COURT FILE NO.: CV-15-11192-00CL

DATE: 20151127

SUPERIOR COURT OF JUSTICE – ONTARIO

IN THE MATTER OF THE COMPANIES’ CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. C-36 AS AMENDED

AND IN THE MATTER OF SECTION 101 OF THE COURTS OF JUSTICE ACT, R.S.O. 1990 c. C-43 AS AMENDED

AND IN THE MATTER OF A PLAN OF COMPROMISE OR ARRANGEMENT OF VICTORIAN ORDER OF NURSES FOR CANADA, VICTORIAN ORDER OF NURSES FOR CANADA - EASTERN REGION, AND VICTORIAN ORDER OF NURSES FOR CANADA - WESTERN REGION

BEFORE: Penny J.

COUNSEL:
Evan Cobb and Matthew Halpin for the Applicants

Joseph Bellissimo for the Bank of Nova Scotia

Mark Laugesen for Collins Barrow Toronto Limited (Proposed Monitor)

Kenneth Kraft for the Board of Directors of the Applicants

HEARD: November 25, 2015

ENDORSEMENT

Overview

[1] On November 25, 2015 I heard an application for an initial order under the Companies’ Creditors Arrangement Act for court protection of certain Victorian Order of Nurses entities. I treated the application as essentially ex parte. In a brief handwritten endorsement, I granted the application and signed an initial order under the CCAA and an order appointing a receiver of certain of the VON group’s assets, with written reasons to follow. These are those reasons.

Background

[2] The Victorian Order of Nurses for Canada and the other entities in the VON group have, for over 100 years, provided home and community care services which address the healthcare needs of Canadians in various locations across the country on a not-for-profit basis.

[3] The VON group delivers its programs through four regional entities:

(1) VON – Eastern Region

(2) VON – Western Region

(3) VON – Ontario and

(4) VON – Nova Scotia.

VON Canada does not itself provide direct patient service but functions as the “head office” infrastructure supporting the operations of the regional entities.

[4] The VON group has, for a number of years, suffered liquidity problems. Current liabilities have consistently exceeded current assets by a significant margin; current net losses from 2012 to 2015 total over $13 million; and cash flows from operations from 2012 to 2015 were similarly negative in the amount of over $8 million. The VON group faces a significant working capital shortfall. A number of less drastic restructuring efforts have been ongoing since 2006 but these efforts have not turned the tide. Current forecasts suggest that the VON group will face a liquidity crisis in the near future if restructuring steps are not taken.

[5] Financial analysis of the VON group reveals that VON Canada, VON East and VON West account for a disproportionately high share of the VON group’s overall losses and operating cash shortfalls relative to the revenues generated from these entities.

[6] As a result of these circumstances, VON Canada, VON East and VON West seek protection from their creditors under the Companies’ Creditors Arrangement Act. The applicants also seek certain limited protections for VON Ontario and VON Nova Scotia, which carry on a core aspect of the VON group’s business but are not applicants in these proceedings. The applicants also seek the appointment of a receiver of certain of the VON group’s assets.

[7] The goal of the contemplated restructuring is to modify the scope of the VON group’s operations and focus on its core business and regions. This will involve winding down the non-viable operations of VON East and VON West in an orderly fashion and restructuring and downsizing the management services provided by VON Canada in order to have a more efficient and cost-effective operating structure.

Jurisdiction

[8] The CCAA applies to a “debtor company” with total claims against it of more than $5 million. A debtor company is “any company that is bankrupt or insolvent.” “Insolvent” is not defined in the CCAA but has been found to include a corporation that is reasonably expected to run out of liquidity within the period of time reasonably required to implement a restructuring.

[9] In any event, based on the affidavit evidence of the VON group’s CEO, Jo-Anne Poirier, the applicants are each unable to meet their obligations that have become due and the aggregate fair value of their property is not sufficient to enable them to pay all of their obligations.

[10] The corporate structure of the applicants does not conform to the parent/subsidiary structure that would be typically found in the business corporation context. I am satisfied, however, that VON East and VON West are under the control of VON Canada from a practical perspective. They are all affiliated companies with the same board of directors. Accordingly, while VON East and VON West do not, on a standalone basis, face claims in excess of $5 million, the applicants, as a group, clearly do. The applicants have complied with s. 10(2) of the CCAA. The application for an initial order is accompanied by a statement indicating on a weekly basis the projected cash flow of the applicants, a report containing the prescribed representations of the applicants regarding the preparation of the cash flow statement and copies of all financial statements prepared during the year before the application.

[11] I am therefore satisfied that I have the jurisdiction to make the order sought.

Notice

[12] The VON group is a large organization with over 4,000 employees operating from coast to coast. I accept that prior notice to all creditors, or potential creditors, is neither feasible nor practical in the circumstances. The application is made on notice to the VON group, the proposed monitor/receiver, the proposed chief restructuring officer and to the VON group’s most significant secured creditor, the Bank of Nova Scotia.

[13] There shall be a comeback hearing within two weeks of my initial order which will enable any creditor which had no notice of the application to raise any issues of concern.

Stay

[14] Under s. 11.02 of the CCAA, the court may in its initial order make an order staying proceedings, restraining further proceedings or prohibiting the commencement of proceedings against the debtor provided that the stay is no longer than 30 days.

[15] The CCAA’s broad remedial purpose is to allow a debtor the opportunity to emerge from financial difficulty with a view to allowing the business to continue, to maximize returns to creditors and other stakeholders and to preserve employment and economic activity. The remedy of a stay is usually essential to achieve this purpose. I am satisfied that the stay of proceedings against the applicants should be granted.

[16] Slightly more unusual is the request for a stay of proceedings against VON Ontario and VON Nova Scotia, neither of which are applicants in these proceedings. However, the evidence of Ms. Poirier establishes that VON Canada is a cost, not a revenue, center and that VON Canada is entirely reliant upon revenues generated by VON Ontario and VON Nova Scotia for its own day-to-day operations. There is a concern that VON Canada’s filing of this application could trigger termination or other rights with respect to funding relationships VON Ontario and VON Nova Scotia have with various third party entities which purchase their services. Such actions would create material prejudice to VON Canada’s potential restructuring by interrupting its most important revenue stream.

[17] In the circumstances, I am satisfied that the stay requested in respect of VON Ontario and VON Nova Scotia, which is limited only to those steps that third party entities might otherwise take against VON Ontario and VON Nova Scotia due to the applicants being parties to this proceeding, is appropriate.

Payment of Pre-filing and Other Obligations

[18] The initial order authorizes, but does not require, payment of outstanding and future wages as well as fees and disbursements for any restructuring assistance, fees and disbursements of the monitor, counsel to the monitor, the chief restructuring officer, the applicants’ counsel and counsel to the boards of directors. These are all payments necessary to operate the business on an ongoing basis or to facilitate the restructuring.

[19] The initial order also contemplates payment of liabilities for pre-filing charges incurred on VON group credit cards issued by the Bank of Nova Scotia. The Bank is a secured creditor. It is funding the restructuring (there is no DIP financing or DIP charge). It has agreed to extend credit by continuing to make these cards available on a go forward basis, but conditioned on payment of the pre-filing credit card liabilities. I am satisfied that these measures are necessary for the conduct of the restructuring.

Modified Cash Management System

[20] Historically, net cash flows were not uniform across the VON group entities. This resulted in significant timing differences between inflows and outflows for any particular VON organization. To assist with this lack of uniformity, the VON group entered into an agreement with the Bank of Nova Scotia whereby funds could be effectively pooled among the VON group, outflows and inflows netted out and a net overall cash position for the VON group determined and maintained. At the date of the commencement of these proceedings, the cash balance in the VON Canada pooled account was approximately $1.8 million. These funds will remain available to the applicants during the CCAA proceedings.

[21] Immediately upon the granting of the initial order, however, the cash management system will be replaced with a new, modified cash management arrangement. Under the new arrangement, the VON Ontario and VON Nova Scotia cash inflows and outflows will take place in a segregated pooling arrangement pursuant to which the consolidated cash position of only those two entities will be maintained.

[22] The applicants will establish their own arrangement under which a consolidated cash position of the applicants will be maintained. Thus, VON Canada, VON East and VON West will continue to utilize their own consolidated cash balance held by those entities collectively.

[23] The segregation of the VON Ontario and VON Nova Scotia cash management is necessary because they are not applicants.

[24] A consolidated cash management arrangement is, however, necessary for the applicants, inter se, in order to ensure that the applicants continue to have sufficient liquidity to cover their costs during these proceedings. Without this arrangement, during the proposed CCAA proceedings VON East and VON West would face periodic cash deficiencies to the detriment of the group as a whole and which would put the orderly wind down of the critical services offered by VON East and VON West at risk.

[25] I am satisfied that the introduction of the new cash management is both necessary and appropriate in order to:

(a) segregate the cash operations of the VON group entities which are subject to the CCAA proceedings from the VON group entities which are not; and

(b) allow the applicants in the CCAA proceedings to pool their cash inputs and outputs, which is necessary in order to avoid liquidity crises in respect of VON East and VON West operations during the wind down period.

Proposed Monitor

[26] Under s. 11.7 of the CCAA, the court is required to appoint a monitor. The applicants have proposed Collins Barrow Toronto Limited, which has consented to act as the court-appointed monitor. I accept Collins Barrow as the court appointed monitor.

Chief Restructuring Officer (CRO)

[27] Section 11 of the CCAA provides the court with authority to allow the applicants to enter into arrangements to facilitate restructuring. This includes the retention of expert advisors where necessary to help with the restructuring efforts. March Advisory Services Inc. has worked extensively with VON Canada to date with its pre-court endorsed restructuring efforts and has extensive background knowledge of the VON group’s structure and business operations. The VON group lacks internal business transformation and restructuring expertise. VON Canada’s “head office” personnel will be fully engaged simply running the business and implementing necessary changes. I am satisfied that March Advisory Services Inc.’s engagement is both appropriate and essential to a successful restructuring effort and that its appointment as CRO should be approved.

[28] Both the VON group and the monitor believe that the quantum and nature of the remuneration to be paid to the CRO is fair and reasonable. I am therefore satisfied that the court should approve the CRO’s engagement letter. I am also satisfied that the CRO’s engagement letter should be sealed. This sealing order meets the test under the SCC decision in Sierra Club. The information is commercially sensitive, in that it could impair the CRO’s ability to obtain market rates in other engagements, and the salutary effects of granting the sealing order (enabling March Advisory Services Inc. to accept this assignment) outweigh the minimal impact on the principle of open courts.

Administration Charge

[29] Section 11.52 of the CCAA enables the court to grant an administration charge. In order to grant this charge, the court must be satisfied that notice has been given to the secured creditors likely to be affected by the charge, the amount is appropriate, and the charge extends to all of the proposed beneficiaries.

[30] Due to the confidential nature of this application and the operational issues that would have arisen had prior disclosure of these proceedings been given to all secured creditors, all known secured creditors were not been provided with notice of the initial application. The only secured creditor of the applicants provided with notice is the Bank of Nova Scotia.

[31] For this reason, the proposed initial order provides that the administration charge shall initially rank subordinate to the security interests of all other secured creditors of the applicants with the exception of the Bank of Nova Scotia. The applicants will seek an order providing for the subordination of all other security interests to the administration charge in the near future following notice to all potentially affected secured creditors.

[32] The amount of the administration charge is $250,000. In the scheme of things, this is a relatively modest amount. The proposed monitor has reviewed the administration charge and has found it reasonable. The beneficiaries of the administrative charge are the monitor and its counsel, counsel to the applicants, the CRO, and counsel to the boards of directors.

[33] The evidence is that the applicants and the proposed monitor believe that the above noted professionals have played and will continue to play a necessary and integral role in the restructuring activities of the applicants.

[34] I am satisfied that the administration charge is required and reasonable in the circumstances to allow the debtor to have access to necessary professional advice to carry out the proposed restructuring.

Directors’ Charge

[35] In order to secure indemnities granted by the applicants to their directors and officers and to the CRO for obligations that may be incurred in connection with the restructuring efforts after the commencement of the CCAA proceedings, the applicants seek a directors’ charge in favor of the directors and officers and the CRO in the amount of $750,000.

[36] Section 11.51 of the CCAA allows the court to approve a directors’ charge on a priority basis. In order to grant a directors’ charge the court must be satisfied that notice has been given to the secured creditors, the amount is appropriate, the applicant could not obtain adequate indemnification for the directors or officers otherwise and the charge does not apply in respect of any obligation incurred by a director or officer as a result of gross negligence or willful misconduct.

[37] As noted above, all known secured creditors have not been provided with notice. For this reason, the applicants propose that the priority of the directors’ charged be handled in the same manner as the administration charge.

[38] The evidence of Ms. Poirier shows that there is already a considerable level of directors’ and officers’ insurance. There is no evidence that this insurance is likely to be discontinued or that the VON group can not or will not be able to continue to pay the premiums. However, given the size of the VON group’s operations, the number of employees, the diverse geographic scope in which the group operates, the potential for coverage disputes which always attends on insurance arrangements and the important fact that this board is composed entirely of volunteers, additional protection for the directors to remain involved post-filing is warranted, Prism Income Fund (Re), 2011 ONSC 2061 at para. 45.

[39] The amount of the charge was estimated by taking into consideration the existing directors’ and officers’ insurance and potential liabilities which may attach including employee related obligations such as outstanding payroll obligations, outstanding vacation pay and liability for remittances to government authorities. This charge only relates to matters arising after the commencement of these proceeding. It also covers the CRO.

[40] The proposed monitor has reviewed and has raised no concerns about the proposed directors’ charge.

[41] The director’ charge contemplated by the initial order expressly excludes claims that arise as a result of gross negligence or willful misconduct.

[42] For these reasons, I am satisfied that the directors’ charge is appropriate in all the circumstances.

Key Employee Retention Plan

[43] The applicants seek approval of a key employee retention plan in the amount of up to $240,000, payable to key employees during 2016.

[44] This is a specialized business. The experience and knowledge of critical employees is highly valuable to the applicants. These employees have extensive knowledge of and experience with the applicants. The applicants are unlikely to be able to replace critical employees post-filing. Under the contemplated restructuring, the employee ranks of the applicants will be significantly downsized. As a result, there is a strong possibility that certain critical employees will consider other employment options in the absence of retention compensation.

[45] The KERP was approved by the board of directors of the applicants. Provided the arrangements are reasonable, decisions of this kind fall within the business judgment rule as a result of which they are not second-guessed by the courts.

[46] The amount is relatively modest given the size of the operation and the number of employees. I am satisfied that the KERP is reasonable in all the circumstances. I am also satisfied that the specific allocation of the KERP is reasonably left to the business judgment of the board.

[47] Because the KERP involves sensitive personal compensation information about identifiable individuals, disclosure of this information could be harmful to the beneficiaries of the KERP. I am satisfied that the Sierra Club test is met in connection with the sealing of this limited information.

Receivership Order

[48] The Wage Earner Protection Program Act was established to make payments to individuals in respect of wages owed to them by employers who are bankrupt or subject to a receivership. The amounts that may be paid under WEPPA to an individual include severance and termination pay as well as vacation pay accrued.

[49] In aggregate, over 300 employees are expected to be terminated at the commencement of these proceedings. These employees will be paid their ordinary course salary and wages up to the date of their terminations. However, the applicants do not have sufficient liquidity to pay these employees’ termination or severance pay or accrued vacation pay.

[50] The terminated employees would not be able to enjoy the benefit of the WEPPA in the current circumstances. This is because the WEPPA does not specifically contemplate the effect of proceedings under the CCAA.

[51] A receiver under the WEPPA includes a receiver within the meaning of s. 243(2) of the Bankruptcy and Insolvency Act. A receiver under the BIA includes a receiver appointed under the Courts of Justice Act if appointed to take control over the debtor’s property. Under the WEPPA, an employer is subject to receivership if any property of the employer is in the possession or control of the receiver.

[52] In this case, the applicants seek the appointment of a receiver under s. 101 of the Courts of Justice Act to enable the receiver to take possession and control of the applicants’ goodwill and intellectual property (i.e., substantially all of the debtor’s property other than accounts receivable and inventory, which must necessarily remain with the debtors during restructuring).

[53] In Cinram (Re) (October 19, 2012), Toronto CV-12-9767-00CL, Morawetz R.S.J. found it was just and convenient to appoint a receiver under s. 101 over certain property of a CCAA debtor within a concurrent CCAA proceeding where the purpose of the receivership was to clarify the position of employees with respect to the WEPPA.

[54] In this case, the evidence is that no stakeholder will be prejudiced by the proposed receivership order. To the contrary, there could be significant prejudice to the terminated employees if there is no receivership and former employees are not able to avail themselves of benefits under the WEPPA.

[55] In the circumstances, I find it is just and convenient to appoint a receiver under s. 101 over the goodwill and intellectual property of the applicants.

Further Notice

[56] I am satisfied that the proposed notice procedure is reasonable and appropriate in the circumstances and it is approved.

Comeback Hearing

[57] In summary, I am satisfied that it is necessary and appropriate to grant CCAA protection to VON Canada, VON East and VON West. There shall be a comeback hearing at 10 a.m. before me on Wednesday, December 9, 2015.

Penny J.

Date: November 27, 2015