Contempt order against management?

Canadian Western Bank v. Canadian Motor Freight Ltd. et al.
What is the test for a contempt order against individuals in a receivership?

Summary: The debtors, related corporations engaged in the freight trucking business, were placed in receivership after defaulting on their secured loan. Following the granting of the receivership order and an asset recovery order, the debtors and various members of management took active steps to put the debtors’ fleet of vehicles and trailers outside the reach of the receiver, transferring them to premises operated by a third-party freight trucking and vehicle and trailer storage company. The Court found the debtors, the third-party storage company and each of their management to be in contempt of its previous orders, finding that they were “intent on playing a shell game” with the debtors’ assets, and “thumbing their nose” at the court and its process. The Court also expressed disapproval of the “ongoing attempts” by the third-party storage company and its management “to shake down the receiver for payments” to which they were not entitled as a strategy to shield the assets from the receiver, in flagrant breach of the Court’s previous orders.

The Debtors were related Ontario corporations engaged in the freight trucking business. By August 28, 2024, the Debtors were in default of substantial secured loan repayment obligations to Canadian Western Bank (“CWB”). As a result, CWB applied for a receivership order under section 243(1) of the Bankruptcy and Insolvency Act (the “BIA”) and on October 9, 2024, Ernst & Young Inc. (“EY”) was appointed as interim receiver of the property, assets and undertaking of the Debtors. On November 5, 2024, EY was appointed as Receiver, effective November 15, 2024. The effective date of the receivership was delayed, at the request of the parties, specifically for the purpose of giving the Debtors time to return vehicles and trailers belonging to the Debtors (the “Fleet Assets”) to allow the Receiver to take possession of them.

The Receiver sought a contempt order against the Debtors and various members of management (collectively, the “Contemnors”) on the basis that they refused to comply with and willfully breached the Receivership Order and an Asset Recovery Order (together, the “Orders”) made in the receivership proceedings under the BIA. Under both Orders, the Contemnors were required to deliver to the Receiver all of the property and assets of the Debtors, including facilitating the Receiver’s retrieval of the Fleet Assets. Instead of allowing the Receiver to take possession of the Fleet Assets “without interference” and delivering the Fleet Assets to the Receiver as required by the Receivership Order, the Debtors instead sent the Fleet Assets to premises operated by United Group of Companies (the “United Yard”).

The test for civil contempt requires that:

1. The order alleged to have been breached must state clearly and unequivocally what should and should not be done;

2. The party alleged to have breached the order must have had actual knowledge of it; and

3. The party allegedly in breach of the order must have intentionally done the act that the order prohibits or intentionally failed to do the act that the order compels.

The Debtors argued that once they had transferred the Fleet Assets to United, the Fleet Assets were no longer under their control, and, implicitly, no longer their problem. However, the Debtors had no right to transfer the Fleet Assets in the face of the Receivership Order, and doing so intentionally and with specific knowledge of the Receivership Order and its requirements was a clear breach.

Similarly, United denied the Receiver access to the United Yard, and advised that it would not release any Fleet Assets to the Receiver. Although the Receiver reiterated that pursuant to the Receivership Order, United was obliged to grant the Receiver full and immediate access to the United Yard so that the Receiver could take possession of the Fleet Assets, without interference, United continued to stall, and to refuse the Receiver access to the United Yard and to the Fleet Assets, in clear violation of the Receivership Order. The Receiver also advised that unless United granted the Receiver immediate access to the United Yard, the Receiver would seek a further order from the court compelling United to release the Fleet Assets.

Following the granting of the Asset Recovery Order, United advised that it was not prepared to comply with the Asset Recovery Order at that time, purportedly because, among other things, no arrangements had been made by the Receiver to pay United, notwithstanding that neither the Receivership Order or the Asset Recovery Order required the Receiver to make any payments as a precondition of retrieving the Fleet Assets. The Receiver was also not advised that following the granting of the Asset Recovery Order, United had been surreptitiously moving the Fleet Assets away from the United Yard to undisclosed locations. In the circumstances, the Receiver brought an ex parte motion seeking a hearing date for the contempt motion.

The Court found all of the Contemnors to be in civil contempt of the Orders. The Orders were clear on their face, and were explained by the Receiver on multiple occasions. The language of the Orders was straightforward and unambiguous. There could be no uncertainty about the power of the Receiver under the Orders to “take possession and exercise control over” the relevant property and assets “without interference from any other Person.” It was simply not credible that the Contemnors did not understand the Receiver’s mandate and power under the Orders. Likewise, there could be no confusion as to the obligation “to grant immediate and continued access to the Property to the Receiver, and [to] deliver all such Property to the Receiver upon the Receiver’s request.” There was no ambiguity in this language, and no scope for the Contemnors’ purported interpretation that it gave them license to negotiate and delay.

There was no doubt that the Contemnors had actual knowledge of the Orders. The Contemnors were represented by counsel throughout, which counsel attended at the motions at which the Orders were granted. They were aware of the Orders at material times, received specific and clear explanations of the requirements of the Orders (which were in any event unambiguous) and made decisions not only to ignore their obligations under the Orders, but to take active steps to thwart the Receiver’s executions of its duties thereunder. They were intent on playing a shell game with the Fleet Assets, and were in no way confused as to what the Orders required of them. They simply and patently chose to ignore those obligations.

The Court fixed a date for sentencing and noted that the Contemnors would, nevertheless, have the opportunity to purge their contempt.

Judge: Justice W.D. Black

Counsel: Natasha MacParland, Chenyang Li and Matthew Howe of Davies for EY (Sharon Hamilton) as receiver

Zain Ayoob Atcha for United Group of Companies

Kristine Holder of Nanda & Associates for the debtors

Marrayam Singh of A&M Lawyers for King Towing and Matheson