Lifting a stay to enforce personal guarantees?

Re Pride Group Holdings Inc. et al.
When should a stay be lifted to allow personal guarantees to be pursued?

Summary: In this case, the Court considered a request to lift the stay in the cross-border insolvency proceedings of the Pride Group to allow personal guarantees to be pursued. The request was made at a time when the Court had already approved a going concern transaction for various Pride Entities and the remainder of the Pride Entities were entering a wind down process. Nevertheless, the Court rejected the request without prejudice to seek the same relief at a later time. The CCAA applicants include 78 privately held corporations, all of which were exclusively operated by the personal guarantors and their immediate family. Accordingly, the Court found that for the time being, given the breadth and complexity of the business of the Pride Entities, the involvement of the personal guarantors remains integral to the successful wind down of the applicants. Compelling the personal guarantors to defend personal claims would place undue strain on the CCAA applicants’ resources and be a significant distraction at this stage of the wind down process. In addition, the Court noted that a parallel motion to lift the stay had been brought in the ancillary US proceedings, and stated that the practice of bringing motions in both the main proceedings and the ancillary proceedings in cross-border restructurings ought to be discouraged as it runs contrary to the basic principles of comity and cooperation, and inevitably results in duplication of efforts, resources and an increase in professional fees.

Mitsubishi Capital requested a case conference to schedule a motion for an order lifting the stay of proceedings in Pride’s Companies’ Creditors Arrangement Act proceedings in respect of Sulakhan Johal and Jasvir Johal (the “Personal Guarantors”) to permit Mitsubishi to move forward with its claims against the Personal Guarantors in Ontario and in the United States, which were commenced prior to these CCAA proceedings. The order was opposed by the Chief Restructuring Officer of Pride (the “CRO”), the directors and officers, and the Monitor.

Mitsubishi and certain other Pride Entities entered into financing facilities and agreements. The Personal Guarantors are brothers and the principals of Pride who provided various guarantees to Mitsubishi in respect of the obligations of Pride under those agreements. Mitsubishi alleged that the Personal Guarantors coordinated and implemented a fraud against parties that financed their business operations, including significant “double financing” of vehicles, pursuant to which the same vehicles were pledged as collateral for loans to different lenders.

On March 25, 2024, and just prior to the commencement of these CCAA proceedings, Mitsubishi commenced its claim in the Ontario Superior Court of Justice against the Personal Guarantors. On the same day, Mitsubishi America commenced three actions against the Personal Guarantors in the United States District Courts for the District of Connecticut, the Northern District of Illinois, Eastern Division, and the Southern District of New York.

The Court noted that in granting the Initial Order in these CCAA Proceedings, Chief Justice Morawetz specifically included within the scope of the stay of proceedings actions against the Personal Guarantors, and observed that the involvement of the Personal Guarantors in defending potential claims would unduly strain Pride’s resources and be a significant distraction from the restructuring efforts, to the detriment of all stakeholders. In support of its motion, Mitsubishi argued that the involvement of the Personal Guarantors was no longer required for the orderly restructuring of the Pride Entities because:

1. the Court had already approved a going concern transaction for various Pride Entities (which was negotiated without the involvement of the Personal Guarantors to avoid any conflict of interest); and

2. the remainder of the Pride Entities were entering a wind down process, such that there would be no going concern outcome and the involvement of the Personal Guarantors in the wind down, and particularly in the turnover of assets thereunder, would be minimal.

The Court held that the stay of proceedings should not be lifted at this time, but noted that the decision was without prejudice to the right of Mitsubishi to seek an order lifting the stay as against the Personal Guarantors when the wind down process of the Pride Entities is further advanced. The CCAA applicants include 78 privately held corporations, all of which were exclusively operated by the Personal Guarantors and their immediate family throughout Canada and the United States. For the time being, given the breadth and complexity of the business of the Pride Entities, the involvement of the Personal Guarantors remains integral to the successful wind down of the applicants.

The CRO reported that the Personal Guarantors continued to be essential to maintain the efficiencies and cost during the wind down. The Personal Guarantors’ intimate knowledge of the business and the real properties has been of material assistance to the Monitor and the CRO and, therefore, accretive to maximizing recoveries for all stakeholders. In addition, the CRO reported that the Personal Guarantors had valuable contacts in each of the jurisdictions in Canada and the United States within which the CCAA applicants operate, and those contacts continue to be relied upon by the CRO and the Monitor. While that knowledge could be replaced, doing so would inevitably cause undue delay and increase the cost of proceedings as professionals would be required to take over many of the tasks currently being performed by the Personal Guarantors.

Compelling the Personal Guarantors to defend personal claims would place undue strain on the CCAA applicants’ resources and be a significant distraction. Notwithstanding that there will be no going concern outcome for the Pride Entities, the Court noted that the current stability should be allowed to continue.

Finally, the Court observed that Mitsubishi had not only sought to lift the stay in these CCAA proceedings, but had also apparently brought a parallel motion in the ancillary US Proceedings for substantially the same relief. The US motion for the order lifting the stay of proceedings is currently scheduled to be heard on December 20, 2024. The Court expressed hope and expectation that Mitsubishi would not proceed with the motion in the US Proceedings, and noted that the practice of bringing motions in both the main proceedings and the ancillary proceedings in cross-border restructurings ought to be discouraged. It runs contrary to the basic principles of comity and cooperation, and inevitably results in duplication of efforts, resources and an increase in professional fees for the Monitor as Foreign Representative, the CRO, and all stakeholders.

Judge: Justice Osborne

Counsel: Leanne Williams and Rachel Nicholson of TGF for the Pride Entities

Chris Burr and Kelly Bourassa of Blakes for EY as monitor

Marc Wasserman, Blair McRadu, Adam Hirsh and Sean Stidwell of Osler for Mitsubishi

Daniel Richer of Fasken for the Lending Syndicate

Elaine Gray of Dentons for Daimler Truck Financial Services Canada

Caroline Descours of Goodmans for Regions Bank Regions Equipment Finance

Andrew Hatnay of Koskie Minsky for the Employees

John Salmas of Dentons for BMO

Raj Sahni of Bennett Jones for the Directors and Officers