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Court of Appeal clarifies the test for appointing a receiver in Québec

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Author: Noah Zucker and Sébastien Girard (student)

 

In Séquestre de Media5 Corporation, 2020 QCCA 943, the Québec Court of Appeal resolved a controversy in the case law, holding that a secured creditor seeking to appoint a receiver under section 243 of the Bankruptcy and Insolvency Act (“BIA”) must respect the requirements related to the exercise of a hypothecary recourse under provincial legislation. The Court also articulated new guidelines to inform the exercise of the court’s discretion in determining whether appointing a receiver would be just and convenient in the circumstances.

Facts

In early 2017, the Laurentian Bank of Canada (the “Bank”) granted certain credit facilities to Media5 Corporation and Acquisitions Essagal inc. (the “Debtors”).

By the fall of 2017, the Debtors were in default of their obligations towards Bank which led to the conclusion of various forbearance agreements.  In the summer of 2018, the Bank sent the Debtors notices under section 244 BIA. In the spring of 2019, the Bank also served upon the Debtors and published prior notices of the exercise of a hypothecary right under the Civil Code of Québec (“CCQ”).

In November 2019, the Bank sought to appoint a receiver under section 243 BIA with a view to disposing of the Debtors’ businesses and property on a going concern basis.

The first instance judgment

At the hearing of the Bank’s motion to appoint a receiver, Justice Dumas indicated that, in his view, section 243 BIA could not support the relief sought and invited the Bank to instead seek the appointment of an interim receiver under article 47 BIA. Following an adjournment the Bank amended its proceedings to rely on the latter provision.

The Superior Court proceeded to dismiss the Bank’s amended motion, holding that, pursuant to the Supreme Court of Canada’s decision in Lamare Saskatchewan (Attorney General) v. Lemare Lake Logging Ltd., 2015 SCC 53 (“Lemare Lake”), section 243 BIA created only a very limited recourse in Québec that could not be used to appoint a receiver to sell a debtor’s assets at the request of a hypothecary creditor. The Court also held that the proposed receivership could not be granted on the basis of section 47 BIA and would not, in any event, be appropriate in the circumstances.

The decision of the Court of Appeal

In a unanimous decision penned by Justice Mainville (Justices Schrager and Hamilton concurring), the Court of Appeal reversed the first instance judgment, clarified the state of the law surrounding the appointment of a 243 BIA receiver in Québec and ultimately decided to remit the matter to the lower court for reconsideration.

The Court began its analysis by reviewing the then-existing controversy in the jurisprudence of the Superior Court. In one camp, courts had decided that the provincial rules governing hypothecary recourses, particularly those relating to prior notices, had to be respected as a condition to appointing a receiver under section 243 BIA. Certain of these courts, including notably the first instance judge, were of the view that such an appointment was only possible in Québec where a “national” receiver was required. In another line of cases, judges had treated section 243 BIA as establishing an independent recourse that could be exercised without necessarily adhering to the requirements associated with a hypothecary recourse.

After proceeding to a detailed review of the relevant legislative provisions as well as the decision in Lamare Lake, the Court of Appeal held as follows:

    • The recourse under section 243 BIA, which facilitates going concern sales – an essential feature of contemporary insolvency practice – is available to secured creditors in Québec, regardless of whether or not the debtor also has assets elsewhere in Canada.
    • A secured creditor seeking relief under section 243 BIA must comply with the substantive and procedural requirements of provincial law relating to the exercise of hypothecary rights, including the prior notice requirements of the CCQ.
    • In exercising its discretion under section 243 BIA, a court should consider factors that account for the particularities of the Québec civil law regime, rather than the general criteria developed in common law jurisdictions.

On the basis of these principles, the Court rearticulated and summarized as follows the now applicable test to appoint a receiver under section 243 BIA in the province of Québec (paras. 97 and 98):

    • The secured creditor must satisfy the following preliminary conditions :
      1. The debtor is insolvent;
      2. The security affects all or substantially all of the debtor’s inventory, accounts receivable or other property;
      3. The subject property is used in connection with the debtor’s business;
      4. A notice under section 244 BIA has been sent and the delays provided for at section 243 (1.1) BIA have been respected;
      5. The substantive and procedural requirements of a hypothecary recourse have been respected, namely: (i) a prior notice of the exercise of a hypothecary right has been published in accordance with articles 2757 and 2758 para. 1 CCQ; and (ii) the delays provided for at articles 2758 para. 2 CCQ have been respected, subject to article 2767 CCQ (which allows for shorter delays in urgent circumstances).
    • If these preliminary conditions are satisfied, the court must determine whether it would be just and convenience to appoint a receiver, with regard to the following factors:
      1. The secured creditor is acting in good faith and not for a collateral purpose;
      2. The appointment would not prejudice the rights of other creditors such that they would be in a worse position than in the case of a bankruptcy of the debtor;
      3. The appointment would not undermine the implementation of a viable proposal under the BIA or an arrangement under the Companies Creditors Arrangement Act (“CCAA”);
      4. The order sought is justified in the circumstances taking into account the remedial objectives of insolvency legislation, namely limiting the social and economic costs of liquidation.

The Court also reaffirmed that an interim receiver appointed under section 47 BIA was empowered only to take conservatory measures, which excludes the implementation of a process to sell an insolvent debtor’s assets.

Ultimately, the Court allowed an amendment requested by the Bank at the hearing of the appeal to include section 243 BIA as the basis for the relief sought, and referred the matter back to the Superior Court to be determined on the basis of the currently prevailing circumstances.

Takeaways

The decision in Media5 has eliminated any ambiguity surrounding a secured creditor’s right to pursue the appointment of a receiver under section 243 BIA in respect of assets in Québec. It has also likely rendered that recourse more onerous by confirming that, in particular, the CCQ prior notice requirements must be respected.

A secured creditor seeking to appoint a receiver will now be generally required to wait 20 or 60 days (depending on the nature of the charged property) instead of 10 days (or less), as provided for under the BIA, unless it meets the conditions of article 2767 CCQ. Creditors seeking more urgent relief will likely invoke the latter provision or may be inclined to seek the appointment of an interim receiver to safeguard their rights during the extended notice period.

Importing hypothecary requirements into a section 243 BIA recourse also raises certain other practical challenges. For instance, CCQ prior notices must be published – unlike notices under section 244 BIA – which means that the exercise of rights by a secured creditor will be brought to the attention of other interested parties, which could affect the debtor’s ongoing operations or complicate the negotiation of informal workouts. The CCQ prior notice rules may also complicate matters where the debtor has waived notice under section 244(2) BIA.

The applicable guidelines for a court to consider when determining whether appointing a receiver would be just and convenient have also been modified. Indeed, the Court appears to have rejected the list of contextual factors, inspired by common law cases, that had been retained by certain Québec courts.[1] It is noteworthy that in rearticulating the applicable criteria, the Court placed considerable emphasis on the requirements of good faith and the remedial objectives of the BIA and CCAA regimes.[2]

Ultimately, it remains to be seen to what extent this decision will render the exercise of rights by secured creditors more difficult and what solutions insolvency practitioners will develop to respond to these new requirements.


[1] See, for example, Mise sous séquestre de DAC Aviation internationale ltée, 2020 QCCS 1077, para. 24 and Groupe Arsenault inc. (Avis d’intention), 2015 QCCS 898, para. 38.

[2] See paras. 93-96 of the decision and, generally, sections 4.2 BIA and 18.6 CCAA as well as Third Eye Capital Corporation v. Ressources Dianor Inc./Dianor Resources Inc., 2019 ONCA 508 and 9354-9186 Québec inc. c. Callidus Capital Corp., 2020 CSC 10 which were considered by the Court of Appeal.