Hands on Capital Investments Inc v. DMCC Holdings Inc et al.

What is the test for the appointment of a receiver by an unsecured creditor?

The plaintiffs commenced an action in respect of promissory notes purportedly signed by all of the defendants for the repayment of unsecured loans advanced by the plaintiffs to certain of the corporate defendants. The DMCC Corporate Defendants and the DMCC Fund Defendants (collectively, the “DMCC Group”) were related entities. They were managed and controlled by the individual defendants, Seehra and Matharoo. Certain of the DMCC Corporate Defendants owned and managed 17 income-producing commercial properties in Florida (the “Florida Properties”). The DMCC Group included the DMCC Performance 1, Trust (the “Trust”) and the DMCC Performance 1, LP (the “Partnership”). Together, the Trust and the Partnership comprised a “Fund” in which there were investors. The plaintiffs and other public investors held Class A units of the Trust, while Seehra and Matharoo held Class C units of the Trust.

The plaintiffs moved for the appointment of a receiver over the entire DMCC Group to sell the Florida Properties, wind-up the Trust and distribute the Trust’s assets to its creditors and unitholders. The plaintiffs argued that this was required to ensure that the Trust is wound up in a transparent and fair manner to all stakeholders. The plaintiffs and the defendants differed on the appropriate test to be applied in the court’s determination of whether to appoint a receiver.

The defendants advocated for an injunction standard. The plaintiffs’ claims against the Trust and other DMCC Group defendants would be as unsecured creditors, at their best, and the plaintiffs would have to establish that there was a serious issue to be tried, irreparable harm if the receiver was not appointed, and the balance of convenience favoured the appointment. The plaintiffs argued that the Court must undertake a contextual analysis to determine whether it is “just and convenient” to appoint a receiver.

When considering whether the injunction test must be strictly applied when determining whether to appoint a receiver, the appropriate distinction to draw is between an interlocutory versus a final appointment. The strict injunction standard did not have to be met for the appointment of a receiver in this case. What the plaintiffs sought was a final order for the appointment of a receiver to oversee and administer the winding-up of the Trust, which the defendants had already initiated. There would be no need for a receiver once the winding-up of the Trust was completed; the purpose of the appointment of the receiver was to carry out a particular function that would be spent once that has taken place. Accordingly, the issue on this motion was whether it was just and convenient to appoint a receiver over the winding-up process and, if so, over which defendants should the appointment be made.

The first consideration was the plaintiffs’ standing to make this request. The plaintiffs (or some of them) were creditors of at least two of the corporate defendants to which they advanced funds. The plaintiffs (or some of them) were investors in the Trust and, therefore, indirectly, in the Partnership. The question is “whether it is more in the interests of all concerned to have the receiver appointed by the Court or not”. The appointment of a receiver over the Administrator of the Trust and DMCC Americas Inc. (Canada), one of the companies that the plaintiffs loaned monies to that indirectly owns a 51 percent interest in the Partnership, was just and convenient in this case because:

• the Fund had public investors, beyond the immediate parties to this proceeding, whose ultimate source of recoveries were the Florida Properties;

• the Trust declaration required the Administrator to proceed to wind-up the affairs of the Trust as soon as may be reasonably practicable after the Wind-Up Notice was delivered, and the winding-up process, while underway, had not been meaningfully advanced by the Administrator under the direction and control of Seehra and Matharoz;

• a court supervised process would ensure that the interests of all creditors and other stakeholders of the Trust were considered with a view to achieving the maximum recoveries for them following an orderly refinancing or sale of the Trust assets and determination and satisfaction of established liabilities;

• the appointment would be for the duration of the winding-up of the Trust and the distribution of its assets, which was finite and purposive.

The involvement of public investors, including the plaintiffs, in the Fund that was being wound-up was a factor that weighed heavily on the “justice” of the appointment of a receiver. The stakeholders’ interests were not being served by the continuation of the status quo of having Seehra and Matharoo in control the winding-up process, having regard to their limited efforts to date. The potential intrusiveness of a receiver was tempered here given that the Trust was in a wind-up phase and was not intended to be an ongoing business. The receiver’s mandate would concentrate on the wind-up that had already been triggered and the receiver would control and steward the winding-up process.

The Court considered it to be just and convenient to appoint an independent receiver over all of the entities of the DMCC Group that were expected to be essential to the winding-up process.

Judge: the Honourable Justice Jessica Kimmel

Counsel: Harvey Chaiton, Chris Staples, and Laura Culleton of Chaitons LLP for the Plaintiffs;

Bevan Brooksbank and Monica Kozycz of Borden Ladner Gervais LLP for the DMCC Fund Defendants;

Christopher Somerville of Affleck Greene McMurtry LLP for the DMCC Corporate Defendants;

Mary Elizabeth (Liza) Quail of Wildeboer Dellelce LLP for the Non-party Fund Investors.