A Review of the Basis for the Court-Appointment of a Receiver

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NORTH OF THE BORDER UPDATE

This article has been contributed to the blog by Rupert Chartrand and Martino Calvaruso. Rupert Chartrand is a partner in the insolvency and restructuring group of Osler Hoskin & Harcourt LLP, and Martino Calvaruso is an associate in the group.

In the recent decision of the Ontario Superior Court of Justice (Commercial List) in Bank of Montreal v. Carnival National Leasing Ltd., Justice Newbould considered the application of The Bank of Montreal (“BMO”) under section 243(1) of the Bankruptcy and Insolvency Act (Canada) (the “BIA”) and section 101 of the Courts of Justice Act (Ontario) (the “CJA”) for the appointment of PricewaterhouseCoopers Inc. (“PwC”) as the national receiver of Carnival National Leasing Ltd. (“Carnival”) and Carnival Automobiles Limited (“Automobiles”).

Carnival was engaged in the business of leasing new and used passenger and equipment vehicles. To assist in financing such operations, Carnival entered into a yearly term sheets with BMO for access to certain credit facilities. The term sheet for the 2010 year contained the following two lines of credit: (i) a demand wholesale leasing facility with a $21.9 million limit, and (ii) a demand operating loan with a $1.15 million limit. These facilities were extended on a demand loan basis and BMO held the right to cancel the credit provided thereunder “at any time at its sole discretion”. BMO also acquired security over all of the assets of Carnival and Automobiles and was granted a general security agreement that included the right to appoint a private receiver or apply for the Court-appointment of a receiver over the assets of Carnival and Automobiles.

The wholesale leasing facility required, as a condition thereof, that the total advances for used vehicle financing not exceed 30% of the approved lease portfolio credit line. However, in late 2010, it came to BMO’s attention that Carnival had significantly exceeded the 30% threshold and in response thereto, BMO engaged PwC to conduct a thorough review of Carnival’s operations. PwC determined that, amongst other breaches and concerns, Carnival had not satisfied this 30% requirement for a number of years. Accordingly, on November 30, 2010, BMO delivered demands for payment on Carnival and its guarantors, Automobiles and Mr. David Hirsh, the president and sole director of Carnival, totalling approximately $17 million.

The Court ultimately appointed PwC as the receiver of Carnival and Automobiles. In so doing, the Court first considered a creditor’s right to enforce payment. The Court noted that in respect of a demand loan, a creditor must allow a debtor reasonable time, generally of a short duration, to raise the funds necessary to comply with the demand. Such reasonable time should not be more than a few days and should not approach 30 days. The Court observed that Carnival’s credit facilities were not only on demand, but that BMO had the right to cancel such facilities at its sole discretion and, at the time of the Court’s decision, over 70 days had passed since BMO made its demand for payment.

Carnival contended that it should be provided with further time to obtain alternative financing and repay the indebtedness owed to BMO. From a legal perspective, the Court determined that Carnival had been provided with more than enough time to obtain additional financing and satisfy BMO’s demand. Practically, the Court viewed it as unlikely that Carnival would be able to obtain the necessary financing in any event. The Court reasoned that even if the potential for refinancing could factor into the consideration of what constitutes “reasonable time”, the circumstances in this case and the chances of Carnival actually obtaining the required refinancing did not prevent BMO for enforcing its security and, at BMO’s election, appointing a private receiver over the assets of Carnival and Automobiles.

Having found that BMO had the right to enforce its security and appoint a private receiver, the Court discussed the ability of the Court to appoint a receiver over a debtor’s assets. The Court noted that under section 243 of the BIA and section 101 of the CJA, a receiver may be appointed by the Court where such Court finds such appointment to be “just and convenient”. Carnival unsuccessfully argued that the Court-appointment of a receiver is an extraordinary remedy that should only be granted “sparingly”. Moreover, Carnival contended that the Court-appointment of a receiver effectively amounts to “execution before judgment” and as a result, strong evidence must be provided in support of such appointment. The Court noted that: (i) in circumstances where the security provides for a private or Court-appointed receiver and the issue to be determined is whether a Court-appointed receiver is preferable, the extraordinary nature of the receivership remedy is mitigated, and (ii) a creditor need not show that it would suffer irreparable harm if the Court did not grant its application for the Court-appointed receiver.

Additional factors considered by the Court included the misconduct by the secured party and the relative costs between a private receiver and a Court-appointed receiver. The Court held that there was no basis to refuse the Court-appointment of a receiver due to alleged misconduct by BMO, as any such misconduct alleged by Carnival was unsubstantiated. On the issue of cost, the Court reasoned that notwithstanding the added costs, the Court-appointment of a receiver was preferable over a privately appointed receiver due to the litigation threat from Carnival if a private receiver was appointed.

The decision and analysis of Justice Newbould in Carnival National Leasing is a useful precedent, as it provides an overview of the ability of a secured creditor to enforce payment and the basis upon which such creditor can seek the appointment of a Court-appointed receiver. The Court provided a useful discussion on what constitutes “reasonable time” upon the making of a demand and set out a number of considerations for a Court when determining whether to grant a creditor’s application for the appointment of a receiver.

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