Apportioning a post-closing tax liability following a receivership sale

Overview: In this case, the Court considered who should be responsible for a post-closing municipal tax liability following the sale of real property in a receivership proceeding — the receiver or the purchaser. Based on the language of the approval and vesting order, the Court concluded that the post-closing tax liability was a permitted encumbrance which remained with the property and transferred to the purchaser. As a result, the the purchaser was responsible for the post-closing tax bills.

KSV Restructuring Inc. was appointed as receiver of certain assets of Mahal VC and Golden Miles (the “Receiver”) on October 1, 2021. In November 2021, the Court approved a sale process for the Receiver to sell certain property of Mahal VC and Golden Miles. Accordingly, the Receiver notified the City of Brantford that it required a statement of property tax arrears in respect of the real property to be sold. The City advised that the property was not properly assessed, and the City had submitted a request to MPAC, which would result in additional taxes being added to the property and omitted tax notices being issued.

In February 2022, MPAC notified the City that there was a freeze on inspections due to Covid restrictions. In March 2022, 12175622 Canada Ltd. (the “Purchaser”) and the Receiver entered into an agreement of purchase and sale pursuant to which the Purchaser agreed to buy substantially all of the assets and property of Mahal VC and Golden Miles, including the real property in Brantford. An approval and vesting order was granted in April 2022 and the transaction closed on May 18, 2022.

In connection with the closing of the transaction, the Receiver obtained tax certificates from the City, which disclosed that $167,560 was due and owing in respect of property taxes, water arrears, interest and penalties as of the closing date. The Receiver paid these outstanding taxes in May 2022. In late October 2022, MPAC reassessed the taxes based on the value of the real property and issued Omit Tax Bills to the Purchaser in the amount of $1,091,423 regarding tax years 2020-2022, inclusive. The Purchaser appealed the tax reassessment, but subsequently withdrew the appeal.

The Receiver sought an order that the Receiver and Mahal VC were not liable to pay the Purchaser or the City on account of the Omit Tax Claims. The Receiver argued that under both the asset purchase agreement and the approval and vesting order, the liabilities in respect of the Omit Tax Claims belonged to the Purchaser and/or MNP Ltd., as receiver of the Purchaser (the “Purchaser’s Receiver”). The Purchaser’s Receiver argued that the Receiver was aware that there was an MPAC assessment and, accordingly, should be liable for the Omit Tax Claims. Mr. Mahal, as the principal of Mahal VC and Golden Miles, and the principal of the Purchaser, supported the position of the Purchaser’s Receiver.

The Court noted that while the Receiver may have known that there was an MPAC assessment, it did not know the timing or likely quantum of the reassessment, if any. The asset purchase agreement (“APA”) and the approval and vesting order both provided that the Purchaser was responsible for the “Permitted Encumbrances”, which included encumbrances for taxes that relate to or secure liabilities that are not yet due or in arrears. The APA also provided that the Purchaser assumed only the “Assumed Liabilities”, which were liabilities related to the purchased assets that arose on or after the closing date. The Omit Tax Claims related to the purchased assets because they were tax liabilities that were assessed on the real property that was purchased.

The parties disagreed on whether the Omit Tax Claims were liabilities arising on or after the closing date. The Court held that liability in respect of the Omit Tax Claims could not have arisen until the Omit Tax Bills were issued in November 2022. The Omit Tax Bills referred to the amount past due as $0 and set out the future instalment payments for the amounts due under those bills.

The Omit Tax Claims were not claims that were vested out of the real property under the APA or the AVO. The permitted encumbrances, which were permitted to remain on the transferred property, included the Omit Tax Claims. The contracting parties turned their minds to what the permitted encumbrances would be in the APA and then replicated that language in the AVO.

Accordingly, the Purchaser’s Receiver was responsible for the Omit Tax Bills.

Judge: Justice Steele

Professionals: Mitch Vininsky of KSV as Receiver; Chris Burr of Blakes for the Receiver; Rob Winterstein of Gardiner Roberts for KLN Holdings Inc. et al.; Geoff Daley for the City of Brantford; Mitch Stephenson of Fasken for A&M as Receiver of 2305145 Ontario Inc. (formerly Skymark Finance Corporation); Clifton Prophet of Gowling WLG for MNP as the Purchaser’s Receiver; Rodney Godard of Kirwin Partners for Santokh Mahal; Tyler Ray of PwC as the Bridging Receiver