SUPERIOR COURT OF JUSTICE – ONTARIO (COMMERCIAL LIST)

RE:

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

-AND-

AND IN THE MATTER OF A PLAN OF COMPROMISE OR ARRANGEMENT OF BOREAL CAPITAL PARTNERS LTD., JRB-331 SHEDDON HOLDINGS LTD., 2123068 ONTARIO LIMITED, JRB-109 REYNOLDS HOLDINGS LTD., JRB-339 CHURCH HOLDINGS LTD., JRB-147 CHURCH HOLDINGS LTD, Applicants

BEFORE:

Penny J.

COUNSEL:

Rebecca L. Kennedy, Rachel Nicholson and Puya Fesharaki, for the Applicants

Peter J. Osborne, Alex Morrison and Greg Adams, for the proposed Monitor, Ernst & Young Inc.

Daniel Shapira and Jessica Sorbara, for the DIP Lender, Halmont Properties Corporation

James MacLellan and Bevan Brooksbank, for Trisura Guarantee Insurance Company

HEARD (by videoconference in Toronto): November 25, 2021

ENDORSEMENT

Overview

[1]

This is an application for an initial order and other related relief under the Companies Creditors Arrangement Act, RSC 1985, c C-36.

[2]

This matter came before me at 2:00 PM on Thursday, November 25, 2021. After reviewing the application record and at the conclusion of oral submissions, I issued the initial order sought, with reasons to follow. These are the reasons.

[3]

The principal issues on the application are whether:

(a)

the applicants meet the criteria to obtain relief under the CCAA;

(b)

the court should grant a stay of proceedings, and whether this court should extend the stay of proceedings to the partnership entities involved in the enterprise;

(c)

the court should authorize the payment of certain pre-filing amounts to critical suppliers;

(d)

the court should approve the proposed interim debtor in possession financing;

(e)

the court should appoint Ernst & Young Inc. as the monitor of the applicants in these proceedings;

(f)

the court should approve the administration charge; and

(g)

the court should appoint Kesmark as the chief restructuring officer in these proceedings.

Background

[4]

In 2016, Roppongi Investments Ltd. (owned by Timothy Price) entered into a 50:50 property development partnership with JRB Capital Group Ltd. (owned by Jonathan Bowman) with the objective of developing residential real estate projects in Oakville, Ontario through Boreal Capital Partners Ltd. which would act as the general partner of Boreal Capital Partners LP, (collectively Boreal).

[5]

For each project, Boreal established a general partner and limited partner structure. There are five projects:

(1)

the 331 Sheddon Avenue project is a 20-unit residential condominium development project. The project’s completion has been delayed but it is currently at an advanced stage of construction;

(2)

the 159 Trafalgar Road project is a potential commercial office development project. The lands for the project have been acquired and requisite permits and approvals obtained, but construction has not yet commenced at the project site;

(3)

the 109 Reynolds Street project is a 23-unit residential condominium development. The lands for the project have been acquired and requisite permits and approvals obtained, but construction has not yet commenced at the project site;

(4)

the 339 Church Street project is a 24-unit residential condominium development. The lands for the project have been acquired and requisite permits and approvals obtained, but construction has not yet commenced at the project site; and

(5)

the 147 Church Street project is currently in the land assembly stage. The lands for the project have been acquired and requisite permits and approvals obtained, but construction has not yet commenced at the project site.

[6]

In August 2020, these Boreal entities faced financial and operational difficulty. Boreal required additional financing on an urgent basis to complete 331 Sheddon because the major secured creditor, Meridian Credit Union Limited, refused to provide additional financing. Roppongi also identified various alleged deficiencies in JRB’s management of the Boreal entities.

[7]

As a result, Roppongi arranged for Halmont Properties Corporation to provide subordinated financing to complete 331 Sheddon. In addition, Mr. Randal Froebelius, a nominee of Roppongi and Halmont, took over the management role of the Boreal entities from JRB. Shortly thereafter, Kesmark Estates Ltd., a company managed by Mr. Froebelius, was appointed as general partner of Boreal LP. The general partner of each of the project partnerships remained but were subject to review, oversight and approval of all decisions by Mr. Froebelius.

[8]

Relations between Roppongi and JRB continued to deteriorate, which ultimately led to a resolution by Boreal LP in September 2021 to replace all the project partnerships’ general partner with Kesmark and to terminate various construction and design management contracts with JRB.

[9]

In May 2021, in order to avoid immediate enforcement action by Meridian, Halmont took an assignment of the obligations owing to Meridian and advanced additional funds to ensure that the Boreal entities could continue operating.

[10]

However, on November 5, 2021 Halmont gave notice of various breaches by the Boreal entities of their obligations and stipulated that any further advances to the Boreal entities would be on a day to day basis and at Halmont’s sole discretion. Ultimately, Halmont advised that it would not make any further advances to the Boreal entities outside of a formal restructuring process.

[11]

In sum, the principal assets of the Boreal entities are the real property relating to the various projects (all in various stages of active development). Halmont is the principal secured creditor, with separate charges registered against most of the real property owned by the Boreal entities. As of November 24, 2021, the Boreal entities’ aggregate indebtedness to Halmont was $44,820,666 (which includes a small unsecured portion of less than $100,000).

[12]

The applicants are insolvent and are currently operating at a financial deficit of approximately $8.9 million on a consolidated basis. They have relied on Halmont as the lender of last resort since October 2020, as no other lender would provide financing to the Boreal entities given their imperiled financial state. The applicants are in default of their obligations owing to Halmont.

[13]

Other secured creditors of the Boreal entities include Trisura Guarantee Insurance Company, Roppongi Investments Ltd. and Canadian Western Bank, with charges registered against real properties owned by various Boreal entities. This application was made on notice to Halmont, Trisura and Roppongi, all of which support the relief being sought.

Analysis

Do the applicants meet the criteria to obtain relief under the CCAA?

[14]

The applicants are insolvent. Both the test under the BIA and the expanded Stelco test are satisfied in this case. The applicants’ liabilities materially exceed their assets and they are experiencing an operational deficit: the applicants are unable to pay liabilities that are currently due and those coming due. In addition, the applicants are exposed to significant financial risk arising from claims of unsecured creditors and other stakeholders that the applicants will be unable to pay without interim financing. This includes a host of potential claims relating to delay or frustration of the development of the projects, such as by contractors and potential end users of the condominium units. The statutory financial threshold is not in issue.

Should the court grant the stay of proceedings and should the court extend the stay of proceedings to the partnership entities involved in the enterprise?

[15]

Section 11.02(1) permits the court to grant an initial stay of up to 10 days on an application for an initial order, provided the stay is appropriate and the applicants have acted with due diligence and in good faith. Under s. 11.001, other relief granted under s. 11 of the CCAA at the same time as an initial order under s. 11.02(1) must be limited “to relief that is reasonably necessary for the continued operation of the debtor company in the ordinary course of business during that period.”

[16]

Absent exceptional circumstances, the relief granted during the initial stay period should be limited and where possible, the status quo should be maintained during that period. The initial stay period allows for operations to be stabilized and negotiations to occur, followed by requests for expanded relief on proper notice to affected parties at the full comeback hearing. Whether particular relief is necessary to stabilize a debtor company’s operations during the initial stay period is a factual determination, based on all of the circumstances of the particular debtor. There are no “hard and fast” rules: Re Lydian International Limited, 2019 ONSC 7473 [Commercial List].

[17]

Here, the applicants are experiencing a liquidity crisis and are unable to meet their obligations generally as they become due. The applicants intend to continue operations and consult with their stakeholders in good faith if they are granted protection. Therefore, it is appropriate for this Court to grant the requested stay of proceedings in favour of applicants. the

[18]

The CCAA applies to debtor companies, not partnerships. Nevertheless, where operations of partnerships are integral and closely related to the operations of the the applicants, it is well-established that the court has the jurisdiction to extend the protection of the stay of proceedings to those partnerships in order to ensure that the purposes of the CCAA can be achieved.

[19]

The individual project partnerships are not applicants in this proceeding. The business and operations of the applicants are, however, deeply integrated with the partnerships at all levels. Omitting the partnerships from relief would frustrate the objective of seeking respite for the applicants under the CCAA.

Should the court authorize the payment of certain pre-filing amounts to critical suppliers?

[20]

The applicants seek authority, with the consent of the Monitor, to make payments, including pre-filing amounts owing and in arrears, to certain third parties that provide services that are integral to the Boreal entities’ ability to operate. This is a measure designed to ensure that the Boreal entities can continue regular business operations during the post-filing period and efficiently complete certain projects.

[21]

The court has jurisdiction to make any orders that it thinks appropriate under s. 11 of the CCAA. Payment to critical suppliers, including provision for the payment of pre-filing amounts to suppliers whose services are viewed as critical to the post-filing operations of the debtor, is necessary to achieve the purposes for which the initial order is being granted.

[22]

A supplier is “critical” to the debtor company’s post-filing operations where the particular goods or services are sufficiently integrated into the debtor company’s operations that it would be materially disruptive to the debtor’s operations and restructuring for the particular supplier to cease providing such services. I agree that in the circumstances, the Monitor is best suited determine when any supplier of the Boreal entities is “critical” such that pre-filing payments should be permitted.

Should the court approve the proposed interim debtor in possession financing?

[23]

Section 11.2 of the CCAA gives the court authority to approve debtor-in-possession (“DIP”) financing. The court may also make an order granting a priority charge to the DIP provider over the debtor’s property. The security or charge may not secure pre-filing obligations.

[24]

As noted above, under the recent CCAA amendments, when an application for interim financing is made at the same time as an initial application, the applicant must satisfy the court that the terms of the loan are “limited to what is reasonably necessary for the continued operations of the debtor company in the ordinary course of business during that period” [i.e. the initial stay period].

[25]

In this case, the DIP facility and related DIP lender’s charge are essential elements of the measures required during the initial stay period to ensure the survival of the Boreal entities’ businesses and operations until the comeback hearing.

[26]

The Boreal entities urgently require interim financing to provide stability, continue operations, and restructure their business. The only potential financier is their existing lender of last resort, Halmont, which has agreed to provide the DIP facility. It is appropriate for the DIP lender’s charge to be secured on the Boreal entities’ property given that all of the Boreal entities will derive benefit from the DIP facility proceeds. The amount sought for the initial charge is exactly calibrated to the anticipated cash needs for the next ten days. The initial draw of $2.6 million is required to allow the Boreal entities to pay specified amounts that are expected to be due during the initial stay period - amounts specified in the Cash Flow Forecast.

[27]

Finally, no viable compromise or arrangement is possible without the DIP facility. Without the immediate liquidity provided by the initial DIP facility draw, the applicants’ business is in serious jeopardy and will not survive beyond the initial stay period.

Should the court appoint Ernst & Young Inc. as the monitor of the applicants in these proceedings?

[28]

Ernst & Young has consented to act as monitor in these CCAA proceedings. It is a trustee within the meaning of subsection 2(1) of the BIA. E&Y is not subject to any of the restrictions as to who may be appointed as monitor set out in section 11.7(2) of the CCAA.

Should the court approve the administration charge?

[29]

Section 11.52 of the CCAA gives the court jurisdiction to grant a priority charge for the fees and expenses of financial, legal and other advisors or experts. In determining whether to approve an administration charge, the Court must consider: (a) the size and complexity of the businesses under CCAA protection; (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 is fair and reasonable; (e) the position of secured creditors likely to be affected by the charge; and (f) the position of the Monitor. These factors have been applied in numerous proceedings.

[30]

The Monitor, its counsel, the applicant’s counsel and the DIP lender’s counsel are essential to the operation of these CCAA proceedings. It is unlikely that these advisors will participate in the CCAA proceedings without the administration charge. Furthermore, the quantum of the proposed administration charge in the initial order is limited to what is “reasonably necessary” for the initial stay period, given the demands on the advisors leading up to the filing together with likely further demands prior to the comeback hearing.

Should the court appoint Kesmark as the chief restructuring officer in these proceedings and grant the requested protections?

[31]

The court has the statutory authority to make an order appointing a CRO under s. 11 of the CCAA. These appointments may be made where the proposed CRO has expertise which will assist the applicants (and the Monitor) in achieving the objectives of the CCAA.

[32]

Kesmark’s expertise and continued participation are critical to achieving the objectives of the CCAA in the circumstances by permitting the Boreal entities to continue their operations and plan a restructuring. Kesmark is not an “insider” of management and has the existing institutional knowledge, expertise and proven track-record to fulfill the obligations of a CRO. This appointment is supported by the Monitor.

[33]

CROs may also be granted certain protections from liability in the execution of their duties in a similar manner to court-appointed monitors. Providing protections in the proposed initial order to Kesmark as CRO will ensure Kesmark can: (i) continue acting as the general partner of the partnerships, (ii) continue the business normalization efforts it has undertaken since its appointment; and, (iii) manage and oversee the projects and conduct the day-to-day business of the Boreal entities.

Conclusion

[34]

For all these reasons, the initial order is granted.

Penny J.

Date: 2021-11-29