Can a debtor avoid a receivership if it has a reasonable plan for moving forward?
The applicant, Meridian, sought an order pursuant to s. 243(1) of the Bankruptcy and Insolvency Act and s. 10 of the Ontario Courts of Justice Act, appointing a receiver and manager over all property, assets and undertaking of the respondents, Okie and 234
Pursuant to a Credit Agreement, Meridian authorized certain Credit Facilities to Okje, payable on demand. In the spring of 2020, as a result of COVID-19 and the government restrictions, Okje requested payment relief from its obligations under the Credit Agreement. Pursuant to subsequent amending agreements, Meridian agreed to defer Okje’s monthly principal and interest payments for three months and then a further two months.
Okje defaulted under the Credit Facilities. On February 26, 2021, after a payment by Okje of past due amounts was returned due to “insufficient funds”, Meridian made a demand for payment upon Okje, 234 and their personal guarantors for the entire amount of the indebtedness under the Credit Facilities, which was $7,770,121.39. The indebtedness remained outstanding.
In an effort to deal with its indebtedness, Okje subsequently entered into an Agreement of Purchase and Sale with a buyer to purchase its property for $7 million. The deal also contemplated a loan by the buyer to Okie. The respondents essentially sought an opportunity to either bring the loans into good standing or sell the property and business and repay Meridian and their other creditors.
The appointment of a receiver is normally considered an extraordinary remedy. However, in this case, Meridian’s right to the appointment of a receiver was derived from a private contract and could not be considered an extraordinary remedy. The underlying contracts and agreements all provided that Meridian was entitled to appoint a receiver and manager in the event of a default.
Both s. 243(1) of the BIA and s. 101 of the CJA provide that the court may appoint a receiver if it considers it to be just or convenient to do so. In determining whether it is just or convenient, the court must have regard to all of the circumstances of the case, including the nature of the property, the rights and interests of the parties to the property, whether the lender’s security is at risk of deteriorating, whether there is a need to stabilize and preserve the business, whether there is a loss of confidence in the debtor’s management and the positions and interests of other creditors.
Meridian argued that a receivership was appropriate in the circumstances. The respondents defaulted on their obligations, were insolvent and presented no clear path to resolve their obligations. There was no assurance that the APS would be completed and even if it was, more money would be required to pay out Meridian and the other ranking creditors, the source of which was also tenuous. Meridian submitted that it had lost confidence in Okje’s management and the appointment of a receiver would bring stability to the business and permit an orderly resolution of the issues.
The Court agreed with Meridian. The indebtedness at issue was significant. The APS, which had been amended twice, was far from firm. The contemplated loan from the prospective buyer was also far from firm. Further, there was no evidence that Okje’s recent application for funding from the Regional Relief and Recovery Fund would solve the respondents’ issues. Even if approved, funding was still 6-9 weeks away and would not resolve their issues with Meridian or with the other creditors. Finally, there was no evidence on the financial status of the business, including its recent cash flow and liabilities. In the circumstances, a receiver was required to stabilize and preserve the business.
The Court appointed a receiver and manager over all property, assets and undertaking of Okje and 234, but did not authorize the receiver to assign the respondents into bankruptcy.
Judge: L.A. Patillo J.
Counsel: Ian Klaiman and Jason Spetter of Lipman Zener Waxman for the Applicant; Robert Choi and Adam Beyhum of Owens Wright for the Respondents