Goudas - First Report - Receiver - Final - KSV Advisory€¦ · FIRST REPORT OF DUFF & PHELPS...

First Report to Court of Duff & PhelpsCanada Restructuring Inc. in its capacity asReceiver and Receiver and Manager ofGoudas Food Products and InvestmentsLimited

January 23, 2015

Page i

Contents Page

1.0 Introduction..........................................................................................................1

1.1 Purposes of this Report .......................................................................................2

1.2 Currency..............................................................................................................2

1.3 Restrictions and Qualifications.............................................................................3

2.0 Background .........................................................................................................3

3.0 Sale Process .......................................................................................................4

3.1 Sale Process Overview........................................................................................4

3.2 Sale Process Results...........................................................................................4

3.3 The Transaction...................................................................................................5

4.0 The Equipment ....................................................................................................6

4.1 Transaction Recommendation .............................................................................7

5.0 Need for Confidentiality .......................................................................................8

6.0 Recommendation.................................................................................................8

Duff & Phelps Canada Restructuring Inc.

Appendices

Appendix Tab

Interim Receivership Order dated September 3, 2014 A

Receivership Order dated September 16, 2014 B

AC Simmonds Organizational Chart C

D&P’s Report dated September 2, 2014 (without appendices) D

Interim Receiver’s Report dated September 15, 2014 (without appendices) E

Bill of Sale (redacted) F

Correspondence to the Receiver from the Ultimate Landlords G

Waiver of Distraint dated April 23, 2012 H

Correspondence from the Receiver to the Ultimate Landlords I

Waiver of Distraint dated May 19, 2012 J

February 6, 2012 agreement and May 19, 2009 General Security Agreement K

Confidential Appendix

Offer Summary 1

Correspondence between AC Simmonds and the Receiver 2

Unredacted Bill of Sale 3

Duff & Phelps Canada Restructuring Inc. Page 1

Court File No.: CV-14-10680-00CL

ONTARIOSUPERIOR COURT OF JUSTICE

COMMERCIAL LIST

ROYAL BANK OF CANADA

Applicant

-and-

GOUDAS FOOD PRODUCTS AND INVESTMENTS LIMITED

Respondent

FIRST REPORT OF DUFF & PHELPS CANADA RESTRUCTURING INC.AS RECEIVER AND RECEIVER AND MANAGER OF

GOUDAS FOOD PRODUCTS AND INVESTMENTS LIMITED

January 23, 2015

1.0 Introduction

1. On August 29, 2014, Goudas Food Products and Investments Limited(“Company”) filed a Notice of Intention to Make a Proposal (“NOI”) pursuant toSection 50.4(1) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, asamended (“BIA”). Macpherson & Associates Inc. (“Macpherson”) was thetrustee appointed in the Company’s proposal proceedings.

2. On September 3, 2014, Royal Bank of Canada (“RBC”) brought an applicationfor the appointment of Duff & Phelps Canada Restructuring Inc. (“D&P”) by theOntario Superior Court of Justice (Commercial List) (“Court”) as interimreceiver of the Company (“Interim Receiver”) under Section of 47.1 of the BIAand Section 101 of the Courts of Justice Act, R.S.O. 1990, c. C.43, asamended (“CJA”). The Court appointed D&P as Interim Receiver on that date(“Interim Receivership Order”). A copy of the Interim Receivership Order isattached as Appendix “A”.

3. On September 16, 2014, RBC brought a motion for an order: i) terminating the30-day period for the Company to file a proposal under the BIA; and ii)appointing D&P as receiver and receiver and manager of the Company(“Receiver”) under Section 243(1) of the BIA and Section 101 of the CJA. TheCourt terminated the 30-day period for the Company to file a proposal andappointed D&P as Receiver on that date (“Receivership Order”). A copy of theReceivership Order is attached as Appendix “B”.

Duff & Phelps Canada Restructuring Inc. Page 2 of 8

4. The Receivership Order also deemed the Company to have made anassignment in bankruptcy. Macpherson is the trustee-in-bankruptcy of theCompany.

1.1 Purposes of this Report

1. The purposes of this report (“Report”) are to:

a. provide background information concerning these proceedings;

b. update the Court on the process undertaken by the Receiver to sell theCompany’s business and assets (“Sale Process”);

c. advise the Court of the outcome of the Sale Process, beingacceptance by the Receiver of an offer submitted by Golden Food &Manufacture Ltd. (“Golden Food”) for the purchase of the Company’strade-marks (“Trade-marks”) and equipment (“Equipment”)(“Transaction”), pursuant to a bill of sale dated January 23, 2015 (“Billof Sale”); and

d. recommend that the Court issue an order:

i. approving the Transaction;

ii. vesting title in and to the Trade-marks and Equipment, free andclear of all liens, charges, security interests and otherencumbrances in Golden Food as of closing of the Transaction;

iii. authorizing and directing the Receiver to execute the Bill ofSale and any other ancillary documents and take suchadditional steps as are necessary to complete the Transaction;

iv. sealing the Confidential Appendices to this Report (as identifiedbelow) until the Transaction has been completed or until furtherorder of the Court; and

v. approving this Report and the Receiver’s activities as detailedin this Report.

1.2 Currency

1. All currency references in this Report are to Canadian dollars.


1.3 Restrictions and Qualifications

1. In conducting its review and preparing this Report, the Receiver has reliedupon financial and other information supplied by the Company, the Company’sbooks and records and discussions with management. The Receiver has notaudited nor conducted a review engagement of the Company’s financial orother information and therefore does not provide a level of assuranceconsistent with such mandates. Certain findings in this Report are preliminaryand are subject to change.

2. The Company’s books, records and financial statements are inaccurate due towhat appear to be intentional misrepresentations of millions of dollars oftransactions that occurred subsequent to the acquisition of the Company byA.C. Simmonds & Sons Inc. (“AC Simmonds”) in April, 2014.

2.0 Background

1. The Company is directly owned by AC Simmonds and is one of over 35entities in the AC Simmonds group of companies (“AC Simmonds Group”), themajority of which appear to be inactive. The AC Simmonds Group purports tohave, or to be in early stage development of, various lines of business in anumber of industries. A copy of the AC Simmonds corporate organizationchart is provided in Appendix “C”.

2. The Company has been in business since 1973 and is principally engaged inthe packaging and sale of packaged and canned goods, which are primarilysold to ethnic communities under the “Mr. Goudas” brand name.

3. RBC is the Company’s primary secured creditor. RBC sought theappointment of the Receiver as a result of the material misrepresentationsreferenced above, which representations caused, inter alia, RBC to advancemillions of dollars against non-existent accounts receivable. As of the date ofthe Receivership Order, the Company’s indebtedness to RBC wasapproximately $11.5 million, excluding interest and fees.

4. Business Development Bank of Canada (“BDC”) has a registered securityinterest over certain of the Company’s equipment. As of the date of theReceivership Order, the Company’s indebtedness to BDC was approximately$282,000, excluding interest and fees.

5. Additional background information concerning the Company and theseproceedings is available in the materials on the Receiver’s website atwww.duffandphelps.ca.


3.0 Sale Process

1. The Company’s financial position and business deteriorated significantly overthe five months leading up to these receivership proceedings, principally fromthe time that it was acquired by AC Simmonds. The Receiver has continuedto source inventory during the receivership proceedings in order to preservethe business while the Sale Process was conducted.

2. Due to the state of the Company’s business as at the receivershipcommencement date, the Receiver was of the view that the Sale Processshould be expedited to minimize the Company’s operating losses and toprevent further erosion to the business, including the loss of customers andemployees.

3.1 Sale Process Overview

1. The Sale Process commenced in late September 2014.

2. The deadline for submitting offers was October 24, 2014 at 4:00 p.m. Due tothe significant interest in the business, and to accommodate purchasers whichrequested additional time to perform the necessary due diligence, the deadlinewas extended to October 31, 2014 at 4:00 p.m. (“Offer Deadline”).

3. The Receiver prepared a teaser summarizing this opportunity, and distributedthe teaser to 43 parties that directly contacted it. The Receiver also prepareda buyers list with a further 56 parties, and teasers were also sent to theseparties.

4. An advertisement regarding this opportunity was placed in the national editionof The Globe and Mail newspaper on September 30, 2014.

5. Interested parties were required to execute a confidentiality agreement, afterwhich they were provided access to an online data room. Interested partieswere provided the opportunity to tour the Company’s premises and to meetwith Company employees.

3.2 Sale Process Results

1. Six offers were received prior to the Offer Deadline and a seventh wasreceived approximately one hour after it. A summary of the offers received(“Offer Summary”) is attached as Confidential Appendix “1”.

2. The Receiver negotiated with the parties which submitted the best threeoffers.

3. One of the three offers was from AC Simmonds – the value of its offer wascomparable to the offer received from the highest bidder, Highbury CancoCorporation (“Highbury”), but its terms were problematic in several respects.


4. The Receiver negotiated with AC Simmonds to see if it would increase thevalue of its offer. While some progress was made, AC Simmonds was unableto provide the deposit required by the Receiver. It was also unable to confirmthat it had financing sufficient to close. A copy of the correspondencebetween the Receiver and AC Simmonds is provided in Confidential Appendix“2”.

5. As evidenced in Confidential Appendix “2”, the Receiver’s concerns dealingwith AC Simmonds were based on, inter alia, the findings regardingmisrepresentations and other matters detailed in its reports dated September2, 2014 and September 15, 2014, which are attached as Appendices “D” and”E”, respectively, without appendices.

6. In mid-November 2014, the Receiver agreed to move forward with the offerreceived from Highbury for the sale of the intellectual property, equipment andinventory.

7. On December 1, 2014, as the Receiver was in the process of finalizing theHighbury asset purchase agreement and the corresponding sale approvalmotion materials, a package of documents was received from counsel to PeterGoudas, the former owner of the Company, including documentationpurporting to evidence Mr. Goudas’ ownership of certain intellectual property,comprised primarily of artwork and product labels.

8. The documentation provided by Mr. Goudas’ counsel caused uncertaintyregarding the ownership of the artwork and labels, which caused Highbury tosignificantly reduce its offer price such that it was no longer feasible tocomplete the Highbury transaction.

9. Subsequently, as the Receiver was preparing to commence a wind-down ofthe Company’s business, the Receiver was contacted by a number of partieswho had previously expressed an interest in, and/or participated in the SaleProcess for, the Company’s business and assets, including its Trade-marks.The Receiver has been negotiating with certain of these parties since thattime.

10. By December 19, 2014, two parties had submitted bids of roughly equal value.In order to formalize a process to get to a final offer, the Receiver asked thateach of these two bidders submit their best and final offer by 10:00 a.m. onDecember 22, 2014. The best offer was submitted by Golden Food.

3.3 The Transaction

1. A summary of the Transaction is as follows:

(a) the assets to be acquired by Golden Food are the Equipment set onSchedule 1 of the Bill of Sale and the Trade-marks set out on Schedule2 of the Bill of Sale (collectively the “Assets”);


(b) Golden Food has paid the Receiver a deposit equal to 23.5% of thepurchase price (“Purchase Price”). The deposit is only refundable toGolden Food if the Court does not issue an approval and vesting orderin respect of the sale of the Trade-marks;

(c) it is the Receiver’s objective to close the Transaction on February 4,2014;

(d) the Transaction is conditional only upon Court approval;

(e) BDC appears to have a first ranking security interest in the Equipment;and

(f) the Assets are being purchased on an “as is, where is” basis, and theterms of the Transaction are substantially consistent with Canadianinsolvency transactions.

2. A redacted copy of the Bill of Sale is attached as Appendix “F” and a completecopy of the Bill of Sale is attached as Confidential Appendix “3”.

4.0 The Equipment

1. On December 15, 2014, and subsequently on January 19, 2015, the Receiverreceived letters from 562444 Ontario Limited and 562445 Ontario Limited, theultimate landlords (“Ultimate Landlords”) of the Company’s premises at 241Snidercroft Road, Concord, Ontario, stating, among other things, that it is itsposition that “all machinery and equipment in any way installed or affixed tothe real property, including silos, piping, improvements and equipment boltedto the floor, ceiling or wall are to be treated as fixtures constituting part of thereal property and accordingly are not to be removed”. A copy of the UltimateLandlords’ correspondence is provided in Appendix “G”.

2. The Receiver investigated this issue with BDC, which appears to have a firstranking security interest in the Equipment.

3. Counsel to BDC provided the Receiver with a copy of a waiver executed bythe Ultimate Landlords on April 23, 2012 (“Waiver”), pursuant to which theUltimate Landlords acknowledge, among other things, that “the fixturesinstalled by the tenant or subtenant remain the Tenant’s fixturesnotwithstanding any contrary provision of any lease, providing that theprovision of this Section 3 shall not apply or extend to plumbing, heating,ventilating, lighting equipment, wiring or electrical panels and services, orother building services and equipment installed on behalf of the Tenant, orpaid for by the Landlord by way of the tenant allowance or free rent (the“Leasehold Improvements”) which Leasehold Improvements shall form part ofthe premises and shall not be part of the Bank’s security”. A copy of theWaiver is attached as Appendix “H”, including a list of equipment subject toBDC’s security. Golden Food is purchasing equipment on this list.


4. The Receiver sent a copy of the Waiver to the Ultimate Landlords onJanuary 14, 2015 and again on January 22, 2015. A copy of thiscorrespondence is provided in Appendix “I”.

5. A further waiver was executed on May 19, 2012 (“Landlord Waiver”) betweenBDC and Goudas Food Realty Inc. (the “Landlord”), pursuant to whichparagraph three states “the Landlord agrees that as between the Landlord andthe Bank fixtures installed by the tenant remain Tenant’s fixturesnotwithstanding any contrary provision in the sublease”. A copy of theLandlord Waiver is attached as Appendix “J”.

6. Mr. Goudas has also advised the Receiver that it is his position that he or acompany he controls, Goudas Food Products Co. Ltd. (“Goudas Co.”), ownsthe majority of the equipment used by the Company and that the equipment isnot subject to BDC’s security. He takes this position despite an executedagreement entitled “Letter of Offer” dated February 6, 2012 among BDC, theCompany, P&P Goudas Holdings Inc., as well as Peter Goudas and PatriciaGoudas as guarantors, which grants BDC a security interest in the equipmentused by the Company. A copy of the February 6, 2012 agreement and theGeneral Security Agreement referenced in the February 6, 2012 agreement isattached as Appendix “K”.

7. The Receiver also notes that the Equipment is included in the fixed assetsreflected on the Company’s audited financial statements, which furthersupports that the Equipment is an asset of the Company. As of the date ofthis Report, the Receiver has not been provided with any documentation fromMr. Goudas in support of his claim.

4.1 Transaction Recommendation

1. The Receiver recommends that the Court approve the Transaction for thefollowing reasons:

in the Receiver’s view, the Sale Process was commercially reasonableand was carried out in a manner substantially consistent with othersales processes conducted by it;

in the Receiver’s view, the Sale Process was of sufficient duration toallow the market to be canvassed appropriately and for interestedparties to perform due diligence;

given that the Company has discontinued sourcing new inventory inrecent weeks, many of the Company’s customers have removed theCompany’s products from their shelves of their stores and sales havesubstantially ceased, engaging in a further sale process is highlyunlikely to yield a better result;


the Transaction provides the greatest recovery available in thecircumstances; and

RBC has consented to the Transaction and BDC has advised that itwill not oppose the Transaction. RBC and BDC are the Company’sprimary secured creditors and appear to be the only stakeholders withan evidenced economic interest in the Transaction.

2. Based on the foregoing, the Receiver respectfully recommends that this Courtgrant the proposed sale approval and vesting order.

5.0 Need for Confidentiality

1. The Receiver respectfully requests that the unredacted Bill of Sale and theOffer Summary be sealed until such time that the Transaction is completed, asit is the Receiver’s view that the availability of this information may negativelyimpact future transactions, if any, in the event that the Transaction does notclose. The Receiver believes that no stakeholder will be prejudiced if theinformation is sealed until the Transaction is complete. A copy of the OfferSummary and unredacted Bill of Sale are attached as Confidential Appendices“1” and “3”, respectively.

2. The Receiver requests that the AC Simmonds Letters also be sealed, as it isthe Receiver’s view that the availability of this information may negativelyimpact future transactions in the event that the Transaction does not close, asthe AC Simmonds Letters identify the AC Simmonds offer price.

6.0 Recommendation

1. Based on the foregoing, the Receiver respectfully recommends that thisHonourable Court make an order granting the relief detailed in Section 1.1 ofthis Report.

* * *

All of which is respectfully submitted,

DUFF & PHELPS CANADA RESTRUCTURING INC.IN ITS CAPACITY AS COURT-APPOINTEDRECEIVER AND RECEIVER AND MANAGER OFGOUDAS FOOD PRODUCTS AND INVESTMENTS LIMITEDAND NOT IN ITS PERSONAL CAPACITY

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