Rose-Isli Corp. v. Frame-Tech Structures Ltd., 2023 ONSC 832

February 15, 2023

How will the Court decide competing motions for an AVO vs. a request to redeem a mortgage?

2735440 Ontario Inc. (“273 Ontario”) was both a second mortgagee that wanted to be paid and a joint venture participant in the Rosehill Project that was to be developed on the Property. The Receiver was appointed upon 273 Ontario’s application under the oppression remedy, s. 248 of the Ontario Business Corporations Act. The Receiver brought this motion for an approval and vesting order and an order for ancillary relief. The net sale proceeds under the agreement of purchase and sale were expected to repay the first mortgage in full, and, subject to the final determination of the registered construction lien claims, part of the 273 Ontario mortgage. 273 Ontario brought its own cross-motion for an order permitting it to redeem the Property upon payment of the amounts found owing in priority to its second mortgage.

In its efforts to redeem the property, 273 Ontario arranged for its financier to enter into a loan sale agreement with the first mortgagee, whereby the first mortgagee assigned the first mortgage charge to 273 Ontario’s financier. As such, both the first-ranking (i.e. the financier) and second-ranking (273 Ontario) secured creditors opposed the sale of the Property, and sought to complete the redemption of the Property by effecting a transfer of the Property to 273 Ontario.

273 Ontario argued that section 2 of the Ontario Mortgages Act guarantees a secured creditor’s right to redeem. Neither the Receiver nor the proposed purchaser disagreed with 273 Ontario’s theoretical right to redeem the Property as the second mortgagee. Rather, they opposed the timing of 273 Ontario’s purported exercise of this right. They maintained that the Court should not exercise its discretion to allow a creditor to exercise a right of redemption after a Court-ordered sale process is in place and a bid has been accepted, particularly a sale process that the creditor (273 Ontario) was consulted about and did not oppose when it was approved by the Court.

The rights relied upon by 273 Ontario must be balanced with the integrity of the Court-approved sale process. That in turn requires a consideration of whether that sale process was carried out in a procedurally fair manner, with a view towards achieving the best (and not an improvident) price, and with regard to the interests of all stakeholders. If a sale process is found to be sound, it should not be permitted to be interfered with by a later attempt to redeem. The potential for prejudice to the different stakeholders is another consideration that is to be factored into the balancing exercise undertaken by the Court in determining whether to permit the exercise of a right to redeem.

The Court recognized that all stakeholder interests may not be equal. Here, the Court was tasked with considering the interest of 273 Ontario (to acquire the Property to try to preserve its debt and equity in the Rosehill Project and avoid the losses that it would suffer if the Transaction was approved), the Receiver (to protect the integrity of the Court-approved sale process), and the purchaser (who participated in the sale process in good faith, and had a financial interest in the acquisition of the Property at the agreed-upon price and in the lost opportunity costs of having the cash to close this transaction tied up).

The weighing of the interests (and prejudice) of all stakeholders is also an integral part of the consideration of the Soundair principles. If the Receiver were found to have carried out the sale process in a manner consistent with the Soundair principles, the balance would favour protecting the integrity of the sale process over 273 Ontario’s right of redemption. The proposed sale must be demonstrated to meet the sale approval test from Soundair. To do so, the Receiver was required to demonstrate that:

  1. sufficient effort was made to obtain the best price and that the Receiver had not acted improvidently;

  2. it had considered the interests of all stakeholders;

  3. the process under which offers were obtained and the sale agreement was arrived at was consistent with commercial efficacy and integrity; and

  4. there had not been any unfairness in the working out of the process.

273 Ontario only sought to redeem at the end of the sale process, which it was consulted on and participated in, after it became apparent that it was not able to make a competitive bid by the time of the extended bid deadline. If 273 Ontario had wanted to reserve its right to redeem to the end of the sale process, that is something that should have been expressly addressed at the time the sale process order was made.

The Receiver consulted with stakeholders, including 273 Ontario, in developing the sale process, which was followed. The APS at issue reflected a purchase price within the range of other all cash bids received and within the (low end of the) range of estimates of value from three independent brokers. The Court appreciated that 273 Ontario stood to lose a great deal if the transaction were approved. It acknowledged that the opinion of the creditors as to which offer ought to be accepted is something to be considered. However, that should not be at the expense of the integrity of the sale process. In the end, what is important is that all relevant stakeholder interests were considered and balanced by the Receiver, including those of 273 Ontario. The Court was satisfied that they were.

The Receiver engaged with 273 Ontario and made efforts to take its interest in making a bid into account. Even after it missed the bid deadline, 273 Ontario’s offer letter was received and considered and 273 Ontario was encouraged and given time to compile a bid. Further, the Receiver treated 273 Ontario fairly in receiving and considering the bid it eventually made, which was not accompanied by proof of financing and was no accompanied by a binding APA. Whereas the Receiver could have rejected this for non-compliance, it did not do so.

Accordingly, the Soundair principles were satisfied, the APS and transaction were approved and the Order was granted.

Judge: Kimmel J.

Counsel: Jason Wadden and Carlos Sayao of Tyr for Rose-Isli Corp., 2631214 Ontario Inc., Seaside Corporation, 2735440 Ontario Inc.; Sharon Kour, Caitlin Fell and Shaun Parson of Reconstruct for EY as Receiver; Nathaniel Read-Ellis and Sean Pierce of Adair Goldblatt Bieber for the purchaser; Adam Wygodny of Groia and Company for a unit purchaser; and Cameron Neil of Simpson Wigle for a lien claimant

Note: This decision is currently under appeal.

By Matilda Lici