SUPERIOR COURT OF JUSTICE – ONTARIO

IN BANKRUPTCY AND INSOLVENCY

COURT FILE NO.: 33-165459

DATE: November 5, 2015

RE: IN THE MATTER OF THE BANKRUPTCY OF AMBERWOOD PRODUCTIONS (ROB THE ROBOT II) INC.,

BEFORE: MASTER CALUM MACLEOD as Registrar in Bankruptcy

COUNSEL:
J. Alden Christian, for the Applicants
Percy Ostroff, for the Respondent

HEARD: July 10th & October 30th, 2015

ENDORSEMENT

[1] This is an application by Atomic Audio Inc. and Serge Cote, creditors of the respondent, Amberwood Productions (Rob the Robot II) Inc. The applicants seek a bankruptcy order pursuant to s. 45 of the Bankruptcy & Insolvency Act, R.S.C. 1985, c. B.3. My jurisdiction to hear this matter in my capacity as Registrar in Bankruptcy is under s. 192 (1) (a) and (j) of the Act. The parties have consented to the master hearing the matter although the application is opposed.

[2] I initially heard evidence on July 10th, 2015. On the basis of that evidence I found that the corporation had committed an act of bankruptcy. Clearly it is indebted in an amount exceeding the statutory minimum of $1,000 and it has failed to pay its creditors as debts fell due. Indeed the debts in question have been outstanding since 2013. The application was supported by two other creditors who filed affidavits setting out the particulars of debts owed to them and the fact that they supported the applicants in requesting a bankruptcy. On the basis of that finding, s. 45 is engaged and it is open to the court to make a bankruptcy order.

[3] I declined to make such an order in July. I was persuaded that an immediate bankruptcy might interfere with certain ongoing and imminent contractual obligations. That would neither have been in the best interests of the corporation nor its creditors. The deadline for completing that work was August 31st, 2015. I therefore adjourned the application on terms.

[4] On October 30th, 2015, the parties re-attended to bring the court up to date on developments since July and to continue the argument. The applicants renew their request for a bankruptcy order. The respondent remains opposed.

[5] For the reasons that follow, I have concluded that the application should be granted unless the parent corporation or one of its other subsidiaries agrees to provide the capital to pay these debts within the next 30 days. I have provided the respondent with a further week to obtain such a commitment failing which the order will be granted without further notice.

Background

[6] Rob the Robot is an animated children’s series which is carried on domestic and international television networks. It is also available on DVD or may be purchased and downloaded from online vendors. It is one of several children’s entertainment projects of Amberwood Productions. The original Rob the Robot was created for TV Ontario and was co-produced by Amberwood and a company in Singapore. There is co-production treaty in place between Canada and Singapore. For purposes of the narrative, the important point is that a certified co-production will meet Canadian content requirements and qualify for Canadian tax credits.

[7] As is common in the industry, Amberwood uses different corporate vehicles for its major productions. The subject corporation Amberwood Productions (Rob the Robot II) Inc. is a wholly owned subsidiary of Amberwood Production Services Inc. and is the corporate vehicle for a second cycle of 26 Rob the Robot episodes. Like the first series, Rob the Robot II is a Canada Singapore co-production and it is now in distribution. There is every reason to believe that the second series will enhance the value of the Rob the Robot episodes and will generate revenue in the future. For reasons I will describe in a moment this is unlikely to result in significant short term revenue for the respondent.

[8] The respondent corporation is significantly indebted and it does not currently have the means to pay those debts. The evidence before the court demonstrated that as of April 10th, 2014 there were acknowledged accounts payable of $266,610.24. Included in those amounts is an amount recognized as owing to the applicant Atomic Audio Inc. of $65,701.71 for audio post production work and an amount of $$42,872.20 owing to the applicant Serge Cote for music composition. The applicants claim higher amounts but whatever the precise number, the debts have been outstanding since the respondent stopped paying their invoices at the end of 2013. Since then there have been repeated demands and repeated promises of payment but the debts remain outstanding.

[9] On the previous occasion, I heard evidence from Sheldon Wiseman, President and CEO of Amberwood Entertainment who is also President of the respondent corporation. Mr. Wiseman testified that the production was complete and was awaiting a certificate from Singapore so that the production could be submitted for final CAVCO (Canadian Audio-Visual Certification Office) approval by the impending deadline of August 31st, 2015. As at June 30th, 2015 CAVCO had also required some additional information and clarification which the corporation was in the process of providing. As Mr. Wiseman testified, failure to obtain Canadian content and tax credit certification would be catastrophic. On the other hand if certification was achieved by the deadline the corporation would receive release of certain funds and in particular $32,800.00 from the Canadian Media Fund.

[10] Although Mr. Wiseman acknowledged it was possible a trustee in bankruptcy could complete the certification process, he was also concerned about any delay or disruption in the process due to the very tight deadline. Ultimately I adjourned the hearing and directed the respondent to diligently pursue the CAVCO certification. I also imposed a freeze on disposition of assets and certain other terms. I should note that the order has not been formalized because the parties were unable to agree on certain drafting details. Nevertheless it has been substantially complied with.

[11] At the original hearing in July I also heard evidence from Mark Edwards who is a lawyer advising the applicants – though he is not litigation counsel – and who has been involved in attempts to collect the outstanding debts for the past two years. Mr. Edwards is an experienced entertainment lawyer. He gave evidence concerning the manner in which productions such as this are typically financed. In particular he outlined the manner in which distributors assist in financing by pre-purchasing distribution rights. That evidence was helpful because it assisted the court to properly understand how the revenue stream is affected.

[12] Mr. Wiseman had tendered a letter from Entertainment One UK Ltd. stating that it is the distributor of Rob the Robot pursuant to a distribution agreement of September 20th, 2011. In the letter, Nick Gawne, an officer of the corporation stated that his corporation had advanced the sum of $300,000 as a minimum guarantee to Rob the Robot II and was entitled to be repaid out of net revenues obtained from licences. The letter then went on to assert that Entertainment One UK Ltd. was a secured creditor of the respondent corporation for the balance of the Minimum Guarantee in the amount of $244,000. He indicated that his corporation would “oppose the petition” and if the court was inclined to grant it, requested that it be adjourned to allow the corporation to instruct counsel.

[13] Of course the letter itself is hearsay and since the adjournment there has been no effort by the distributor to instruct counsel or to seek standing in the application. It is of concern to me because it is slightly misleading. In cross examination Mr. Wiseman acknowledged that he had solicited it for use at the hearing. It is misleading because Entertainment One UK Ltd. is not a creditor. Rather it has purchased the distribution rights which have been assigned to it.

[14] The distributor is not a secured creditor. As explained by Mr. Edwards, distributors assist with financing of productions by pre-purchasing distribution rights through minimum guarantees. The distributor is then entitled to receive all of the net revenues obtained from licencing of Rob the Robot. In effect the producer assigns its licencing rights to the distributor which has the exclusive right to collect royalties until the minimum guarantee is repaid and for a period of time set out in the distribution agreement. Licencing revenue covered by the agreement does not accrue to the respondent corporation but accrues to the distributor. The producer does not pay the distributor. Rather the distributor receives the funds and pays itself. What the producer retains is the right to residual royalties after the original distribution agreement has been fulfilled. That is the case here.

[15] Because this is a co-production the interest of Amberwood Productions (Rob the Robot II) Inc. in the 26 animated half hour episodes is a 50% interest and because the Rob the Robot series is likely to be distributed as a bundle of 52 animated episodes, the royalties will be divided between the first and second series. So in general terms the income stream to the respondent corporation will be 25% of the royalties from future licence renewals. Of course these residual rights have value and could be sold by a trustee in bankruptcy but the respondent argues the value of the Rob the Robot franchise might be diminished if the episodes are not jointly marketed.

[16] Since the hearing in July, the application for CAVCO certification has been completed and a Certificate of Completion was issued on August 5th, 2015. On August 17th, 2015 the Ontario Media Development Corporation provided its confirmation that the production qualified for an Ontario Film and Television Tax Credit. This will result in release of the $32,800.00 from the Canadian Media Fund shown as an account receivable.

[17] The respondent has also delivered the audited statement of production costs which covers the period of active production between March 8th, 2011 and August 31st, 2013. It also purports to have delivered a complete set of its books and records to counsel for the applicant although that was done so recently that Mr. Christian was unable to confirm that the records are complete or to have them reviewed.

[18] At the time of the hearing in July a statement of “assets as at June 25, 2015” was placed before the court. Included in that statement was a receivable of $25,000 due from Shaw Rocket Fund. Apparently that amount had been received at the time of the hearing and $10,000.00 had been paid to Mr. Ostroff as a retainer. This was disclosed to the court at the resumption of the hearing and while the propriety of the payment is not challenged by the applicants, I am asked to take into account that the document was submitted in evidence without comment and did not paint an accurate picture of the situation.

[19] It appears from the evidence tendered at the resumption of the hearing that the corporation now has just over $30,000 in the bank plus a sum of just over $8,000 held in trust by Mr. Edwards to its credit. With the $32,800 due from the Canadian Media Fund there will be just under $72,000 in cash. There is some HST payable and the corporation states it must make certain other payments with the result that it anticipates being able to distribute $67,787 to its creditors. This available cash is the only liquid asset. The applicants alone are owed more than $100,000 while the total accounts payable appear to be closer to $300,000. The corporation is operationally insolvent. The question is whether a bankruptcy is the appropriate remedy.

[20] If it is correct that the bank loan has been repaid then these are the only debts and there are no longer any secured creditors. The HST preferred debt is small. It seems unfortunate to bankrupt the subsidiary when the problem could be solved by a relatively modest injection of capital but there is no such proposal from the parent company.

[21] There is no evidence to suggest the creditors seek a bankruptcy order for an improper purpose. To the contrary, they have been more than patient. Promises of payments and payment schedules have repeatedly been made to them and have not been kept. Only after this application was commenced has there been full financial disclosure.

[22] The other grounds of objection were to deny the debts were owing, to state that the respondent had made arrangements to pay the creditors, to assert that assets that would be available to the creditors would not be available if a bankruptcy order was made and to argue that nothing is to be gained by the making of a bankruptcy order. Only the last of these objections has any substance.

[23] There is reason to believe that eventually there will be revenues from the residual rights which remain in the corporation. The amount of that future revenue stream and when it may materialize is not in evidence. There is no reason to conclude that the rights to such revenues would be damaged by a bankruptcy or that they could not be enforced by a trustee.

[24] I have given weight only to the futility objection. If an order is granted, the limited funds immediately available will be encroached upon by the costs of this application and the costs incurred by the trustee to investigate and administer the estate. Unless significant value can be realized from the illiquid assets – primarily the right to future royalties – or investigation by a trustee reveals improper diversion of funds or assets to other Amberwood entities, the creditors may find they would have been better off to accept immediate distribution of the cash in the bank and to eventually be paid the balance from future revenues.

[25] The problem is that no specific alternative plan is suggested by the respondent. No proposal to recapitalize or restructure was made to the court. I considered the possibility of a monitor or receiver but neither party proposed such a measure and I have no means to assess whether or not that would be significantly less disruptive or expensive in the long run. I am not persuaded that vague promises of paying the debts in the future are sufficient to avoid a bankruptcy. To the contrary, some of the material submitted to the court suggested that limitation defences might be raised. Further delay will prejudice the creditors.

[26] Amberwood could avoid the bankruptcy of its subsidiary by finding a means to inject the necessary capital. Rob the Robot II was a $2.5 million production which has ultimately been successfully completed. As it appears there will be minimal operating costs in future for this particular subsidiary, injection of approximately $300,000 would appear to be all that is necessary to clear the remaining debt. Although no request was made for such relief, in light of the respondent’s expressed concern about the impact of a bankruptcy on the Amberwood brand, I will stay the application for a further week to permit Amberwood to provide a concrete plan to fund the respondent so that it can pay its debts.

[27] If the court receives such a proposal from the respondent and from the parent corporation or one of the other Amberwood entities by November 13th, 2015 I will consider extending the stay. Failing that, there will be an order placing the corporation into bankruptcy and appointing BDO Canada Limited as trustee effective November 14th, 2015.

[28] In either case, the applicants shall have costs of the application to be agreed, fixed or assessed. The terms of the existing order remain in effect except that the respondent may remit the HST that is owing to the Canada Revenue Agency and Mr. Ostroff may retain the remaining funds in his trust account to apply against his fees and disbursements. The respondent may not rely on the running of any limitation period against the creditors during the pendency of the application.

[29] I may be spoken to for further direction and remain seized of the matter.

Master MacLeod