Valuing security in a proposal proceeding

North House Foods Ltd. (Re), 2025 ONCA 563
How is security in a proposal proceeding valued?

Summary: In this case, the Court of Appeal dismissed an appeal by a subcontractor and lien claimant who sought to have the value of its lien against the debtor’s leasehold interest revised from $0 under section 50.1(4) of the BIA. The Court found that the appellant had not satisfied its onus of establishing that it could realize more money by enforcing its security in comparison with the proposed assessed value set out in the proposal. The Court stressed the importance of considering what is being valued. Here, there was no hard asset standing as security, but just a security interest in a contract, namely the lease. The appellant had presented no evidence from any willing buyer or expressions of interest from any potential purchaser of an assignment of the lease, even assuming some of the limitations embedded in such a purchase could be overcome. As a result, the Court dismissed the appeal.

In May 2023, North House Foods—a manufacturer, co-packer, and distributor of natural and organic food and beverage products—filed a Division I Proposal, which was accepted by its unsecured creditors. It then filed an Amended Proposal (the “Proposal”) on June 23, 2023, which was accepted by its unsecured creditors and subsequently approved by the court on July 7, 2023.

In its Proposal, North House had listed the estimated realizable value of its assets as $3,658,897.32 and estimated liabilities as $11,439,174. Among other debts, North House owed approximately $1,127,005 to its general contractor, Robert Construction General Contractor Inc. (“Robert Construction”), which had done construction work on the expansion of North House’s leasehold premises. The appellant, Seabrook Bros. Mechanical Ltd., was a sub-contractor of Robert Construction, worked on the leasehold premises, and held a judgment for $291,467.31 against Robert Construction. The appellant also registered and perfected a construction lien for that amount against North House’s leasehold interest.

North House included a proposed assessed value of nil for the appellant’s security—the lien against North House’s leasehold interest. The Proposal Trustee accepted the appellant’s claim in the full amount of $291,467.31 but found the proposed assessed value of nil to be reasonable. The significance of this decision was that the appellant would rank as an unsecured creditor and not as a secured or partially secured creditor for the purposes of the Proposal.

Relying on s. 50.1(4) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (the “BIA”), the appellant moved before the motion judge for an order that the proposed assessed value of its security be amended and an order that the appellant be treated as a secured creditor for the full amount of its claim. The motion judge dismissed the application, finding that the appellant had no lien judgment and no immediate right to seize and sell the leasehold interest of North House. As such, the proposed valuation was a theoretical exercise. The motion judge also found that the values suggested by the appellant’s experts were not the value that could be realized on a court supervised sale of the leasehold interest at the end of a lien action.

The appellant appealed from the order dismissing its application under s. 50.1(4) of the BIA to revise the proposed value of its security. The Court found that the appellant was not entitled to appeal as of right under s. 193(a)-(c) of the BIA but granted leave to appeal under s. 193(e), recognizing the general importance of interpreting s. 50.1(4). On appeal, the appellant argued that the motion judge erred in placing the onus on the appellant to value its security and its underlying collateral, when the appellant only needed to prove the amount of the debt and the existence of security.

The Court held that it is not enough for the appellant to simply prove the debt and the existence of security. The appellant has to establish, on a balance of probabilities, that it could realize more money by enforcing its security in comparison with the proposed assessed value set out in the Proposal. The onus is on the appellant, as the dissatisfied creditor, to show that its security should receive a higher value. The Court did not give effect to the appellant’s first submission relating to onus.

Secondly, the appellant submitted that the motion judge failed to apply a broad, liberal interpretation to the provisions of the Construction Act. The Court of Appeal disagreed, and found (as the motion judge had found) that the appellant had no right to seize and sell the leasehold interest as it had no lien judgment and, in any event, an order for sale pursuant to such a judgment is discretionary in nature. In rejecting this second submission of the appellant, the Court of Appeal agreed with the motion judge’s assessment that if fairness were the primary concern, the motion judge would have also been required to consider whether it would be fair to give the appellant priority over the general body of unsecured creditors, many of whom were owed far more than the appellant.

Finally, the appellant argued that the motion judge’s consideration of North House’s leasehold interest was flawed. However, as the motion judge found, the lease provided that it may not be assigned without the consent of the landlord who had the sole and unfettered discretion to refuse, and the premises were “cut up” into food preparation sections such that a new tenant would likely have to gut the premises before installing its own leasehold improvements. The appellant submitted that the anti-assignment provision in the lease was not a barrier as the court could override such a provision.

The Court stressed the importance of considering what is being valued. Here, there was no hard asset standing as security, but just a security interest in a contract, namely the lease. The appellant presented no evidence from any willing buyer or expressions of interest from any potential purchaser of an assignment of the lease even assuming some of the limitations embedded in such a purchase could be overcome.

The Court of Appeal saw no basis on which to interfere with the motion judge’s determination that the appellant had failed to meet its onus and failed to establish that its security had a value beyond $0 in the event it attempted to enforce its lien against North House’s leasehold interest.

Judges: Tulloch C.J.O., Pepall and Pomerance JJ.A.

Professionals involved:

• John Siwiec of Perley-Robertson, Hill & McDougall for the respondent North House Foods Ltd.

• Patrick Shea of Gowling WLG for the respondent proposal trustee Doyle Salewski Inc.

• David Debenham of Low Murchison Radnoff for the appellant Seabrook Bros. Mechanical Ltd.