When will a lender’s receivership application trump a debtor’s CCAA application?
This case involved two applications put before the Court. In the first application (the “Receivership Application”), the Receivership Applicants applied for the appointment of a receiver in respect of the undertaking, assets and properties of the Debtors (“Richmond Hill”, “Shouldice”, and “Brampton”). In the second application (the “CCAA Application”), certain corporations related to the Debtors (the “CCAA Applicants”) requested certain relief under the Companies’ Creditors Arrangement Act (the “CCAA“), including an initial stay of proceedings in respect of the Debtors and approval of a proposed debtor-in possession facility (the “DIP Facility”).
The three Debtors each own parcels of land, referred to collectively as the “Properties”. Richmond Hill is currently building a six-story medical office building on one of the Properties (the “Project”). The Project has been financed by a combination of loans from third-party lenders and equity contributions of Richmond Hill. The Project is over budget, behind schedule—at the time of this decision, it was only 80% complete—and construction has effectively ceased. In addition, the Debtors have defaulted on the loans.
Pursuant to the Bankruptcy and Insolvency Act and the Courts of Justice Act, a court may appoint a receiver where it is “just or convenient” to do so. A court should have regard to all the circumstances of the case, but in particular, to the nature of the property and the rights and interests of the affected parties in relation thereto. On the other hand, the granting of a stay of proceedings on an initial application under the CCAA requires the applicant to demonstrate that it is a “debtor company” as defined in the CCAA and that circumstances exist to make such an order appropriate. There was no dispute that each of the CCAA Applicants were debtor companies for the purposes of the CCAA. Further, each of the Debtors is insolvent and unable to meet their respective obligations as they fall due.
There is no obvious priority of consideration of the Receivership Application and the CCAA Application—each must be judged independently on its own merits. The CCAA Applicants argued that their financial plan is more realistic than the receivership plan. Their plan contemplates an availability of $50 million under the DIP Facility. The receivership plan is limited to $35 million, $20 million of which would only be available if the hard construction costs do not materially exceed those contemplated. The principal differences between the two plans pertain to lower interest costs and professional fees in the receivership plan, as well as differing views respecting the amounts required to pay lien claimants and a larger cushion for contingencies under the DIP Facility.
The CCAA Applicants also argued that their construction plan was more reliable than that of the proposed receivership because, among other reasons, they are better positioned to get the construction restarted given their prior familiarity with the construction plan and schedule.
The Court denied the CCAA Application and granted the Receivership Application. The Court was not persuaded that, on balance, the receivership plan is unrealistic or unfeasible, as the CCAA Applicants argued, nor that the financing plan of the CCAA Applicants is materially better. The receivership plan was deemed consistent with the capital costs to completion estimated by two quantity surveyors. Further, the Court held that there was no basis for preferring one construction plan over the other. Although Richmond Hill had more knowledge of and involvement in the Project, under its supervision, the capital costs of the Project increased significantly—giving rise to valid concerns about its ability to manage the Project in a cost-effective manner. The CCAA Applicants could not demonstrate that the Receivership Application, if granted, would result in the Project failing to be completed. Accordingly, the Court did not consider the operational features of the respective plans of the parties to be a significant consideration weighing in favour of either the CCAA Application or the Receivership Application.
The nature of the property at issue, however, was an important consideration in this proceeding. The CCAA Applicants argued that Richmond Hill in particular should be treated as a business because it has around 20 employees and consultants, and has contracted with approximately 20 future tenants. The Court disagreed, holding that none of the Debtors could be properly characterized as a business as there was no demonstrated ongoing business of any of the Debtors. The few employees and consultants were employed solely for the purpose of building the Project. The CCAA Applicants could not demonstrate that the relationship between themselves is sufficiently complex so as to require a CCAA proceeding to properly identify the various stakeholder interests in the debtor companies and ensure fair treatment of such interests. In circumstances where the security coverage of secured creditors is in question, courts have generally given effect to the rights of secured creditors by granting a receivership order. The Court stressed that judicial preference for a receivership order over a CCAA proceeding in the circumstances of a single-project real estate development corporation is not a free-standing rule, but rather the outcome of a consideration of various factors.
The legal rights of secured creditors are an important consideration in making a determination as to the appropriateness of relief under the CCAA and the application of the “just or convenient” test for the appointment of a receiver. The appraisals provided by the CCAA Applicants were not sufficiently reliable on a balance of probabilities. They were conducted on a “fully built” basis, which assumed 100% occupancy at certain projected rental rates. There is a real risk that the projected rental stream will not be achieved until the Project is fully completed. As such, it follows that the value of the Project at the present time must be discounted from the appraisal value to reflect such risks. The Court must therefore proceed on the basis that there is at least a reasonable possibility that the DIP Facility would adversely affect the creditors’ security position, which tips the scale in favour of a receivership.
The grant of the requested receivership order would not prevent the CCAA Applicants from continuing to market the Properties with a view to a sale or refinancing transaction that would repay the creditors. Further, the effect of a CCAA proceeding would be to deprive the secured creditors of the right to cause a change in the management of the Project in the very circumstances in which their security contemplates such a right. Given that the Receivership Applicants have lost faith in the Debtors’ management, and they have bargained for the right to have a receiver take over control of, and complete, the construction of the Project, there must be good reason to deprive them of such right.
A CCAA proceeding, which entails prejudice or potential prejudice to senior ranking creditors in favour of junior ranking creditors and equity holders, can only be justified on the basis of larger societal interests. In this case, the CCAA Applicants did not seek relief under the CCAA for the purpose of maintaining the status quo, or for “stabilizing” the situation, in the sense in which those terms are generally understood in the context of CCAA proceedings. Fundamentally, the purpose of the CCAA Application was to maintain control of the Project by a court-ordered imposition of new construction financing in the hope of realizing value for the subordinated lenders and equity holders. Such control comes at the cost of prejudice to the rights and, potentially, the security position of the secured creditors. This is inconsistent with the mandate of the CCAA not to transfer risk, and potentially value, from senior creditors to junior creditors and equity holders without the consent of the senior creditors.
Given the foregoing, the Court concluded that the CCAA Applicants failed to establish that the prejudice to the Receivership Applicants is offset by the benefits of the proposed CCAA proceeding.
Counsel: David Preger and Lisa Corne of Dickinson Wright for Romspen Investment Corporation, Clifton Prophet of Gowlings WLG for Meridian Credit Union Limited, Marc Wasserman and Mary Paterson of Osler for the Atlas Respondents and the Applicants under the Companies’ Creditors Arrangement Act, Robert Chadwick and Andrew Harmes of Goodmans for PointNorth Capital Inc., the Proposed DIP Lender, Eric Golden of Blaney McMurtry for Ernst & Young Inc., the Proposed Receiver and Mario Forte of Goldman Sloan Nash & Haber for KSV Kofman Inc., the Proposed Monitor.