Guidance on competing CCAA & receivership applications

AFC Mortgage Administrative Inc. v. Sunrise Acquisitions (Stayner) Inc. et al.
What factors will a court consider in determining competing applications by debtors for CCAA protection and their lenders for the appointment of a receiver?

Overview: In this case, the court considered competing applications by the debtors - real estate development companies - for CCAA protection, and their lenders for the appointment of a receiver. The Court stated that when it comes to choosing receivership over CCAA in the real estate context, there is nothing barring a CCAA proceeding for a real estate development company or other real property-centric company. However, in a significant majority of real estate cases, secured creditors’ receivership applications will be granted instead of competing debtors’ CCAA applications. Here, the Court found that the Lenders had clear and uncontested rights, under various of their security instruments, to appoint receivers and had established a basis for their lack of confidence in the companies’ management. Though the companies proposed to imbue the monitor with “super monitor” powers, it was evident that they envisioned retaining a role in the CCAA proceeding and a “super monitor” would not allay the concerns of the lenders in the way that appointing receivers would.

AFC and Brexit (collectively, the “Lenders”) provided mortgage financing to the Sunrise Group and their principals (collectively, the “Debtors”) pursuant to two loan arrangements. The Stayner Loan, in the amount of $11 million, was for a 12-month term, and was secured by a first mortgage charge on a 66-acre parcel of vacant land in Stayner, Ontario and various guarantees and other security. Under the security, the Lenders had the right to appoint a receiver in the event of default. In the case of the Elmvale Loan, AFC had two mortgages registered against a 10-acre collection of lands in Elmvale, Ontario. The first mortgage, in the amount of $1,960,000, contained a right for the mortgagee to appoint a receiver in the event of default. The second mortgage, in the amount of $2,010,000, similarly contained a right for AFC to appoint a receiver in the event of default.

Following various defaults, the Lenders commenced applications to appoint receivers in respect of the Stayner Loan and the Elmvale Loan. In response to the receivership applications, the Debtors filed materials asserting that in the circumstances, an order bringing the matters collectively under the Companies’ Creditors Arrangement Act would be preferable and would better maximize the value for all concerned. While the Court acknowledged that the Lenders had been patient and granted many indulgences to the Debtors, the Court previously granted an adjournment to permit the Debtors to deliver their CCAA application materials and make their arguments so that the question of the appropriate manner of proceeding could be decided with the benefit of their materials before the Court. Against that backdrop, the parties returned to the Court in February for a final adjudication of the issue.

The Lenders argued that they had lost faith in the Debtors and their ability to manage the situation, and submitted that they met the test under s. 243 of the Bankruptcy and Insolvency Act. The Debtors did not contest the appropriateness of the receiverships if the Court found that route preferable to proceedings under the CCAA. They acknowledged that they were insolvent and in default in each proceeding, and that the evidence satisfied the test for the appointment of a receiver. However, in the circumstances and in response to the proposed receiverships, the Debtors asserted that an order bringing the matters under the CCAA would better maximize the value for all concerned.

The Court noted that the Debtors had come before it with no concrete plan that made sense and accomplished what they aspired to do. The Debtors had argued that the “plan” was to establish a SISP to be presented at a comeback hearing in 10 days. The Court noted that this effectively amounted to saying that nothing had yet been done.

When it comes to choosing receivership over CCAA in the real estate context, there is nothing barring a CCAA proceeding for a real estate development company or other real property-centric company. However, in a significant majority of real estate cases, secured creditors’ receivership applications will be granted instead of competing debtors’ CCAA applications. The reasons for such outcomes include:

• While CCAA can apply to companies whose sole business is a single land development, such companies do have difficulty proposing an arrangement or compromise acceptable to secured creditors;

• The priorities of security are often straightforward and there is little incentive for secured creditors having greater priority to agree to an arrangement that involves money being paid to more “junior creditors” (in this case, even the “junior creditors” opposed the relief sought by the Debtors);

• If a developer is insolvent and not able to complete a development without further funding, the secured creditors may feel that they will be in a better position by exercising their remedies rather than letting the developer remain in control of the failed development while attempting to rescue it by means of obtaining refinancing, capital injection by a new partner or a DIP financing; and

• Where a mortgagor has provided an express “covenant” agreeing to the appointment of a receiver, the Court “should not ordinarily interfere with the contract between the parties.”

In choosing between receivership or CCAA process, the court must balance the competing interests of various stakeholders to determine which process is more appropriate. The factors to be considered are:

• Payment of the receivership applicants;

• Reputational damage;

• Preservation of employment;

• Speed of the process;

• Protection of all stakeholders;

• Cost; and

• Nature of the business.

Here, the Court found that the Lenders had clear and uncontested rights, under various of their security instruments, to appoint receivers. They also had a legitimate evidentiary basis for their avowed lack of confidence in the Debtors’ management. There were uncontested findings of past misappropriation and an abiding lack of cooperation and transparency on the part of the Debtors and their principals. Though the Debtors proposed to imbue the monitor with “super monitor” powers, it was evident that they envisioned retaining a role in the CCAA proceeding and a “super monitor” would not allay the concerns of the Lenders in the way that appointing receivers would.

While there was ostensible appeal to the notion that appointing a single monitor rather than two receivers would yield costs savings, the Lenders fairly argued that the Stayner Property and the Elmvale Property were very different projects, giving rise to the need for independent analysis and decision-making for each of them. As such, the notional savings associated with having a single monitor rather than two receivers would prove illusory, inasmuch as two separate and independent exercises would be required.

Finally, the priorities, and the Lenders’ strong preference simply to realize on their security in accordance with those priorities, was reasonable when compared to a SISP process which would inevitably forestall to some extent the Lenders’ recovery, and may well lead to payments to more junior creditors before the Lenders are fully paid out.

The Court granted the receiverships sought by the Lenders relative to the Stayner Property and the Elmvale Property.

Judge: Justice Black

Professionals: Jeffrey Berger of TDB Advisory as receiver; Paul Mand of Mand Law for AFC; Johnathan Kulathungam of Teplitsky for Brexit; Jason Wadden and Shimon Sherrington of Tyr for the CCAA applicants; Joseph Blinick and Evana Yukanna of Bennett Jones for KSV; and Ryan Baulke of Baulke Stahr McNabb and Jared Rosenbaum and Sharon Kour of Reconstruct for Louis Bellwood.