Court File and Parties
COURT FILE NO.: CV-22-00686113-00CL DATE: 20231101 ONTARIO - SUPERIOR COURT OF JUSTICE – COMMERCIAL LIST
IN THE MATTER OF THE NOTICE OF INTENTION TO MAKE A PROPOSAL OF ISPAN SYSTEMS LP
RE: iSpan Systems LP, Applicant
BEFORE: Peter J. Osborne J.
COUNSEL: Sam Babe, for the Applicant Heather Meredith and Saneea Tanvir, for King David Inc. Philip Cho and Les O’Connor, for Wilkinson Construction Services David Ullmann, for Intact Insurance Matilda Lici, for DIP Lender Annamaria Perruccio, for Ivan Joseph
HEARD: October 26, 2023
Endorsement
Background
1The DIP Agent seeks the appointment of The Fuller Landau Group Inc. (“Fuller”) as non-possessory Receiver pursuant to section 243 of the Bankruptcy and Insolvency Act (the “BIA”) and section 101 of the Courts of Justice Act (the “CJA”), for the limited purpose of monitoring iSpan and conducting a sale solicitation process (SSP). It also seeks related relief in the form of an order suspending the Claims Adjudication Process and the Mediation directed by Justice Steele on March 16, 2023.
2Defined terms in this Endorsement have the meaning given to them in the motion materials unless otherwise stated.
3The relief sought by the DIP Agent is strongly supported and recommended by the proposed Receiver who is also the Proposal Trustee. It is not opposed by any other party, save and except as described below – two unsecured (contingent) creditors oppose certain terms of the proposed SSP and sought clarification regarding others. The form of receivership order was settled amongst the parties, and the submissions today related to the SSP.
4The chronology and progress of this matter is somewhat unusual, but in my view the appointment of a receiver is appropriate here.
5iSpan manufactures and installs proprietary cold-formed steel floor joist and framing systems for residential, commercial and industrial building projects principally in Ontario. It operates from a property in Princeton, Ontario, which it leases from a related party, iSpan Systems Holdings Inc. (“Holdings”).
6The financial troubles of iSpan began during the pandemic and were exacerbated by dramatic swings in the price of steel, which is the primary cost input of its production processes. In addition, iSpan is facing prosecution by the Ministry of Labour in respect of a tragic building collapse on one of its projects in London, Ontario which resulted in the deaths of two workers and exposure to iSpan of a maximum potential penalty in excess of $11 million.
7iSpan filed an NOI on August 7, 2022 and Fuller was appointed Proposal Trustee.
8The deadline for filing a proposal was extended on September 6, 2022, October 19, 2022 and December 2, 2022. Also on September 6, 2022, the Court approved the DIP Facility with a credit limit of $1,500,000 to be used for working capital purposes and to fund costs of the Proposal Proceeding.
9The debts of iSpan total approximately $20.5 million excluding amounts owing under the DIP Facility and the potential exposure to the Ministry of Labour. CIBC was the first ranking creditor and is owed approximately $1.7 million. CIBC had served a section 244 Notice prior to the filing of the NOI.
10The second ranking generally secured creditors are the beneficiaries of the Administration Charge. The third ranking secured creditors are the DIP Lenders.
11iSpan filed a proposal and then an Amended Proposal which was accepted by its creditors on February 6, 2023. It was approved by the Court on March 16, 2023. That contemplated, among other things, payments in instalments. The problem now is that iSpan is not able to fund the next $500,000 payment due on October 31, 2023 or subsequent payments as they come due.
12Certain Litigation Claims have been advanced against iSpan (prior to filing) and while large, they are as yet unproven. They were assigned a value of one dollar for the purpose of voting on the Amended Proposal.
13Those Litigation Claims include a claim advanced by Wilkinson Construction Services Inc. (“Wilkinson”) in the amount of $3,101,149.57, and a claim advanced by King David Inc. (“King David”) in the amount of $9,408,591, together with three other claims. It is the view of the Proposal Trustee as described in its Fourth Report dated March 6, 2023, that there is duplication and overlap between the claims of Wilkinson and King David respectively since the proofs of claim arise from the same work that iSpan performed on a project called Cathedraltown.
14The present financial challenges of iSpan are exacerbated by continued interest rate increases, the Canadian construction market and slow approval processes. As a result, in addition to the inability of iSpan to make the remaining payments contemplated by the Amended Proposal as described above, it was not able to repay the DIP Facility on its maturity date of April 30, 2023 and cannot repay the CIBC Credit Facilities indebtedness which has, since the start of April, been subject only to day-to-day forbearance.
15Since CIBC served its Notice of Intention and iSpan waived the 10-day notice period and consented to immediate enforcement, CIBC is not subject to the stays imposed by sections 69 and 69.1 of the BIA in the Proposal Proceedings. Previous forbearance arrangements have not been formally extended.
16Holdings has now paid out the CIBC indebtedness and stepped into its position as assignee and subrogee, and, as a result, Holdings is now the first ranking secured creditor.
17Rather than following the more typical process that would flow from a failed Proposal in circumstances where, as here, the six-month period (as extended) allowed under the BIA for filing a proposal has already expired, all parties here are in agreement that there is still significant value in the order book of iSpan, with the result that a sale process is the best way to preserve value for stakeholders.
18The alternative would be a situation where the creditors could move to have iSpan declared bankrupt, which would destroy much of the present value of its business leaving effectively only equipment to be sold on an “as is” basis.
19It is expected that the business and assets of iSpan will be sold as a going concern, since the value of its order book, its intellectual property and the intellectual know-how of its staff, are of greatest value if sold together.
20Accordingly, iSpan has agreed with the DIP Lenders that the DIP Agent should bring this motion to seek the appointment of Fuller as Receiver with the mandate to conduct an SSP.
21The proposed Receivership would, as stated above, focus the powers of the Receiver on monitoring the business of iSpan and conducting the SSP. It would leave iSpan in possession and control of its business, albeit under the oversight of the Receiver, thereby maintaining the order book and the employment and critical knowledge of employees to be preserved pending a sale.
22The requested relief also includes a suspension of the Claims Processes (the Claims Adjudication Process and the Mediation) since those concern unsecured claims which may or may not see surplus proceeds after secured claims are satisfied.
23It is submitted that it makes good practical sense to suspend the Claims Processes until a sale has been completed and, practically, it is known whether there are any net proceeds remaining to pay out those unsecured claims (including the unsecured contingent claims of Wilkinson and King David) even if they were successful. To proceed with the Claims Processes now would incur professional fees, costs and expenses which may ultimately turn out to have been incurred in respect of issues that are rendered moot if there are no surplus proceeds.
24The proposed SSP is set out in Schedule “A” to the draft order. All parties are in agreement that a receivership rather than a bankruptcy will maximize potential recoveries for stakeholders and, while unusual, is appropriate here. No party opposes an SSP or that it be conducted by the Receiver.
25The two Litigation Claim contingent unsecured creditors, Wilkinson and King David, however, took issue with, and/or required clarification of, certain elements of the proposed SSP.
26I will address the issues in order.
Should a Receiver be Appointed?
27First, should a receiver be appointed?
28The First Extension Order gives the DIP Agent the right, upon default under the DIP Loan Agreement, to seek the appointment of a receiver. The DIP Agent has the same right under the DIP GSA. Defaults have occurred.
29The test for the appointment of a receiver is well settled under both the BIA and CJA: is it just or convenient to appoint a receiver?
30In making a determination about whether it is, in the circumstances of a particular case, just or convenient to appoint a receiver, the Court must have regard to all of the circumstances, but in particular the nature of the property and the rights and interests of all parties in relation thereto. These include the rights of the secured creditor pursuant to its security: Bank of Nova Scotia v. Freure Village on the Clair Creek, 1996 O.J. No. 5088.
31Where the rights of the secured creditor include, pursuant to the terms of its security, the right to seek the appointment of a receiver, the burden on the applicant is lessened: while the appointment of a receiver is generally an extraordinary equitable remedy, the courts do not so regard the nature of the remedy where the relevant security permits the appointment and as a result, the applicant is merely seeking to enforce a term of an agreement already made by both parties: Elleway Acquisitions Ltd. v. Cruise Professionals Ltd., 2013 ONSC 6866 at para. 27. However, the presence or lack of such a contractual entitlement is not determinative of the issue.
32The Courts have considered numerous factors which have been historically taken into account in the determination of whether it is appropriate to appoint a receiver and which I have considered in this case:
a. whether irreparable harm might be caused if no order is made, although as stated above, it is not essential for a creditor to establish irreparable harm if a receiver is not appointed where the appointment is authorized by the security documentation; b. the risk to the security holder taking into consideration the size of the debtor’s equity in the assets and the need for protection or safeguarding of assets while litigation takes place; c. the nature of the property; d. the apprehended or actual waste of the debtor’s assets; e. the preservation and protection of the property pending judicial resolution; f. the balance of convenience to the parties; g. the fact that the creditor has a right to appointment under the loan documentation; h. the enforcement of rights under a security instrument where the security-holder encounters or expects to encounter difficulties with the debtor; i. the principle that the appointment of a receiver should be granted cautiously; j. the consideration of whether a court appointment is necessary to enable the receiver to carry out its duties efficiently; k. the effect of the order upon the parties; l. the conduct of the parties; m. the length of time that a receiver may be in place; n. the cost to the parties; o. the likelihood of maximizing return to the parties; and p. the goal of facilitating the duties of the receiver.
See: Canadian Equipment Finance and Leasing Inc. v. The Hypoint Company Limited, 2022 ONSC 6186, the Supreme Court of British Columbia, citing Bennett on Receivership, 2nd ed. (Toronto, Carswell, 1999) and Maple Trade Finance Inc. v. CY Oriental Holdings Ltd., 2009 BCSC 1527 at para. 25.
33How are these factors to be applied? The British Columbia Supreme Court put it, I think, correctly: “these factors are not a checklist but a collection of considerations to be viewed holistically in an assessment as to whether, in all the circumstances, the appointment of a receiver is just or convenient: Pandion Mine Finance Fund LP v. Otso Gold Corp., 2022 BCSC 136 at para. 54.
34It is not essential that the moving party establish, prior to the appointment of a receiver, that it will suffer irreparable harm or that the situation is urgent. However, where the evidence respecting the conduct of the debtor suggests that a creditor’s attempts to privately enforce its security will be delayed or otherwise fail, a court-appointed receiver may be warranted: Bank of Montreal v. Carnival National Leasing Ltd., 2011 ONSC 1007 at paras. 24, 28-29.
35Accordingly, is it just or convenient to appoint a receiver in the particular circumstances of this case?
36In my view, it is, for the reasons set out above. The Receiver is needed to run the SSP, and the SSP is in turn necessary to maximize value for stakeholders, as they all agree. The alternative is bankruptcy which would destroy much of the value in the estate. In particular, the Proposal Trustee, the first ranking secured creditor (or its assignee, Holdings), and iSpan all consent to and support the proposed SSP.
37The other parties present today, including the contingent unsecured creditors Wilkinson and King David do not oppose the process.
38Fuller is an experienced Receiver and certainly qualified to run the SSP. It has consented to act and is hereby appointed as Receiver on the terms of the proposed order, principally to monitor the business of iSpan and conduct the SSP.
Should the SSP be Approved?
39Second, should the SSP be approved?
40The Court has jurisdiction pursuant to section 243 of the BIA to appoint a receiver to, among other things, take any action that the Court considers advisable. The Court of Appeal for Ontario has held that this includes the discretion to empower a receiver to sell assets: Third Eye Capital Corporation v. Ressources Dianor Inc., 2019 ONCA 508 at para. 76.
41In considering a sales solicitation process, including the use of a stalking horse bid, the Court should assess the following factors (See: CCM Master Qualified Fund v. bluetip Power Technologies, 2012 ONSC 1750 at para. 6):
a. the fairness, transparency and integrity of the proposed process; b. the commercial efficacy of the proposed process in light of the specific circumstances facing the receiver; and c. whether the sales process will optimize the chances, in the particular circumstances, of securing the best possible price for the assets up for sale.
42These factors are to be considered in light of the well-known Soundair Principles, which, while applicable to the test for approving a transaction following a sales process, not surprisingly track the same principles applicable to approval of the process itself. (See Royal Bank of Canada v. Soundair Corp., (1991), 4 O.R. (3d) 1 (Ont. C.A.) at para. 16):
a. whether the party made a sufficient effort to obtain the best price and to not act improvidently; b. the interests of all parties; c. the efficacy and integrity of the process by which the party obtained offers; and d. whether the working out of the process was unfair.
43The proposed SSP has been developed by Fuller to be fair and transparent and to have integrity. The particulars of the process are set out at Schedule “A” to the proposed order. A teaser will be sent to a list of potential bidders prepared by the Receiver in consultation with iSpan and its financial advisor, FAAN, who is also experienced in such matters. Notice will be published in The Globe & Mail (National Edition). Those who sign a non-disclosure agreement will be given access to an electronic data room and, upon reasonable request, access to the company’s management, facilities and equipment. The timeline for the SSP including the bid deadline, is set out in advance and applies to all bidders.
44King David, supported by Wilkinson, submits that the proposed timeline is extremely tight (approximately five weeks), and it submits that a seven-week timeline is more reasonable. King David also submits that the required deposit should be reduced to 10% from the proposed 15%, and that there should be proactive contact to possible bidders. King David proposed other less fundamental changes as well, such as allowing discretion to the Receiver in accepting bids in different formats and requiring approval for material amendments to the process.
45I am satisfied that the proposed process here satisfies the CCM factors. In my view, it is not, in most cases, necessary or desirable for the Court to micro-manage the intricacies of every step of a proposed sales process. The Court cannot and should not do that, and indeed that is why the qualified and experienced Receiver is appointed to conduct the process in the first place. The Court needs to be satisfied that the process is fair, transparent and will be conducted with integrity. The objective is to maximize recovery for stakeholders, and to do so following a process that is conducted such that all stakeholders will have confidence in the outcome which results from confidence in the process by which that outcome was achieved.
46I am satisfied that the proposed process, developed by Fuller in consultation with iSpan and FAAN, does that here.
47The timing of the process is, without question, short. The Receiver is going to proactively contact known potential bidders. The balance that is required is that between minimizing the length of the process and the cost on the one hand, as against the objective of ensuring that the market is fully canvassed on the other hand. In the particular circumstances of this case, even a relatively short extension has a magnifying effect since that will extend the process over the Christmas/New Year’s holidays and into next year. I defer to the recommendation of the Receiver that the proposed timeframe is sufficient in the particular circumstances of this case.
48I also defer to the Receiver that the proposed deposit of 15% is appropriate, particularly in the absence of any evidence to the effect that 15% would have a chilling effect on the process and dissuade potential bidders, and also in the absence of any evidence to the effect that reducing the deposit to 10% would remedy that chilling effect. In my view, the requirement for a 15% deposit is not disproportionately high, yet at the same time is sufficient so as to demonstrate a commitment to complete any transaction entered into.
49Finally, significant submissions were made by the parties arising out of a concern raised by King David and supported by Wilkinson to the effect that if, as could happen as part of the SSP, a credit bid is made, that any such credit bid include only such amounts as are owing pursuant to the DIP Loan Facility, including applicable interest and fees pursuant to the DIP Loan Agreement and the secured indebtedness owing to Holdings.
50To be clear, that would not include “Existing Loans” as that term is defined in the DIP Loan Agreement made as of August 15, 2022 (see Ex. “F” to the Affidavit of Walter Koppelaar sworn October 19, 2023 and relied upon by the DIP Agent in this motion). I need not determine this point, since it has now been agreed by parties, and is reflected in the revised draft order proposed. Whether the Existing Loans are properly “Obligations” under the DIP Loan Agreement can be determined if and as necessary, another day. As submitted by the DIP Agent, the Court previously approved the DIP Facility, not the DIP Agreement.
51The proposed SSP is approved.
Should the Claims Adjudication Process be Suspended?
52Third, should the Claims Adjudication Process be suspended pending the results of the SSP? As stated above, this suspension is not opposed by any party. In my view it makes good practical sense for the reasons set out above. Most fundamentally, the parties will not know whether there will in fact be any surplus proceeds for distribution to unsecured creditors including contingent unsecured Litigation Claim creditors if those claims are successful, until the SSP has been completed.
53No party is requesting today that the Court direct that the Claims Adjudication Process, which, while entirely appropriate at the time it was approved, should continue now with the attendant incurring of fees and expenses.
54Accordingly, the Claims Adjudication Process is suspended pending the results of the SSP.
55I have signed the Receivership Order and the SSP Approval Order. Both orders to go in the form signed by me today. They have immediate effect without the necessity of issuing and entering.
Osborne J.