Court File and Parties
COURT FILE NO.: CV-23-00695725-00CL DATE: 20230818 ONTARIO - SUPERIOR COURT OF JUSTICE – COMMERCIAL LIST
RE: Canadian Western Bank, Applicant AND: 2563773 Ontario Inc., Respondents
BEFORE: Peter J. Osborne J.
COUNSEL: Lisa Susan Corne, for the Applicant, Canadian Western Bank Rahul Shastri, for the Respondent, 2563773 Ontario Inc. Jonathan Reimche, for the Receiver
HEARD: August 8, 2023
Endorsement
Overview
1The Applicant, Canadian Western Bank, (CWB), seeks the appointment of a receiver over the property and assets of the Respondent, 2563773 Ontario Inc. (the Respondent or 773).
2The Respondent seeks an order dismissing the Application or in the alternative, adjourning it (yet again) on the basis that there is a pending agreement that would permit the payout of the indebtedness owed to the Applicant.
3Defined terms in this Endorsement have the meaning given to them in the motion materials unless otherwise stated.
4For the reasons that follow, I am satisfied that the Application should be granted and a receiver appointed.
The Test for Appointing a Receiver
5The test for the appointment of a receiver pursuant to section 243 of the BIA or section 101 of the CJA is not in dispute. Is it just or convenient to do so?
6In making a determination about whether it is, in the circumstances of a particular case, just or convenient to appoint a receiver, the Court must have regard to all of the circumstances, but in particular the nature of the property and the rights and interests of all parties in relation thereto. These include the rights of the secured creditor pursuant to its security: [Bank of Nova Scotia v. Freure Village on the Clair Creek, 1996 O.J. No. 5088, 1996).
7Where the rights of the secured creditor include, pursuant to the terms of its security, the right to seek the appointment of a receiver, the burden on the applicant is lessened: while the appointment of a receiver is generally an extraordinary equitable remedy, the courts do not so regard the nature of the remedy where the relevant security permits the appointment and as a result, the applicant is merely seeking to enforce a term of an agreement already made by both parties: Elleway Acquisitions Ltd. v. Cruise Professionals Ltd., 2013 ONSC 6866 at para. 27. However, the presence or lack of such a contractual entitlement is not determinative of the issue.
8The appointment of a receiver becomes even less extraordinary when dealing with a default under a mortgage: BCIMI Construction Fund Corporation et al. v. The Clover on Yonge Inc., 2020 ONSC 1953 at paras. 43-44.
9As I observed in Canadian Equipment Finance and Leasing Inc. v. The Hypoint Company Limited, 2022 ONSC 6186, the Supreme Court of British Columbia, citing Bennett on Receivership, 2nd ed. (Toronto, Carswell, 1999) listed numerous factors which have been historically taken into account in the determination of whether it is appropriate to appoint a receiver and with which I agree: Maple Trade Finance Inc. v. CY Oriental Holdings Ltd., 2009 BCSC 1527 at para. 25:
a. whether irreparable harm might be caused if no order is made, although as stated above, it is not essential for a creditor to establish irreparable harm if a receiver is not appointed where the appointment is authorized by the security documentation; b. the risk to the security holder taking into consideration the size of the debtor’s equity in the assets and the need for protection or safeguarding of assets while litigation takes place; c. the nature of the property; d. the apprehended or actual waste of the debtor’s assets; e. the preservation and protection of the property pending judicial resolution; f. the balance of convenience to the parties; g. the fact that the creditor has a right to appointment under the loan documentation; h. the enforcement of rights under a security instrument where the security-holder encounters or expects to encounter difficulties with the debtor; i. the principle that the appointment of a receiver should be granted cautiously; j. the consideration of whether a court appointment is necessary to enable the receiver to carry out its duties efficiently; k. the effect of the order upon the parties; l. the conduct of the parties; m. the length of time that a receiver may be in place; n. the cost to the parties; o. the likelihood of maximizing return to the parties; and p. the goal of facilitating the duties of the receiver.
10How are these factors to be applied? The British Columbia Supreme Court put it, I think, correctly: “these factors are not a checklist but a collection of considerations to be viewed holistically in an assessment as to whether, in all the circumstances, the appointment of a receiver is just or convenient: Pandion Mine Finance Fund LP v. Otso Gold Corp., 2022 BCSC 136 at para. 54.
11It is not essential that the moving party establish, prior to the appointment of a receiver, that it will suffer irreparable harm or that the situation is urgent. However, where the evidence respecting the conduct of the debtor suggests that a creditor’s attempts to privately enforce its security will be delayed or otherwise fail, a court-appointed receiver may be warranted: Bank of Montreal v. Carnival National Leasing Ltd., 2011 ONSC 1007 at paras. 24, 28-29.
12Accordingly, is it just or convenient to appoint a receiver in the particular circumstances of this case?
Background and Chronology
13The Notice of Application seeking the appointment of a receiver pursuant to section 243 of the BIA and section 101 of the CJA was issued almost 6 months ago on March 3, 2023. It was served on the Service List the same day, for a hearing returnable on March 10, 2023.
14The chronology and underlying facts are not in dispute. The Respondent is indebted to CWB in connection with a secured loan that has been in default since October 7, 2022. A demand for payment and the section 244 Notice were issued and served on January 19, 2023. As of February 27, 2023, the indebtedness totalled $11,918,512.13. That has not been repaid.
15The principal asset of the Debtor is a hotel property located in London, Ontario. It previously operated as a Holiday Inn. The proceeds of the second tranche of the loan advanced by CWB were intended to fund, in part, renovations to convert the hotel to a Hilton hotel. Arrangements between the Debtor and Hilton Hotels were never finalized with the result that the hotel operates without affiliation and as an independent facility.
16CWB advanced secured loans pursuant to a loan agreement dated March 30, 2020 between CWB and the Debtor, and also Akash Aurora (Aurora) as personal guarantor [1]. Aurora is the president and directing mind of 773.
17The loan was secured by a mortgage over the hotel property in the amended principal amount of $14,910,000, and additional collateral security was provided in the form of a general assignment of rents, a general security agreement and a guarantee and indemnity from Aurora dated November 14, 2019.
18Following the initial default, counsel for CWB delivered a formal notice of that default on October 25, 2022. Discussions between the parties ensued. The Debtor requested an extension of time to pay the loan, and also to pay outstanding arrears of HST owing to the Canada Revenue Agency and arrears of property taxes owing to the municipality.
19The chronology of the correspondence and communications between the parties is fully set out in the materials and is not at issue today. Ultimately, and at the request of the Debtor, the parties entered into a forbearance agreement dated March 22, 2023.
20Pursuant to that forbearance agreement, the Debtor acknowledged and agreed that the principal amount of $11,910,740.07 was outstanding under the loan agreement. The Debtor acknowledged the Existing Defaults, irrevocably waived all defences, counterclaims and rights of setoff, agreed that upon the occurrence of any Additional Event of Default, the agreement of CWB to forbear would terminate and it would be permitted to enforce all of its rights and remedies, including the appointment of a receiver. The Debtor agreed to pay priority payables for HST, payroll source deductions and real property taxes, together with interest and penalties, and any other priority ranking remittances.
21Finally, the Debtor agreed to execute a consent to judgment appointing a receiver and manager, to be held in escrow and released upon the expiry of the 10-day cure period following written notice of the occurrence of an Additional Event of Default.
22The Debtor failed to comply with its covenant to pay the priority payables. Those remain outstanding today. The parties unsuccessfully attempted to negotiate the terms of a further forbearance agreement. On June 1, 2023, CWB delivered a written notice to the Debtor that an Additional Event of Default had occurred. That was not cured during the 10-day cure period or at all.
23Accordingly, and on the basis of the consent to the appointment of a receiver, CWB made the Application returnable again on July 4, 2023.
24On the return of the Application, the Debtor sought another adjournment for an additional 30 days, which was opposed by the Applicant. The basis for the adjournment request was that the Respondent had entered into an agreement of purchase and sale for the property on July 3, 2023 which, if completed, would pay out the Applicant. It was, however, subject to a significant condition that the franchisor, Hilton, would need to assess and approve the purchaser.
25For the reasons set out in her Endorsement dated July 5, 2023, Justice Steele granted the adjournment for 30 days to give the Debtor an opportunity to satisfy the condition. As reflected at paragraph seven of the Endorsement, however, the Court advised the Debtor that if the condition was not satisfied prior to the return date, given the terms of the forbearance agreement, it was likely that the receiver would be appointed.
26CWB also requested that if the adjournment were granted, the deposit for the hotel purchase be transferred to the trust account of counsel for CWB. Counsel for the Respondent indicated that he would attempt to agree to this but that the proposed purchaser would need to consent as well.
27The matter was adjourned until it came on before me.
28CWB served and filed supplementary motion materials renewing its request for the immediate appointment of a receiver, on the basis of the facts set out above and on the basis that notwithstanding inquiries of the Debtor, it had not provided any confirmation as to whether the condition had been satisfied or waived. Nor had the deposit been transferred to the trust account of counsel. Counsel for CWB then requested an undertaking from the deposit holder that the deposit not be released without its consent or court order made on notice to CWB. That undertaking was refused.
29In addition, the priority payables (HST and property tax arrears) had still not been paid, and that constituted an unacceptable material adverse change.
30Following the delivery of the supplementary Application materials by CWB, a few days before the return of the Application, the debtor filed a supplementary affidavit of Aurora stating that the Respondent, as vendor under the proposed sale agreement, would not agree that the deposit be transferred to the trust account of counsel for the Applicant, and nor was it prepared to undertake that the deposit would not be released without the Applicant’s consent.
31In addition, the affidavit stated that the purchaser had waived to the condition referred to in the Endorsement of Justice Steele with the result that the transaction is now scheduled to close on November 1, 2023, being 120 calendar days following the date of the agreement (July 3, 2023).
32The affidavit also stated that the Debtor was prepared to wire transfer $200,000 to Counsel for the Applicant as a prepayment towards the outstanding balance and as a demonstration of good faith.
33The day before the hearing of the Application, the Respondent delivered a further supplementary affidavit from Aurora confirming that the wire transfer had been sent. [2]
Analysis
34As a result, the Respondent requested that the Application be dismissed or adjourned for another 90 days until after the proposed closing date of the purchase agreement of November 1, 2023. It further submitted that permitting the transaction to proceed would ensure that there is no disruption to the hotel or the employment of its staff and that permitting the Respondent to proceed with the sale in a non-receivership status would preserve the value of its equity and avoid the costs of a receivership.
35The Applicant submitted that there remained uncertainty in the closing of the transaction, that it had lost confidence in the management of the Debtor, that a Receiver could commence a sale process which in turn could include the proposed pending sale and that it was entitled to the appointment of a receiver as had been agreed, most recently expressly pursuant to the terms of the forbearance agreement.
36I was directed to the terms of the proposed sale agreement which, pursuant to the Endorsement of Justice Steele, remains filed under seal. I have been conscious of the fact that the agreement remains confidential, and the obvious reasons for that, in making reference to certain terms as I have done below.
37I accept the submission of the Applicants that the agreement does not unequivocally demonstrate certainty that the transaction will in fact close on November 1.
38First, the Closing Date can be amended or extended by the parties: 1(a)(xiii). Consent of the Applicant (or of any receiver if appointed) is not required by the terms of the agreement. Nor has the Respondent undertaken or agreed, as it could have done, that the closing date would not be extended without the consent of the Applicant.
39Second, the agreement sets out, in a manner typical for agreements of this nature, various representations and warranties of the vendor. Those include the representation and warranty that there are no Encumbrances for Taxes and no event has occurred that could reasonably be expected to result in an Encumbrance, and that to the knowledge of the vendor, no taxing authority is in the process of imposing any Encumbrance.
40That is simply not accurate given the HST arrears and the arrears of property taxes. (This is discussed further below).
41Third, the vendor represents and warrants that there are no claims or other proceedings in progress or threatened that could challenge or seek to prevent, enjoin, or otherwise delay the transactions contemplated by the agreement, and further that to the best of the knowledge of the vendor, there are no judgments or orders which affect the purchased assets or the business.
42That, too, is not accurate given this very proceeding and the Endorsement of Justice Steele from July 4.
43Fourth, the vendor represents and warrants that it has paid all compensation and has remitted all source deductions to the relevant governmental agencies in respect of employees. That, yet again, is not accurate.
44The Respondent submits that the representation with respect to the arrears of HST remittances and taxes will be substantively irrelevant since the Respondent intends to pay those out on the closing of the transaction.
45That may well be accurate and intended. However, the agreement could easily have reflected this. In the same way, it could easily have reflected the fact that this proceeding was pending and reflected any previous orders made. Yet it does neither.
46I am left with a record that does not demonstrate that the proposed purchaser is aware of this Application at all, nor of the outstanding HST or property tax arrears, contrary to the representations given in the agreement. Even if the purchaser is in fact aware, the agreement as filed appears to give that party, in the absence of any other evidence in the record, the ability not to close the transaction. All of this further supports the conclusion in my view that there is a real risk that the transaction may not close on the currently scheduled Closing Date or at all.
47My concern is further increased by the fact that the HST and property arrears have not been addressed or paid. Those obligations, together with applicable interest and penalties, continue to accrue, and that accrual further erodes the security position of the Applicant. HST arrears are approximately $85,000 per month.
48Counsel for the Respondent directed me to journal entries and documents prepared by the Respondent’s third-party payroll administration firm, but these do not demonstrate to me that all of the source deductions have in fact been remitted.
49I further accept the submission of the Applicant that its concern is heightened by the refusal of the Respondent to agree (whether or not the purchaser would consent) that the $250,000 deposit would be held in trust pending agreement or further order.
50In the same way, the good faith payment of $200,000 is not material as against either the total amount of indebtedness or even as against the continuing accrual of priority encumbrances such as the HST arrears and property taxes. It does not satisfy me that the security position of the Applicant will not, as is urged by the Respondent, be further eroded over the next three months until the Closing Date, if that is not amended.
Conclusion and Disposition
51Having considered all of the evidence, and recognizing the efforts the Respondent has made to try to bring certainty to the submission that the proposed sale transaction will in fact close, I am satisfied that it is not only just or convenient, but indeed just and convenient, that a receiver be appointed now.
52The Applicant has been more than patient. Its actions are not rash or rushed. The loan facilities have been in default for almost 10 months since last November. This Application was brought in March. The forbearance agreement of March 22 expressly provided on a consent basis the appointment of receiver in the event of further default. That has occurred. An adjournment of 30 days was given on July 4. Now a further adjournment for an additional 90 days or more, which would take the parties to effectively the one year anniversary from the initial default, is sought. Yet there is still no certainty that the transaction will close.
53PricewaterhouseCoopers Inc. is qualified and is an appropriate receiver. The terms of the proposed receivership as reflected in the draft order filed on the original return of the Application are appropriate and are consistent with the terms of the Model Order of the Commercial List.
54I would add, so there is no uncertainty, that the receiver would be at liberty to continue negotiations and discussions with the proposed purchaser and I would expect the receiver to fully consider the agreement in the course of performing its duties. Indeed, it may well be that the agreement with that purchaser can be closed in the best interests of all stakeholders. If that occurs, presumably the term of the receivership could be short, and expenses minimized. But in the interim, the Applicant is entitled to have a receiver in place. The receiver is a court officer and must act so as to balance the rights of the parties and maximize the return for all stakeholders. Further direction and advice may be sought from the Court if and as necessary. Today, however, balancing all of the rights and obligations of the parties, and considering all of the factors set out above, I am satisfied that a receivership is appropriate.
55Order to go in accordance with these reasons. The Applicant should submit to me an updated and cleaned-up form of order for signing, with the approval of the Respondent as to form and content. If for some reason the parties cannot agree on the form of order, they may seek a very brief appointment before me to settle the terms of same.
56If the parties cannot agree on the costs of this Application, I may be spoken to.
Osborne J.
1The loan agreement was amended by agreement dated November 26, 2021 and a commitment letter dated May 12, 2021.
2Subsequent to the hearing of the Application, counsel advised the Court via email that in fact the $200,000 good faith prepayment had been made and received (less a $10 bank wire fee).