When will a stay extension and DIP financing be granted to a debtor over creditors’ objections?
Four related corporations (the “NOI Companies”) served notice of intention to make a proposal pursuant to the Bankruptcy and Insolvency Act (the “BIA“). Three of the corporations are subsidiaries of the publicly traded parent company. Only one of the corporations had any significant asset—a 100 acre parcel of land containing a largely completed, licenced, but not yet operational, cannabis facility. The purpose of the proposed financing was to complete the facility and to generate sales so that there is cash flow.
Three secured creditors strongly objected to the temporary financing and extension of time to make a proposal. They took the view that permitting the NOI Companies to raise more funds in priority to the existing secured creditors is futile and would only result in further erosion of their collateral and any potential recovery for the existing creditors.
If the interim financing was not granted, then it was likely that there would be a receivership and a liquidation of the assets, which would result in no recovery for the unsecured creditors. The Court had to decide if it was reasonable to authorize this additional debt while continuing to protect the debtors from their existing creditors in the hope that this will generate a better outcome.
The proposal trustee reviewed the proposed cash flow and was satisfied that the interim financing would provide sufficient liquidity to bring the facility to completion and to begin production. It believed that the plan was a better option than either an immediate bankruptcy or uncontrolled efforts by secured creditors to realize on their security.
The interim financing plan was expensive and would add $2.3 million in debt to the burden already in place. The plan involved at least three significant assumptions which could not be tested and carried significant risks. There was the risk that the remaining construction will not be completed on time, to specification and within budget. There was the risk that production of cannabis will not ramp up as smoothly as predicted. Finally, there was the risk that buyers of the product would not be found in sufficient time or numbers to meet the cash flow predictions.
A notice of intention to make a proposal under s. 50.4 (1) of the BIA permits the debtor to gain the statutory protection of a stay of proceedings without initial court approval while, subject to compliance with the terms of the BIA, it attempts to put itself in the position to make a proposal. The BIA only permits this for 30 days, within which time it is necessary to either put together a proposal or to obtain further approval and protection from the court.
The Court may extend the time to make a proposal and during that time the Court may approve interim financing pursuant to s. 50.6 (1) of the BIA. In making that decision and in exercising its discretion, the Court is mandated to consider all relevant factors including those set out in subsection 50.6(5).
The secured creditors argued that the proposed interim financing would materially prejudice them by placing another $2.3 million in debt in priority to their security. The Court conceded that $2.3 million in additional debt over the next month was significant. The Court also agreed that there was a significant risk inherent in cultivating a first crop of cannabis and finding buyers. The cannabis industry is in its infancy and the struggles of some of the established companies in this area are public knowledge. The question was whether this is a risk worth taking despite the misgivings of the secured creditors and the potential prejudice to their position.
The Court was encouraged by the First Report of the Proposal Trustee and the support for the plan set out therein. It also took notice of the fact that both the interim lender and the first mortgagee are fully secured against the value of the land but the willingness to lend the additional funds is supported by their analysis of the plan as viable. It was also notable that the remaining secured creditors supported the NOI Companies’ efforts.
The Court was persuaded that immediate liquidation would have dire effects whereas the brief extension of time and the interim financing hold at least the prospect of increased value and a successful proposal. It granted the NOI Companies’ proposed order.
Counsel: Patrick Shea of Gowling WLG for the debtors, Sean Zweig of Bennett Jones LLP for Dominion Capital LLC and Lou Brzezinski of Blaney McMurtry LLP for the Proposal Trustee.