How should a court deal with a receivership application when the applicant only has security over fixtures, while another party has security over the real property?
The Applicant, CEF, sought the appointment of a receiver, pursuant to section 243 of the Bankruptcy and Insolvency Act and section 101 of the Courts of Justice Act, over all of the assets and property of the Respondents, Hypoint and 909, that was used in relation to a business carried on by either or both of them. The business of the Respondents was a custom-built cannabis production facility. Hypoint’s assets included the HVAC equipment installed at the premises from which the business was conducted. CEF and Hypoint entered into a loan and security agreement, pursuant to which CEF had first-ranking security over the HVAC equipment (the “Collateral”). Meanwhile, 909 owned the premises against title to which the Mortgagees held mortgage security (the “Premises”).
CEF sought the appointment of a receiver over the Premises as well as the Collateral, with the intent to sell the Premises with the HVAC equipment still installed, through a single sales process approved and overseen by a receiver under the direction of the Court. The Mortgagees did not oppose the appointment of a receiver over the assets of Hypoint but did oppose the appointment of a receiver over the real estate assets of 909. They argued that, while 909 was a related entity to Hypoint, it was not a party to the loan and security agreement with CEF, and only the HVAC equipment was pledged as Collateral. Consequently, CEF had no legal right to the appointment of a receiver of property owned by any party other than that belonging to Hypoint.
CEF argued that proceeds and recovery would be maximized for all only if the Premises were sold as a turnkey cannabis production facility, with the HVAC still installed. If CEF enforced its rights only as against the Collateral, it would have to remove and sell the Collateral separately, devaluing both the Collateral and the Premises, to the detriment of all stakeholders. The Mortgagees argued that they were entitled, by the terms of their mortgage security and the Mortgages Act, to enforce their mortgages by selling the premises under power of sale (i.e. they were in favour of a fragmented sales process).
The test for appointing a receiver, whether under the BIA or the CJA, is whether it is just and convenient to do so. The overarching objective is to enhance and facilitate the preservation and realization of a debtor’s assets, for the benefit of all creditors. the Court must have regard to all of the circumstances, but in particular the nature of the property and the rights and interests of all parties in relation thereto. These include the rights of the secured creditor pursuant to its security.
CEF’s submission that the Court should appoint its proposed receiver over the assets of 909 pursuant to section 243 of the BIA failed for the simple fact that 909 was not a party to the CEF credit agreement, nor was CEF a secured creditor of 909. Unlike Hypoint, CEF had no contractual right to the appointment of a receiver over the assets of 909 pursuant to any agreement. It similarly lacked any rights as a judgment creditor of 909.
However, the Court concluded that it was just and convenient to appoint a receiver under section 101 of the CJA. 909 and Hypoint were related entities operating the same business out of the same Premises. The Premises, including the Collateral, were custom-built for the operation of a cannabis production facility. All parties agreed that all of the assets of Hypoint and 909 should be sold to maximize recovery for all creditors, but could not agree on the process pursuant to which that sale should be undertaken. The Court was satisfied that this represented a classic example of a situation in which it was just and convenient to appoint a receiver.
To permit CEF to enforce against the Collateral only and the Mortgagees to enforce as against the Premises would have the potential for further conflict, delay, increase in cost and decrease in asset value. Other unsecured creditors whose rights may be affected by the manner in which a sale was undertaken were also best protected by a fair and transparent process that was run by a court-appointed receiver rather than any one party individually.
The Court allowed the application, but opted to appoint msi Spergel (GRIP), the firm nominated by the Mortgagees, as the Court-appointed receiver.
Judge: Justice Osborne
Counsel: Brendan Bissell and Joel Turgeon of Goldman Sloan Nash & Haber for CEF; Jonathan Rosenstein of Rosenstein Law for the Mortgagees; Domenico Magisano of Lerners for Albert Gelman (the receiver proposed by CEF) and Caitlin Fell of Reconstruct for the receiver, msi Spergel (GRIP)
By Matilda Lici