NORTH OF THE BORDER UPDATE
This article has been contributed to the blog by Caitlin Fell and Rebecca Wainstein. Caitlin Fell is an associate in the Insolvency & Restructuring group of Osler, Hoskin & Harcourt LLP and Rebecca Wainstein is an articling student at Osler, Hoskin & Harcourt LLP.
The Ontario Superior Court of Justice in the receivership proceedings of HSBC Bank Canada v. Mahvash Lechcier-Kimel, 2013 ONSC 7241, 2013 CarswellOnt 15938 (Ont. S.C.J.), declined to approve a proposed agreement of purchase and sale (the “Proposed Sale Agreement”) obtained by the receiver prior to the completion of an auction sale process approved by the Court on October 2, 2013. The Court held that, notwithstanding the Proposed Sale Agreement, it was necessary for the auction to proceed in order to maintain the integrity of the sale process in the receivership proceedings.
On April 18, 2013, a receiver (the “Receiver”) was appointed over certain property owned by the Respondents. On October 2, 2013, the Receiver made an application to Court for the approval of an auction sales process for the main asset of the estate, a property located in Toronto, Ontario (the “Property”). The proposed auction sales process included a proposed reserve bid. The auction marketing agreement between the Receiver and the auctioneer (the “Auctioneer”) provided that the Receiver would be obligated to sell the property in the event that the highest bid met or exceeded the reserve price. The auction sales process order was granted and the auction was scheduled for November 26, 2013.
Thereafter, the Auctioneer established a website for the auction, and its marketing efforts resulted in 975 inquiries for the Property and 131 property tours being conducted. On November 7, 2013, prior to the auction, the Receiver made a motion to discontinue the auction sale process and instead, sought approval of the Proposed Sale Agreement in lieu of the auction. At this time, no one had registered to bid at the auction. It was proposed by the Receiver that, if the transaction did not close, they would revive the auction process.
The Legal Arguments:
The Receiver recommended approval of the Proposed Sale Agreement on the basis that: (i) the offer price was at the high-end of the range of valuations for the Property; (ii) the offer was unconditional and not subject to financing; (iii) the offer included a significant deposit; and (iv) while a higher price may be possible to achieve at a ‘live’ auction, it would be an unlikely outcome.
The Proposed Sale Agreement would result in a full recovery for the first mortgagee and construction lien claimants, however, the remaining creditors (including the Canada Revenue Agency and the second mortgagee) would suffer significant shortfalls. The second mortgagee opposed the Proposed Sale Agreement on the grounds that the Receiver should continue with the sales auction process as approved and, being one of the creditors unlikely to recover much, if anything, under the Proposed Sale Agreement, it would be in the interest of fairness to give it the opportunity for greater upside potential through the auction process.
The Court’s Decision:
The Court held in favour of the second mortgagee creditor, notwithstanding that the offer price was at the high-end of the range of valuations and would pay out the senior secured creditor. Deviating from the court-approved auction process only four business days prior to closing of the auction would damage the integrity of the sales process. The interest during the marketing process for the auction indicated that it would be reasonable to assume that some bids would be made at the auction. Halting the auction in order to approve the proposed sale transaction could result in bidders arguing that the auction process was not fairly conducted.
In its reasons, the Court stated that although the successful bid at the auction could be lower than the Proposed Sale Agreement, such risk attaches to any auction process, and the outcome of the auction is for the market to decide. Furthermore, the Court stressed that the Receiver itself had recently recommended the auction process to the Court as the most appropriate way to sell the property, and the Court had accepted such recommendation. Overall, the Court held that the integrity of the sales process required that the auction proceed as approved.
Discussion & Implications:
The Court recognized, as it did in Royal Bank of Canada v. Soundair Corp, that, while the primary concern of a receiver is protecting the interest of creditors, there are secondary considerations which may be given significant weight. In particular, as a court appointed officer, a receiver has a duty to act fairly and even-handedly, in order to preserve the integrity of the court proceedings. In this case, the Court indicated that the fairness and transparency of the process outweighed the higher offer, despite the possibility that the auction process could result in a less favourable outcome for creditors.
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