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Arc Productions is best known for helping produce popular children’s series such as Thomas & Friends.

The sword fell on financially troubled animation studio Arc Productions Ltd. on July 26, and it was the forthcoming film Blazing Samurai – Arc's marquee project – that delivered the final blow, court documents say.

After months flirting with financial disaster, an e-mail from a company involved with Blazing Samurai sealed Arc's fate, setting in motion the company's failure. Within days, the Toronto studio known for helping create the beloved television series Thomas & Friends would be forced into insolvency by its creditor, Grosvenor Park Media Fund LP, which was demanding payment of $30.8-million (U.S.) in debts.

Documents filed in Ontario Superior Court of Justice last week to begin receivership proceedings suggest Arc's woes began much earlier. The company had quietly stumbled through a series of defaults on its debts since February, according to the documents. Arc, which was previously known as Starz Animation, had expanded rapidly over the past year and a half, and was crushed by the weight of its financial obligations. The company was unable to make its payroll last Friday, and Grosvenor Park pushed the studio into receivership the same day, effectively putting more than 500 staff out of work.

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The fateful e-mail was sent at 11:24 a.m. on July 26 by Guy Collins, co-founder of London-based GFM Films, which is in charge of selling international rights to Blazing Samurai. In the e-mail, which was included in the documents, Mr. Collins wrote to Donald Starr, the chief executive officer of Grosvenor Park, that he was concerned that Arc's chief executive officer, Tom Murray, had stopped work on the film. Arc was providing animation services for the project, which features Samuel L. Jackson and Michael Cera.

Mr. Starr suggests in an affidavit included with the court documents that Mr. Murray was trying to persuade the investors financing the film to advance $1.75-million due to Arc in August.

"I understand from the producers that Tom has shut down production today which is a pity," Mr. Collins wrote.

According Mr. Starr's affidavit, the film's backers had indicated Arc would receive no further payments for Blazing Samurai, eliminating a key source of revenue. "The loss of this receivable is catastrophic to Arc," he said.

Mr. Collins declined to comment and Mr. Starr did not respond to a request for an interview.

"Arc does not have any reasonable or foreseeable prospect of turning its business around, and the Lender (Grosvenor Park) has lost faith in Arc's management," lawyers for Grosvenor Park wrote in the court documents filed late last week. Mr. Murray told The Globe and Mail that Arc will not contest the receivership.

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The court documents show that Arc's dealings with Grosvenor Park, a finance company specializing in media and entertainment based in Santa Monica, Calif., began last year. On Dec. 10, 2015, the two firms signed a loan giving Arc access to up to $45.3-million, including $17.5-million to repay a prior debt to specialty lender Callidus Capital Corp.

Less than two months later, on Feb. 8, 2016, Arc defaulted on its obligations, failing to make "a number of payments" on the debt, according to the court filing. "The speed with which Arc went into default after signing the Credit Agreement raises serious issues regarding the accuracy and content of the disclosure and representations that Arc made to Grosvenor," Mr. Starr said in his affidavit.

A spokesperson for law firm Blake, Cassels & Graydon LLP, which represented Arc, declined to comment. Lawyers representing Grosvenor did not reply to requests for comment.

According to the court documents, Grosvenor then twice signed waiver agreements giving Arc time to turn around its fortunes, and extending another $4.6-million in credit, with conditions. In return, Arc persuaded Blazing Samurai's producer to advance $1.05-million due to the studio directly to Grosvenor Park.

But "despite the indulgences and breathing room provided," Arc defaulted on May 3 and July 13, the court documents say.

Meanwhile, the documents say, Arc posted $9.2-million in losses in the first six months of 2016, taking in just $17.9-million in revenue. It was also behind on $250,000 in rent for its office, owed $2-million for office renovations and another $1-million in payroll.

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Employees say they saw signs the company was struggling. "We've had to stop production on things because we weren't able to actually facilitate the agreed-to deals," said a senior staff member, who spoke on condition of anonymity. Purchases of computer hardware and software were put off because money was "tight," the staff member said.

According Mr. Starr's affidavit, Arc paid $100,000 to its lawyers and $23,000 to settle corporate expenses charged to Mr. Murray's personal credit card, "some of which may be unlawful."

"The events that have transpired at Arc are truly regrettable. The team at Arc worked very hard to avoid this end result but our best efforts were obviously unsuccessful," Mr. Murray said in an e-mail to The Globe and Mail. He also noted that the court filings present "only the views of one side," but declined to comment further.

Grosvenor proposed a forbearance agreement that would appoint a chief restructuring officer and a receiver, but Arc did not agree. On July 22, Grosvenor demanded payment of the debt, and Arc failed to pay, the court documents allege.

After receiving Mr. Collins's e-mail, Grosvenor Park started work to seek a court-ordered receivership. By Friday, July 29, the documents say, Arc's executives had drafted a lawyer-approved notice to staff outlining the company's insolvency, but Mr. Murray did not send it. Chief financial officer Peter Kozik sent a shorter e-mail, apologizing to staff that "payroll this week has not been processed as scheduled," and promising to work "diligently" to solve the problem.

But it was already too late. Grosvenor went to court that day and had consultants Deloitte & Touche appointed as interim receiver with oversight of Arc's affairs. On Tuesday, after a long weekend, staff found Arc's offices locked, and they had still not been paid.

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