January 6, Error! Unknown document property name.

Transcription

1 First Report of Duff & Phelps Canada Restructuring Inc., in its capacity as Interim Receiver of Ontario Inc. o/a Scrapmen and o/a Boparai Trading Co., and Ontario Inc. o/a Canada Steel January 6, 2014 Error! Unknown document property name.

2 Contents Page 1.0 Introduction Purposes of this Report Currency Restrictions and Qualifications Background Events Leading to the Interim Receivership December 30 th Events Events During the Interim Receivership Proceedings Conclusion and Recommendation...10 Appendices Appendix Tab Appointment Order and Endorsement dated December 30, A Junior Del Brocco s to Rantej Boparai... B Robert Kofman s to the Companies and its Advisor... C Response from Timothy Dunn to Robert Kofman s ... D Confidential Appendix Employee Names... 1 Tab Duff & Phelps Canada Restructuring Inc. Page i of i

3 Court File No.: CL ONTARIO SUPERIOR COURT OF JUSTICE (COMMERCIAL LIST) B E T W E E N: BANK OF MONTREAL - and - Applicant ONTARIO INC. o/a SCRAPMEN and o/a BOPARAI TRADING CO., AND ONTARIO INC. o/a CANADA STEEL IN THE MATTER OF AN APPLICATION PURSUANT TO SECTION 47(1) OF THE BANKRUPTCY AND INSOLVENCY ACT, R.S.C. 1985, c. B-3, AS AMENDED Respondents FIRST REPORT OF DUFF & PHELPS CANADA RESTRUCTURING INC. IN ITS CAPACITY AS INTERIM RECEIVER OF ONTARIO INC. o/a SCRAPMEN and o/a BOPARAI TRADING CO., AND ONTARIO INC. o/a CANADA STEEL 1.0 Introduction JANUARY 6, This report ( Report ) is filed by Duff & Phelps Canada Restructuring Inc. ( D&P ) 1 in its capacity as Interim Receiver (the Interim Receiver ), under Section 47(1) of the Bankruptcy and Insolvency Act ( BIA ), R.S.C. 1985, c. B-3, as amended, of Ontario Inc. o/a Scrapmen and o/a Boparai Trading Co. ( 165 ), and Ontario Inc. o/a Canada Steel ( 232 ) (jointly, 165 and 232 are referred to as the Companies ). 1 References to D&P relate to its mandate as advisor to the Bank. References to Interim Receiver relate to D&P s mandate in that capacity. Duff & Phelps Canada Restructuring Inc. Page 1 of 11

4 2. Pursuant to an application by Bank of Montreal (the Bank ), the Ontario Superior Court of Justice ( Court ) issued an order on December 30, 2013 ( Order ) appointing D&P as the Interim Receiver of the Companies. The Order is effective until January 8, A copy of the Order and the Endorsement of Mr. Justice Morawetz of the Court ( Endorsement ) is provided in Appendix A. 1.1 Purposes of this Report 1. The purposes of this Report are to: 1.2 Currency a) Provide background information about the Companies and these proceedings; b) Detail the events leading to the commencement of these proceedings on an urgent basis; c) Detail the Interim Receiver s findings since it was appointed; and d) Recommend that the Court issue an order appointing D&P as the receiver ( Receiver ) of the Companies properties, assets and undertakings under Sections 243 of the BIA and Section 101 of the Court of Justices Act, R.S.O 1990 C. C.43, as amended, or, in the alternative, extending the duration of the appointment of D&P as Interim Receiver to January 28, All currency references in this Report are to Canadian dollars unless otherwise noted. 1.3 Restrictions and Qualifications 1. D&P is in the process of investigating the Companies. The Companies books and records have been removed from the Companies premises. The Receiver has not been able to locate any books and records, and no management representatives have been present at the Companies premises since the commencement of the interim receivership proceedings. No representative of the Companies has contacted the Interim Receiver since the date it was appointed 2. D&P s only discussions with a management representative of the Companies occurred on December 19, 2013 at a meeting at the offices of the Bank. Accordingly, the findings presented herein are preliminary and will continue to develop. 2 The former CFO of the Companies, Raj Gulati, contacted GDR (as defined herein) on January 6, 2014 to advise that he had resigned in late December, 2013, prior to the commencement of the interim receivership proceedings, notwithstanding he was present at the Companies during many of GDR s attendances at the Companies in late December, Duff & Phelps Canada Restructuring Inc. Page 2 of 11

5 2.0 Background 1. The Bank is the most significant secured creditor of the Companies. As at December 30, 2013, the Bank was owed $15,198,416 and US$1,738,811. Among other facilities, BMO provides the Companies with operating and term loan facilities is an Ontario corporation, and has its registered head office at 10 Hillyard St., Hamilton, Ontario (the Hillyard Premises ). Mr. Boparai is the sole director of is an Ontario Corporation, and has its registered head office at the Hillyard Premises. Mr. Boparai is the sole officer and director of The Interim Receiver understands that the Companies are principally engaged in the processing and export of scrap metal and secondary steel, including heavy melting scrap 1 and 2, cast iron scrap, non-ferrous metals, oil filter briquettes, used rails, plate and structural steel and lead acid battery scrap. The Companies export to the United States, Singapore, India, South Korea, Taiwan and Malaysia. 5. The Companies assets consist of processed and unprocessed scrap metal inventory, one scrap metal shredder, one partially assembled scrap metal shredder, miscellaneous scrap metal moving and processing equipment and accounts receivable. Only a small portion of the inventory (steel tubing) is held at the Hillyard Premises - the majority of the inventory, equipment and both shredders are located at the Companies premises located at 735 Strathearne Street, Hamilton, Ontario (the Strathearne Premises ). 6. Great Bay Development Corp. is the registered owner of the Strathearne Premises, which are leased to Ontario Inc. ( ), which in turn has sub-leased the Strathearne Premises to Scrapman Metal Trading Corporation (and not Scrapmen, the trading name of one of the Debtors). A corporation profile report obtained from the Ontario Ministry of Government Services (the Ministry ) in respect of indicates that the sole director and officer of is Mr. Boparai, and that has several registered business names, including Scrapman. 7. A corporation profile search of the records of the Ministry in respect of Scrapman Metal Trading Corporation, the sub-lessor of the Strathearne Premises, revealed that there is no record of a corporation with that name or having that registered business name registered with the Ministry. Duff & Phelps Canada Restructuring Inc. Page 3 of 11

6 8. The Interim Receiver understands that prior to the commencement of these proceedings, 165 employed approximately 26 individuals. The Companies workforce is not unionized. It appears that all but three employees were terminated by management of the Companies in advance of the commencement of the interim receivership proceedings. The three employees were advised prior to the interim receivership proceedings that their last day of employment by the Companies would be December 31, Events Leading to the Interim Receivership 1. The Interim Receiver has been advised by the Bank s representatives that during 2013, Mr. Boparai approached the Bank to request additional funding to expand the Companies business. The Bank determined that any increase in its exposure to the Companies would require that the credit facilities be transitioned into an asset based loan ( ABL ) facility and would be subject to credit approval by the Bank. 2. During its review of the Companies financial information in the context of its consideration of the Companies request for additional funding, the Bank s representatives identified that for the nine month period from January 1 to September 30, 2013 the Companies reported sales of $64,641,136, but only had deposits of $7,466,444 into its bank accounts at the Bank, including only $3,964 in September, The inconsistency between sales and collections caused the Bank to investigate further the Companies financial affairs, including a field examination at the Companies premises to determine the integrity of the Companies financial position, reporting and systems, as well as to assess the value of the proposed collateral for the ABL facility, being inventory and accounts receivable. 4. As a result of the above concerns, D&P was retained as an advisor to the Bank on December 13, At around the same time, the Bank retained GDR Advisory Group Inc. ( GDR ) to review, inter alia, the Companies accounts receivable and inventory. 5. GDR provides field audits for financial institutions. D&P has worked with GDR previously. D&P and GDR have worked closely from the date of their respective appointments on this matter to review the Companies business and operations. 6. During the week of December 16, 2013, the Bank requested copies of all of the Companies operating bank account statements, including bank accounts that the Companies had been maintaining at Toronto-Dominion Bank ( TD Bank ), which the Interim Receiver understands was in contravention of the terms of the Companies lending agreements with the Bank. The Bank appears to have had knowledge of the existence of the TD Bank accounts, but understood the purpose of these accounts was to be limited to petty cash transactions and sundry activity. Duff & Phelps Canada Restructuring Inc. Page 4 of 11

7 7. The Companies had provided GDR with six months of statements from the 165 Canadian dollar bank account with TD Bank, but had not provided copies of the 165 US dollar account statements, nor the 232 Canadian dollar or US dollar account TD Bank account statements. 8. On December 16, 2013, GDR attended at the Hillyard Premises to commence its examination of the Companies. GDR was to review the following: a. existence and valuation of accounts receivable and inventory; b. analytical and trending analysis on accounts receivable, inventory and accounts payable; c. review of accounts payable; and d. general evaluation of the accounting department. 9. Despite numerous requests by GDR during its daily attendances at the Companies premises during the week of December 16, 2013, GDR was not provided with the information and documentation required to perform the above analyses, including the missing TD Bank statements, customer files and otherwise normal course documentation that is typically readily available to conduct such a review. 10. In respect of the missing TD Bank statements, on December 17, 2013, Mr. Boparai advised GDR that an administrative person (named Seema) allegedly had the key to a locked filing cabinet in which the TD Bank account statements were allegedly maintained and that she was allegedly at home tending to her sick child. GDR did not learn until later that the administrative person was Ms. Boparai this was not disclosed by Mr. Boparai. The key to the filing cabinet was never provided to GDR. 11. One of the main concerns of D&P and of GDR was the apparent misalignment of sales and collections throughout 2013, as illustrated by the lack of cash activity in the one TD Bank account for which statements were provided to the Bank, as well as in the Companies accounts at the Bank. D&P and GDR were concerned that either the sales and/or accounts receivable were overstated, and/or that funds collected from sales of the Company s inventory had been inappropriately diverted. 12. As a result of the continued inability to obtain virtually any information or documentation from the Companies (including the TD Bank statements), and as a result of a myriad of questions related to the operations of the business, the Bank arranged a meeting among its advisors and Mr. Boparai on December 19, 2013 at the offices of the Bank. The attendees were Mr. Boparai, three representatives of the Bank (Greg Fedoryn, Junior Del Brocco and Marc Andre Bergeron (by phone)), Gino Di Petta of GDR and Robert Kofman of D&P. Duff & Phelps Canada Restructuring Inc. Page 5 of 11

8 13. Mr. Boparai advised at the meeting that he would: a) provide Mr. Kofman with copies of all missing TD Bank statements by 10:00 am on the following morning and b) deposit all future collections into the Companies accounts at the Bank. He also suggested that the TD Bank statements would reflect the missing accounts receivable collections and advised that the Companies premises would be dark until January 2, 2014, i.e. there would be no activity at the Companies premises. Mr. Del Brocco sent an to Mr. Boparai immediately following the meeting confirming items (a) and (b) above. A copy of this is attached as Appendix B. 14. Mr. Boparai did not provide to Mr. Kofman the TD Bank statements the next morning, as he had promised. These statements were only provided in the early evening on December 24, 2013, and only after extensive follow-up by the Bank and its advisors. 15. Upon receipt of the TD Bank statements, GDR immediately performed an analysis comparing sales to collections ( Sales Analysis ). GDR s analysis reflects there is at least a $48 million discrepancy between the sales reported to the Bank and cash collections being deposited into the Companies TD and BMO accounts. This means that either the sales reported to the Bank have been significantly overstated, or the cash collections have been inappropriately diverted. 16. As a follow-up to the review of the TD Bank statements and the Sales Analysis, Mr. Kofman sent an to the Companies and an advisor that the Companies had retained asking a number of questions. This is attached as Appendix C. On December 30, 2013 Mr. Kofman received a response from Timothy Dunn of Minden Gross LLP, a copy of which is attached hereto as Appendix D. Mr. Dunn advised at the time that he was in the process of being retained by the Companies. In response to a follow up inquiry by Edmond Lamek of Borden Ladner Gervais LLP, counsel to the Bank, Mr. Dunn advised on January 3, 2014 that he expects his retainer to be finalized on January 6, Based on the substantial concerns identified by the Bank and its advisors, and the lack of cooperation by the Companies management, security was arranged to patrol the Companies premises over the holiday season as a precaution in the event that the Companies, principals of the Companies or stakeholders of the Companies attempted to remove inventory or other assets from the Companies premises. 18. Despite assurances by Mr. Boparai that the Strathearne Premises site would be dark until January 2, 2014, the security company advised that the site was active over the holiday season; however, it did not report any property being removed from the premises until December 30, Duff & Phelps Canada Restructuring Inc. Page 6 of 11

9 4.0 December 30 th Events 1. At approximately 10:00 am on the morning of December 30, 2013, the security company contacted a representative of D&P to advise that there was substantial activity at the Companies Strathearne Premises. As detailed below, over the course of the day, several trailers left the Companies premises loaded with what appeared to be inventory - and books and records appear to have been removed. 2. At approximately 11:00 am on December 30, 2013, a Cadillac Escalade driven by a woman of apparently East Indian ethnicity entered the office premises portion of the Strathearne Premises carrying apparently empty boxes. This woman was observed by GDR approximately one hour later putting several cardboard boxes into the vehicle and leaving the Strathearne Premises with them. 3. At or about the same time as the Escalade arrived at the Stratherne Premises, two empty open top container trucks entered the Strathearne Premises scrap yard gate. At approximately 12:23 P.M. a third container truck left the Strathearne Premises after being weighed on the Strathearne Premises scale. GDR s representative followed the truck, and because the container was open, GDR s representative was able to observe that it contained a large quantity of partially crushed automobiles. 4. The truck travelled to another scrap yard located at 800 Parkdale Hamilton, Ontario at approximately 12:40. Further investigation confirmed that this is a Triple M Metal ( 3M ) facility. Shortly thereafter, the same truck was seen by a representative of D&P leaving the 800 Parkdale scrap yard empty of the crushed vehicles. 5. During GDR s tour of the Strathearne Premises with Mr. Boparai in mid- December, Mr. Boparai advised GDR s representative that the crushed vehicle inventory is owned by On December 30, 2013, as a result of the substantial concerns regarding the Companies business and operations (including the Sales Analysis variance), the inaccurate information regarding the level of activity at the Companies over the holiday season and the removal of inventory, books and records, the Bank brought an urgent, ex parte, application for the appointment of D&P as Interim Receiver of the Companies. The Court granted the Order. Duff & Phelps Canada Restructuring Inc. Page 7 of 11

10 5.0 Events During the Interim Receivership Proceedings 1. On December 30, 2013, immediately following its late afternoon appointment, the Interim Receiver secured the Companies premises, including changing the locks and putting in place security to monitor the facilities on a 24 hour basis. Only one employee of the Companies was present at the Hillyard Premises ( Hillyard Employee ) during the Interim Receiver s attendance on December 30, The name of the Hillyard Employee is provided in Confidential Appendix 1 ( Confidential Appendix ). That employee advised the Interim Receiver s representative that their employment had been terminated by Ms. Boparai prior to the Interim Receivership, with an effective date of December 31, No employees of the Companies were present at the Strathearne Premises during the Interim Receiver s attendance on December 30, On the morning of December 31, 2013, two employees (the Strathearne Employees ) were on site when the Interim Receiver arrived at the Strathearne Premises. The names of these individuals are also provided in the Confidential Appendix. The Strathearne Employees advised that they were recent hires who had both been terminated by Ms. Boparai prior to the Interim Receivership, with an effective date of December 31, One of the employees was there to perform administrative work, but was unable to do so because that employee s computer had recently been removed from the Strathearne Premises. 4. The Interim Receiver toured the Strathearne Premises and could not locate any books and records. The two Strathearne Employees advised that they were recently directed by Ms. Boparai to box up all books and records for year-end inventory purposes and to free up space for next year. 5. All but two computers and security camera hardware had also been removed from the Strathearne Premises. The Strathearne Employees advised that the remaining computer and security equipment hardware are unlikely to contain any substantive information. 6. One of the Strathearne Employees advised that several young men arrived last week to remove the books and records; however, the employee did not know their identities. The employee advised that the removal was directed by Ms. Boparai. 7. The Hillyard Employee was present at the Hillyard Premises when the Interim Receiver attended at that location on December 31, Similar to the Strathearne Premises, the Hillyard site was void of any books, records and all but two computers. The two computers are being analyzed by the Interim Receiver; however, the Hillyard Employee does not believe that they contain any substantive information. Duff & Phelps Canada Restructuring Inc. Page 8 of 11

11 9. Similar to comments from the Strathearne Employees, the Hillyard Employee advised that Ms. Boparai directed that the books and records be boxed and removed for year-end inventory purposes and to free up space for the new year. 10. Since the commencement of the interim receivership, management of the Companies has not been present at the Companies, nor has management attempted to contact the Interim Receiver or its counsel. The Interim Receiver has been advised that Mr. Boparai is out of the country, but it has not been able to independently confirm this. 11. On January 6, 2014, counsel to the Bank advised the Interim Receiver that Aaron DiCarlo, a representative of Swift Process Service Ltd. ( Swift Process ), a process server retained by the Bank s counsel, attempted to personally serve Mr. Boparai on behalf of the Companies on Saturday, January 4, 2014 at 10:50 a.m. at 46 Meadow Lands Blvd., Ancaster, Ontario, L4K 1H8 ( Meadow Lands Premises ) with a copy of the Bank s Notice of Motion dated January 3, 2014 in respect of the motion scheduled for January 8, 2014 seeking an order, among other things, appointing D&P as Receiver, as well as a copy of the Bank s Notice of Application (previously filed with the Court), the Order and Endorsement (collectively the Bank s Materials ) but was unable to effect personal service. 12. Bank s counsel further advised that the Meadow Lands Premises address used by Swift Process to effect personal service is the address that is listed for Mr. Boparai in his capacity as director of the Companies on the corporation profile reports obtained from the Ontario Ministry of Government Services in respect of the Companies. 13. Swift Process advised Bank s counsel that Mr. DiCarlo spoke with an adult female occupant of the Meadow Lands Premises. She advised that Rantej S. Boparai does not live at the Meadow Lands Premises, but he is known to her. He did reside at this address previously. She further advised that no one at the premises worked for the Companies. Mr. DiCarlo left his contact information with the adult female and the process server asked that she have Rantej call him over the weekend. Mr. DiCarlo advised that there has been no response to date from Mr. Boparai. 6.0 Creditor Issues 1. Sections 245 and 246 of the BIA require a receiver to send a prescribed notice to all creditors within ten days of its appointment. Except with respect to the Bank and those secured creditors listed on the Personal Property Security Act (Ontario) registry searches of the Companies, the Interim Receiver is unable to send the prescribed notice to any other creditor at this time because all of the books and records have been removed from the Companies premises. The Interim Receiver intends to send the prescribed notice to the Official Receiver, as required by the BIA, as well as to the PPSA registrants. The Interim Receiver will send the prescribed notice to other creditors, if and when identified. Duff & Phelps Canada Restructuring Inc. Page 9 of 11

12 2. On January 3, 2014, the Interim Receiver was contacted by Element Financial Corporation ( Element Financial ). Element Financial advised that within the last ten days it had advanced $2.8 million to the Companies to assist to finance the partially completed shredder. Element Financial and the Interim Receiver have arranged to meet on January 7, 2014 at the Companies premises to enable Element Financial to take photographs of that shredder. The Interim Receiver does not believe that Element Financial has been contacted by the Companies management to advise of the commencement of these proceedings. 7.0 Conclusion and Recommendation 1. The Interim Receiver recommends that the Court issue the order sought for, inter alia, the following reasons: a. Based on the evidence to date, it appears that the Companies, including the Companies management and Mr. and Mrs. Boparai have taken steps to remove assets, books and records and have misstated the financial position of the Companies. This includes: i. An approximately $50 million discrepancy between sales collections, as reflected by the Sales Analysis; ii. iii. iv. All books and records have been removed from the Companies premises, as have substantially all computers; Ms. Boparai, who was allegedly at home with a sick child during GDR s attendances at the Companies, appears to have been directing the removal of the books, records and computers, and potentially to have participated in the removal herself on the morning of December 30, 2013; Ms. Boparai terminated the Strathearne Employees and Hillyard Employee in advance of the interim receivership proceedings. No other employees have shown up for work since the proceedings commenced. It appears that the discontinuation of the business was being planned in advance of the commencement of the proceedings no mention was made of this while the Bank was reviewing the financial affairs of the Companies, including when GDR was attending at the Companies premises and at the Bank meeting with Mr. Boparai on December 19, 2013; and v. Mr. Boparai inaccurately described at the Bank meeting that the activity in the TD Bank accounts would illustrate that all sales previously reported to the Bank had been deposited in the Companies bank accounts. Mr. Boparai did not advise the Bank of the apparent imminent discontinuation and wind-down of the business. Duff & Phelps Canada Restructuring Inc. Page 10 of 11

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