Using the PPSA to appoint a receiver over the purchaser of collateral

Royal Bank of Canada v. Express GT Parts Serve Inc. et al.
Can the PPSA be used to appoint a receiver over the purchaser of collateral subject to its security interest?

Overview: In this case, the Court found that a creditor’s security interest was broad enough to cover the purchaser of the collateral. It appointed a receiver over the purchaser to protect the creditor’s collateral and any proceeds.

RBC applied for a receivership order over the assets, undertakings and properties of Express GTPS. Express GTPS opposed the application. 

RBC was a secured lender to the Original GTPS Borrowers, which operated an auto parts and aftermarket business. They described themselves on their website as “Brampton, Caledon and Georgetown’s leading new auto parts and aftermarket parts supplier”. It was readily apparent that Express GTPS operated the same business—it used identical language on its website to describe its business, the same logo, the same supplier, and operated out of the same location.

The Original GTPS Borrowers were indebted to RBC for close to $1 million in principal and interest, with costs and interest continuing to accrue. The sole principal of the Original GTPS Borrowers was Randhawa, the former husband of Kaur. RBC’s debt was guaranteed by 284 (of which Kaur was the President) and Randhawa. As security for the obligations of the Original GTPS Borrowers, RBC held various general security agreements and a charge over the Caledon property from which the Original GTPS Borrowers carried on business. The Original GTPS Borrowers were also indebted to Bank of Montreal for $765,000, and BMO supported RBC’s application to appoint a receiver.

Randhawa and Kaur signed a separation agreement on May 28, 2021. Kaur incorporated Express GTPS six days later and was its sole stated director and officer. Under the separation agreement, Randhawa was entitled to the assets of the Brampton and Georgetown locations (valued in the agreement at $500,000 and $250,000, respectively), and Kaur was entitled to the assets of the Caledon location (valued at 250,000). Nevertheless, Express GTPS operated from all three locations, though only $87,450 was paid to the Original GTPS Borrowers for the business, specifically certain inventory. That amount was paid by 30 cheques that were deposited by the Original GTPS Borrowers in accounts at various banks, four of them at RBC. The invoices for the inventory were for round amounts and did not list the name or address of the vendor.

On February 23, 2023, the Original GTPS Borrowers were dissolved. Despite the apparent transfer of the businesses to Express GTPS, none of RBC’s secured debt was repaid. RBC was not notified about any of the dealings between the Original GTPS Borrowers and Express GTPS, nor the transfer of assets to Express GTPS.

RBC argued that its general security agreements broadly covered all assets of the Original GTPS Borrowers’ auto parts business. Once RBC discovered the transfer of the business to Kaur, RBC added Express GTPS to its PPSA registrations so that its security interest extended to the collateral transferred to Express GTPS under s. 48(2) of the PPSA. Accordingly, RBC sought a receiver to protect its collateral and the proceeds thereof, and to obtain the necessary information to safeguard its own interests and those of other creditors.

Express GTPS argued that Kaur’s business was independent of her former husband’s business, that she was carrying on the only business she knew, and the Court should place no weight on the values given to the businesses in the separation agreement. It submitted that the only asset it received from the Original GTPS Borrowers was the inventory, and RBC implicitly authorized the transfer of that collateral for purposes of s. 25(1) of the PPSA. Alternatively, it argued that the inventory was sold to Express GTPS in the ordinary course of the business and was free of RBC’s security interest under s. 28(1) of the PPSA.

The Court rejected the submissions of Express GTPS, finding that the broad security afforded by RBC’s general security agreements and perfected under the PPSA covered any of the assets transferred to the business. Express GTPS had been using the collateral to carry on its business, without RBC’s debt having been repaid. The purchase of inventory for approximately $87,000 represented only a portion of the business assets, and the manner in which the 30 cheques were prepared and deposited raised numerous questions. The Court also saw no reason to disregard the business values ascribed by Randhawa and Kaur to the businesses in their separation agreement.

In the circumstances, it was just and convenient to appoint a receiver over the assets, undertakings and properties of Express GTPS. Doing so would enable RBC to protect its collateral and the proceeds thereof.

Judge: Justice Conway

Counsel: Aird & Berlis for RBC; Sherman Brown for Express GT Parts Serve Inc. and Lipman Zener Waxman for BMO