO MAKE A PROPOSAL OF COMSTOCK CANADA LTD., Applicant

BEFORE: MORAWETZ J.

COUNSEL:
A. MacFarlane and F. Lamie, for Comstock Canada Ltd., Applicant

H. Chaiton, for the Bank of Montreal

R. B. Schwill, for PricewaterhouseCoopers Inc.

HEARD & ENDORSED: JULY 3, 2013

REASONS: JULY 12, 2013

ENDORSEMENT

[1] Comstock Canada Ltd. (“Comstock”) brought an urgent motion for an order appointing PricewaterhouseCoopers Inc. (“PwC”) as interim receiver (in such capacity, the “Interim Receiver”), in respect of Comstock for the limited and specific purpose of authorizing and directing the Interim Receiver to borrow funds for the purpose of enabling payment of Comstock’s current payroll and independent contractor amounts due and owing on July 4, 2013.

[2] Comstock is a borrower or principal obligor in respect of secured debt obligations pursuant to a credit agreement dated July 29, 2011, as amended (the “Credit Agreement”) among Comstock, as borrower and Bank of Montreal (“BMO”) as lender.

[3] Comstock has been unable to comply with certain financial and other covenants under the Credit Agreement.

[4] On June 27, 2013, Chrysler Canada locked out Comstock from the performance of its contract at facilities in Ontario.

[5] In response, Comstock’s Board of Directors determined that Comstock had no other readily available options but to file a Notice of Intention to Make a Proposal (the “NOI”) pursuant to section 50.4(1) of the Bankruptcy and Insolvency Act (“BIA”) on June 28, 2013.

[6] The record established that, by Thursday, July 4, 2013, Comstock required an immediate advance on a priority basis of $1.5 million in order to meet its payroll and independent contractor obligations.

[7] Counsel to Comstock submitted that, in the absence of Comstock being able to meet payroll, a predictable chain of events would follow, namely, employees and contractors would, in a likelihood, not show up to work, which in turn would cause a serious disruption to Comstock’s ability to provide its core services which would impair the viability of various projects and have negative effects that would cascade through the trades, subtrades, and local economies of the various Comstock projects across Canada.

[8] BMO was prepared to fund the Interim Receiver in respect of the amount required for the payroll in accordance with the terms of the term sheet substantially in the form attached to the affidavit of Mr. Birkbeck, sworn July 3, 2013.

[9] A fundamental precondition to BMO’s contemplated advance included the appointment of the Interim Receiver and the granting a of super-priority charge in favour of the Interim Receiver for the payroll advance, with specific priority being given over construction lien and trust claimants.

[10] Counsel advised that it was contemplated that Comstock would shortly be filing a motion to continue these proceedings under the Companies’ Creditors Arrangement Act (“CCAA”).

[11] The request for the appointment of the Interim Receiver was made pursuant to section 47.1(1) of the BIA. As noted, the NOI had been filed under section 50.4 of the BIA.

[12] The appointment can be made if it is shown to be necessary for the protection of (a) the debtor’s estate; or (b) the interests of one or more creditors, or other creditors generally.

[13] Having reviewed the record, I concluded that it was appropriate to make the order for both the protection of the debtor’s estate and the interests of creditors.

[14] Section 47.2(1) provides the authority to make an order respecting the fees and expenses of the Interim Receiver. In this case, given the urgency of the situation and the magnitude of the operations of Comstock, I concluded that it was appropriate to grant the Interim Receiver a super-priority for its fess and disbursements in the form of the Interim Receiver’s Charge. Section 47.2(1) provides that the court shall not make such an order unless it is satisfied that all secured creditors who would be materially affected by the order were given reasonable advance notification and an opportunity to make representations to the court. BMO, the major secured lender, does not object to the granting of a charge. With respect to the position of other secured creditors, I concluded that the granting of the super-priority charge would not have a material effect on their positions. The appointment of the Interim Receiver is for a limited purpose and, in view of the stated intention of Comstock to seek to continue these proceedings under the CCAA, it will also be time limited. The urgency of the situation and the accompanying uncertainty was such that, in my view, Comstock and its creditors would benefit from the presence of the Interim Receiver. The alternative could result in a chaotic situation which would be detrimental to the interests of all stakeholders.

[15] I turn now to the issue of authorization for the Interim Receiver to borrow funds, on a super-priority basis, to cover payroll. In my view, an advance of this type does not have the effect of preferring a creditor or group of creditors. Rather, it provides compensation for services rendered and is designed to keep the business operating. It also does not have the effect of altering priorities of any specific creditor group nor, in my view, does it have any obvious negative impact on construction lien and trust claimants.

[16] Section 47.2(2) specifies that “disbursements” in subsection (1) do not include payments made in operating a business of the debtor. If the advance were to be made on a super-priority basis, it became necessary to also consider the appropriateness of granting a fixed and specific charge (the “Interim Receiver’s Borrowing Charge”) as security for the payment of money borrowed to cover payroll and independent contractor obligations.

[17] I am satisfied that the creation of a charge (the “Interim Receiver’s Borrowing Charge”) to the extent of $1.5 million, was appropriate in these circumstances. Simply put, in the absence of granting this charge, there was a significant likelihood that the job sites would be shut down causing significant damage to many parties and would impair the ability of Comstock to restructure either under the BIA or the CCAA.

[18] BMO did not oppose the granting of this provision. With respect to the impact on other secured creditors, including any construction lien and trust beneficiaries, it appears to me that the granting of the Interim Receiver’s Borrowing Charge would not have a material effect on these secured creditors. The de facto beneficiaries of the Interim Receiver’s Borrowing Charge are the employees and contractors. If this group does not show up to work, the enterprise value of Comstock will suffer.

[19] In this case, I was satisfied that the purpose of the “Interim Receiver’s Borrowing Charge” was to maintain business operations and to promote a greater stability for Comstock.

[20] Section 50.6 of the BIA provides the authority to grant super-priority for interim financing for an insolvent debtor. There is no similar provision to provide such financing for an Interim Receiver under section 47.1 However, there is no provision that prohibits the granting of such super-priority. In view of the urgency of this situation, it seems to me that the objectives of PART III of the BIA and the expected proceedings under the CCAA would be frustrated if the Interim Receiver’s Borrowing Charge was not granted. I was satisfied that, in these circumstances, the charge could be granted under the inherent jurisdiction of the court.

[21] In the result, the motion was granted, which appointed PwC as Interim Receiver. The order specifically provides for an Interim Receiver’s Charge for PwC’s reasonable fees and disbursements and for the Interim Receiver’s Borrowing Charge, provided that the outstanding principal amount does not exceed $1.5 million. These charges are to have specific priority over present construction liens and trust claims whether or not perfected or preserved.

[22] A formal order was signed to give effect to the foregoing.

Morawetz J.

Date: July 12, 2013