What does the new duty of good faith under s. 4.2 of the BIA require in the context of a receivership application?
The plaintiff lenders sought a final order of receivership against the defendant debtors. The defendants collectively owned and operated a pharmacy in St. Albert, Alberta. The pharmacy continued to conduct business under the supervision of the Court-appointed Interim Receiver of the corporate defendants. In the meantime, Loder—the principal of the corporate defendants and the personal defendant and guarantor—was actively trying to sell the pharmacy as a going concern, but had not yet found a buyer.
The plaintiffs argued that the defendants had defaulted on their loans. The plaintiffs issued demands for payments of their loans, but they were not paid. They submitted that the pharmacy’s operation was unsustainable; not placing the pharmacy in receivership would put their security in jeopardy; and a receiver would be best-positioned to sell the pharmacy at the most advantageous price.
The defendants argued that they had been induced by the plaintiffs to take on the loans and that Loder had been lulled into a false sense of security that the current predicament of litigation would be avoided. The defendants invoked section 4.2 of the Bankruptcy and Insolvency Act to say that a receivership order should not be granted.
This recently enacted provision has two components:
- first, any interested person in any proceedings under the BIA shall act in good faith with respect to those proceedings; and
- second, if the Court is satisfied that an interested person fails to act in good faith, on application by any interested person, the Court may make any order that it considers appropriate in the circumstances.
The relationship between lender and debtor is contractual. The remedy of receivership sought from the Court is a contractual component and its initiation is subject to the exercise of the lender’s discretion. The good faith to be exhibited must be “in respect of” BIA proceedings, which encompasses not only conduct in the course of such proceedings but also the conduct that precipitated the proceedings, as it relates to the indebtedness in question and the relationship between lender and borrower. The effect of section 4.2 should not reach back into time indefinitely. In this case, the prospect of receivership proceedings first materialized with the sending of the first set of demand letters. The plaintiffs’ conduct in relation to the loans thereafter, when receivership loomed, was factually and temporally connected to the proceedings.
A secured creditor seeking a Receivership Order is an “interested person” subject to the good faith requirement. In the insolvency context, this requirement means that the interested party will not bring or conduct proceedings for an oblique motive or improper purpose. In this case, the duty of good faith requires the parties not to lie to or mislead the other with respect to the status of the loan or the state of the lender-borrower relationship. It does not impose a duty of loyalty or disclosure, nor require the subordination of one’s own interests to the other. Whether dishonesty has occurred in a given case is fact-specific and may, depending on the circumstances, include lies, half-truths, omissions and even silence.
Where there are allegations of a lack of good faith in respect of a secured lender’s conduct, a remedy under s. 4.2 may include denial of the Receivership Order. The conduct of the party alleged to have breached the good faith requirement should be assessed in light of the intent and policy objectives of the BIA. The content or degree of the good faith requirement will necessarily vary with different BIA actors and different facts.
Here, the Court found that the plaintiffs did not promise a specific outcome to the defendants’ refinancing request. The plaintiffs were entitled to modify the terms of refinancing in accordance with what they felt was in their best interest. Neither plaintiff was required to subordinate its interests by approving a form of restructuring that it felt would jeopardize its security. The Court concluded that the plaintiffs did not engage in misrepresentation or dishonesty in dealing with the defendants’ refinancing request.
The Court held that there had been no breach of the good-faith requirement that would warrant refusing the final order of receivership. It was just and convenient to appoint a receiver over the assets of the corporate defendants. A transparent, Court-supervised process provided the best option for selling the pharmacy as a going concern and maximizing recoveries for all concerned.
Counsel: Terrence Warner & Spencer Norris of Miller Thomson LLP for the Plaintiffs; Jim Schmidt of Bennett Jones LLP for the Defendants; Ryan Quinlan of Duncan Craig LLP for the Interim Receiver, MNP Ltd.
Judge: Justice Douglas R. Mah