BDC Capital, one of Spartan Bioscience’s largest creditors, is urging the judge overseeing the bankruptcy-protection case to order the distressed company be liquidated or find a new prospective buyer.  

In an affidavit filed to the Ontario Superior Court, Susan Rohac, vice-president of BDC’s Cleantech Practice, claimed Casa-Dea Finance Limited (CDFL), which won the bid to purchase Spartan, does not have the finances to buy the company, and that its plan to raise money to acquire the firm through a new numbered company is bound to fail. Rohac also called into question the integrity of the sales process, claiming it “appears to have been manipulated by a creditor or other parties not operating at arms’ length with Spartan.” 

“It is apparent to me that the proposed asset purchase, on its current terms, has no reasonable chance of success and is simply designed to benefit CDFL and a few insiders at Spartan who are pushing off an inevitable liquidation event but cutting out the remaining creditors in the process,” wrote Rohac in the filing, dated Aug. 9.

Spartan—which creates COVID-19 rapid tests as well as technology to detect a bacteria in the air called legionella—entered into a loan agreement with BDC Capital for $9 million in October 2019.

Spartan filed for bankruptcy protection this spring, after spending heavily to develop a COVID-19 rapid test last year. Early into the pandemic, the Ottawa-based company signed several large government and private-sector contracts to sell its tests, but continued experiencing issues with the devices, pausing test shipments and laying off the bulk of its staff in April. Spartan owed creditors nearly $73 million when it declared insolvency, according to a court filing from its monitor EY, including $16.45 million to the Public Health Agency of Canada, $9.8 million to Public Health Ontario and $6.9 million to CDFL, a family-owned trust registered in Trenton, Ont.

Spartan began soliciting bids from prospective buyers in late April. It selected the little-known CDFL as the successful bidder out of an initial pool of four interested parties. Just two submitted Phase 2 bids and CDFL was the only bidder to propose a full purchase of the company. CDFL—whose principal Darrell Edgett is the brother of Spartan’s executive vice-president Steve Edgett, according to Rohac’s filing—offered to buy the firm for $20 million in new equity that would represent 66.7 per cent ownership after the restructuring. 

CDFL’s bid was conditional on the trust securing financing for the purchase within 30 days of being selected. The firm ultimately missed the deadline and withdrew its bid in early July. “Only after CDFL advised Spartan that it could not obtain financing for the proposal did CDFL learn from Spartan that there was no other viable option to restructure or sell the business,” an earlier filing states. 

But rather than abandon plans to buy Spartan, CDFL set up a numbered company, dubbed 2856031 Ontario Inc., incorporated on July 23. The new entity “would offer to purchase substantially all the assets of [Spartan] in consideration for the debt owed to CDFL and payment or assumption of certain other priority amounts and certain other liabilities.” 

BDC’s Rohac, however, argued in the filing that the numbered company was no better positioned than CDFL to raise money to buy Spartan and keep the firm operational. 

“The success of the asset purchase … is entirely dependent on further investment, which is both unlikely and being promised by the same entity that reneged on the ‘Successful Bid’ in the [sales process] because it could not attract the required investment,” reads Rohac’s affidavit, which claims there is no evidence the numbered company or CDFL have “the necessary financing or investment to carry on Spartan’s business as proposed.” 

Both BDC and CDFL declined to answer The Logic’s questions. Spartan did not immediately respond to a request for comment. 

David Filice, a partner who focuses on corporate restructuring at accounting firm Fuller Landau, told The Logic it’s common for a creditor to set up a numbered company to buy an insolvent firm that owes it money. “If you put it through a numbered company, it protects the shareholders of the [creditor] company,” said Filice. “If the investment falters, the shareholders are protected. There’s no other investment held by this numbered company, so just fold up the company, and the shareholders don’t have any issues.” 

However, he said it’s unusual for a creditor to bid through a numbered company after already failing itself to purchase the distressed firm. “Usually, you don’t have this two-step process,” he said, adding that unless CDFL already had funds secured, it wouldn’t be any easier to buy Spartan through a numbered company. 

Rohac’s submission includes emails between her and Darrell and Steve Edgett from July 27 and 28, in which Steve confirmed CDFL was trying to raise $10 million in common shares to invest in Spartan’s operations, but that it wasn’t yet secured. 

Rohac argued in the filing that CDFL’s proposed terms for raising funds were unattractive to “sophisticated investors,” and urged the Edgetts in an email included in the affidavit that prospective investors would expect CDFL to convert some of its debt to common shares and take a subordinate position to new shareholders. “Based on my professional experience, CDFL will not be able to attract investment while seeking to maintain a priority position with respect to the existing CDFL debt, or a position that is even on par with any new lender or investor,” Rohac stated in the filing. “I believe that Darrell has a fundamental misconception about what type of investment CDFL will be able to attract, and that any such investment from sophisticated lenders or investors, will require the existing CDFL debt to be rolled into common shares, which will be subordinate to any new investment, which I understand CDFL is unwilling to do.” 

Instead of moving forward with a sale to CDFL’s new entity, Rohac is asking the court to trigger a new sales process or a liquidation of Spartan. While she said she believes Spartan needs “an immediate and significant capital influx,” she claimed the firm reported to BDC that it had resolved its COVID-19 testing problems and has seen an uptick in demand for its legionella testing, suggesting a liquidation or new soliciting new sales offers “may in fact result in a greater return to creditors.” 

Spartan’s insolvency-protection period is set to expire on Aug. 13. The company has requested a stay extension until Sept. 3, with the option to push the stay to Nov. 5.