Lessons from Norcon: Private Receivers as an Adequate Alternative Avenue of Relief to Court-Appointed Receivers

By: Puya Fesharaki (Associate) and Stephanie Sonawane (Student-at-Law), Thornton Grout Finnigan LLP

Ontario lawyers could be forgiven for thinking that the decades-long trend towards Court-appointed receiverships rather than private receiverships is a Canada-wide phenomenon. According to the Office of the Superintendent of Bankruptcy, there were 140 Court-appointed receivers in Ontario in 2018, compared to 71 private receivers in the province for the same period. By contrast, in Newfoundland and Labrador, there were only five Court-appointed receivers in 2018, compared to 14 private receivers in that province for the same period. 

A recent decision from the Supreme Court of Newfoundland and Labrador (General Division) in Norcon Marine Services Ltd., (Re), 2019 NLSC 238 (“Norcon”) could help explain the discrepancy between the provinces and may have important implications beyond Newfoundland and Labrador. In Norcon, the Court denied the application for a Court-appointed receivership on the basis that the applicant did not demonstrate that a Court-supervised process was “necessary”. In so deciding, among other reasons, the Court put an emphasis on the availability of a private receivership as an adequate alternative avenue of relief. 

Contrasting the two forms of receivership, the Court suggested that future applicants should consider, as part of their receivership application, why a Court-appointed receiver is necessary in circumstances where the remedy of a private receiver is already available to the applicant.

The Trend towards Court-Appointed Receiverships 

The trend towards court-appointed receiverships across Canada in general is a well-documented phenomenon. There are many reasons why Court-appointed receiverships have grown in popularity over the years as the relief sought in complex situations, including the fiduciary duty of the Court-appointed receiver to act in the best interest of all stakeholders rather than just the secured creditor applicant, the transparency of the Court-process and the expanded powers and protections of Court-appointed receivers to deal with and protect property. 

Many such reasons are captured as part of the non-exhaustive list of factors factors to be considered as part of an application for a Court-appointed receivership, as set out in Enterprise Cape Breton Corp. v. Crown Jewel Resort Ranch Inc., 2014 NSSC 128, and as applied in Norcon. 

Background to the Norcon Decision

The debtor company in Norcon operated a marine transportation business, and its primary assets consisted of four vessels and some real estate. The company suffered a downturn due to the loss of material business contracts. For a period of several months preceding the receivership application, the company failed to co-operate with its creditors, failed to provide financial statements to its primary secured creditor and operating lender, permitted tax liabilities to accrue and had one of its ships arrested by the federal government. For all of the foregoing reasons and citing concerns about wasting assets, the primary secured creditor and operating lender brought an application for a Court-appointed receiver and manager, among other relief. 

The Norcon Decision

The Court did not find that the evidence submitted by the applicant proved that a Court-appointed receiver was necessary in order to protect the interests of the operating lender and stakeholders. The Court emphasized that little, if any, evidence had been produced in respect of the factors to be considered in a receivership application and it expressly declined to make any assumptions in favour of the applicant. The Court held that counsel to the applicant had acknowledged that a receivership in the circumstances would be relatively straightforward, that that there was no suggestion that assets were at risk of being removed, and that the two primary secured creditors were already party to an intercreditor agreement.

The Court then considered the adequacy of a private receivership alternative to the requested Court-appointed receivership. It concluded as follows:

[61] … There is no evidence to suggest that [a private receiver] would not properly protect [the applicant’s] security, would not act in good faith to secure maximum value for the secured property, and would not have ready access to the court process should the need arise. 

[62] In summary, on such evidence as I have, I am not able to reasonably draw the inference that the circumstances are such as to render just or convenient the Court’s appointment of a receiver.

[63] [The applicant’s] application for a court-appointed receiver is dismissed.

Implications for Ontario Lawyers

The Norcon decision is foremost a reminder to all lawyers to always adduce sufficient evidence to prove the relevant elements of the test for the Court-appointment of a receiver – something that is sometimes forgotten in relatively straightforward matters like Norcon. Second, the Norcon decision, if followed outside of Newfoundland and Labrador, would require Courts to consider whether a private receivership is an adequate alternative to a Court-appointed receivership in the applicable circumstances. Counsel would be well-advised to ensure they can explain why a Court-appointed receiver is a necessity.