SUPERIOR COURT OF JUSTICE – ONTARIO

COMMERCIAL LIST

RE: IN THE MATTER OF THE BANKRUPTCY AND INSOLVENCY ACT, R.S.C. 1985, c. B-3, AS AMENDED

AND IN THE MATTER OF THE NOTICE OF INTENTION TO MAKE A PROPOSAL OF Quality Meat Packers Limited

BEFORE: D. M. Brown J.

COUNSEL: J. Dietrich and E. Morris, for Quality Meat Packers Limited

J. Levine and W. Rostom, for the Moving Party, Synergy Swine Inc.

P. Guy and K. Montpetit, for the Ontario Pork Producers’ Marketing Board

R. English, for the Proposal Trustee, A. Farber & Partners Inc.

R. Jaipargat, for Westland Hog Co. Inc.

D. Magisano, for Kuijpers Key Farm Ltd.

F. Spizzirri, for the Toronto-Dominion Bank

L. Lacelle, representative of the employees in UFCW Local 175

HEARD: April 10 and 11, 2014

REASONS FOR DECISION

I. Motion to terminate a Notice of Intention to file a Proposal proceeding or to appoint a receiver over inventory

[1] On April 3, 2014, Quality Meat Packers Ltd. (“Quality Meat”), and a related company, Toronto Abattoirs Limited (“Toronto Abattoirs”), filed Notices of Intention to make proposals under section 50.4(1) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3. The companies purchase and slaughter hogs to produce and sell pork products.

[2] Synergy Swine Inc. (“Synergy Swine”) sells hogs to Quality Meat. It moved for an order under BIA s. 50.4(11) declaring terminated the 30-day period for Quality Meat to file a proposal or, alternatively, an order appointing a receiver over all or substantially all of the inventory of Quality Meat under section 101 of the Courts of Justice Act, R.S.O. 1990, c. C.43.

[3] Synergy Swine’s motion was supported by the following interested persons: The Ontario Pork Producers’ Marketing Board (the “Marketing Board”) (as to the request for a receiver only), Westland Hog Co. Inc. and Kuijpers Key Farm Ltd. It was opposed by the companies, a related company, Quality Meat Packers Holdings Limited, the Toronto-Dominion Bank, the primary secured creditor, and the union representing the companies’ 634 unionized employees, UFCW Local 175.

[4] The hearing of the motion commenced on April 10, 2014. At the conclusion of submissions I adjourned the motion to Friday, April 11 at 4:00 p.m. to receive an update on the status of the relationship between Quality Meat and its primary lender, the Toronto-Dominion Bank, because a Second Forbearance Agreement was set to expire at that time.

[5] On April 11, 2014, the Proposal Trustee filed a Supplementary First Report and a brief hearing was held at 4:00 p.m.

[6] For the reasons set out below, I dismiss the motion.

II. Background events

[7] The contracts between Quality Meat and its hog suppliers generally provided that the company would pay for delivered hogs within three working days of slaughter. Typically, hogs delivered to Quality Meat were slaughtered on the day of, or the day after, delivery.

[8] The supply contract between Synergy Swine and Quality Meat provided for the delivery of about 104,000 hogs a year, or approximately 2,000 per week. Between Wednesday, March 26 and Thursday, April 3, 2014, the date of the filing of the NOI, Synergy Swine and its related companies delivered roughly 3,500 hogs to Quality Meat with an estimated value of $901,626.86. Synergy Swine has not received any payment for those deliveries.

[9] Synergy Swine also filed evidence that 10 other hog producers had delivered about $1.784 million worth of hogs to Quality Meat in the days leading up to the filing of the NOI for which those producers had not been paid.

[10] The Marketing Board, which facilitates sales from producers to processors, filed evidence that an additional 82 hog producers had shipped about $1.007 million worth of hogs to Quality Meat between March 27 and April 3 for which they had not received payment.

[11] According to the First Report of the Proposal Trustee dated April 9, 2014, as at April 3, 2014 Quality Meat and Toronto Abattoirs owed hog producers about $8.671 million. David Schwartz, the President of those two companies, deposed that as at April 9, 2014 the estimated realizable value of the companies’ inventory was about $2.88 million. The April 11 Supplementary First Report of the Proposal Trustee put that number at approximately $2 million.

[12] It was evident from the materials that what had prompted Synergy Swine to bring its motion were statutory restrictions on the availability of the special priority granted to farmers by BIA s. 81.2(1). Under that section, the claim of a farmer who has sold and delivered products of agriculture, such as livestock, to another person for use in relation to the purchaser’s business is secured by security on all the inventory of or held by the purchaser, and the security ranks in priority over all other security and claims against that inventory except a supplier’s right to repossess goods under BIA s. 81.1, subject to two very important qualifications which go to the heart of this motion. First, the security is limited to inventory of the purchaser on one of two specified dates: (i) the date on which the purchaser became bankrupt; or, (ii) the first day on which there was a BIA s. 243(2) receiver in relation to the purchaser. Second, the claim for which security is granted is limited to the products which were delivered to the purchaser within the 15-day period preceding either of those two dates.

[13] As can be seen, the 15-day farmer’s supplier priority only arises when the purchaser becomes bankrupt or becomes subject to a receiver. The filing of a NOI does not trigger the BIA s. 81.2 security; only bankruptcy or receivership does. As a result, the filing of the NOI by Quality Meat on April 3 did not result in Synergy Swine or other unpaid hog producers obtaining BIA s. 81.2 security over inventory. As matters now stand, Synergy Swine is an unsecured trade creditor of Quality Meat.

[14] However, should Quality Meat become bankrupt or subject to a receiver, then the BIA s. 81.2 security would kick in. If either of those events were to occur today, April 11, then the 15-day delivery period specified in BIA s. 81.2 would run back to March 28, 2014, thereby giving Synergy Swine, and all other unpaid deliverers of hogs during that period of time, the priority security on the inventory of Quality Meat.

[15] So, Synergy Swine has moved for alternative relief. First, it seeks an order under BIA s. 50.4(11) terminating the period for making a proposal. If such a termination order were to be made, by operation of BIA ss. 50.4(8) and (11) Quality Meat would be deemed to have made an assignment in bankruptcy, thereby becoming bankrupt. BIA s. 81.2 would then apply. Second, Synergy Swine seeks the appointment of a receiver over the inventory of Quality Meat. Again, should a receiver be appointed, BIA s. 81.2 would kick in. Those are the purposes of this motion. Let me turn to examine each part of it.

III. Request to terminate the period for making a proposal: BIA s. 50.4(11)

A. The statutory provision

[16] An insolvent person which files a notice of intention to file a proposal under BIA s. 50.4(1) has 30 days in which to file a proposal, subject to the ability of the court to extend the time for filing, and the insolvent person enjoys the benefit of the automatic stay of proceedings granted by BIA s. 69(1). Section 50.4(11) provides a mechanism by which a person can apply to a court to terminate the period for making a proposal before the expiration of the 30 days. It provides:

50.4 (11) The court may, on application by the trustee, the interim receiver, if any, appointed under section 47.1, or a creditor, declare terminated, before its actual expiration, the thirty day period mentioned in subsection (8) or any extension thereof granted under subsection (9) if the court is satisfied that

(a) the insolvent person has not acted, or is not acting, in good faith and with due diligence,

(b) the insolvent person will not likely be able to make a viable proposal before the expiration of the period in question,

(c) the insolvent person will not likely be able to make a proposal, before the expiration of the period in question, that will be accepted by the creditors, or

(d) the creditors as a whole would be materially prejudiced were the application under this subsection rejected,

and where the court declares the period in question terminated, paragraphs (8)(a) to (c) thereupon apply as if that period had expired.

[17] Courts have described BIA s. 50.4(11) as “an unusual remedy and a serious one” which requires a person moving to invoke it to establish that one of the four situations set out in sub-sections (a) through (d) apply on a balance of probabilities; suspicion is not sufficient.[^1]

[18] Synergy Swine rested its argument on BIA s. 50.4(11)(a), (b), (c) and (d). Let me consider each allegation advanced by Synergy Swine in turn.

B. The insolvent person has not acted, or is not acting, in good faith and with due diligence: BIA s. 50.4(11)(a)

[19] In support of its argument that Quality Meat has not acted in good faith and with due diligence, Synergy Swine primarily relied on evidence of events which occurred before Quality Meat had filed its NOI on April 3. Some courts have considered pre-filing conduct when considering an argument advanced under BIA s. 50.4(11)(a). For example, in the Com/Mit Hitech Services case Farley J. concluded that because the debtor had gone “essentially in a 180º way against” what it had agreed to with its bank in the six months prior to the filing of the NOI, it had not acted in good faith and with due diligence.[^2] In Cougar Metal Industries the British Columbia Supreme Court considered whether large orders of product for inventory by the debtor placed in the weeks immediately before the filing of the NOI, for which the debtor had not paid, constituted bad faith conduct. Although the court was “left with some suspicion”, it was not satisfied on a balance of probabilities that the debtor had acted in bad faith.[^3]

[20] For the past 17 years Quality Meat’s primary banking relationship has been with TD, which is the company’s senior secured lender. Although the precise terms of that banking relationship were not in the evidence, as of the date of filing the NOI the Quality Meat group of companies owed TD just over $8 million. By April 8 that indebtedness had been reduced to $4.857 million. Details concerning the reduction were not in the evidence.

[21] Over the years Quality Meat had looked to a related company, Quality Meat Packers Holdings Limited (“Holdings”), for secondary financing. Holdings has advanced Quality Meat in excess of $11.5 million since February, 2013; total outstanding indebtedness amounts to more than $19 million.

[22] Mr. Schwartz is the principal of both Quality Meat and Holdings. He deposed that on March 28, 2014 Holdings decided that it “was no longer prepared to fund the ongoing losses of Quality while simply waiting for the market to improve”.

[23] Synergy Swine relied heavily on that evidence. It submitted that with a related company having made the decision not to fund, Quality Meat had acted in bad faith by continuing to accept the deliveries of hogs on March 31, April 1, April 2 and April 3 – the date of its NOI – knowing that it lacked the ability to pay for that product. As Synergy Swine stated in its factum:

QMP has acted in bad faith within the meaning of s. 50.4(11) by accepting millions of dollars in market-ready hogs less than one week prior to filing its NOI. QMP has no current plan to pay any of the farmers who supplied these hogs. QMP must have been aware at the time that it accepted these hog shipments that it had no plan to pay for them, but chose to accept the shipments in any event.

This type of conduct amounts to trading while insolvent with virtually all of its hog suppliers at once. This conduct cannot be considered to be acting in good faith.

[24] In support of Synergy Swine’s position the Marketing Board contended that the failure of Quality Meat to indicate at a meeting last weekend with the Ontario Deputy Minister of Agriculture that it would be filing a NOI or that it would stop paying suppliers was evidence of bad faith.

[25] I do not accept those arguments, for several reasons. First, accepting product from suppliers in the days before filing a NOI does not, in and of itself, indicate bad faith. One normally would expect to see that kind of business activity by most companies which have decided not to close their doors, but instead to attempt a restructuring to keep the enterprise continuing as a going concern. Something more would be required to establish bad faith.

[26] Second, there was no evidence that Quality Meat had “ramped up” its acceptance of product in the week before filing the NOI; the evidence suggested the continuance of ordinary course levels of deliveries.

[27] Third, the evidence disclosed that in the week prior to filing the NOI Quality Meat had continued to pay suppliers, only suspending payments on April 3. Obviously, not all suppliers were paid, but the evidence disclosed efforts by Quality Meat to maintain ordinary course payments to suppliers.

[28] Fourth, Quality Meat met with TD on March 31 and negotiated a forbearance agreement on April 2 which ran until April 4. To satisfy a term of that forbearance agreement, Holdings advanced $500,000 to Quality Meat and related companies. That conduct indicated a debtor intent on trying to restructure, not a debtor engaged in bad faith conduct.

[29] Fifth, following the execution of the April 2 forbearance agreement, Quality Meat retained the Proposal Trustee to begin work on the NOI filing. The filing was made the next day – i.e. with due dispatch.

[30] Sixth, following the filing of the NOI, Quality Meat has worked to reach understandings or agreements with numerous stakeholders, such as the union – which strongly supported the company’s position on this motion – hog suppliers, and the Marketing Board. Quality Meat has negotiated a supply arrangement with the Board, although no hogs yet have been shipped under it.

[31] Next, Quality Meat negotiated a second forbearance agreement with TD which ran from April 4 until 4:00 p.m. today, April 11. In its April 11 Supplementary First Report the Proposal Trustee described the companies’ continuing efforts to negotiate a further forbearance agreement with TD.

[32] Finally, in its First Report, the Proposal Trustee stated that it had “not seen evidence that would lead the Proposal Trustee to conclude that the Companies have acted or are acting in bad faith”.

[33] None of this conduct by Quality Meat before or after the filing of the NOI established that the company had not acted, or is not acting, in good faith and with due diligence. On the contrary, the evidence established the opposite.

C. The insolvent person will not likely be able to make a viable proposal before the expiration of the period in question: BIA s. 50.4(11)(b)

[34] Although Synergy Swine submitted that Quality Meat should have developed a plan to pay creditors before filing its NOI given its intention to continue accepting product after March 28, that is not what the statute requires. The NOI device provides insolvent companies with a short breathing space in which to try to put together a reorganization plan or proposal, and the evidence disclosed that that was what Quality Meat was doing.

[35] In its First Report the Proposal Trustee stated that it had “not determined that the Companies cannot make a viable proposal” and that it was “of the opinion that it is too early to make that determination”.

[36] At the hearing on April 10, I observed to the company’s counsel that the evidence did not contain any information about efforts to extend the forbearance agreement with TD Bank past 4:00 p.m. on April 11. I noted that if the Bank was not prepared to continue its forbearance, there was always the possibility that the Bank, as the primary secured creditor, might seek the appointment of its own receiver. Were that to happen, the ability of Quality Meat to make a viable proposal most likely would be affected.

[37] In its April 11 Supplementary First Report the Proposal Trustee advised that TD had not been able to review thoroughly the information Quality Meat had provided about its intended plans, weekly forecast and margining availability analysis, but TD had indicated to the Proposal Trustee that:

[B]ased upon their initial review they are favourably considering an extension to the forbearance to allow the Companies to continue to operate for at least the next week and are expecting to instruct counsel to prepare documentation for execution.

[38] The Proposal Trustee also reported that although Quality Meat had not ordered any hogs under the pre-paid supply agreement it had negotiated with the Marketing Board, management’s current plan was to secure a supply of hogs starting next Monday for delivery next Wednesday and Thursday.

[39] Obviously a degree of uncertainty and fluidity characterizes the operating and restructuring circumstances of Quality Meat. Nevertheless, this motion must be determined on the evidence presently before the Court. While reasonable inferences may be drawn from the evidence when justified, speculation cannot seep into the analysis. On reviewing that evidence, I am not satisfied that the moving party, Synergy Swine, has demonstrated, on a balance of probabilities, that Quality Meat will not likely be able to make a viable proposal before the expiration of the 30-day period.

D. The insolvent person will not likely be able to make a proposal, before the expiration of the period in question, that will be accepted by the creditors

[40] In its factum Synergy Swine stated that by the time of the April 10 hearing for the motion it expected that:

[A] majority of unsecured creditors of QMP will have indicated that they will oppose any proposal that does not see their pre-filing claims paid in full. Accordingly, it would appear that there is thus no viable proposal that can be enforced on the unsecured creditors.

[41] The First Report of the Proposal Trustee stated that as at April 3, 2014, the companies owed unsecured creditors approximately $13.014 million. Synergy Swine filed an initial affidavit which indicated that it and other suppliers with claims totaling about $2.69 million did not intend to support any plan which failed to provide for payment in full of their claims. Its supplementary affidavit raised that number to $3.9 million. At the hearing today, Mr. Magisano advised that he now represented eight hog producers with claims of about $750,000 who would not support any plan containing a compromise of their claims. However, that evidence did not establish that a majority of the companies’ unsecured creditors shared that view. Further, the NOI was only filed eight days ago. It is conceivable that some of the unsecured creditors who now are taking an “all or nothing” approach to the companies’ plans might well modify their views once they actually see the details of a plan. Synergy Swine has not demonstrated that Quality Meat will likely be unable to make a proposal that will be accepted by its creditors.

E. The creditors as a whole would be materially prejudiced were the application under this subsection rejected: BIA s. 50.4(11)(d)

[42] It was clear from the factum filed by Synergy Swine that the material prejudice which it contended would result if the time for filing a proposal was not terminated was prejudice to a specific class of creditors, not the creditors as a whole – i.e. farmers would not enjoy the benefit of the BIA s. 81.2 priority and security. Parliament decided not to extend the benefit of the BIA s. 81.2 priority to situations where an insolvent debtor had availed itself of the Part III, Division 1 proposal scheme by filing a NOI. That was a public policy decision. In light of that decision, I do not see how a group of unsecured creditors can argue that prejudice would result because they cannot qualify for a priority not extended by statute to their circumstances. Their prejudice results from the legislative crafting of the BIA’s proposal regime, not from any conduct of the debtor company.

F. Conclusion

[43] For those reasons, I dismiss that part of the motion by Synergy Swine seeking an order under BIA s. 50.4(11) terminating the period in which Quality Meat can file a proposal.

IV. Request for the appointment of a receiver

[44] Synergy Swine sought the appointment of a receiver over the all or part of the inventory of Quality Meat pursuant to section 101 of the Courts of Justice Act. The Marketing Board supported that request.

[45] Although typically courts appoint receivers over all of the assets, property and undertaking of a commercial or corporate entity, conceptually the jurisdiction of a court under CJA s. 101 would enable the appointment of a receiver over just some of the assets of a company, such as its inventory. However, as was pointed out in Bank of Nova Scotia v. Freure Village of Clair Creek, 1996 8258 (ON SC), in deciding whether or not to appoint a receiver a court must have regard to “the rights and interest of all parties in relation to” the property.[^4]

[46] In the present case Synergy Swine submitted that it would be just and convenient to appoint a receiver over the inventory in order to “remedy the harm to farmers arising from QMP accepting shipments when it could not pay for them in order to trigger the s. 82.1 claim and allow the receiver to receive the proceeds of sale and administer an s. 82.1 claims process”. Put another way, Synergy Swine essentially argued that because Parliament had not extended the benefit of BIA s. 82.1 priority security to farmers in circumstances where the purchaser had filed a NOI, the courts should intervene and extend such protection by appointing a receiver, thereby triggering the availability of the BIA s. 82.1 priority scheme. In my view, that would not be a proper exercise by the court of its jurisdiction to appoint a receiver under CJA s. 101. Such a course of action would not be just and convenient because it would ignore the express provisions of a statutory regime and create a preference for one class of creditors over others. Accordingly, I dismiss the request by Synergy Swine to appoint a receiver over inventory.

V. Summary and costs

[47] For the reasons set out above, I dismiss the motion brought by Synergy Swine. This is not an appropriate case for any award of costs.

D. M. Brown J.

Date: April 11, 2014

[^1]: Cougar Metal Industries Inc. (Re) 2004 BCSC 1258, para. 12; 1512759 Ontario Ltd. (Re) (2002), 2002 17534 (ON SC), 38 C.B.R. (4th) 159 (Ont. S.C.J.), para. 1; Com/Mit Hitech Services Inc. (Re) (1997), 47 C.B.R. (3d) 182 (Ont. Gen. Div.); Cumberland Trading Inc. (Re) (1994), 1994 7458 (ON SC), 23 C.B.R. (3d) 225 (Ont. Gen. Div.).

[^2]: Com/Mit Hitech Services Inc., supra., para. 8.

[^3]: Cougar Metal Industries, supra., paras. 12 and 13.

[^4]: (1996), 1996 8258 (ON SC), 40 C.B.R. (3d) 274 (Ont. Gen. Div.), para. 10.