SUPERIOR COURT OF JUSTICE - ONTARIO

COURT FILE NO.: CV-14-10495-00CL

DATE: 2014-03-31

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 REDSTONE INVESTMENT CORPORATION AND REDSTONE CAPITAL CORPORATION

BEFORE: Regional Senior Justice Morawetz

COUNSEL:
Craig J. Hill and Roger Jaipargas, for Redstone Investment Corporation and Redstone Capital Corporation

Steven Graff and Ian Aversa, for Grant Thornton Ltd., Proposed Monitor

HEARD and ENDORSED: March 28, 2014

REASONS: March 31, 2014

ENDORSEMENT

[1] This application was heard, without notice, on March 28, 2014. At the conclusion of the hearing, I endorsed the record as follows: “CCAA protection granted. Order has been signed. Reasons will follow. These are the reasons.

[2] Redstone Investment Corporation (“RIC”) and Redstone Capital Corporation (“RCC”, and together with RIC, the “Companies” or the “Applicants”) apply for protection under the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36, as amended (the “CCAA”).

[3] The Companies’ seek an Initial Order under the CCAA to permit the Companies to protect their business, ensure ongoing operations and preserve value while the Companies seek to restructure their affairs.

[4] The facts relevant to this application are set out in the Affidavit of Eric Hansen sworn March 27, 2014 (the “Hansen Affidavit”) and are summarized below.

[5] Capitalized terms not defined herein have the meanings ascribed to them in the Hansen Affidavit.

Factual Background

[6] RIC is an Ontario Corporation with a registered office in Toronto, Ontario.

[7] RCC is an Ontario corporation with a registered office in Toronto, Ontario.

[8] The shareholders of RCC are Mr. Ed So and Target Capital Inc. The shareholders of RIC are Mr. So and Mr. Eric Hansen.

[9] Mr. Hansen states that RIC is a commercial lender to Canadian based small to medium sized businesses and established entrepreneurs that wish to obtain additional working capital on a short-term basis from third party lenders such as RIC.

[10] Mr. Hansen reports that as of February 28, 2014, RIC’s lending portfolio (the “RIC Portfolio”) includes 35 accounts with loans totalling approximately $24,648,000. Mr. Hansen further reports that all of the loans completed by RIC (the “RIC Loans”) to its borrowers are secured and, typically, are supported by personal guarantees from shareholders where the borrower is a corporation. The RIC Loans are fully assignable.

[11] Mr. Hansen further reports that RIC sought to raise capital for its lending activities by way of a continuous offering (the “RIC Offering”) of unsecured promissory notes of RIC (the “RIC Notes”) pursuant to exemptions from the prospectus requirements of applicable securities legislation in each of the provinces and territories of Canada.

[12] Mr. Hansen reports that RIC is not registered in any capacity with any provincial or territorial securities regulatory authority and certain of the trades resulting from the distribution of RIC Notes have been made through an agent who is a registered Exempt Market Dealer (“EMD”) or made to a registered EMD who is purchasing as principal or in reliance on other dealer registration exemptions.

[13] Mr. Hansen further reports that RIC pays compensation realized on the sale of the RIC notes to a number of parties, including the EMD. In addition, 1710814 Ontario Inc. (“Redstone Management Services” or “RMS”), who acts as manager may pay certain EMD’s an additional fee over and above payment by RIC or assisting in the sale of RIC Notes.

[14] Each of the RIC Notes has a principal amount equal to the amount that its holder paid to RIC to acquire that RIC Note. The RIC Notes mature and become payable at varying times from 180 days up to 5 years, as selected by the subscriber of the RIC Notes.

[15] RCC was established for the purpose of loaning funds to RIC. Forty percent of the shares of RCC are owned by Mr. Edward So and 60% of the issued and outstanding shares are owned by Target Capital Inc., a publically traded investment company with its shares listed on the TSX Venture Exchange.

[16] RCC has sought to raise capital for its lending activities by way of a continuous offering (the “RCC Offering”) of unsecured, fixed rate bonds of RCC (the “RCC Bonds”) pursuant to exemptions from the prospectus requirements of applicable securities legislation in each of the provinces and territories of Canada. Since its inception, RCC has issued 710 RCC Bonds raising $16,486,000.

[17] RCC’s debt obligations represented by the RCC Bonds are unsecured obligations and rank pari passu amongst themselves. Mr. Hansen advises that RCC Bonds will mature and become payable at varying times from 6 months up to 5 years as selected by the subscriber of the RCC Bonds.

[18] Mr. Hansen sets out that prior to January 2014, Mr. So was the sole officer and director of the Applicants. He states that certain events arose in December 2013 that resulted in a determination that someone other than Mr. So had to oversee the operations of the Applicants to ensure the protection of the interests of the investors, including the preservation of investor capital. Mr. Hansen reports that with Mr. So’s concurrence, he became the sole officer and director of the Applicants, as well as President and CEO of both of the Applicants in January 2014.

[19] Shortly after Mr. Hansen assumed the management roles, a review of RIC’s and RCC’s financial position commenced and has been ongoing to date.

[20] During the review period, previously unreported loan losses for RIC for the year ended August 31, 2013 were discovered and concerns developed with respect to the transfer of the Applicants’ funds to RMS and the Applicants’ funds by RMS at the direction of Mr. So.

[21] Mr. Hansen reports that one of the primary reasons giving rise to the financial problems of the Applicants is the recent discovery of the movement of assets from RIC to RMS. As of March 10, 2014, Mr. Hansen states that RMS owes the Applicants approximately $6.5 million.

[22] Mr. Hansen also reports that for the three month period commencing April 1, 2013, RIC will have promissory note maturities of $3,139,000 and RCC will have bond maturities of $1,130,300 for a total of $4,269,300.

[23] For the three month period commencing April 1, 2014, RIC will have interest payments on promissory notes of approximately $570,000 and RCC will have interest payments on bonds of approximately $377,000 for a total of $947,00.

[24] In addition, Mr. Hansen reports that RIC and RCC have not repaid all of the promissory note and bond maturities for March 2014 totalling $850,000 and RIC and RCC have not paid the interest owing for the month of March, totalling $296,000.

[25] From the period September 1, 2013 to January 31, 2013, Mr. Hansen reports that the Applicants have experienced a loss of approximately $1,970,000. Anticipated losses for the months of February and March 2014 are expected to be approximately $330,000 in each month.

[26] On January 6, 2014, KPMG LLP, the Applicants’ auditors, resigned. As a result of the resignation, the auditors did not report on the financial statements for the Applicants for the year ended August 31, 2013 and the most recent audited financial statements are for the period ending August 31, 2012, which statements were attached to the affidavit of Mr. Hansen.

[27] Mr. Hansen reports that RCC has no secured creditors. RIC has granted security to RCC in respect of obligations under a loan agreement.

[28] As of February 28, 2014, RIC’s unsecured obligations to the RIC Noteholders was approximately $23.3 million dollars, inclusive of interest to February 28, 2014.

[29] As of February 28, 2014, RCC’s unsecured obligations to the RCC Bond Holders was approximately $16.3 million, inclusive of interest to February 28, 2014.

[30] There are no employees for RIC and RCC, as the services to each of the Applicants were provided by RMS pursuant to the Management Services Agreement. There are a number of consultants to RIC and RCC who have historically been paid either by RMS or RIC.

[31] The Applicants have no pension plans.

[32] RIC has trade debt of approximately $126,000 and RCC has trade debt of approximately $98,000.

[33] Grant Thornton Ltd. (“GTL”) was engaged by the Applicants on March 17, 2014 and Mr. Hansen states that GTL has assisted the Applicants in preparing the CCAA application. GTL is the proposed monitor.

[34] The affidavit of Mr. Hansen also sets out the basis for an administration charge (paras. 57-58) and a Directors’ and Officers’ Charge (paras. 59-62).

[35] Mr. Hansen concludes his affidavit by stating that given that RCC and RIC are not currently making any interest or maturity payments to RIC Noteholders or RCC Bondholders and that he was receiving a number of inquiries from EMD’s on a daily basis as to the financial state of both of the Applicants, he is of the view that it is necessary to make application for CCAA protection on an urgent basis.

[36] GTL filed a report which provides some commentary on the financial position, the cash-flow projection, the Administration Charge and the D&O Charge.

[37] Mr. Hansen is of the view that the Applicants are insolvent and in order to ensure the best possible recovery for stakeholders, the Applicants have determined that either a sale of the RIC portfolio is required or an orderly wind-down is required. It is the intention of the Applicants to work closely with a CCAA monitor with a view to developing a sale and marketing process for the RIC Portfolio and return to court in the coming weeks to seek directions with respect to a realization strategy for the RIC Portfolio.

[38] The Applicants are of a view that a CCAA stay of proceedings is needed to ensure that the RIC Portfolio can be sold in an efficient manner under the protection of the Court without the threat of proceedings against the Applicants or a discontinuation of essential services.

[39] GTL has concluded that a stay of proceedings is necessary to allow the Applicants to maintain their business and to provide the Applicants with the opportunity to implement their restructuring and realization plan in a stable environment.

[40] GTL has also outlined a communication strategy which will be necessary in these circumstances as the Applicants have in excess of 1000 investors, most of whom are unsecured debtholders of RIC Notes and unsecured debtholders of RCC Bonds. These investors have not received notice of this application and I accept the Monitor’s recommendation that it is necessary to ensure that an effective communication strategy is in place to deal with the anticipated concerns of investors.

Analysis

[41] The primary issues to be determined on this application are whether the Court should:

(a) grant protection to the Applicants under the CCAA;

(b) grant the Administration Charge; and

(c) grant the D&O Charge.

[42] RIC is a “company” within the meaning of the CCAA because it is a corporation incorporated under the laws of Ontario. Similarly, RCC is a “company” within the meaning of the CCAA because it is a corporation incorporated under the laws of Ontario.

[43] The CCAA does not define “insolvent”. CCAA courts have taken guidance from the definition of “insolvent person” under the Bankruptcy and Insolvency Act (the “BIA”) in assessing whether an applicant is a debtor company in the context of the CCAA. The definition of “insolvent person” in the BIA means a person (a) who is not bankrupt; and (2) who resides, carries on business or has property in Canada; and (iii) whose liability to creditors provable as claims under the BIA amount to one thousand dollars; and (iv) who is “insolvent” under one of the following tests:

(a) is for any reason unable to meet his obligations as they generally become due,

(b) has ceased paying his current obligations in the ordinary course of business as they generally become due, or

(c) the aggregate of the person’s property is not, at a fair valuation, sufficient, or if disposed of at a fairly conducted sale under legal process, would not be sufficient to enable payment of all his obligations, due and accruing due.

(see: Stelco Inc. (Re) (2004), 2004 24933 (ON SC), 48 C.B.R. (4th) 299, (Ont Sup Ct [Commercial List]) [“Stelco”] at paras. 21-22)

[44] A company is also insolvent for the purposes of the CCAA if there is a reasonably foreseeable expectation, at the time of filing, that there is a looming liquidity crisis that would result in the company being unable to pay its debts as they generally become due if a stay of proceedings and ancillary protection are not granted by the court (see: Stelco, supra, para 40).

[45] Taken together, RIC and RCC face current claims in the total approximate amount of $6,362,300.

[46] In this case, the Applicants meet both the test of insolvency under the BIA and the expanded test for insolvency as the Applicants will eventually not have the funds necessary to make the interest and maturity payments under the RIC Notes and the RCC Bonds.

[47] I am satisfied that the Applicants are each a “debtor company” within the meaning of the CCAA and qualify for protection under the CCAA.

[48] The Applicants have filed the required financial information, including the cash flow information and accordingly meet the requirements of the CCAA in this regard.

[49] Among the relief sought by the Applicants in this application is a stay of proceedings. Section 11.02 of the CCAA provides that the Court may, on an initial application, for a period of not more than thirty days, impose a stay of proceedings in respect of the Applicants if the Applicants satisfy the Court that circumstances exist which make the order appropriate.

[50] The purpose of any stay of proceedings issued pursuant to section 11 of the CCAA is to maintain the status quo for a period of time so that proceedings can be taken under the CCAA for the wellbeing of the debtor company and of the creditors. Further, the stay order is intended to prevent any creditor from obtaining an advantage over other creditors while the company is attempting to reorganize its affairs (see: Comstock Canada Ltd., (Re), (2013) 8 C.B.R.).

[51] Having reviewed the record and hearing submissions, I am satisfied that it is just and reasonable to grant the requested stay of proceedings in this case because a stay of proceedings will:

(a) ensure that the RIC Portfolio can be sold or wound down in an efficient manner under the protection of the Court without the threat of proceedings against the Applicants or the discontinuation of essential services;

(b) restrain, temporarily, the exercise of rights and remedies under agreements with which the Applicants are a party, preserve the status quo and restrain existing creditors from taking unfair advantage in the circumstances; and

(c) would be beneficial so that the RIC Portfolio can be monetized by either a sale of the RIC Portfolio or a wind down of the RIC Portfolio, with a view to an orderly distribution of the assets of the Applicants to their stakeholders.

Charges

[52] The Applicants are seeking approval of Court-ordered charges over their assets for costs relating to the administration of the CCAA proceedings and for the indemnification of their directors and officers. Save and except for RCC (with respect to its secured claim against RIC), there are no secured creditors which would be affected by such Court-ordered charges.

[53] The Applicants are seeking a charge over their assets, property and undertaking in the amount of $750,000 (the “Administration Charge”) to secure the fees and disbursements at the standard rates and charges of the Monitor, the Monitor’s counsel and the Applicants’ legal counsel. The Administration Charge would rank in priority to all other charges set out in the Initial Order.

[54] Section 11.52 of the CCAA provides this Court with the jurisdiction to grant the Administration Charge.

[55] In addition to the considerations provided for in section 11.52 of the CCAA, in Canwest Publishing Inc. (Re), the Court set out a non-exhaustive list of factors for a CCAA Court to consider in deciding to grant an administration charge, which include:

(a) the size and complexity of the business being restructured;

(b) the proposed role of the beneficiaries of the charge;

(c) whether there is an unwarranted duplication of roles;

(d) whether the quantum of the proposed charge appears to be fair and reasonable;

(e) the position of the secured creditors likely to be affected by the charge; and

(f) the position of the monitor.

[56] In this case, I am satisfied the Administration Charge is warranted and necessary, and it is appropriate to grant the Administration Charge because:

(a) the beneficiaries of the Administration Charge will provide essential legal and financial advice and support the Applicants throughout the CCAA proceedings;

(b) the roles of the Applicants legal counsel, the monitor and the monitor’s legal counsel are distinct and there is no anticipated or unwarranted duplication;

(c) the Administration Charge does not purport to prime any secured party who has not received notice of this Application; and

(d) the proposed Monitor supports the granting of the Administration Charge.

[57] The Applicant is also seeking a charge in the amount of $100,000 (the “D&O Charge”) over the assets, property and undertakings of the Applicants to indemnify the directors and officers of the Applicants in respect of certain potential liabilities they may incur in such capacities after the date of an Initial Order. The sole director and officer of the Applicants has indicated that his ongoing involvement is conditional upon the granting of an order under the CCAA. The D&O Charge is subordinate to the Administration Charge.

[58] Section 11.51 of the CCAA provides this Court with the jurisdiction to grant the D&O Charge.

[59] In Canwest Global Communications Corp. (Re) (2009), 50 C.B.R. (5th) 72, the Court outlined the test for granting a charge under section 11.51 of the CCAA:

I have already addressed the issue of notice to affected secured creditors. I must also be satisfied with the amount and that the charge is for obligations and liabilities the directors and officers may incur after the commencement of proceedings. It is not to extend to coverage of wilful misconduct or gross negligence and no order should be granted if adequate insurance at a reasonable cost could be obtained.

[60] In this case, I am satisfied the D&O Charge is warranted and necessary, and it is appropriate to grant the D&O Charge because:

(a) the existing Policy contains several exclusions and limitations to the coverage it provides and there is potential for there to be insufficient coverage in respect of the potential liabilities;

(b) a comparable level of insurance coverage is not available through any other insurance provider at rates more favourable than those currently in place; and

(c) the D&O Charge is required in order to provide a level of protection with respect to possible liabilities that may be imposed on the sole director and officer of the Applicants.

[61] In making this determination, I have also taken into account that the proposed Monitor support the requested relief and that the D & O Charge does not purport to prime any secured party who has not received notice of this application.

[62] GTL has also reported that they have been advised by the Applicants’ consultants that the Applicants may be unable to compile a mailing list of the investors within 5 business days of the making of the order. I have acknowledged this concern and accordingly, the initial order extends the date for the required notice to 10 business days from the date of the initial order.

DISPOSITION

[63] For the foregoing reasons, the Initial Order is granted and has been signed.

[64] This initial order was granted without notice. Paragraph 46 of the initial order is the usual come-back language. The parties wishing to schedule court hearings should do so through the Commercial List Office.

Morawetz, RSJ

Date: March 31, 2014