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Mobilicity, which is legally known as Data & Audio-Visual Enterprises Wireless Inc., is trying to convince the court to stay Catalyst’s application.CARRIE PRATT/The Associated Press

The legal battle between small wireless carrier Mobilicity and one of Canada's most prominent distressed-debt investors will remain in limbo until a judge issues a key decision in the case.

Judge Ruth Mesbur of the Ontario Superior Court of Justice on Tuesday reserved her decision on whether Catalyst Capital Group Inc. can proceed with a legal application that seeks to nix a $75-million lending agreement that gave Mobilicity a key financial lifeline earlier this year. Although Judge Mesbur could take up to three months to release her decision, she indicated a preference to move quickly on the matter.

Catalyst, a fund company run by investor Newton Glassman, has amassed a position in Mobilicity's bonds and earlier this month filed in an Ontario court to have a judge throw out the lending agreement.

Mobilicity, which is legally known as Data & Audio-Visual Enterprises Wireless Inc., is trying to convince the court to stay Catalyst's application. During Tuesday's hearing, it argued the fund company's legal action is merely a tactic to "create leverage" at a time when the carrier is financially strapped.

The stakes are high. The Vaughan, Ont-based carrier is trying to plot out its future ahead of a key auction of wireless spectrum later this year. In addition to shoring up its finances, Mobilicity is trying to distinguish itself from a clutch of new entrants, while also competing against the big three wireless carriers. In order to remain viable, the company needs to beef up its customer base, expand its service footprint and upgrade its wireless network. Part of that strategy could involve bidding for rival carrier Wind Mobile, which is up for sale, according to sources.

But in court on Tuesday, Mobilicity was characterized as a company that is financially distressed.

"Mobilicity is going through some very tough times financially," said lawyer Marc Kestenberg, who is representing the company in this case. He told the court that Catalyst is pursuing legal action to stop Mobilicity's recent debt deal because it is unhappy that its offer to provide refinancing was rejected by the company.

The court heard that Catalyst, which has more than 25 per cent of Mobilicity's senior secured notes, tried to engage the company in financing discussions in 2012 but talks broke down in early January. As a result, Fred Myers, the lawyer representing the unnamed purchasers of Mobilicity's new notes, attempted to paint Catalyst as a "bitter bidder" – a notion that Catalyst rejected.

In stressing the gravity of Mobilicity's financial woes, Mr. Myers said the wireless carrier has about $450-million worth of debt in multiple series, adding it was only acting to "save its business" when it announced a new $75-million financing deal on Feb. 12. So far, the company has drawn a $15-million tranche that is being used for operational purposes.

"This is a real-time case," Mr. Myers said, adding that Judge Mesbur is weighing into a "restructuring" that is under way. The new debt deal, he said, is about Mobilicity's right to seek refinancing rather than Catalyst's ability to pursue what he termed a "leverage play."

Catalyst, however, argues it was given insufficient information to fully understand the terms of the new financing. Lawyer David Cameron Moore argued the crux of the case is the "oppressive conduct" by Mobilicity and its other note holders who negotiated a new debt deal with "secret" terms that put Catalyst at a disadvantage.

"It is rather unusual to come to court and not know who the lenders are," Mr. Moore said of the unnamed note holders represented by Mr. Myers. Further, he argued that Mobilicity failed to provide adequate details about the new financing deal, which leaves Catalyst "largely in the dark" in terms of assessing its impact.

Catalyst is also concerned that the new financing deal comes with an interest rate that tops 15 per cent and an upfront fee of $8.25-million that is payable to the unnamed note holders on May 30. Moreover, he argued the trustee in this case, Equity Financial Trust Co., faces a potential conflict of interest because it is a party to the new financing deal, suggesting it cannot "faithfully" uphold its duties to senior bondholders like Catalyst. None of the allegations has been proven in court.