How does the court decide between a CCAA and a receivership application?
This proceeding involved competing applications for the appointment of a receiver and manager pursuant to subsection 243(1) the Bankruptcy and Insolvency Act (the “BIA“) and an application for protection under the Companies’ Creditors Arrangement Act (the “CCAA“).
Each of the Receivership Applicants had advanced loans on some or all of three residential condominium construction projects. The Debtors were special-purpose, project-level entities for the development of each of the three projects. After conducting their own independent investigation, the Receivership Applicants discovered a lack of transparency by the Debtors and concluded that they no longer wanted anything to do with the projects. The Debtors objected to the receivership application and brought their own application to seek protection under the CCAA.
A receiver may be appointed where it is just and convenient to do so. In Confederation Life, Farley J. set out four factors that courts may consider in determining whether it is just and convenient to appoint a receiver:
- The lenders’ security is at risk of deteriorating;
- There is a need to stabilize and preserve the debtors’ business;
- Loss of confidence in the debtors’ management; and
- Positions and interests of other creditors.
The Court held that all four factors applied in this case:
- Security at risk of deteriorating: The lenders’ security was at risk of deteriorating. All three projects were overbudget. The Debtors acknowledged that the projects were economically unviable. Work had stopped on the projects and trades were not being paid. These various factors made it necessary to gain control of the projects quickly.
- The need to stabilize the business: The Debtors agreed that there was a need to stabilize the business. The parties disagreed about whether it should be stabilized through a receivership or a CCAA proceeding.
- Loss of confidence in management: Given the length of time during which the financial irregularities had persisted, the deliberate, proactive nature of those irregularities and the deliberate efforts to hide the irregularities, the Receivership Applicants had a legitimate basis for a lack of confidence in management.
- Position and interests of other creditors: No other creditor opposed the receivership application.
In the circumstances, the Receivership Applicants established a prima facie right to a receivership. The issue was which of a receivership or a CCAA proceeding was preferable. In choosing between a receivership or a CCAA process, a Court must balance the competing interests of the various stakeholders to determine which process is more appropriate. The Court will consider the following factors:
- Payment of the Receivership Applicants;
- Reputational damage;
- Preservation of employment;
- Speed of the process;
- Protection of all stakeholders;
- Cost; and
- Nature of the business.
The CCAA proposal did not address the Receivership Applicants’ concerns. The Receivership Applicants wanted their money back. What was currently on the table was a purchase agreement with Concord that was close to completion. Even if that enforceable agreement materializes, it would not give the Receivership Applicants what they want. The Receivership Applicants should not necessarily be compelled to remain in the project either permanently or temporarily while they wait for a project specific company to obtain new financing without the Receivership Applicants having any control of the process.
Secondly, the Debtors took a series of proactive steps to hide information from a creditor over a prolonged period. The Court held that any reputational damage to the Debtors resulting from a receivership was of their own making.
Thirdly, while CCAA proceedings often preserve jobs, there was no evidence to support that assertion in this case. The vast majority of the jobs associated with the three projects were construction jobs. Construction contractors will be needed to complete the projects whether a new owner acquires through a receivership or through a CCAA proceeding. At the moment, construction on the projects is halted because of COVID-19 and a lack of financing. As a result, there was no significant difference between a receivership and a CCAA proceeding with respect to either immediate or long term employment.
Finally, the Debtors argued that their CCAA application will protect all stakeholders. In actuality, the condominium purchasers would lose their contracts. The construction employees will not have jobs until new financing has been arranged. The creditors would be left to negotiate the best outcome they can in a CCAA proceeding. Therefore, it would be preferable to have a receiver acting as an officer of the court who can act without being hamstrung by closing a transaction that favours equity over creditors.
In the case at hand where the breakdown in the relationship is caused by persistent and deliberate wrongdoing by the debtor, where there are no significant differences to the outcome for other stakeholders between a receivership or a CCAA proceeding and where there are no material employment concerns, there was no reason to restrain the exercise of the Receivership Applicants’ contractual rights. A receivership was preferable to a CCAA procedure.
Counsel: David Bish, Adam Slavens and Jeremy Opolsky of Torys LLP for the Applicants, BCIMC Construction Fund Corporation and BCIMC Specialty Fund Corporation, Alan Mersky, Virginie Gauthier and Peter Choi of Norton Rose Fulbright for the Applicants, Otéra Capital Inc., Steven Graff, Ian Aversa and Jeremy Nemers of Aird & Berlis LLP for the Respondents, Geoff Hall, Heather Meredith and Alex Steele of McCarthy Tétrault LLP for PricewaterhouseCoopers Inc. and Sean Zweig and Danish Afroz of Bennett Jones LLP for KingSett Mortgage Corporation.
Judge: Koehnen, J.