Appointing a "governance receiver"?

Coromandel Properties Ltd. (Re), 2023 BCSC 2187
What is the test for appointing a “governance receiver” to perform corporate functions normally carried out by management?

Overview: In this case, the Court considered a request to appoint a “governance receiver”, whose primary purpose would be to perform the necessary corporate functions that would normally be carried out by management. Even though the Court found that current management had failed to adequately or properly perform the day-to-day operations of the debtor companies, it refused to grant the order sought. The applicants had not tendered any convincing evidence that would justify subjecting the debts to the additional cost and complexity that would result from the proposed order’s terms requiring cooperation with the receiver’s investigative efforts.

The Coromandel Group filed for protection under the Companies’ Creditors Arrangement Act on February 6, 2023. The Coromandel Group had its origins in an agreement between Mr. Mo and Mr. Zhong to pursue real estate opportunities in British Columbia in partnership with each other. Mr. Mo agreed to fund real estate projects, while Mr. Zhong agreed to manage the projects for their mutual benefit. To pursue these projects, Mr. Zhong caused numerous companies to be established, which later came to be known as the Coromandel Group.

The application for an Initial Order was originally adjourned. On March 10, 2023, the remaining petitioners filed a notice of discontinuance in the CCAA proceeding after entering into forbearance agreements with various lenders. At the time, Mr. Zhong and the Coromandel Group were negotiating a potential transaction to sell a significant portion of the Coromandel Group’s assets to another development group. The proposed sale never materialized.

The Applicants—which included the two sons of Mr. Mo, but not Mr. Mo himself—advanced an application for the appointment of a receiver of the Coromandel Group. They argued that they and Mr. Mo together owned 70% of the Coromandel Group directly and indirectly, and alleged that its current management was not managing the operation prudently, resulting in the erosion of assets. The Respondents, most of whom opposed the application, included secured lenders and other stakeholders in relation to the entities over which the receivership order was sought.

The Applicants submitted that the receiver they sought to have appointed would be a “governance receiver”, meaning that the receiver’s primary purpose would be to perform the necessary corporate functions that would normally be carried out by management. They argued that the Coromandel Group’s current management had failed to: attend to ongoing communications regarding day-to-day operations; pay outstanding professional fees; respond to the landlord of the Coromandel Group’s head office; respond to correspondence from the Canada Revenue Agency; and file tax returns. In this context, the Applicants argued that they had “lost all confidence” in management.

The Respondents opposed the order sought for a number of reasons. They argued that there was no security instrument providing for the appointment of a receiver by the Applicants. Further, there are already receivership orders over certain project entities, and appointing another receiver would impose another layer of costs without benefit to any of the parties or assets already under receivership or foreclosure. If a receivership order were granted for “governance” purposes or for providing the debtors with a “voice”, the Respondents argued that it should do little more than to clothe a receiver with the rights that the board of directors or the management of the company would otherwise have. To that end, they suggested that the proposed order should not preclude future legal proceedings against properties owned by the subject entities nor give the receiver powers of compulsion and investigation. They also said that any receivership order should not prohibit third parties from discontinuing services to debtor companies or from breaching contracts with them. Notably, the draft order proposed by the Applicants would do all of these things.

The Court agreed that the extent and scope of the Applicants’ interest in the Coromandel Group was unclear. It held that it was incumbent upon the Applicants to establish on the evidence and explain clearly what interests they, and not Mr. Mo (who was not an Applicant), had in the entities over which the receivership order was sought. The Court also found that the Applicants had not tendered any convincing evidence that would justify subjecting the Respondents to the additional cost and complexity that would result from the proposed order’s terms requiring cooperation with the receiver’s investigative efforts. Such terms were onerous, and not justified given the limited legal and economic interests that the Applicants appeared to have.

The evidence established that Coromandel Group’s current management had failed to adequately or properly perform the day-to-day operations of the debtor companies. As such, the Court agreed with the Applicants that it would be appropriate for the debtors—at least those not already under receivership—to have a “voice” other than Mr. Zhong. However, the Court found that it would not be just, convenient, or equitable to grant the order sought in order to achieve this objective. Accordingly, the application for the appointment of a receiver, on the terms sought in the draft order presented to the Court, was dismissed without prejudice to the entitlement of the Applicants, or any other party or parties, to seek a different order, for the appointment of a receiver or otherwise, upon proper notice to all interested parties.

Judge: Justice Loo

Counsel: John Sandrelli and Eamonn Watson of Dentons for the Applicants; S. Stephens for Lanyard Financial Corporation et al.; W.L. Roberts and N. Mann for Fang Ning et al.; B.S. Khatra, as agent for S. Turner, for Gardenful Ventures Ltd.; J. Bradshaw and J. Faner, Articled Student, for Amber Mortgage Investment Corporation; S. Boucher for Dragon Heir Investments Ltd. et al.; J.D. West for 1314378 B.C. Ltd. et al.; A.P. Bains for Peterson Investment Group Inc.; C.C. Cheng and J. Mason, as agent for C.C. Cheng, for 1200143 B.C. Ltd.; Alan Frydenlund of Owen Bird for D. Manning & Associates Inc.; Ryan Kusuhara of Panorama Legal for Rely Construction Ltd.; and F. Troen for Cedarhurst Holdings Ltd. and Silverstone Investment Corporation