British Columbia · CCAA

This report is supplemental to the Monitor’s Eighth Report. At hearings within these proceedings on January 28, 2019, Mr. Justice Walker raised an observation that there was little evidence on the record from the Monitor regarding Ernst & Young’s prior involvement with the debtor and related parties. Further, on February 4, 2019, Mr. Justice Walker raised this observation, as well as three (3) additional observations, by way of a memorandum to counsel dated (“Memo to Counsel”), a copy of which was attached as Appendix “A” to the Eighth Report. On February 8, 2019, the Monitor filed its “Eighth Report” the purpose of which was to, a) provide this Honourable Court with a full account of Ernst & Young’s prior involvement with HFRO and its related parties, and b) report on the conflict of interest allegations made by Mr. Smithers by way of the Injunction Application (defined in the Eighth Report) and remarks to this Honourable Court during the Court hearings of December 20 and 21, 2018. At hearings within these proceedings on February 11, 2019, Mr. Justice Walker asked that the Monitor file with this Honourable Court a copy of the “2018 Engagement Letter” referenced in the Eight Report; a copy of which is attached hereto as Appendix “A”. The 2018 Engagement Letter is dated September 3, 2018. The Scope Expansion letter referred to in the Eighth Report, dated September 26, 2018, is attached hereto as Appendix “B”. In addition to Mr. Smithers’ assertions respecting Ernst & Young, Mr. Smithers has questioned whether HFRO misled this Honourable Court with respect to its solvency in its application for the Initial Order. In particular, Mr. Smithers has drawn this Honourable Court’s attention to the timing pursuant to which HFRO recognized in its books and records the contingent liability associated with the remediation obligation (the “Remediation Obligation”) under the Port Lease (defined in the Proposed Monitor’s Report). In particular, Mr. Smithers indicates that HFRO filed financial statements as at August 31, 2018 in connection with its application for the Initial Order. In these statements, HFRO had not accrued for the Remediation Obligation; whereas when the Monitor investigated certain allegations of Mr. Smithers in respect of the CCAA Proceedings and reported on this investigation in its “Sixth Report”, the Monitor referenced HFRO’s October 31, 2018 financial statements that reflected an accounting entry that had been made to accrue for the Remediation Obligation of approximately $16 million (the “Remediation Obligation Entry”). As the Monitor has noted in its previous reports, Ernst & Young Inc. (“EYI”) was retained by HFRO in the beginning of September to assist it in, among other things, evaluating its options (the “Restructuring Advisor”). Mr. Justice Walker has noted that EYI was retained during the period the Remediation Obligation Entry was made and has sought more information on what advice EYI may have provided in regard to that entry and other matters pertaining to HFRO’s solvency. It is worthy of note that had EYI not been retained by HFRO in advance of the CCAA filing that the information provided to this Honourable Court in the Proposed Monitor’s Report would not have been available to this Court for purpose of the initial application, except by way of debtor affidavit. The purpose of this tenth report of the Monitor (the “Tenth Report”) is to provide this Honourable Court with information pertaining to the foregoing

Court officer report · 18 February 2019