Court rejects interim receivership request

Séquestre de Royal Bank of Canada, 2025 QCCS 2906
What is the test for an interim receivership order?

Summary: The Quebec Superior Court recently dismissed a lender’s ex parte application to appoint an interim receiver over two long-standing manufacturing companies, emphasizing that the extraordinary powers sought—control of operations, property on both sides of the border, and the ability to suspend business—exceeded the conservatory purpose of interim receiverships under s. 47 of the BIA. While the lender cited misrepresentations, undisclosed tax arrangements, and insider dealings to justify its loss of confidence in management, the Court noted there was no evidence of imminent asset dissipation or irreparable harm. The companies had cooperated with advisors, retained counsel to address creditor concerns, and recently posted a profit, all of which undercut the need for urgent relief. The decision underscores the high bar for ex parte interim receiverships: applicants must demonstrate true urgency and risk of prejudice, and courts remain wary of granting intrusive remedies without hearing from the debtor given the potential impact on employees, creditors, and communities.

The Royal Bank of Canada sought, on an ex parte basis, to appoint an interim receiver over Canadoil Forge Ltd and CFC Canadoil Inc. (together, the “Debtors”) pursuant to Section 47 of the Bankruptcy and Insolvency Act. The Bank, being a senior secured lender of the Debtors, alleged a loss of confidence in the management of the Debtors as a result of (i) misrepresentations in respect to borrowing base calculations; (ii) the lack of disclosure of a payment plan entered into in 2024 with Canada Revenue Agency regarding unpaid source deductions; and (iii) a recent dealing by the Debtors with a debt due to Mr. Giacomo Sozzi, a director and officer of the Debtors.

Fiera, a senior secured lender, did not contest the Bank’s Application, but suggested that it might file a similar application in respect to the immovable assets depending on the impending outcome of the Debtors’ ongoing financial difficulties. The Bank and the Debtors had expected that Fiera would replace the Bank through a refinancing, but those refinancing discussions subsequently cooled down.

The Court noted that the appointment of an interim receiver is an extraordinary and intrusive remedy. The Ontario Court of Appeal previously issued a cautious reminder that ex parte interim receivership proceedings must be commenced sparingly and only in circumstances where it is demonstrated that notice to other parties would undermine the purpose of the proceedings. The Court warned that courts should never be compelled to issue an order that could have far-reaching and significant consequences for numerous stakeholders without a complete understanding of the full context.

Here, there were substantial economic and social interests at stake. The Debtors had maintained continuous operations for more than four decades, generating approximately $30 million in annual revenues and employing over 100 employees.

The Bank sought an Order that FTI be granted with powers to (i) take over control of the Debtors’ business with the ability to not only conduct business in lieu of the directors and officers, but also to suspend the employment and the operations of the Debtors, (ii) take control of the property of the Debtors on both sides of the border, and (iii) issue subpoenas and examine the Debtors’ directors and officers. This was far beyond the typical conservatory measures of an interim receivership order aimed at securing the property of the Debtors subject to the Bank’s collateral.

Interim receiverships were created to protect the interests of secured creditors during the brief period between when a secured creditor issues a notice to enforce its secured rights and the time when those rights are effectively exercised. There must be strong evidence that the applicant’s right to a potential recovery is in serious jeopardy. Even so, Courts are invited to ponder the impact of such an appointment on all stakeholders, considering the conduct of the parties and all relevant circumstances of the file.

In this case, the Court was simply not prepared to issue the orders sought without having the perspective of the Debtors, as the orders could seriously jeopardize the ongoing operations of the Debtors, which would be detrimental to various stakeholders, including the Bank and Fiera. The Court did not believe that the allegations in the Bank’s application justified such an intrusive intervention on an ex parte basis, especially considering that:

• the Debtors had cooperated with the information requests of the Bank’s financial advisor;

• the Debtors retained external counsel to assist them with the requests made by FTI and to facilitate their impending restructuring, which suggested that the Debtors were taking the Bank’s concerns seriously;

• the latest audited financial statements for the year ending on January 31, 2025, showed a profit of almost $4M; and

• the Bank had not served its s. 244 BIA notice, pending the disposition of its ex parte application.

While the Bank’s concerns warranted a response, the Court could not simply assume that there were no reasonable explanations from the Debtors. The Court did not believe that the circumstances showed imminent dissipation of assets or potential irreparable harm of the Bank’s position, at least not from the evidence submitted in support of the application.

The Court dismissed the Bank’s application and noted that the application should not have been advanced without notice.

Judge: The Honourable Luc Morin, S.C.J. 

Professionals involved:

• Miguel Bourbonnais and François Alexandre Toupin of McCarthy Tétrault for the Royal Bank of Canada