Nanopay: the 1% proposal, then the assignment

Nanopay Corporation was incorporated under the Canada Business Corporations Act in December 2015 to sell what its sole director calls embedded payments solutions for businesses and banks: software that lets a client set up accounts, link them to verified bank accounts, send and receive invoices with its own customers, and receive and make payments against them. It ran on its investors' money. Over eight years some $35.8 million of shareholder investment went into its parent, Nanopay Holdings Inc., which has no operations or bank account of its own, and from there into Nanopay's account, according to the Affidavit of Laurence Cooke, June 15, 2023, paras. 2, 8, 10, 14, 21. The company "only began earning revenue in the first quarter of 2023," its proposal trustee told the court the same day, per the First Report of the Proposal Trustee, June 15, 2023, para. 18.

Nanopay has now been through two insolvency proceedings with the same trustee. The first began on May 19, 2023, with a notice of intention to make a proposal under s. 50.4(1) of the Bankruptcy and Insolvency Act naming Dodick Landau Inc. as proposal trustee, per the Notice of Intention to Make a Proposal, May 19, 2023. It ended with an amended proposal that cancelled all existing common shares, gave Ontario $50,000 for the secured portion of its employer health tax claim and gave general unsecured creditors 1% of the new common shares, the other 99% going to new investors; Justice Steele of the Ontario Superior Court of Justice (Commercial List) approved it on October 3, 2023, per the Order of Justice Steele, Oct. 3, 2023, para. 3 and App. "A" (Amended Proposal, Aug. 30, 2023), paras. 13, 18, 25 and n. 1. The second began at 8:24 a.m. on July 2, 2026, when Nanopay made an assignment in bankruptcy and Dodick Landau was appointed trustee, per the Certificate of Appointment, July 2, 2026. The company had ceased operations on December 31, 2025, after "further investor funding was withdrawn," the trustee reports in its Preliminary Report, July 20, 2026, paras. 1–2, 5.

A start-up on investors' money

When Laurence Cooke, the sole director, swore his affidavit for the company's first motion, Nanopay had 24 employees and one contractor, most in Ontario, and leased premises at 905 King Street in Toronto, though most staff worked remotely. "The Company is a start up. Its cash from operations is insufficient to fund its liabilities as they fall due," he swore; the notice of intention "was prompted by changes in market conditions which resulted in a longer timeline required for the Company to reach profitability." Among the creditors he listed were the landlord, Allied Properties, owed an estimated $2.4 million in rent arrears; investors holding unsecured loans of approximately $1,308,000; and Ontario, owed approximately $760,322 in employer health tax, of which approximately $375,000 was secured by the one registration against the company. The company had not remitted that tax for a number of years "as it was not aware of its obligation to do so," according to the Affidavit of Laurence Cooke, June 15, 2023, paras. 9, 11, 14–15, 18, 20, 22.

The trustee's report to creditors that August put figures to that timeline: net losses of approximately $5.2 million, $5.4 million and $6.3 million for 2020, 2021 and 2022, and total debt of approximately $35.8 million, $38.5 million and $44.6 million at those year-ends. The shareholders' investment itself sat on the books as a debt to the parent: because Nanopay Holdings had no bank account, the investments were deposited to Nanopay, and the external accountant recorded a year-end related-party payable from Nanopay to its parent for the cumulative $35.8 million. The trustee said it had asked the company for documentation of that obligation, per the Report of Trustee on Amended Proposal, Aug. 31, 2023, paras. 18, 27.

The DIP lender's nominee

There was "currently no other viable financing option available to the Company," Mr. Cooke swore, and without an interim loan it "will cease operations and be forced into bankruptcy." The lender was Nephesh Partners, LLC, which he described as an investment vehicle aggregating funds from various lenders. Its term sheet offered a non-revolving facility of up to $2,000,000, initial advances of up to $600,000, interest at 15% a year, a facility fee of 5% of the whole facility, and mandatory prepayment out of the company's Scientific Research and Experimental Development refund for 2022 or the proceeds of any sale outside the ordinary course. It required Nanopay to engage David Kay, as chief executive of Ao8 Strategic Advisors, LLC, as chief restructuring officer at $27,500 a month for a minimum of three months, his fees accruing to be paid at the loan's maturity or mandatory prepayment. The engagement agreement disclosed that Nephesh is "an investment vehicle that is managed by David Kay and wholly-owned by a party related to David Kay," and stated that he had no monetary interest in the facility; under it, he would resign as CRO if the lender enforced, per the Affidavit of Laurence Cooke, June 15, 2023, paras. 24–25, 28–31, 35, 38, 41–43.

The trustee reported that another shareholder group, represented by two creditors and investors in the parent, had considered further loans but did not submit a term sheet; the group represented by Mr. Kay did. The trustee found Mr. Kay well qualified. It understood that the lender "or parties connected to the DIP Lender, could become parties interested in sponsoring the Debtor's restructuring plan," expected him to act in the company's best interests either way, and said it would monitor the company and, by extension, its CRO. The facility's "fees, terms and costs," it wrote, "while significant, are still commercially reasonable for a business in circumstances similar to those of the Debtor," per the First Report of the Proposal Trustee, June 15, 2023, paras. 19–20, 25, 28–30.

Justice Osborne approved the term sheet and Mr. Kay's engagement on June 16, 2023, and extended the time to file a proposal to August 2; because service had been short, he limited advances to $275,000 until the matter returned a week later, per the Endorsement of Justice Osborne, June 16, 2023, paras. 4, 7–8, 10–11. His signed order treats the lender as unaffected by any proposal in respect of its advances, and provides that no proposal may be approved that does not provide for payment in full of all amounts due to the CRO under his engagement, per the Order of Justice Osborne, June 16, 2023, paras. 10, 22. On June 23, with the Province of Ontario, "the only secured creditor," served and no one opposing, he authorized advances up to the full $2 million, per the Second Report of the Proposal Trustee, July 31, 2023, App. "C" (Endorsement of Justice Osborne, June 23, 2023), paras. 2–5. Justice Penny later extended the filing deadline to August 21, per the Order of Justice Penny, Aug. 1, 2023, para. 2.

The statement of affairs filed with the amended proposal showed approximately $810,000 owed to the lender, inclusive of interest and fees; shortly after the original proposal was filed, an SR&ED refund of approximately $810,000 arrived and was transferred to the lender to repay its advances to date, per the Report of Trustee on Amended Proposal, Aug. 31, 2023, para. 23. The company's next forecast, prepared with the trustee's assistance, had fresh advances drawn weekly, $706,000 of them through October 16, and warned that absent continued funding from the lender the company "will immediately enter a liquidity crisis," per the Third and Final Report of the Proposal Trustee, Sept. 18, 2023, para. 28 and App. "C".