Clearford Water Systems Inc

Headnote

National Policy 11-206 Process for Cease to be a Reporting Issuer Applications and National Policy 11-207 Failure-to-File Cease Trade Orders and Revocations in Multiple Jurisdictions -- application for order that issuer is not a reporting issuer and for full revocation of failure-to-file cease trade order -- issuer cease traded due to failure to file annual audited financial statements and annual management's discussion and analysis and related certifications -- issuer has completed reorganization under the Bankruptcy and Insolvency Act -- issuer has applied for a full revocation of the cease trade order -- issuer has applied to cease to be a reporting issuer in each jurisdiction where it is a reporting issuer -- full revocation of the failure-to-file cease trade order and cease to be reporting issuer application granted.

Applicable Legislative Provisions

Securities Act, R.S.O. 1990, c. S.5, as am., ss. 1(10)(a)(ii) and 144.

National Policy 11-206 Process for Cease to be a Reporting Issuer Applications.

National Policy 11-207 Failure-to-File Cease Trade Orders and Revocations in Multiple Jurisdictions.

IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the Jurisdiction) AND IN THE MATTER OF A REVOCATION OF A FAILURE-TO-FILE CEASE TRADE ORDER AND IN THE PROCESS FOR CEASE TO BE A REPORTING ISSUER APPLICATIONS AND IN THE MATTER OF CLEARFORD WATER SYSTEMS INC. (the Issuer)

ORDER

Background

The Issuer is subject to a failure-to-file cease trade order (the FFCTO) issued by the Ontario Securities Commission (the Decision Maker) on May 6, 2022.

The Issuer has applied to the Decision Maker under National Policy 11-207 Failure-to-File Cease Trade Orders and Revocations in Multiple Jurisdictions (NP 11-207) for a revocation of the FFCTO (FFCTO Revocation Order) pursuant to section 144 of the Securities Act (Ontario) (the Legislation) to take effect as at the Effective Date (as defined below).

The Decision Maker also received an application (Cease to be a Reporting Issuer Application) from the Issuer for an order (the Cease to be a Reporting Issuer Order) under section 1(10)(a)(ii) of the Legislation that the Issuer has ceased to be a reporting issuer in all jurisdictions of Canada in which it is a reporting issuer (the Jurisdictions) pursuant to section 21 of National Policy 11-206 Process for Cease to be a Reporting Issuer Applications (NP 11-206) to take effect at the Effective Date.

Under the Process for Cease to be a Reporting Issuer Applications (for a passport application):

(a) the Decision Maker is the principal regulator for this application; and

(b) the Issuer has provided notice that subsection 4C.5(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in British Columbia and Alberta.

Interpretation

Terms defined in National Instrument 14-101 Definitions, NP 11-206, NP 11-207 and MI 11-102 have the same meaning if used in this order, unless otherwise defined.

Representations

This decision is based on the following facts represented by the Issuer:

1. The Issuer is a "reporting issuer" in the provinces of British Columbia, Alberta and Ontario (the Reporting Jurisdictions).

2. The Issuer was formed on January 26, 2006 in accordance with a Certificate of Amalgamation filed in respect of Clearford Industries Inc., Innovative Sewage Systems Inc. and Brooklin Concrete Inc. pursuant to the provisions of the Canada Business Corporations Act (the CBCA) and originally named "Clearford Industries Inc." On June 19, 2014, the name of the Issuer was changed to "Clearford Water Systems Inc." pursuant to a Certificate of Amendment.

3. The head office of the Issuer is located at 300-1545 Carling Ave, Ottawa, ON, Canada K1Z 8P9.

4. The authorized capital of the Issuer consists of an unlimited number of shares of a class designated as "New Common Shares" (the New Common Shares), an unlimited number of shares of a class designated as "Non-Voting Common Shares" (the Non-Voting Common Shares, and together with the New Common Shares, the New Shares) and an unlimited number of shares of a class designated as "Redeemable Shares" (the Redeemable Shares), of which 6,000 New Common Shares, 4,000 Non-Voting Common Shares and no Redeemable Shares are issued and outstanding as of the date hereof.

5. On April 28, 2022, the Issuer filed a Notice of Intention to Make a Proposal (NOI) pursuant to the provisions of Part III of the Bankruptcy and Insolvency Act (Canada) (the BIA). Pursuant to the NOI, KSV Restructuring Inc. was appointed as the proposal trustee (the Proposal Trustee) to assist the Issuer in its restructuring efforts.

6. The Proposal Trustee reported that as of the date of the filing of the NOI, based on the Issuer's books and records, the Issuer had secured creditor obligations of approximately $16.5 million (excluding vehicle specific fleet financing which was unaffected by the Proposal (as defined below)), 100% of which secured creditor obligations was owed to the Sponsors, and known unsecured creditor obligations of approximately $29.5 million, being an aggregate of approximately $46 million of creditor obligations. The Issuer estimated that its assets, at net book value, are approximately $5.4 million, principally comprised of its interest in its operating subsidiaries. As a result, the Issuer was wholly insolvent.

7. On May 12, 2022, the Issuer filed a proposal (the Proposal) pursuant to the provisions of Part III of the BIA. The Proposal was developed with the support of certain senior secured creditors of the Issuer (the Sponsors) and intended to restructure and compromise the Issuer's obligations to both its unsecured creditors and the Sponsors (together, the Creditors), as well as to continue its business as a going concern. Under the terms of the Proposal, trade creditors and terminated employee creditors were to receive a pro rata distribution from the Unsecured Creditor Cash Amount (funded by the Sponsors), in full satisfaction of their claims, and the Sponsors and other creditors (through the Issuer's subsidiaries' intercompany claims), were to be issued a participating interest in an unsecured contingent value note (the Contingent Value Note) to be issued by the Issuer on implementation of the Proposal, recoveries under which are dependent on the Issuer's future revenue. The Contingent Value Note provides for repayment to the participants thereunder up to a maximum principal amount of approximately $46 million (which corresponds to the aggregate amount of the Issuer's creditor obligations), without interest, from the following: (A) all of the Issuer's annual distributable cash flow (net cash flow less various reserves required for continued operations) if any, in any fiscal year for the period commencing on January 1, 2023 and ending on the earlier of (i) December 31, 2033, and (ii) a sale or merger in respect of the Issuer; (B) all subsidiary transaction proceeds, being the net consideration paid to or received by the Issuer resulting from a transaction or series of any related transactions with an arm's-length party involving (i) all or substantially all of the shares of Clearford Water Works Inc. (CWW) and/or the shares of UV Pure Technologies Inc. (UV Pure), the two principal operating subsidiaries of the issuer, or (ii) a sale of all or substantially all of the assets or undertaking of CWW and/or UV Pure; and (C) all sponsor transaction proceeds, being the net consideration or proceeds received by the Sponsors (as holders of New Common Shares of the Issuer as a result of the Corporate Reorganization (as defined below)) from any transaction or series of any related transactions with an arm's-length party involving all or substantially all of the New Common Shares, payable by the Sponsors pursuant to the Contingent Value Note.

8. On May 12, 2022, the Issuer and the Sponsors executed an agreement (the Restructuring and Support Agreement) in which the Sponsors outlined the terms of their support for the compromises, arrangements and transactions contemplated by the Proposal and agreed to continue to fund the Issuer through to the conclusion of the restructuring process. Under the Restructuring and Support Agreement, the Sponsors agreed to give up their first ranking security interest and participate in the Contingent Value Note as an unsecured creditor, and agreed to provide certain cash payments contemplated under the Proposal, in return for which the Sponsors would have all of the New Shares (as defined below) of the Issuer issued to them on implementation of the Proposal.

9. On June 2, 2022, a meeting of the Issuer's creditors (the Meeting) was held to consider and vote on the Proposal, and at the Meeting, 100% of the creditors attending in person or by proxy voted in favour of the Proposal.

10. On July 13, 2022, the Ontario Superior Court of Justice in Bankruptcy and Insolvency (the Court) granted an order (Estate/Court File no. 33-2825753) (the BIA Order) approving: (i) the Proposal; (ii) a reorganization of the capital structure of the Issuer in accordance with section 59(4) of the BIA (the Corporate Reorganization); and (iii) the First Report of the Proposal Trustee dated June 29, 2022 and the actions of the Proposal Trustee described therein.

11. The Corporate Reorganization included the amendment of the Issuer's constating documents to, inter alia, effect the redemption or cancellation of all common shares of the Issuer (the Old Common Shares) outstanding immediately prior to effective date of the Corporate Reorganization, and authorized the issuance of New Shares to the Sponsors or their designated assignee. The principal steps of the Corporate Reorganization included, among other things, the following:

(i) to amend the authorized share capital of the Issuer to: (A) create an unlimited number of shares of New Common Shares; (B) create an unlimited number of Non-Voting Common Shares; and (C) create an unlimited number of Redeemable Shares;

(ii) to change each Old Common Share into 0.000001 (one-millionth) of a Redeemable Share;

(iii) to remove the authorized but unissued Old Common Shares and the Class A Special Share outstanding immediately prior to the effective date of the Corporate Reorganization and all rights, privileges, restrictions and conditions attaching thereto;

(iv) to declare that the capital of the Issuer after giving effect to the foregoing shall consist of an unlimited number of New Common Shares, an unlimited number of Non-Voting Common Shares and an unlimited number of Redeemable Shares;

(v) to include a provision in the articles of reorganization to be filed with Corporations Canada (the Articles of Reorganization) to introduce limitations on the number of shareholders permitted and restrictions on transfer in order to qualify it as a "private issuer" for the purposes of National Instrument 45-106 Prospectus Exemptions, which limitations will provide that the issue, transfer or ownership of shares shall be restricted in that no shares shall be transferred without either: (A) the consent of the directors of the Issuer expressed by a resolution passed or by an instrument in writing signed by the majority of the directors; or (B) the consent of the holders of shares of the Issuer to which are attached at least a majority of the votes attaching to the shares;

(vi) to automatically redeem all Redeemable Shares, into which the Old Common Shares and fractional interests therein outstanding are changed pursuant to the Proposal, on payment of $0.01 for each whole Redeemable Share; and

(vii) to issue New Shares to the Sponsors, which will be subject to the resale restrictions set out in section 2.6 of National Instrument 45-102 Resale of Securities.

12. The effective date of the Corporate Reorganization was [•], 2022 (the Effective Date).

13. Immediately prior to the Effective Date, the authorized capital of the Issuer consisted of an unlimited number of Old Common Shares and one Class A Special Share, of which 102,027,729 Old Common Shares and no Class A Special Shares were outstanding. In addition, immediately prior to the Effective Date, the Issuer had: (i) approximately $7.4 million of secured debt owing to Morebath Limited pursuant to (a) a convertible debenture and share pledge in the principal amount of $500,000 dated November 5, 2018, as amended by an undated amending agreement, (b) a convertible debenture and share pledge in the principal amount of $1.65 million dated May 15, 2018, as amended by an undated amending agreement, and (c) a convertible debenture and share pledge in the principal amount of $3.5 million dated August 5, 2015, as amended by an amending agreement dated August 5, 2017 and an undated second amending agreement; (ii) approximately $5.35 million of secured debt owing to Sustainable Water Projects Inc. (SWP), comprised of (a) a loan in the principal amount of $3.25 million pursuant to a loan agreement dated November 19, 2014 originally advanced by Canadian Water Projects Inc. (CWP) on or about November 19, 2014, and assigned by CWP to SWP on or about September 30, 2016 and (b) a loan in the principal amount of approximately US$1.47 million pursuant to a loan agreement dated May 19, 2016; (iii) approximately $3.7 million of secured debt owing to Lexus Continental Ltd. pursuant to a convertible debenture and share pledge in the principal amount of $2.975 million dated November 1, 2017, as amended by an undated amending agreement; and (iv) approximately $4.5 million of unsecured debt owing to SW Everett Inc. pursuant to an unsecured loan in the principal amount of USD$3.35 million advanced under a loan agreement dated November 19, 2016. Immediately prior to the Effective Date, all other debt obligations of the Issuer was comprised of intercompany debt as well as trade debt (i.e. vendor claims and amounts due to professional advisors).

14. As of and since the Effective Date, the authorized share capital of the Issuer consists solely of an unlimited number of shares of New Common Shares, an unlimited number of Non-Voting Common Shares and an unlimited number of Redeemable Shares, of which 6,000 New Common Shares, 4,000 Non-Voting Common Shares and no Redeemable Shares are issued and outstanding as of the date hereof.

15. As of and since the Effective Date, the Issuer only has three registered and beneficial securityholders, namely the Sponsors.

16. The rights of the shareholders of the Issuer are governed by and subject to the Issuer's share terms, which are set forth in (a) the Articles of Reorganization, and (b) a shareholders' agreement to which all of the shareholders of the Issuer are parties following completion of the Corporate Reorganization and implementation of the Proposal.

17. There is no obligation in any of the Proposal, the Articles of Reorganization or the shareholders' agreement for the Issuer to maintain its status as a reporting issuer and no prohibition on ceasing to be a reporting issuer.

18. The prior holders of Old Common Shares ceased to have any economic interest in the Issuer upon completion of the Corporate Reorganization.

19. The Old Common Shares were previously listed for trading on the TSX Venture Exchange (the TSXV) under the symbol "CLI" and on April 29, 2022, the TSXV issued a bulletin indicating that trading in the Old Common Shares had been halted and effective at the opening on May 3, 2022, the Issuer was transferred to NEX, its Tier classification was changed from Tier 2 to NEX, and the Filing and Service Office was changed from Toronto to NEX. In connection with the migration to the NEX, the trading symbol for the Old Common Shares changed from "CLI" to "CLI.H". In connection with the completion of the Proposal and the Corporate Reorganization, the Issuer submitted an application to delist the Old Common Shares from trading on the TSXV and the NEX.

20. On the Effective Date, the Old Common Shares were delisted from the NEX and TSXV, following which no securities of the Issuer, including debt securities, have been traded in Canada, the United States or another country on a marketplace as defined in National Instrument 21-101 Marketplace Operation (NI 21-101), or any other facility for bringing together buyers and sellers of securities where trading data is publicly reported.

21. The Issuer has no current intention to seek public financing by way of an offering of securities in Canada or elsewhere or to make or maintain a market in securities of the Issuer.

22. The securities of the Issuer are subject to a FFCTO issued by the Decision Maker on May 6, 2022 that is applicable in certain other Reporting Jurisdictions for its failure to file, subsequent to the date of the NOI and the appointment of the Proposal Trustee, Filings (as defined below) under applicable securities laws.

23. The Issuer is applying for an order revoking the FFCTO and an order that the Issuer has ceased to be a reporting issuer in all of the Reporting Jurisdictions.

24. As of the date hereof, the Issuer is not in default of any of the requirements of securities legislation in the Reporting Jurisdictions, or the rules and regulations made pursuant thereto, except (the following, the Defaults):

(i) the obligation to file the following periodic disclosure documents (the Filings):

1. audited annual financial statements for the year ended December 31, 2021 (the Annual Financials), management's discussion and analysis relating to the audited annual financial statements for the year ended December 31, 2021 (the Annual MD&A) and certification of the foregoing filings (together with the Annual Financials and the Annual MD&A, the Annual Filings) as required by National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings NI 52-109);

2. interim financial statements for the three month period ended March 31, 2022, management's discussion and analysis relating to the interim financial statements for the three month period ended March 31, 2022 and certification of the foregoing filings as required by NI 52-109; and

3. interim financial statements for the three and six month period ended June 30, 2022, management's discussion and analysis relating to the interim financial statements for the three and six month period ended June 30, 2022 and certification of the foregoing filings as required by NI 52-109, all of which Filings became due after the appointment of the Proposal Trustee;

(ii) in filing the Proposal, which contemplates, among other things, the Corporate Reorganization, the Issuer may have engaged in certain acts in furtherance of trades in the securities of the Issuer, which may be in violation of the requirements of the FFCTO; and

(iii) in acting in compliance with the BIA Order in completing the Corporate Reorganization, the Issuer may have engaged in certain trades and acts in furtherance of trades in the securities of the Issuer in violation of the requirements of the FFCTO, which acts were taken at the direction and with the approval of, and under the supervision of, the Court.

25. But for the Defaults, the Issuer would qualify for the simplified procedure set out in NP 11-206 on the basis that:

(i) it is not an OTC reporting issuer under Multilateral Instrument 51-105 Issuers Quoted in the U.S. Over-the-Counter Markets;

(ii) the outstanding securities of the Issuer, including debt securities, are beneficially owned, directly or indirectly, by fewer than 15 securityholders in each of the jurisdictions of Canada and fewer than 51 securityholders in total worldwide; and

(iii) the Issuer's outstanding securities, including debt securities, are not traded in Canada or another country on a marketplace, as defined in NI 21-101, or any other facility for bringing together buyers and sellers of securities where trading data is publicly reported.

26. The Issuer acknowledges that, in granting the relief sought, the Decision Maker is not expressing any opinion or approval as to the terms of the Corporate Reorganization.

Order

The Decision Maker is satisfied that FFCTO Revocation Order and the Cease to be a Reporting Issuer Order meet the tests set out in the Legislation for the Decision Maker to make the order

The decision of the Decision Maker under the Legislation is that the FFCTO Revocation Order and the Cease to be a Reporting Issuer Order are granted.

DATED this 7th day of October, 2022