Permitting a company in receivership to operate?

Royal Bank of Canada v. Trans Globe Logistics et al.
What is the test for a limited scope receivership order which permits the company to continue to operate?

Summary: A group of trucking companies which were respondents to a receivership application admitted that they were in default of their loan obligations and that their lender had the right to appoint a receiver, but argued that the scope of the receivership order should be limited to permit them to continue to operate their business. They took the position that the sale of one of their properties would allow the lender to be repaid in full, and proposed that the lender would have full access to their books and records during the limited receivership. The Court disagreed, finding that a limited receivership order was inappropriate in this case and that several factors supported a broad receivership order. Specifically, the respondents did not provide adequate proof that the value of the real property owned was sufficient to cover the indebtedness to the lender and had not been transparent with the lender over the past year, having failed to provide quarterly financial statements since February 2024. This factor was particularly important in the context of a demand facility where the lender was not being paid and was rightly concerned about its position. In addition, someone associated with the respondents had forged the lender’s signature on a document purporting to waive the lender’s security interest in seven tractor units in an attempt to obtain another source of financing. In the circumstances, the lender’s loss of confidence was justified, and a full receivership order was appropriate.

RBC sought a full receivership over the operations of the respondent debtors. The respondents were related companies, with common shareholders and directors, engaged in trucking in Ontario. The respondents did not dispute that they were in default of their loan obligations, nor did they suggest that the security interest of RBC was invalid or unenforceable. They acknowledged that the loans were demand facilities and the documents allowed for the appointment of a receiver.

The real dispute was the remedy to be granted to RBC, specifically, the terms of the receivership order. The respondents expected that the receiver would market and sell the respondents’ assets, which would result in the shut down of the respondents’ business and the loss of employment for 14 people. The shut down would also result in disruption in the supply chain for the respondents’ customers, given that the respondents serviced the auto sector with just-in-time delivery.

The respondents first proposed a limited receivership order that would extend only to three specific properties: the Coleraine Drive property in Caledon; a 60-acre property located in Augusta, Ontario; and a 14-acre property located in Fort Erie. KPMG, being the proposed receiver, would take over control of these three properties and market them. The respondents submitted that the sale proceeds were likely to exceed the indebtedness owing to RBC. They showed that they had already received an offer for the Coleraine Drive property and, with proper time to market the properties, it was likely that the amount recovered would cover the indebtedness. They also proposed that RBC would have full access to the books and records of the respondents.

KPMG met with and made requests of the respondents, and concluded in its report that the sale proceeds of the Coleraine Drive property were unlikely to be sufficient to repay RBC’s outstanding debt in full. As a result, RBC would need to rely on realizations in respect of its additional collateral (including the respondents’ vehicle fleet and accounts receivable). KPMG submitted that the respondents had not demonstrated the ability to maintain a going-concern business model in which they paid their obligations as they became due. Further, their continued use of RBC’s collateral to fund working capital commitments of their business would only erode RBC’s recovery from these assets.

Notwithstanding the conclusions of KPMG, the respondents requested that the scope of the receivership order be limited to permit the respondents to continue to operate the business. The Court held that such an order was inappropriate in this case. There were several factors that supported a broad receivership order.

First, the respondents did not provide adequate proof that the value of the real property owned was sufficient to cover the indebtedness. There was a concern that the owner of the Augusta property was not one of the respondents. Second, the respondents had not been adequately transparent with RBC. One of the non-monetary defaults of the respondents had been the failure to provide quarterly financial statements since February 2024. While the respondents blamed their former accountant for this, the quarterly reports did not resume even after the respondents’ new accountants were retained. This factor was particularly important in the context of a demand facility where the lender was not being paid and was rightly concerned about its position.

Finally, the respondents did not demonstrate an adequate sense of urgency and RBC lost confidence in the respondents. Among other things, RBC became aware of an attempt by someone associated with the respondents to forge the signature of RBC’s Director of Equipment Finance and Leasing. The apparently forged signature was on a waiver provided to another potential lender to assist the respondents in obtaining another source of financing. The document purported to release RBC’s interest in seven tractor units. The Court found that RBC’s loss of confidence was well justified.

The Court concluded that it was just and convenient to appoint a receiver on the terms of the order prepared by RBC.

Judge: Justice Chown

Counsel: David Smith and Roger Jaipargas of BLG for RBC; George Benchetrit of Chaitons for KPMG as receiver; Richard Swan and Shaan Tolani of Bennett Jones for the respondents