Court File No. 31-1696322 ONTARIO SUPERIOR COURT OF JUSTICE COMMERCIAL LIST IN THE MATTER OF THE PROPOSAL OF FRONTLINE TECHNOLOGIES CORPORATION, A COMPANY INCORPORATED PURSUANT TO THE LAWS OF THE PROVINCE OF ONTARIO, WITH A HEAD OFFICE IN THE CITY OF TORONTO, IN THE PROVINCE OF ONTARIO FACTUM OF FRONTLINE TECHNOLOGIES CORPORATION (Motion returnable January 9, 2013) January 8, 2013 AIRD & BERLIS LLP Barristers and Solicitors Brookfield Place 181 Bay Street, Suite 1800 Toronto, Ontario M5J 2T9 Steven L. Graff (LSUC # 31871V) Tel: 416.865.7726 Fax: 416.863.1515 Email: s g aff(a),airdberlis.com r Ian Aversa (LSUC # 55449N) Tel: 416.865.3082 Fax: 416.863.1515 Email: iaversa@airdberlis.com Lawyers for Frontline Technologies Corporation.
1 I NATURE OF MOTION 1. On December 11, 2012, Frontline Technologies Corporation ("FTC") filed a Notice of Intention to Make a Proposal (the "NOV) under section 50.4 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, as amended (the "BIA"). Duff & Phelps Canada Restructuring Inc. ("D&P") was named as the proposal trustee under the NOI (in such capacity, the "Proposal Trustee") 2. This factum is filed by FTC in support of a motion for an Order, inter alias (a) approving an extension of the time for FTC to file a proposal; (b) approving a debtor-in-possession financing facility (the "DIP Facility") with Hoss Astaraki (the "DIP Lender") in the principal amount of $332,900.00 and granting a priority charge (the "DIP Charge") over all of the assets, properties and undertakings of FTC (collectively, the "Property") to secure repayment of the amounts borrowed by FTC under the DIP Facility; (c) granting a priority charge over the Property in the principal amount of $200,000 to secure the fees and disbursements of counsel to FTC, the Proposal Trustee and counsel to the Proposal Trustee (the "Administration Charge "); and (d) dispensing with compliance with sections 5.4 and 5.6 of Multilateral Instrument 61-101 ("MI 61-101")
2 II- FACTS (a) FTC's Business and Operations 3. FTC is a corporation incorporated pursuant to the laws of the Province of Ontario, which was formed by articles of amalgamation on January 1, 2009. Affidavit of Hoss Astaraki, sworn January 4, 2013 (the "Astaraki Affidavit"), Tab 2 Motion Record of FTC at para. 3. 4. FTC is a wholly-owned subsidiary of Frontline Technologies Inc. (" FTI"), a public company incorporated pursuant to the laws of the Province of Ontario and listed on the TSX Venture Exchange. Astaraki Affidavit, Tab 2 Motion Record of FTC at para. 4. 5. FTC provides on-site and remote IT technical support for its clients, including, without limitation, maintenance, hardware and software management, network architecture and security services. Astaraki Affidavit, Tab 2 Motion Record of FTC at para. 5. 6. FTC operates from a premises located at 25 Adelaide Street East, Suite 1103, Toronto, Ontario, which premises are leased from 1239079 Ontario Limited (the "Premises "). Astaraki Affidavit, Tab 2 Motion Record of FTC at para. 6. (b) FTC's Secured Creditors 7. The Personal Property Security Act (Ontario) ("PPSA") search results with currency as of December 12, 2012 show the following registrations by creditors in descending order of
I priority with their respective collateral classification, each of which is an equipment lessor with security over certain of FTC's assets only: (a) Income Leasing Inc. "Inventory", "Equipment" and "Other" in respect to various computer equipment; (b) National Leasing Group Inc. "Equipment" in respect to all computer systems; (c) Essex Capital Leasing Corp. "Equipment", "Accounts" and "Other" in respect to certain leased equipment; (d) Alliance Funding Corporation "Equipment" and "Other"; (e) Blue Chip Leasing Corporation "Equipment" and "Other"; (f) MCAP Leasing Inc. and MCAP Leasing Limited Partnership "Equipment", "Accounts" and "Other" in respect to certain leased equipment; (g) National Leasing Group Inc. "Equipment" in respect to certain leased computer systems; (h) Blue Chip Leasing Corporation "Equipment" and "Other"; (i) Indcom Leasing Inc. "Inventory", "Equipment" and "Other" in respect to six certain leased equipment; (j) National Leasing Group Inc. "Equipment" in respect to certain leased computer systems;
0 (k) Essex Capital Corporation `Equipment", "Accounts" and "Other" in respect to certain leased equipment; and (1) Mercedes-Benz Financial Services Canada Corporation "Equipment", "Other" and "Motor Vehicle" in respect to a 2008 S550 Mercedes-Benz bearing vehicle identification number WDDNG86X28A212642.. Astaraki Affidavit, Tab 2 Motion Record of FTC at para. 9. 8. There are no secured creditors that have general security over the current and future assets of FTC. Astaraki Affidavit, Tab 2 Motion Record of FTC at para. 10. (c) FTC's Financial Difficulties 9. Beginning in 2012, FTC and its parent corporation, FTI, experienced significant operating losses and negative cash flows from operations as a result of various factors, including, without limitation, inadequate profit margins, FTC's dependence on a limited number of customers for a substantial amount of its revenues, credit and market deterioration and market share erosion to FTC's competitors. Astaraki Affidavit, Tab 2 Motion Record of FTC at para. 11. 10. Accordingly, FTC's liquidity and working capital have deteriorated to levels beyond repair without the aid of creditor protection. Astaraki Affidavit, Tab 2 Motion Record of FTC at para. 12.
E (d) The DIP Loan 11. FTC's cash flow projections project that FTC, with the benefit of the proposed DIP Facility, will have sufficient funding to continue operating until March 1, 2013. Astaraki Affidavit, Tab 2 Motion Record of FTC at para. 24. 12. The proposed DIP Facility is conditional on, inter alia, FTC obtaining the DIP Charge over all of FTC's Property, ranking first in priority to any existing security other than the Administration Charge. Astaraki Affidavit, Tab 2 Motion Record of FTC at para. 25. 13. In the absence of the DIP Facility, FTC will not be able to continue to carry on business or initiate any restructuring efforts for the benefit of its creditors. Astaraki Affidavit, Tab 2 Motion Record of FTC at para. 27. (e) Administration Charge 14. In order to protect the fees and expenses of FTC's legal counsel, the Proposal Trustee and the Proposal Trustee's legal counsel (collectively, the "Administration Professionals ") throughout the proposal proceedings, FTC seeks the Administration Charge on the Property of FTC, ranking in priority to claims of all secured and unsecured creditors and the proposed DIP Charge. Astaraki Affidavit, Tab 2 Motion Record of FTC at para. 28.
0 15. Each of the Administration Professionals will play a critical role in FTC's restructuring and it is unlikely that the Administration Professionals will participate in the restructuring unless the Administration Charge is granted to secure their respective fees and disbursements. Astaraki Affidavit, Tab 2 Motion Record of FTC at para. 29. III ISSUES 16. The issues on this motion are as follows: (a) Should the Court approve the extension of time for FTC to file a proposal? (b) Should the Court approve the DIP Facility and the DIP Charge? (c) Should the Court approve the Administration Charge? (d) Should the Court dispense with compliance of MI 61-101? IV LAW AND ARGUMENT (a) Discretion to extend the time for FTC to file a proposal 17. FTC seeks an extension of time to file a proposal. The stay of proceedings will expire on January 10, 2013. 18. Subsection 50.4(9) of the BIA confers on the Court the statutory jurisdiction to extend the time within which FTC may file a proposal to its creditors: 50.4(9) Extension of time for filing proposal: 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
7 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. 19. In the present case, it is submitted that the Court should grant an extension of time for FTC to file a proposal to and including February 22, 2013, because: (a) FTC, in conjunction with the Proposal Trustee, have been working diligently on formulating a proposal to its creditors; (b) FTC would likely be able to make a viable proposal if the extension being applied for were granted; and (c) None of FTC's creditors would be materially prejudiced if the extension being applied for were granted. Astaraki Affidavit, Tab 2 Motion Record of FTC at paras. 18-20. First Report of the Proposal Trustee dated January 7, 2013 (the "First Report "), page 8. 20. Accordingly, FTC submits that the Court ought to grant FTC an extension to file a proposal to and including February 22, 2013
(b) Discretion to approve the DIP 21. FTC seeks approval of the DIP Facility and of the DIP Charge, which would rank, ahead of all other charges and security interests except the Administration Charge, subject only to the statutory provisions for priority payment imposed by the BIA. 22. The amendments to the BIA which came into force in September of 2009 codified the availability of interim financing during proposal proceedings. Section 50.6 of the BIA confers on the Court the statutory jurisdiction to grant a debtor-in-possession ("DIP") financing charge: 50.6(1) Interim Financing: On application by a debtor in respect of whom a notice of intention was filed under section 50.4 or a proposal was filed under subsection 62(1) and on notice to the secured creditors who are likely to be affected by the security or charge, a court may make an order declaring that all or part of the debtor's property is subject to a security or charge in an amount that the court considers appropriate in favour of a person specified in the order who agrees to lend to the debtor an amount approved by the court as being required by the debtor, having regard to the debtor's cash-flow statement referred to in paragraph 50(6)(a) or 50.4(2)(a), as the case may be. The security or charge may not secure an obligation that exists before the order is made. 50.6(3) Priority: The court may order that the security or charge rank in priority over the claim of any secured creditor of the debtor. 23. Subsection 50.6(5) of the BIA sets out a non-exhaustive list of factors to be considered by the Court in deciding whether to grant DIP financing: 50.6(5) Factors to be considered: In deciding whether to make an order, the court is to consider, among other things, (a) the period during which the debtor is expected to be subject to proceedings under this Act; (b) how the debtor's business and financial affairs are to be managed during the proceedings;
I (c) whether the debtor's management has the confidence of its major creditors; (d) whether the loan would enhance the prospects of a viable proposal being made in respect of the debtor; (e) the nature and value of the debtor's property; (f) whether any creditor would be materially prejudiced as a result of the security or charge; and (g) the trustee's report referred to in paragraph 50(6)(b) or 50.4(2)(b), as the case may be. 24. In the present case, it is submitted that the Court should approve the DIP Facility together with the DIP Charge. DIP financing is essential to provide FTC with the financing it requires to continue to operate its business and make a viable proposal to its creditors. The following factors support the granting of the DIP Facility and the DIP Charge: (a) The availability of the DIP Facility is contingent on this Court issuing an Order approving the DIP Facility and the DIP Charge to secure any advances made thereunder; (b) The necessity for the DIP Facility is demonstrated and supported by FTC's cash flow projections; (c) In the absence of a DIP Facility, FTC will not be able to continue to carry on business or make a viable proposal to its creditors; (d) None of FTC's creditors will be materially prejudiced as a result of the DIP Facility and the DIP Charge; and (e) The Proposal Trustee supports the DIP Facility and the DIP Charge. Astaraki Affidavit, Tab 2 Motion Record of FTC at paras. 24-27. First Report, pages 6 and 7.
10 25. Accordingly, FTC submits that the Court ought to approve the DIP Facility and grant the DIP Charge on FTC's Property. (c) Discretion to grant Administration Charge 26. FTC seeks the Administration Charge to secure the fees and disbursements of the Administration Professionals whose services are critical to the successful restructuring of FTC. This charge is to rank in priority to all other security interests in FTC's Property. 27. As is the case of DIP financing, the recent BIA amendments now confer on the Court the statutory jurisdiction to grant an administration charge. Specifically, section 64.2 of the BIA provides: 64.2 Court may order security or charge to cover certain costs: On notice to the secured creditors who are likely to be affected by the security or charge, the court may make an order declaring that all or part of the property of a person in respect of whom a notice of intention is filed under section 50.4 or a proposal is filed under subsection 62(l) is subject to a security or charge, in an amount that the court considers appropriate, in respect of the fees and expenses of (a) the trustee, including the fees and expenses of any financial, legal or other experts engaged by the trustee in the performance of the trustee's duties; (b) any financial, legal or other experts engaged by the person for the purpose of proceedings under this Division; and (c) any financial, legal or other experts engaged by any other interested person if the court is satisfied that the security or charge is necessary for the effective participation of that person in proceedings under this Division.
11 64.2(2) Priority: The court may order that the security or charge rank in priority over the claim of any secured creditor of the person. 28. Since the coming into force of this section, the Courts have granted an administration charge in a number of proposal proceedings under the BIA. In the Matter of the Proposal of Libman Manufacturing Limited, Order of the Honourable Madam Justice Hoy dated April 23, 2012 at para. 3. In the Matter of Proposal of Great Lakes Fish Corporation, Order of the Honourable Madam Justice Leitch dated July 2, 2010 at paras. 13-14. 29. The Administration Professionals have indicated that they require the benefit of the Administration Charge to secure their fees and disbursements. Astaraki Affidavit, Tab 2 Motion Record of FTC at para. 29. First Report, page 7. 30. The following additional factors support the granting of the Administration Charge: (a) The legal and financial advice provided by the Administration Professionals is essential to FTC throughout the proposal proceedings; (b) The roles of each of the Administration Professionals is distinct and there is no anticipated unwarranted duplication; and (c) The Administration Charge does not purport to prime any secured party who has not received notice of FTC's motion. Astaraki Affidavit, Tab 2 Motion Record of FTC at para. 28.
12 31. Accordingly, FTC submits that this is an appropriate circumstance for the Court to grant the Administration Charge with priority over pre-existing security interests. Each of the Administration Professionals whose fees and disbursements are to be secured by the Administration Charge has, and will continue to, play a critical role in these proposal proceedings. (d) Discretion to dispense with compliance of MI 61-101 32. FTC also seeks an Order dispensing with compliance of MI 61-101 as it relates to the DIP Facility and the transactions contemplated therein. Pursuant to MI 61-101, issuers must obtain a formal valuation for a related party transaction and obtain minority approval of such transactions: 5.5(1) Formal Valuation: An issuer shall obtain a formal valuation for a related party transaction described in any of paragraphs (a) to (g) of the definition of related party transaction. (2) If a formal valuation is required under subsection (1), the issuer shall (a) include, in accordance with section 6.5, a summary of the formal valuation in the disclosure document for the related party transaction, unless the formal valuation is included in its entirety in the disclosure document, (b) state in the disclosure document who will pay or has paid for the valuation, and (c) comply with the other provisions of Part 6 applicable to it relating to formal valuations. (3) The board of directors of the issuer or an independent committee of the board shall (a) determine who the valuator will be, and (b) supervise the preparation of the formal valuation.
13 5.6 Minority Approval: An issuer shall not carry out a related party transaction unless the issuer has obtained minority approval for the transaction under Part 8. 33. Subsections 5.5(f) and 5.7(d) provide exemptions from the formal valuation and minority approval requirements under MI 61-101: 5.5 Exemptions from Formal Valuation Requirement: Section 5.4 does not apply to an issuer carrying out a related party transaction in any of the following circumstances: 5.5(f) Bankruptcy, Insolvency, Court Order: (i) the transaction is subject to court approval, or a court orders that the transaction be effected, under (A) bankruptcy or insolvency law, or (B) section 191 of the CBCA, any successor to that section, or equivalent legislation of a jurisdiction, (ii) the court is advised of the requirements of this Instrument regarding formal valuations for related party transactions, and of the provisions of this paragraph (f), and (iii) the court does not require compliance with section 5.4, 5.7 Exemptions from Minority Approval Requirement: (1) Subject to subsections (2), (3), (4) and (5), section 5.6 does not apply to an issuer carrying out a related party transaction in any of the following circumstances if the exemption relied on, any formal valuation exemption relied on, and the facts supporting reliance on those exemptions are disclosed in the disclosure document, if any, for the transaction: 5.7(d) Bankruptcy, Insolvency, Court Order: the circumstances described in subparagraph (f)(i) of section 5.5, if the court is advised of the requirements of this Instrument regarding minority approval for related party transactions, and of the provisions of this paragraph, and the court does not require compliance with section 5.6
14 34. The requirements under subsection 5.5(f) of MI 61-101 apply equally to the requirement to obtain a formal valuation and to the requirement to obtain minority approval. 35. In the present case, it is submitted that the following factors support an Order dispensing with compliance with the requirements of MI 61-101: (a) The DIP Facility and transactions contemplated therein are subject to the supervision and approval of the Court under the BIA; (b) The proposal proceedings giving rise to the DIP Facility and transactions contemplated therein will be held in open Court on notice to FTC's secured creditors and major stakeholders; (c) The value of cash injections into FTC in the form of advances under the DIP Facility are not financially complex and can be valued at face value; and (d) The DIP Facility does not purport to advance any funds originating from FTI. 36. The Courts have made orders dispensing with compliance with MI 61-101 in the context of BIA proposal proceedings. Orbus Pharma Inc. (Re), 2011 LNONOSC 15, (2011) 34 OSCB 757 (OSC), Brief of Authorities of FTC, Tab 2, at para. 20. 37. Accordingly, FTC submits that this is an appropriate circumstance for the Court to grant an order dispensing with compliance of the requirements of MI 61-101.
15 V ORDER SOUGHT 38. FTC seeks an order of the Court approving the relief set out in paragraph 2 of this Factum. All of which is respectfully submitted. Date: January 8, 2012 Aird & Berlis LLP Barristers & Solicitors Brookfield Place, 181 Bay Street Toronto, ON M5J 2T9 Steven L. Graff (LSUC# 31871B) Tel: 416.865.7726 Fax: 416.863.1515 Ema' : sgfaff@airdberlis.com Ian Aversa (LSUC# 55449N) Tel: 416.865.3082 Fax: 416.863.1515 Email: iaversa@airdberlis.com Lawyers for Frontline Technologies Corporation
SCHEDULE"A" LIST OF AUTHORITIES 1. In the Matter of the Proposal of Libman Manufacturing Limited, Order of the Honourable Madam Justice Hoy dated April 23, 2010. 2. In the Matter of Proposal of Great Lakes Fish Corporation, Order of the Honourable Madam Justice Leitch dated July 2, 2010 3. Orbus Pharma Inc. (Re), 2011 LNONOSC 15, (2011) 34 OSCB 757 (OSC).
SCHEDULE "B" RELEVANT LEGISLATION Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 50.49(1) 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. 50.6 (1) On application by a debtor in respect of whom a notice of intention was filed under section 50.4 or a proposal was filed under subsection 62(1) and on notice to the secured creditors who are likely to be affected by the security or charge, a court may make an order declaring that all or part of the debtor's property is subject to a security or charge in an amount that the court considers appropriate in favour of a person specified in the order who agrees to lend to the debtor an amount approved by the court as being required by the debtor, having regard to the debtor's cash-flow statement referred to in paragraph 50(6)(a) or 50.4(2)(a), as the case may be. The security or charge may not secure an obligation that exists before the order is made. Priority 50.6 (3) The court may order that the security or charge rank in priority over the claim of any secured creditor of the debtor. Factors to be considered 50.6 (5) In deciding whether to make an order, the court is to consider, among other things, (a) the period during which the debtor is expected to be subject to proceedings under this Act;
im (b) how the debtor's business and financial affairs are to be managed during the proceedings; (c) whether the debtor's management has the confidence of its major creditors; (d) whether the loan would enhance the prospects of a viable proposal being made in respect of the debtor; (e) the nature and value of the debtor's property; (f) whether any creditor would be materially prejudiced as a result of the security or charge; and (g) the trustee's report referred to in paragraph 50(6)(b) or 50.4(2)(b), as the case maybe. 64.2 (1) On notice to the secured creditors who are likely to be affected by the security or charge, the court may make an order declaring that all or part of the property of a person in respect of whom a notice of intention is filed under section 50.4 or a proposal is filed under subsection 62(1) is subject to a security or charge, in an amount that the court considers appropriate, in respect of the fees and expenses of Priority (a) the trustee, including the fees and expenses of any financial, legal or other experts engaged by the trustee in the performance of the trustee's duties; (b) any financial, legal or other experts engaged by the person for the purpose of proceedings under this Division; and (c) any financial, legal or other experts engaged by any other interested person if the court is satisfied that the security or charge is necessary for the effective participation of that person in proceedings under this Division. 64.2 (2) The court may order that the security or charge rank in priority over the claim of any secured creditor of the person. Protection of Minority Security Holders in Special Transactions, O.S.C. MI 61-101 (1 February, 2009) 5.4 Formal Valuation (1) An issuer shall obtain a formal valuation for a related party transaction described in any of paragraphs (a) to (g) of the definition of related party transaction. (2) If a formal valuation is required under subsection (1), the issuer shall
3 (a) include, in accordance with section 6.5, a summary of the formal valuation in the disclosure document for the related party transaction, unless the formal valuation is included in its entirety in the disclosure document, (b) state in the disclosure document who will pay or has paid for the valuation, and (c) comply with the other provisions of Part 6 applicable to it relating to formal valuations. (3) The board of directors of the issuer or an independent committee of the board shall (a) determine who the valuator will be, and (b) supervise the preparation of the formal valuation. 5.5 Exemptions from Formal Valuation Requirement Section 5.4 does not apply to an issuer carrying out a related party transaction in any of the following circumstances: (f) Bankruptcy, Insolvency, Court Order (i) the transaction is subject to court approval, or a court orders that the transaction effected, under (A) bankruptcy or insolvency law, or (B) section 191 of the CBCA, any successor to that section, or equivalent legislation a jurisdiction, (ii) the court is advised of the requirements of this Instrument regarding formal valuations related party transactions, and of the provisions of this paragraph (f), and (iii) the court does not require compliance with section 5.4, 5.6 Minority Approval An issuer shall not carry out a related party transaction unless the issuer has obtained minority approval for the transaction under Part 8.
Ll 5.7 Exemptions from Minority Approval Requirement (1) Subject to subsections (2), (3), (4) and (5), section 5.6 does not apply to an issuer carrying out a related party transaction in any of the following circumstances if the exemption relied on, any formal valuation exemption relied on, and the facts supporting reliance on those exemptions are disclosed in the disclosure document, if any, for the transaction: (d) Bankruptcy, Insolvency, Court Order the circumstances described in subparagraph (f)(i) of section 5.5, if the court is advised of the requirements of this Instrument regarding minority approval for related party transactions, and of the provisions of this paragraph, and the court does not require compliance with section 5.6,
IN THE MATTER OF THE PROPOSAL OF FRONTLINE TECHNOLOGIES CORPORATION, A COMPANY INCORPORATED PURSUANT TO THE LAWS OF THE PROVINCE OF ONTARIO, WITH A HEAD OFFICE IN THE CITY OF TORONTO, IN THE PROVINCE OF ONTARIO Court File No. 31-1696322 ONTARIO SUPERIOR COURT OF JUSTICE COMMERCIAL LIST Proceedings commenced at Toronto FACTUM OF FRONTLINE TECHNOLOGIES CORPORATION AIRD & BERLIS LLP Barristers and Solicitors Brookfield Place 181 Bay Street, Suite 1800 Toronto, ON M5J 2T9 Steven L. Graff (LSUC # 31871V) Tel: 416.865.7726 Fax: 416.863.1515 Email: s g raffgairdberlis.com Ian Aversa (LSUC # 55449N) Tel: 416.865.3082 Fax: 416.863.1515 Email: iaversaairdberlis.com Lawyers for Frontline Technologies Corporation