A Primer on “Over-the-Counter” Sales Processes in Insolvency Proceedings

In a typical insolvency, the requirement that Court approval be obtained by a debtor or Court-appointed officer before a material asset can be sold ensures that all stakeholders have the opportunity to weigh in on a decision that will play a definitive role in creditor recovery.

However, for large-scale, multi-unit condominium developments, this procedural requirement can create serious drawbacks that undermine the ability of debtor companies and court-appointed officers to effectively realize on what are, in some ways, fungible commodities for which there will be many readily available alternatives. In this scenario, the requirement that parties attend a motion on notice to obtain approval of a sale transaction can complicate what otherwise would have been relatively straightforward transactions and diminish, rather than protect creditor recoveries.

Recent decisions of the Ontario Superior Court of Justice’s Commercial List have addressed this problem in an innovative way by implementing a mechanism that approves a “template” form of sale transaction and permits the debtor company or court-appointed officer to obtain approval and vesting orders for sale transactions over the counter from the Registrar, so long as the transaction is in the approved form and satisfies a minimum threshold price.

These decisions establish a useful mechanism to be employed by practitioners when dealing with an insolvent condominium development with many individual units to be realized upon, and demonstrate the creative and flexible manner in which the Court’s jurisdiction under the Bankruptcy and Insolvency Act and Companies’ Creditors Arrangement Act can be deployed to alter the Court’s typical procedures where expedient.

Over-the-Counter Sale Process Approval Orders

In the recent cases of Cameron Stephens Mortgage Capital Ltd. v. 2011836 Ontario Corp., Re LJM Developments (Hamilton) Inc. and KingSett Mortgage Corporation and Dorr Capital Corporation v. Vandyk – Uptown Limited et al., Court-appointed officers and debtors were faced with a difficult situation.

Their primary assets were individual condominium units for which the market would likely be individual homebuyers, rather than sophisticated investors, and for which the market in Ontario has been steadily declining.

In the normal course, an approval and vesting order would be required to convey clean title to purchasers but, as the Court-appointed officers noted, preparing for and attending a motion on notice in connection with all of these transactions would be unduly burdensome, given the relatively low value of the condo units on an individual basis.

Instead, parties sought an order approving what is, essentially, a form of template transaction, which order authorized the Registrar to issue specific approval and vesting orders for transactions where the Court-appointed officer certified that the transaction was substantially in the form of the template.

In particular, in each of these cases, the Court approved (1) template forms of agreement of purchase and sale and (2) a set of minimum prices for the units (filed confidentially with the Court in the case of Cameron Stephens Mortgage Capital Ltd. v. 2011836 Ontario Corp. and Re LJM Developments (Hamilton) Inc., to prevent prospective purchasers from simply making offers at the minimum price and to provide the receiver/debtor with some negotiating flexibility).

Where an agreement to purchase a unit (1) was substantially in the form of the Court-approved template and (2) had a purchase price that was equal to or greater than the minimum price (the “Target Price”), the Order authorized the debtor company/Court-appointed officer to present a pre-approved form of approval and vesting order to the Registrar, to be issued over the counter.

This framework avoided the need for parties to attend a motion hearing in connection with each unit, while simultaneously ensuring that the sale process is subject to Court oversight and submissions from stakeholders.

In LJM, Justice Steele referred to the sale approval criteria set out in Nortel Networks Corporation (Re), 2009 CanLII 39492 (ON SC) and s. 36(3) of the CCAA, finding that the above noted process would allow the debtor company’s condo units to be sold “in an efficient, cost-effective, and uniform manner” (para. 38).

Takeaways

Practitioners should draw the following lessons from these decisions:

1. An over-the-counter sale process approval order is a powerful tool to minimize professional fees where practitioners are faced with a large number of individual condominium units for which a traditional insolvency sales process, culminating in a motion on notice seeking Court approval, is impractical. Perhaps this process could even be employed for other types of high-volume assets, the transfer of which requires Court approval and a clear guarantee of clean title; and

2. The Court’s jurisdiction under the BIA and CCAA is wide enough to ensure that procedural safeguards do not become undue burdens that limit creditor recovery. Practitioners should not assume that standard procedures are written in stone and should instead be alive to the possibility that they (or another party) could move before the Court to suspend or amend procedural rules and practices where it may be beneficial to a debtor’s stakeholders to do so.