The Court of Appeal of Québec in Séquestre de Media5 Corporation has put an end to a controversy in the case law by ruling that when an insolvent debtor is in default, the recourses open to hypothecary creditors are not limited to those found in the Civil Code of Québec (Civil Code or CCQ) and also extend to appointing a receiver under section 243 of the Bankruptcy and Insolvency Act (BIA). What’s more, the Court of Appeal of Québec has clarified the conditions that must be met if an application to appoint a receiver is to be allowed.
In March 2017, Laurentian Bank of Canada granted term loans to Media5 Corporation and Acquisitions Essagal Inc. (the debtors). The loans were secured, among others, by prior ranking hypothecs. Starting in the fall of 2017, notices of default were sent to debtors, who agreed to reimburse the amounts owing in the near future. In the summer of 2018, the bank sent its 10-day notices pursuant to sec. 244 BIA, and then served and published its prior notices of exercise under the Civil Code in April of 2019.
In November 2019, with the debtors being in default of their contractual obligations, the bank filed an application to appoint a receiver under sec. 243(1) BIA, which was subsequently amended to become an application for the appointment of an interim receiver (sec. 47 BIA). Justice Gaétan Dumas of the Superior Court of Québec dismissed the application on the grounds that appointing a receiver under sec. 243(1) BIA for the purposes of selling a business’ assets upon the application of the hypothecary creditors would, in its opinion, circumvent the Civil Code’s hypothecary recourse provisions.
The Court of Appeal allowed the appeal in part and quashed the Superior Court ruling.
When a debtor becomes insolvent, the Court of Appeal notes that hypothecary creditors may choose between Civil Code or BIA recourses. In fact, the two regimes are not mutually exclusive. The goal of receivers, within the meaning of sec. 243 BIA, is not impeded by the Civil Code, which merely imposes additional conditions. Nothing therefore prevents hypothecary creditors from requesting the appointment of a receiver under sec. 243(1) BIA instead of exercising a hypothecary recourse under the Civil Code. On the other hand, the nature of the hypothec will result in the concurrent application of the substantial and procedural requirements under the Civil Code, in particular, prior notices of exercise and inherent time limits. Once these requirements have been met, the Superior Court may then exercise its discretion to appoint a receiver and confer upon it the powers it deems useful, including that of selling the business of the insolvent debtor as a going concern.
The question then arises as to what criteria must be met in order for an application to appoint a receiver to be allowed. First, the creditor must satisfy the preliminary conditions as prescribed by law:
- The debtor is insolvent;
- The hypothec applies to all or substantially all the property acquired or used by the debtor;
- This property is used in relation to a business carried on by the debtor;
- The notice prescribed by sec. 244 BIA was given, and the period referred to in sec. 243(1.1) BIA was complied with; and
- The requirements under sec. 2757 and 2758, para. 1 CCQ for the prior notice of exercise and that prescribed by sec. 2758, para. 2 CCQ regarding the period for surrender have been met.
Once these preliminary conditions have been met, courts must consider the following criteria before authorizing the appointment of a receiver:
- The hypothecary creditor is acting in good faith;
- The appointment of a receiver will not impair other creditors’ rights;
- The appointment will not prevent the implementation of a proposal under the BIA or an arrangement under the Companies’ Creditors Arrangement Act (CCAA); and
- The appointment is justified given the objectives of the BIA and CCAA, such as that of avoiding the social and economic losses resulting from liquidating an insolvent commercial company.
Following the decision of the Court of Appeal in Media5, nothing prevents a hypothecary creditor from applying for the appointment of a receiver under sec. 243(1) BIA, provided it is able to (i) satisfy the preliminary conditions for the appointment prescribed by the BIA, and (ii) comply with the substantial and procedural requirements prescribed by the Civil Code for the realization of the hypothecs. This unanimous decision puts an end to a controversy in the case law that made the scope of applicability of sec. 243 BIA in Quebec unclear by establishing the distinctiveness of this recourse, while subjecting it to the prior notice of exercise requirements under the Civil Code. Given the effectiveness and frequency in practice of appointing a receiver under sec. 243 BIA, in particular to allow the sale of assets of an insolvent business as a going concern, this is a welcome decision by the Court of Appeal.
The authors would like to thank Giacomo Marchisio, law student, for his help in preparing this legal update.