LICENSED INSOLVENCY TRUSTEE RECEIVER APPOINTED BY COURT ERRORS TO AVOID

Licensed insolvency trustee: Introduction

I want to chat with you today about the independence of the licensed insolvency trustee (LIT or trustee) (formerly called a bankruptcy trustee) acting as a court-appointed receiver. I have seen many times when a secured creditor needs to resort to a court appointment, and not privately appoint the receiver, yet feel they still can control every aspect of the court-appointed receiver’s actions and conduct.

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The decision of the Court of Appeal of Alberta released on February 4, 2019, in Jaycap Financial Ltd v Snowdon Block Inc, 2019 ABCA 47 (Jaycap), highlights the issue.

Licensed insolvency trustee: Back to basics

To better understand the Jaycap decision, I want to talk about a few basic points. In a private receivership, the receiver’s primary duties are to act:

1. On behalf of and have a duty of care primarily to the secured creditor who appointed the receiver.
2. In a commercially reasonable way.
3. Lawfully.

In a court appointment, the court-appointed receiver:

1. Acts on behalf of the Court as a Court officer.
2. Be and be seen to be independent of all stakeholders.
3. Owes a duty of care to all stakeholders.
4. Must act in a commercially reasonable and lawful way.

Various practices have evolved over time to indicate the independence of the court-appointed receiver. They aren’t necessarily rules or laws. However, they are indicators that the Court looks to in determining if its court-appointed receiver is seen to be independent and is actually independent of specific stakeholders, normally, secured creditors.

Examples of these indicators are:

1. The court-appointed receiver has its own legal counsel and does not rely upon legal counsel for one of the secured creditors.
2. The court’s receiver has obtained sufficient independent appraisals of the assets and has not taken the word of or earlier appraisals commissioned by a secured creditor.
3. A sales process being recommended by the court-appointed receiver is fair to all parties and does not favour one or more stakeholders over others.
4. The analysis performed by a court-appointed receiver in making its recommendations to the court is seen to be free from undue influence.
5. The court-appointed receiver has not shared its appraisal or other information which could influence the outcome of the receivership administration with any of the stakeholders.
6. The court-appointed receiver has not treated some stakeholders differently than others.
7. Any information shared by the court-appointed receiver or meetings held to share information has been done with all secured creditors, not just a senior secured creditor or the secured creditor who made the court application to appoint the receiver.

Licensed insolvency trustee: The Jaycap situation

The receiver was appointed by the court as receiver and manager of Snowdon Block Inc. (Snowdon) in February 2016. The only material possession of Snowdon was land and building in Calgary. In July 2016 the receiver started a sales procedure to ask for deals for the property. In October 2016 the Receiver ultimately received 2 offers for the real estate. The receiver accepted a conditional offer from a third party.

After months of extensions, the potential buyer was incapable to remove its conditions and the sale did not continue.

Jaycap was the primary lender of Snowdon and was funding the
receivership. Jaycap became interested in capping the increasing costs and safeguarding its financial investment. The receiver advised Jaycap that a credit bid would be a possible option to get title to the real estate and bring the receivership to an end.

On July 5, 2017, Jaycap emailed the Receiver that it would credit bid its “current costs” as a specific amount. Jaycap scheduled a numbered company it managed to be the buyer. For simplicity, I will refer to Jaycap’s nominee company as the buyer.

Licensed insolvency trustee: The first Jaycap credit bid

An agreement of purchase and sale (APS) was prepared and entered into by Jaycap and the Receiver on August 2, 2017. The total debt was defined to be the amount included in the July 5, 2017 e-mail and that amount was likewise the acquisition cost.

On August 21, 2017, the Receiver obtained the approval and vesting order authorizing the APS. The guarantors of the Jaycap debt did not oppose this application as there would be no shortfall that they would be responsible for.

It is somewhat unclear as to the reasons for what happened next. The receiver states in its 3rd report that on August 28, 2017, legal counsel for Jaycap indicated that there was an error in the purchase price. The report after that states that the receiver’s legal counsel advised it that a common mistake occurred about the purchase price as set out in the APS. They further advised that court authorization was needed to fix this mistake.

The transaction subject to the APS was not completed at the end of August 2017.

Licensed insolvency trustee: The second Jaycap credit bid

On September 6, 2017, the receiver and Jaycap entered into a new agreement (the 2nd APS), which decreased the purchase price. On September 8, 2017, the receiver filed an application to abandon the first approval and vesting order and sought approval of the 2nd APS.

The guarantors were served with the new application. One of the guarantors, a Mr. Richardson, sent out a series of letters to the receiver’s legal counsel asking for information as well as papers to support that a mistake had actually occurred. The receiver’s lawyer answered some, however not all, of these demands.

The application was to be heard on September 19, 2017. It was adjourned to October 26, 2017. The chambers judge reserved to think about the submissions and to evaluate Mr. Richardson’s materials which had not made it into the court documents prior to the hearing.

She released her decision a week later approving the 2nd APS and providing the necessary vesting order. She discovered that she was not prevented from abandoning the first order and providing another.

The chambers judge considered the merits of the 2nd APS and whether it fulfilled the requirements established in Royal Bank of Canada v Soundair Corp (Soundair). She was satisfied the 2nd APS was sensible in the circumstances, whether the receiver had made sufficient efforts to get the best price and was not acting improvidently. She kept in mind the lack of offers, the lack of ability to complete an earlier conditional deal, the earlier order approving the sale, and the changed acquisition price, which was still higher than the property’s appraised value.

Licensed insolvency trustee: The guarantor’s appeal

Under the 1st APS, there was no shortfall and the guarantors had no liability. Under the 2nd APS, there was a shortfall in excess of $1 million that the guarantors would be responsible for.

The guarantors appealed the approval of the 2nd APS specifying that the court erred in finding there was a mutual mistake. Further, given the lack of information provided to Mr. Richardson to his reasonable request for information, the guarantors say that the receiver’s conduct casts doubt on the honesty of the process. They say that the Receiver did not discharge its independent obligation and was following guidelines and instructions from Jaycap, that had a change of mind about the transaction and wanted to decrease the price.

Their position was that the 2nd approval and vesting order needs to be vacated, the 1st APS ought to be reinstated, and the guarantors should be alleviated of their responsibility under the guarantee.

Licensed insolvency trustee: The Appeal Court’s analysis

The Court of Appeal of Alberta agreed with the guarantors that the evidence did not support a mutual mistake was made. They found that it was a mistake for the chambers court to conclude that the test was satisfied.

While the guarantors were successful on this ground, this does not finish the matter. The appeal cannot be successful unless the guarantors establish a reviewable error in the chambers court’s Soundair evaluation.

The guarantors raised two concerns sustaining their allegation that the integrity of the process was jeopardized. First, the receiver fell short in not disclosing all relevant records about what transpired after August 2, 2017. Second, the receiver did not seem to be acting independently of Jaycap.

The Appeal Court agreed that the receiver’s proof about what transpired after August 2, 2017, was not sufficient, also taking into consideration the evidence from the confidential supplement to the third report. The receiver’s lawyer’s conclusion that there was a mutual mistake was inappropriate. That was for the court to decide.

As far as the conduct of the receiver, the Appeal Court had this to say. While insolvency proceedings undergo special procedural rules and are not surprisingly time delicate in nature, these considerations do not relieve the receiver from its basic responsibilities to the stakeholders and the court. Also, it does not excuse the Receiver from supplying proof to fulfill its requirement to provide sufficient evidence to the requisite standard for each application that it brings.

The Appeal Court went on to say that:

1. A court-appointed receiver is an officer of the Court appointed to
   discharge certain duties listed in the appointment order.
2. When a court-appointed receiver is appointed, the receiver-manager is given exclusive control over the assets of the company and in this regard, the board of directors is displaced.
3. The significance of a receiver’s power is to clear up liabilities and sell off assets.
4. It is well developed that a court-appointed receiver owes a duty of care not just to the Court, but likewise to all parties who may have an interest in the debtor’s assets. This includes competing secured creditors, guarantors, unsecured creditors, contingent creditors, and shareholders.
5. A receiver has the duty to work out such reasonable treatment, supervision, and control of the debtor’s property as a regular person would give to his or her very own.
6. A receiver’s duty is to perform the receiver’s powers truthfully and in good faith.
7. A receiver’s responsibility is that of a fiduciary to all interested stakeholders involved with the borrower’s assets, properties.

The Appeal Court was harsh in its criticism of both the receiver and Jaycap. The court found that the absence of details about what occurred and the method the receiver and Jaycap used to skirt around the issues in its application materials definitely did not assist in showing the receiver’s independence.

The optics of the circumstances most likely added to the guarantors’ uncertainty that what had taken place warranted even more inquiries and that the Receiver was following Jaycap’s instructions to hide from the guarantors the real state of affairs.

Jaycap and the receiver were jointly represented by the same legal counsel before the Alberta Court of Appeal, which was unhelpful and was in the court’s view, highly unusual. Jaycap could not address questions the Receiver would be anticipated to know. Throughout the hearing, the panel discovered that the guarantors’ arguments were convincing.

Licensed insolvency trustee: The Appeal Court’s decision

What was missing was transparency. The process should be transparent. It should enable the court and interested parties to make an informed decision as to whether the sale can be considered fair and reasonable in the circumstances. Given the significant questions left unanswered by the Receiver, the Appeal Court had serious concerns about the efficacy, fairness, and integrity of the process the Receiver followed between August 2, 2017, and the hearing of the application to approve the 2nd APS. As a result, the Alberta Court of Appeal disagreed with the chambers judge that the Receiver met the requirements of Soundair.

The appeal was allowed, and an order was made returning the matter to the lower court for a rehearing before a different judge.

Licensed insolvency trustee: Summary

This decision clearly states what a court expects from a court-appointed receiver.

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