Tag: red flags

ex parte motion

When a company faces financial distress, the path forward often depends on more than just the numbers on a balance sheet. The recent Canadoil Forge Ltd. case from Quebec’s Superior Court demonstrates how procedural fairness and judicial scrutiny can dramatically impact the outcome of receivership applications – even when the underlying financial issues remain largely unchanged. This is especially true when a party applies to the court with an ex parte motion.

As described below, there are two very different court decisions in this one case:

Séquestre de Royal Bank of Canada, 2025 QCCS 2906 (CanLII)

Séquestre de Canadoil Forge Ltd., 2025 QCCS 3066 (CanLII)

As a Licensed Insolvency Trustee who has handled countless corporate insolvency matters, I find this court case particularly instructive. It shows how the manner in which creditors approach the court can be just as important as the strength of their legal position. Let me walk you through what happened and why it matters for any business facing financial difficulties.

Ex Parte Motion Background: A Company in Crisis

Canadoil Forge Ltd. and CFC Canadoil Inc. were companies operating on both sides of the Canada-U.S. border for over four decades. Their main operation was a production facility in Bécancour, Quebec, generating approximately $30 million in annual revenue and employing over 100 people. This wasn’t a small startup – it was an established business with significant economic impact.

The company had two main lenders. The Royal Bank of Canada (RBC) held security over the moveable assets (inventory, accounts receivable, equipment), while Fiera Private Debt Funds (Fiera) held security over the immovable assets (real estate). This dual-lender structure is common in larger commercial financing arrangements, but it can create complications during financial distress.

The Financial Problems Surface

By 2025, several red flags had emerged:

1. Borrowing base issues: The companies allegedly misrepresented their financial position in calculations used to determine how much they could borrow
2. Hidden tax debts: Management failed to disclose a payment plan with the Canada Revenue Agency for over $4 million in unpaid payroll deductions
3. Questionable transactions: A recent payment of over $7 million to Giacomo Sozzi, a director and officer of the companies
4. Lack of cooperation: Management became uncooperative with the financial advisor, which RBC had appointed in June 2025 to review the company’s finances
5. Failed refinancing: Expected refinancing fell through, leaving the company without a financial lifeline

When RBC made a demand for repayment of its entire loan – approximately $12.5 million – giving the companies just over 30 days to repay, the stage was set for a receivership battle.

The First Ex Parte Motion Application: August 19, 2025 – A Procedural Ex Parte Order Disaster

RBC’s first attempt to obtain an interim receivership ex parte order was a textbook example of how not to approach the court. Here’s what went wrong in the case of Séquestre de Royal Bank of Canada, 2025 QCCS 2906 (CanLII:

Ex Parte Motion Applications: High Risk, High Reward

An “ex parte” application means only one party, the one who filed the Notice of Motion, making the emergency motion before the judge – the Applicant, is before the court. In this case, it was RBC as Applicant through its lawyers. Fiera’s lawyers were also in attendance. The debtor companies, which were the Respondents, weren’t notified or given a chance to present their side of the story. While such applications are permitted in urgent situations, they come with strict requirements.

Justice Morin of Quebec’s Superior Court was clearly uncomfortable with this approach from the outset. As he noted:

“Although an application for interim receivership may proceed on such a basis, the Court should be mindful that unless it is presented with strong evidence suggesting that the mere service of the application may severely further the depreciation of the creditors’ position, it should be wary of deciding such a proceeding based solely on a one-sided version of a complicated storyline.”

Inadequate Preparation and Disclosure

The procedural problems were glaring:

• The court received the application materials in the “wee hours of the night” before a 2:00 PM hearing
• The proposed interim receiver’s report was provided only three hours before the hearing
• An amended version of the report arrived just one hour before the hearing began
• Both bankruptcy rules and local court directives require materials to be filed at least one day before the hearing

This rushed approach violated basic procedural requirements and left the judge without adequate time to review complex materials involving a company with over 100 employees and $30 million in annual revenue.

The Duty of Full and Frank Disclosure

When applying ex parte, lawyers have what courts call a “super-added duty” to present not just their client’s case, but also any facts that might favour the other side. Justice Morin found this obligation wasn’t met. Most notably, RBC’s lawyers failed to notify the debtors’ insolvency counsel, even though they knew experienced practitioners represented the companies.

The court cited a Quebec Court of Appeal’s prior decision, emphasizing that an ex parte motion should be “taken sparingly, and only then on full disclosure and in circumstances where it is demonstrated that notice to other parties would undermine the purpose of the proceeding.”

Overreaching Relief Sought

RBC wasn’t just seeking to preserve assets – they wanted sweeping powers that went far beyond typical interim receivership temporary orders:

• Full control over business operations
• Power to suspend operations and lay off employees
• Authority to issue subpoenas and examine company officers
• A broad stay of proceedings
• A $300,000 administrative charge ranking ahead of other creditors

As Justice Morin observed:

“This is far beyond the typical conservatory measures of an interim receivership order aimed at securing the property of the Debtors subject to the Bank’s collateral.”

The Business Was Still Viable

Critically, the evidence showed the business remained profitable. Draft audited financial statements indicated the company earned almost $4 million in profit for the year ending January 31, 2025, recovering from a $136,000 loss the previous year (caused by a strike and plant fire). The company was projecting operational profitability on a 13-week rolling basis.

This viability made the court especially reluctant to grant intrusive relief that could jeopardize ongoing operations and the livelihoods of over 100 employees. The court was not prepared, based on this ex parte motion, to make an ex parte order that would cause irreparable harm.

Reasons Justice Morin Dismissed RBC’s First Ex Parte Motion Application

Justice Morin dismissed RBC’s application for several interconnected reasons:

1. Procedural unfairness: The ex parte motion approach wasn’t justified given the circumstances
2. Inadequate evidence of urgency: No showing that immediate action was necessary to prevent asset dissipation. The professionals involved did not take the additional steps necessary in this ex parte motion to make it clear to the court that this was an urgent motion deserving of not giving the other party notice.
3. Overreaching relief: The powers sought exceeded what was appropriate for interim receivership
4. Viable business operations: The company remained profitable and operational
5. Impact on stakeholders: Over 100 employees and numerous trade partners would be affected

The judge emphasized that interim receivership is meant to be “a short-lived band-aid, an interim measure, a safeguard ex parte order aimed at preserving the secured creditor’s rights and interests.” It’s not a tool for taking over a functioning business without proper justification and process.

The Second Ex Parte Motion Application: August 29, 2025 – A Different Story

Just 10 days later, RBC and Fiera returned to court with a joint application in Séquestre de Canadoil Forge Ltd., 2025 QCCS 3066 (CanLII). This time, the outcome was dramatically different. Justice Morin granted the interim receivership temporary order, noting:

“Whereas the first act was precipitated, this second act is far more convincing.”

Key Factors Distinguishing the Second Application

Several key factors distinguished the second application:

1. Proper Notice and Process The Applicants’ Notice of Motion was served in advance, the debtors were notified of the motion and had an opportunity to respond through experienced insolvency counsel. While they didn’t consent to the receivership, they didn’t actively oppose it either.
2. Management Resignation All directors and officers of the Canadian entity had resigned by the time of the second hearing, effectively leaving the company without leadership.
3. Acknowledgment of Financial Reality The debtors’ counsel confirmed they had attempted to find a commercial solution but couldn’t secure the funds needed to continue operations.
4. Joint Creditor Action Fiera joined as a co-applicant, presenting a united front from the major secured creditors rather than RBC acting alone.
5. Inadequate Response from Debtors The sworn declaration filed by the debtors failed to address key concerns raised in the applications. As Justice Morin noted, it offered “nothing in this document offers a structured explanation” regarding:

• The company’s insolvency
• Alleged misrepresentations to lenders
• Next steps for addressing creditor concerns
• A potential restructuring path
• The purpose of the $7 million payment to Mr. Sozzi
• Why were tax debts misrepresented

The Judge’s Ongoing Concerns

Even though the second ex parte motion application succeeded, Justice Morin highlighted several troubling aspects that insolvency professionals should note:

Court Concerns Over Employee Treatment

The court expressed serious concern about how employees were handled:

“100 employees are currently working at the Bécancour Plant, having no idea of what is going on in this Courtroom and the impact any Judgment of this Court will inevitably have on their livelihood as early as next week.”

The judge was particularly critical of management informing employees “à la dépêche” (hastily) that they wouldn’t need to come to work the following week, calling this approach inappropriate for an insolvency situation.

Dual Receiver Inefficiency

Initially, both RBC and Fiera wanted to appoint separate receivers for different asset classes. Justice Morin rejected this approach, emphasizing proportionality principles now embedded in Quebec’s Civil Code of Procedure. He noted that in a case where operations would likely be stayed pending a sale process, “the appointment of two receivers would add an unnecessary layer of complexity” and would cost more despite professional assurances to the contrary.

Need for Clear Direction

The court demanded clarity on several operational questions that the creditors hadn’t adequately addressed:

• Would operations continue, or would there be mass layoffs?
• Was the business viable with available receipts and cash?
• What kind of sale and investment solicitation process was planned?
• What were the timeline milestones?

These questions highlight the importance of having a clear post-appointment plan, not just a strategy for obtaining the receivership ex parte order.

Fiduciary Duties to All Stakeholders

Justice Morin reminded all parties that receivers are court officers owing fiduciary duties to all stakeholders, not just the secured creditors who initiated their appointment. This reflects modern insolvency practice, where value maximization for the entire stakeholder group is prioritized over narrow creditor interests.

Key Ex Parte Motion Lessons for Businesses and Professionals

This case offers several important lessons for companies facing financial distress and the professionals who advise them:

For Distressed Companies:

1. Transparency is crucial: Attempting to hide problems from lenders typically backfires. The misrepresentations and lack of disclosure cited in this case became central to the creditors’ loss of confidence.
2. Professional help matters: Engaging experienced insolvency counsel early can help navigate complex situations and maintain creditor relationships.
3. Response quality counts: When facing serious allegations, a comprehensive, structured response addressing each concern is essential. Generic blame-shifting rarely persuades courts.
4. Employee communication: If insolvency proceedings become likely, having a proper communication strategy for employees is both ethically important and legally relevant.

For Lenders and Creditors:

1. Process matters: Even with strong substantive grounds, procedural shortcuts can derail applications and damage credibility with the court.
2. Proportionality is key: Courts increasingly scrutinize whether the relief sought matches the actual risks and circumstances.
3. Stakeholder impact: Modern insolvency law requires consideration of all affected parties, not just secured creditor interests.
4. Full disclosure obligations: Ex parte motion applications require complete candour, including facts that might favour the other side.

For Insolvency Professionals:

1. Preparation is essential: Last-minute filings and inadequate documentation create unnecessary risks and court skepticism.
2. Clear post-appointment plans: Courts want to see specific strategies for value preservation and maximization, not vague intentions.
3. Cost efficiency: Multiple professionals should be justified by clear benefits, not just creditor convenience.
4. Communication protocols: Establishing proper channels between professionals and stakeholders prevents confusion and builds confidence.

The Broader Context: Modern Insolvency Practice

The Canadoil case reflects broader trends in Canadian insolvency law. Courts are increasingly sophisticated about commercial realities and expect high standards from insolvency professionals. The emphasis on proportionality, stakeholder protection, and procedural fairness has grown significantly.

This evolution benefits the overall system by:

• Encouraging early intervention and negotiated solutions
• Protecting employment and business relationships where possible
• Ensuring professional accountability
• Maintaining public confidence in insolvency processes

However, it also means that creditors and professionals must be more diligent in their approach. The days of routine ex parte orders and creditor-focused solutions are largely over.

Practical Implications for Your Business

If your company is experiencing financial difficulties, the Canadoil case highlights the importance of:

Early Professional Engagement: Don’t wait until a crisis hits to engage qualified insolvency professionals. Early intervention provides more options and better outcomes.

Transparent Communication: Maintaining open dialogue with lenders, even when delivering bad news, is generally preferable to surprises discovered through investigation.

Comprehensive Planning: Whether pursuing informal workouts, formal proposals, or liquidation, having detailed plans with clear timelines and stakeholder consideration is essential.

Employee Considerations: Your workforce is both a key asset and a significant stakeholder. Proper communication and treatment during distress can preserve value and goodwill.

Frequently Asked Questions About Ex Parte Motion in Business Insolvency

1. What is an ‘ex parte’ motion, and why is it considered a high-risk legal tool in insolvency?

For any director or creditor involved in a corporate restructuring, understanding the high-stakes nature of an ex parte motion isn’t just strategic—it’s essential for survival. An ex parte motion is a legal procedure where only one party, the Applicant seeking relief, appears before a judge. The other party, the Respondent, is not notified of the hearing and is therefore not present to provide their side of the story.

Courts are inherently wary of these motions precisely because of this one-sided nature. As Justice Morin noted in the Canadoil case, a court should be cautious about “deciding such a proceeding based solely on a one-sided version of a complicated storyline.” The risk of making a significant ruling based on incomplete information is substantial. Given this risk, courts impose exceptionally strict requirements on any party bringing an ex parte application, particularly concerning the duty of full and frank disclosure.

2. What is the “duty of full and frank disclosure” required in an ex parte motion?

This duty is the primary safeguard against the inherent procedural unfairness of a one-sided hearing. In an ex parte application, lawyers have what is known as a “super-added duty” of disclosure. This means they are obligated to present not only the facts that support their client’s case but also any material facts that might favour the absent party. This is one of the highest ethical bars in law, and as the Canadoil case shows, failing to clear it has immediate and severe consequences for an applicant’s credibility.

The first Canadoil application serves as a clear example of a failure to meet this high standard. RBC’s lawyers were aware that the debtor companies were represented by experienced insolvency counsel, yet they failed to notify them of the hearing. Citing the Quebec Court of Appeal, the court reiterated that an ex parte motion should be “taken sparingly, and only then on full disclosure.” Failing to meet this critical obligation was a central reason the bank’s first attempt to secure a receiver was rejected.

3. Why did the court initially reject the bank’s request for an interim receiver in the Canadoil case?

The failure of RBC’s first application provides a powerful lesson in the importance of procedural diligence and proportionality. Justice Morin dismissed the motion based on a combination of procedural errors and substantive overreach, which can be summarized as follows:

• Procedural Unfairness: The motion was fundamentally unfair due to its rushed nature. The proposed interim receiver’s report was provided only three hours before the hearing, with an amended version arriving just one hour before it began. This violated court rules requiring materials to be filed at least one day in advance and left the judge with inadequate time to review a complex file.

• Inadequate Evidence of Urgency: The bank failed to provide strong evidence that notifying the debtors would cause further depreciation of assets. The court was not convinced that the situation was so urgent that it justified sidestepping the normal court process and denying the other party a chance to be heard.

• Overreaching Relief Sought: The powers RBC requested went far beyond the typical purpose of an interim receiver, which is meant to be a “short-lived band-aid” to preserve assets. RBC sought sweeping control, including the authority to suspend operations, lay off employees, and issue subpoenas, which the court deemed disproportionate.

• Ongoing Business Viability: Evidence showed that the company was not defunct but was, in fact, profitable. Audited financial statements indicated a profit of nearly $4 million for the year ending January 31, 2025, and the company was projecting continued operational profitability.

• Impact on Stakeholders: The court explicitly considered the significant negative impact the requested order would have on the company’s more than 100 employees and its various trade partners, who would be blindsided by such a drastic measure.

The combination of these procedural missteps and the excessive nature of the relief sought doomed the first application, demonstrating that even a creditor with legitimate concerns must approach the court with fairness and respect for process.

4. What key factors led to the success of the second receivership application just ten days later?

The success of the second application, filed jointly by RBC and Fiera, illustrates how correcting procedural flaws and responding to new developments can completely change a legal outcome. The underlying financial issues remained, but the context and process were fundamentally different.

• Proper Notice and Process: The second time, the debtors were properly served with the motion and were represented by their own experienced insolvency counsel. While the debtors did not consent, they also did not actively oppose the motion, addressing the primary procedural defect of the first hearing.
• Change in Management: A critical new development had occurred: all directors and officers of the Canadian company had resigned. This left the business without any leadership, creating a genuine urgency to appoint a receiver to take control and preserve assets.
• Acknowledgment of Financial Reality: The debtors’ own counsel acknowledged in court that they had been unable to find a commercial solution or secure the necessary funds to continue operations, effectively conceding the company’s financial predicament.
• United Creditor Front: The second application was brought jointly by RBC and Fiera, the two primary secured lenders. This presented a united front and demonstrated to the court that the key financial stakeholders were aligned on the necessary course of action.
• Inadequate Debtor Response: Justice Morin was highly critical of the sworn declaration filed by the debtors. He noted that it failed to provide a “structured explanation” for a number of critical issues, including: the company’s insolvency, the alleged misrepresentations to lenders, the company’s next steps, a potential restructuring path, the purpose of the $7 million payment to Mr. Sozzi, and why tax debts were misrepresented. This lack of a substantive defence critically weakened their position.

While this second application was successful, the judge still raised significant concerns about the handling of the matter, particularly regarding the treatment of key stakeholders like employees.

5. How do courts in modern insolvency cases view the impact on employees?

The court’s focus on the employees in the Canadoil case reflects a broader and important trend in Canadian insolvency law: a growing emphasis on considering the interests of all stakeholders, not just secured creditors. The judge’s perspective shows that the human impact of an insolvency proceeding is a relevant and material factor in the court’s decision-making process.

Justice Morin expressed direct concern, stating: “100 employees are currently working at the Bécancour Plant, having no idea of what is going on in this Courtroom and the impact any Judgment of this Court will inevitably have on their livelihood as early as next week.” He was particularly critical of how management informed the workforce “à la dépêche” (hastily) about a work stoppage, calling the approach inappropriate. This judicial scrutiny makes it clear that the manner in which a company’s workforce is treated during a period of financial distress is not a private matter but a factor that can influence a court’s evaluation of an insolvency application. This stakeholder-focused approach provides important lessons for any business owner navigating financial challenges.

6. For a distressed business owner, what are the most critical takeaways from the Canadoil case?

The Canadoil saga offers a clear roadmap of what to do—and what not to do—when a business is facing significant financial challenges. For any director or owner, this case highlights several critical lessons for navigating a crisis effectively.

• Prioritize Transparency: Attempting to hide problems, such as the undisclosed payroll tax debts in this case, inevitably erodes lender confidence and ultimately backfires in court. In my experience, what lenders fear most isn’t bad news; it’s surprises. This case is a perfect illustration of that principle.

• Engage Professionals Early: The involvement of experienced insolvency counsel is not a sign of failure but a strategic necessity. These professionals can help navigate complex creditor relationships, ensure procedural fairness, and prevent costly missteps that can jeopardize the company.

• Provide Substantive Responses: When faced with serious allegations from creditors, generic denials or attempts to shift blame are unpersuasive to a court. A comprehensive, structured, and evidence-based response that directly addresses each concern is required to be taken seriously.

• Develop an Employee Communication Strategy: The proper and ethical treatment of employees is more than just a moral duty; it is a legally relevant factor that courts consider. A well-planned communication strategy for your workforce is critical for preserving value and demonstrating responsible leadership.

Ultimately, the most effective strategy for preserving a company’s value and achieving the best possible outcome is to engage with financial problems proactively, transparently, and with the guidance of qualified professionals.

Conclusion: Why Process and Substance Both Matter in an Ex Parte Motion

The Canadoil case demonstrates that in modern insolvency practice, how you seek relief through an ex parte motion can be as important as what you’re trying to achieve. RBC had legitimate concerns about the companies’ financial condition and management conduct in both applications. The underlying facts didn’t change significantly between August 19 and August 29, 2025.

What changed was the process. The failed ex parte motion highlighted the importance of proper procedures, adequate disclosure, and genuine urgency. The second application succeeded by following proper notice requirements and addressing the court’s concerns about stakeholder impact and proportionality. Even with these improvements, Justice Morin identified significant issues with how the situation was handled.

For businesses facing financial distress, this case underscores the value of engaging experienced professionals early and maintaining transparent relationships with stakeholders. For creditors considering an ex parte order, it demonstrates that even strong legal positions require proper presentation, complete disclosure, and consideration of broader impacts.

The insolvency system works best when all parties approach it with professionalism, transparency, and respect for established procedures. The Canadoil case shows both what can go wrong when these standards aren’t met in ex parte motions and what becomes possible when they are.

Final Ex Parte Motion Thoughts

Running a company in the GTA isn’t easy. The key is recognizing problems early and getting professional help when you need it.

As a Licensed Insolvency Trustee with extensive experience helping GTA companies, I’ve seen them recover from seemingly impossible situations. With the right approach, your business can not only survive current challenges but also emerge stronger and more profitable.

Remember, seeking help isn’t a sign of failure – it’s a smart business decision that can save your company, protect your employees’ jobs, and preserve your investment in your business.

If you’re ready to take the next step, contact a Licensed Insolvency Trustee today. Your business and your peace of mind are worth the phone call.

If your business is facing financial challenges, don’t wait until it’s too late. Early intervention provides more options and better outcomes. Contact Ira Smith Trustee & Receiver Inc. today to discuss your situation confidentially and explore your options.

You’re not alone in this. There’s a path forward, and it starts with reaching out for the right kind of help. Take that step—you deserve it. If you’re a GTA resident dealing with an overwhelming debt crisis, don’t wait for your credit situation to get worse. As a licensed insolvency trustee serving Toronto, Mississauga, Brampton, Markham, and surrounding areas, I’m here to help you understand your options.

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As a licensed insolvency trustee in the Greater Toronto Area, I tell consumers and business owners to see financial problems not as failures but as challenges. Proper guidance can solve them. By knowing the warning signs of insolvency and getting professional advice early, many people and businesses find a way forward. They can restructure, make strategic changes, or wind down in an orderly way that protects future chances.

Remember: The earlier you seek help for company insolvency concerns, the more options you’ll have.

If you or someone you know is struggling with too much debt, remember that the financial restructuring process, while complex, offers viable solutions with the right guidance. As a licensed insolvency trustee serving the Greater Toronto Area, I help Canadian entrepreneurs understand their options and find a path forward during financial challenges.

At the Ira Smith Team, we understand the financial and emotional components of a debt crisis. We’ve seen how traditional approaches often fall short in today’s economic environment, so we focus on modern debt relief options that can help you avoid bankruptcy while still achieving financial freedom.

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If any of this sounds familiar and you’re serious about finding a solution, reach out to the Ira Smith Trustee & Receiver Inc. team today for a free consultation. We’re committed to helping you or your Canadian company get back on the road to healthy, stress-free operations and recover from financial difficulties. Starting Over, Starting Now.

The information provided in this blog is intended for educational purposes only. It is not intended to constitute legal, financial, or professional advice. Readers are encouraged to seek professional advice regarding their specific situations. The content should not be relied upon as a substitute for professional guidance or consultation. The author, Ira Smith Trustee & Receiver Inc., and any contributors do not assume any liability for any loss or damage.

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Brandon Smith is a Licensed Insolvency Trustee and Senior Vice-President of Ira Smith Trustee & Receiver Inc. With extensive experience in corporate insolvency and restructuring matters, Brandon assists businesses and individuals in navigating financial distress throughout the GTA and Ontario. For confidential consultation regarding your business’s financial situation, contact Ira Smith Trustee & Receiver Inc.