Flasha Holdings Ltd (Re), 2021 ABQB 435

Court of Queen’s Bench of Alberta Citation: Flasha Holdings Ltd (Re), 2021 ABQB 435 Date: 20210602 Docket: B203 733822, B203 733823 Registry: Edmonton Docket No. B203 733822 In the Matter of the Notice of Intention to Make a Proposal of Flasha Holdings Ltd. Under the Bankruptcy and Insolvency Act Between: Arundel Capital Corporation Applicant/Respondent - and - Flasha Holdings Ltd. Respondent/Applicant - and - Docket No. B203 733823 In the Matter of the Notice of Intention to Make a Proposal of Paul Flasha Contracting Ltd. Under the Bankruptcy and Insolvency Act Between: Paul Flasha Contracting Ltd.

Applicant - and - Arundel Capital Corporation Respondent _______________________________________________________ Decision of the Honourable Mr. Justice G.S. Dunlop _______________________________________________________ 1. Introduction [ 1 ] Arundel Capital Corporation applies to terminate the period for Flasha Holdings Ltd. to make a proposal.

Flasha Holdings, Paul Flasha Contracting Ltd. and their proposal trustee, Faber Inc., apply to extend the date for them to make a proposal. [ 2 ] The relevant provisions of the Bankruptcy and Insolvency Act are: 50.4(9) The insolvent person may, before the expiry of the 30-day period referred to in subsection (8) or of any extension granted under this subsection, apply to the court for an extension, or further extension, as the case may be, of that period, and the court, on notice to any interested persons that the court may direct, may grant the extensions, not exceeding 45 days for any individual extension and not exceeding in the aggregate five months after the expiry of the 30-day period referred to in subsection (8), if satisfied on each application that (

a) the insolvent person has acted, and is acting, in good faith and with due diligence; (

b) the insolvent person would likely be able to make a viable proposal if the extension being applied for were granted; and (

c) no creditor would be materially prejudiced if the extension being applied for were granted. …

(11) The court may, on application by the trustee, the interim receiver, if any, appointed under

section 47.1, or a creditor, declare terminated, before its actual expiration, the thirty day period mentioned in subsection (8) or any extension thereof granted under subsection (9) if the court is satisfied that (

a) the insolvent person has not acted, or is not acting, in good faith and with due diligence, (

b) the insolvent person will not likely be able to make a viable proposal before the expiration of the period in question, (

c) the insolvent person will not likely be able to make a proposal, before the expiration of the period in question, that will be accepted by the creditors, or (

d) the creditors as a whole would be materially prejudiced were the application under this subsection rejected, and where the court declares the period in question terminated, paragraphs (8)(

a) to (

c) thereupon apply as if that period had expired. [ 3 ] Arundel submits that the Flasha corporations will not likely be able to make a proposal that will be viable and will be accepted by the creditors, thus meeting the tests of s 50.4(11)(

b) and (

c) of the Act. In particular, Arundel submits that the Flasha corporations are unlikely to be able to make a proposal that would include paying the secured creditors and the Canada Revenue Agency in full, and that Arundel will not accept any proposal that does not including paying Arundel in full. Arundel concedes that it would likely accept a proposal that included paying out Arundel in full, but it submits that such a proposal is unlikely, based on the facts presently known.

[ 4 ] In opposition to Arundel’s application and in support of the extension application, the Flasha corporations submit that they will likely be able to make a proposal that would include paying Arundel in full. If so, then neither of the tests in s 50.4(11) relied upon by Arundel would be met, and the likely viable proposal portion of the test for an extension in s 50.4(9)(

b) would also be met. In addition, the Flasha corporations submit that they have acted and are acting in good faith and that no creditor would be materially prejudiced by an extension, completing the other components of the test for an extension in s 50.4(9)(

a) and (c). [ 5 ] Arundel makes no submissions regarding the Flasha corporations’ good faith, but it submits that Arundel would be materially prejudiced by an extension because the equipment which is its security is depreciating.

The Flasha corporations submit that the equipment is worth far more than what is owed to Arundel so any depreciation will not materially prejudice Arundel. [ 6 ] Arundel also submits, in the alternative, that if an extension is granted it should be on conditions including that it receive the lease payments due from the date of Flasha Holdings’ Notice of Intention to Make a Proposal and that it be provided with proof that the equipment which is its security is insured. [ 7 ] The proposal trustee supports the Flasha corporations in all of the submissions set out above.

The Canada Revenue Agency supports the extension application, but otherwise takes no position on these applications. [ 8 ] These two applications turn on the following issues: • whether the Flasha corporations will likely make a proposal that includes paying out Arundel in full; • whether the depreciation of the equipment during any extension period will prejudice Arundel; and • if an extension is granted, what conditions, if any, should apply. 2.

Likely Proposal [ 9 ] The Flasha corporations have obtained an expression of interest by Travelers Restructuring Capital Inc to refinance their secured debt with an advance of $1,575,000. However, before they can make a proposal incorporating new financing by Travelers, the Flasha corporations must confirm the amount owing to CRA for source deductions, which was listed as $195,620 in the Notices of Intention, but which CRA is presently reviewing. CRA has not advised when that review will be complete.

At the hearing of these applications on May 28, 2021, the proposal trustee advised that the final amount owing to CRA is expected to be close to the amount estimated in the Notices of Intention. [ 10 ] Arundel submits that the Flasha corporations are unlikely to make a proposal that includes paying Arundel in full because the $1,575,000 in financing offered by Travelers will not be sufficient to pay CRA, Arundel and the other secured creditors. [ 11 ] Arundel’s submission is based on the following secured, potentially preferred and CRA amounts owing: • $1,323,583 owed to Arundel; • $200,000 owed to CRA for source deductions; • $100,000 owed to ATB; and • $200,000 owed to the Provincial Crown for surface leases. [ 12 ] Although the Flasha corporations take issue with the figure put forward by Arundel for the amount it is owed, for the purposes of this application, I accept the figure provided by Arundel during the hearing of these applications on May 28, 2021.

However, the principal of the Flasha corporations, Steven Flasha, deposes in his affidavit that Arundel is holding $106,681 in funds which was earmarked to pay CRA, but has not been advanced. Setting that amount off against what Arundel says is presently owing, leaves a net amount of $1,216,902 owing to Arundel. Arundel also claims it is owed legal fees, but did not provide a figure for those.

The Flasha corporations say they need to know what Arundel’s claimed legal fees are before they provide their position on that. [ 13 ] The best figure presently available for the amount owing to CRA is $195,620. [ 14 ] The debt owing to ATB is shown as $100,000 in the Notices of Intention. ATB did not appear on these applications. [ 15 ] Arundel admits it is not certain of what priority, if any, the Provincial Crown may have for the amounts it is owed under the surface leases. The proposal trustee’s first report indicates the amount owing is estimated to be $270,000.

However, at the May 28, 2021 hearing the proposal trustee advised that a payment plan has been reached with the Provincial Crown. Consequently, it appears that the surface lease debt will not have to be satisfied in any proposal. [ 16 ] There is also a debt owing to Royal Bank of Canada, secured by a truck, in the amount of $47,000. [ 17 ] All of these figures are subject to adjustment. However, on the evidence before me, it appears that the following is owing to CRA and secured creditors: • Arundel $1,216,902; • CRA $195,620; • ATB $100,000;

• RBC $47,000; • Total $1,559,522. [ 18 ] It appears to me likely that the Traveler’s financing in the amount of $1,575,000 would be sufficient to pay out CRA, Arundel and the other secured creditors. Arundel admits it would vote in favour of a proposal that saw it paid in full. [ 19 ] In addition, I note that the proposal trustee advised in its first report at paragraph 30: Based on the information available to the Trustee, it appears that the companies are able to make viable Proposals provided HoldCo is entitled to retain the Equipment.

If the Travelers refinancing proceeds, then Arundel and CRA should be paid out. [ 20 ] The proposal trustee’s May 21, 2021 Extension Report also states in paragraph 17 b: Holdco and Opco would likely be able to make viable Proposals if the extension being applied for were granted. [ 21 ] In addition to Faber’s two written reports, Dan Faber attended the hearing of the two applications on May 28, 2021 and advised that recent purchase orders and accounts receivable for the Flasha corporations are better than previously projected, that Travelers continues to be engaged in supporting a proposal, and that discussions with CRA suggest that what is owed to it will be about what was anticipated.

Mr. Faber expects that the Flasha corporations will be able to make a proposal in the near future which will include paying out Arundel in full. [ 22 ] On the evidence and information before me I find that the Flasha corporations will likely be able to make a viable proposal which will include paying out Arundel in full. [ 23 ] Arundel relies upon 1252206 Alberta Ltd. v Bank of Montreal , 2009 ABQB 355 , and Cumberland Trading Inc., Re [1994] O.J.

No. 132 for the proposition that a creditor in a veto position need not wait to see what a proposal contains before determining that it will not vote for any proposal and on that basis terminate the proposal period. The facts here are different than in those two cases in several respects. First, Arundel says it would vote in favour of a proposal that saw it paid in full, and it appears that such a proposal will be forthcoming. That was not true in either 1252206 or Cumberland .

Second, in 1252206 , the anticipated proposal would have required the secured creditor to assume risk by waiting for the debtor to complete its development with the aid of debtor in possession financing, hoping to achieve enough in future sales to pay the secured creditor in full. The expected proposal in this case would not involve Arundel assuming any risk; on the contrary it would have the certainty of immediate full payment.

Third, in Cumberland , the debtor had given no indication of what the proposal would be, whereas in this case the Flasha corporations and the proposal trustee have described the intended proposal, supported by a copy of Travelers’ term sheet, and they have explained that the CRA review, which is pending, is required to finalize a proposal.

This is far more substantial than the “bald assertion” of a future proposal in Cumberland . [ 24 ] Arundel has failed to show that the Flasha corporations (and Flasha Holdings in particular) will not likely be able to make a viable proposal, and it has failed to show that they will not likely be able to make a proposal that will be accepted by the creditors. On the contrary, the Flasha corporations have shown that they will likely be able to make a viable proposal if an extension is granted. 3.

Prejudice through Depreciation [ 25 ] Arundel has put forward no evidence of the rate of depreciation of the equipment which secures its leases beyond Mr. Smyth’s evidence that it is being deteriorated, likely damaged and its value is being eroded. [ 26 ] According to the proposal trustee’s first report, the equipment which is the subject of Arundel’s leases was appraised by Arundel’s parent corporation in January 2020 and valued at $3,065,600 fair market value, $2,566,900 orderly liquidation value and $2,201,700 forced liquidation value. [ 27 ] According to Mr.

Flasha’s affidavit, Flasha Holdings had a desktop appraisal of the equipment done in February 2021 which estimated the forced liquidation value of the equipment at over $2,000,000 and another desktop appraisal was done by Travelers in March 2021 which estimated the forced liquidation value to be approximately $2,000,000. [ 28 ] Based on the information before me, I conclude that the forced liquidation value of the equipment in March 2021 was at least $2,000,000 and that any depreciation between March 2021 and July 2021 will not reduce its value below $1,500,000 and that consequently Arundel would not suffer prejudice due to depreciation as a result of the extension sought by the Flasha corporations. 4.

Period and Conditions of Extension [ 29 ] Arundel submits that the extension should be limited to 15 days and it should be on the conditions that the Flasha corporations provide proof that the equipment is insured and that Arundel receive the lease payments from the date of the Notices of Intention. [ 30 ] Arundel initially sought to have the secured equipment excluded from Flasha Holdings’ proposal on the grounds its leases were true leases rather than financing leases, with its termination application in the alternative.

After I adjourned Arundel’s application so that questioning on affidavits could be conducted, Arundel abandoned its true lease application and returned its termination application to be heard at the same time as the Flasha corporations’ extension application.

In light of the time and resources lost to Arundel’s true lease application, since abandoned, and in light of the fact that CRA is not able to predict when its review process will be complete, I find that the appropriate extension is 45 days. [ 31 ] During the hearing on May 28, 2021, the proposal trustee offered to provide proof of insurance, so a condition on that is not

required. [ 32 ] Given Arundel’s abandonment of its true lease application, it has essentially conceded that its leases are finance leases. Consequently, it is not appropriate for it to receive lease payments from the date of the Notices of Intention. 5. Conclusion [ 33 ] Arundel’s application to terminate the proposal period is dismissed. The Flasha corporations’ application to extend the proposal period is granted with an extension to 45 days from the date the application was heard. The application was heard on May 28, 2021 so the extension is granted to July 12, 2021. I attach no conditions to the extension.

Heard on the 28 th day of May, 2021. Dated at the City of Edmonton, Alberta this 2 nd day of June, 2021. G.S. Dunlop J.C.Q.B.A. Appearances: J. Flanagan McLennan Ross LLP for Arundel Capital Corporation B. Smith Verhaeghe Law Office for Flasha Holdings Ltd. and Paul Flasha Contracting Ltd. B. Maruyama Parlee McLaws LLP for Faber Inc. G. Body Department of Justice Canada for Canada Revenue Agency