This article has been contributed to the blog by Joshua Hurwitz, an Associate of the Insolvency & Restructuring group at Osler, Hoskin & Harcourt and Jaime Auron, an Articling Student at Osler, Hoskin & Harcourt LLP.

In 8527504 Canada Inc. v. Liquibrands Inc. (2014), 2014 CarswellOnt 17188, 2014 ONSC 7015 (Ont. S.C.J. [Commercial List]) (“Liquibrands”), the Ontario Superior Court of Justice (the “Court”) provided guidance on the interpretation of the stay provisions in a receivership order. The Court also addressed the request from a second ranking creditor to have proceeds from assets paid into court rather than being paid to the first ranking creditor, pending resolution of a claim by the second ranking creditor against the first.

Background

Liquibrands Inc. (“Liquibrands”) was a secured creditor of, and was the sole shareholder of, Sun Pac Foods Limited (“Sun Pac”), a manufacturer of branded beverage products, among other things. Liquibrands ranked second in priority with respect to Sun Pac, behind 8527504 Canada Inc. (“852 Canada Inc.”), a related company to Bridging Canada Inc. (“Bridging”). Bridging provides alternative solutions to borrowers who are not able to otherwise secure traditional financing.

In October 2012, Bridging advanced a multi-facility loan to Sun Pac – Facility A was a $5 million revolving loan and Facility B was a term loan on equipment – that was secured on the assets of Sun Pac. Bridging subsequently assigned these loan interests to 852 Canada Inc. Liquibrands guaranteed $1 million of Facility A (the “Guarantee”), supported by a security over all its assets.

Although Sun Pac was nearing a production deal with Loblaws, the company was short on working capital and was in default of its obligations to 852 Canada Inc. by August 2013. In September 2013, 852 Canada Inc., Sun Pac and Liquibrands entered into a Forbearance and Amending Agreement (the “Agreement”) to provide Sun Pac with a bridge loan in anticipation of the Loblaws contract coming to fruition. This bridge loan involved two tranches of funding, including a demand non-revolving loan under a Facility D.

852 Canada Inc. agreed to hold off on enforcing its rights absent an Event of Default, but did not advance the $1.15 million Facility D loan at any point. Sun Pac became insolvent and shut down operations, leading 852 Canada Inc. to commence a receivership application under which BDO Canada Limited (“BDO”) was appointed as receiver of Sun Pac. Meanwhile, Liquibrands and Sun Pac commenced an action against 852 Canada Inc. and Bridging, seeking $100 million of damages for breach of the Agreement, for the alleged lost profits that would have been earned pursuant to the Loblaws deal.

BDO realized proceeds from Sun Pac’s assets (the “Sun Pac Proceeds”) and proposed an interim distribution of $383,381 from the Sun Pac Proceeds to 852 Canada Inc.

Decision and Analysis

Interpretation of the Stay Provisions in a Receivership Order

Sun Pac and Liquibrands argued that the stay provisions in the receivership order stayed Liquibrands’ and Sun Pac’s action against 852 Canada Inc. and Bridging (the right to commence the action then being held by the receiver). Newbould J. held that paragraphs 7 and 3(j) of the model receivership order used on the Ontario Superior Court of Justice (Commercial List) (the “Commercial List”) enable a receiver to continue an action previously commenced by a debtor without the necessity of obtaining leave. Read together, these sections stipulate that no proceedings against a debtor shall be commenced without leave (or the consent of the receiver); however, this does not preclude a receiver from initiating a proceeding without seeking leave.

Request from the Second Ranking Creditor to have Proceeds Paid Into Court

Newbould J. proceeded to consider the request made by Liquibrands that the Sun Pac Proceeds be paid into court by the receiver, pending a decision in the action brought by Sun Pac and Liquibrands against 852 Canada Inc. and Bridging. Liquibrands cited Rule 45.02 as support for its position. Rule 45.02 grants the power to the court to order funds be paid into court where a party’s right to a specific fund is in question. Newbould J. held that the Rule was not applicable to the current situation, as the plaintiff had no direct proprietary claim to the specific funds in question.

Newbould J. clarified that the Sun Pac Proceeds held by the receiver were not subject to any claim by Liquibrands that could achieve a priority ranking over 852 Canada Inc.. He emphasized that even if a real issue existed in respect of Sun Pac’s and Liquibrands’ damages claim against 852 Canada Inc. and Bridging, it was not an issue that would impact the decision in front of the Court.

In response to Liquibrands’ contention that no receiver should be appointed until its law suit against 852 Canada Inc. and Bridging had been resolved, Newbould J. held that the terms under which Liquibrands gave its Guarantee were in no way limited by the possibility of success in a separate action. He also highlighted a Subordination, Assignment, Postponement and Standstill Agreement made at the same time as the Guarantee, under which Liquibrands agreed not to do anything that might delay, defeat, impair or diminish the priority rights of 852 Canada Inc. In addition to reinforcing Newbould J.’s reasons with respect to the Sun Pac Proceeds, this assurance by Liquibrands was the final straw in Newbould J.’s decision to find it just and convenient for a receiver of Liquibrands to be appointed.

Conclusions

The Liquibrands decision emphasizes that the stay provisions in the Commercial List model receivership order do not require a receiver to seek leave to continue an action previously commenced by a debtor company. Furthermore, Liquibrands illustrates that funds from proceeds will only be withheld from a rightful creditor where a serious questions exists as to that creditor’s rights to those proceeds. The funds will not be re-routed and paid into court on the mere possibility that the first-ranking creditor may owe some unrelated moneys to a subordinated creditor.

Further, it demonstrates a reluctance by the court to act definitively with respect to issues between creditors that may or may not directly impact the proceedings at hand. Such matters will instead be left for resolution by the interested parties.