A recent decision of the Ontario Superior Court of Justice (Commercial List) in 9-Ball Interests Inc v Traditional Life Sciences considered the evidence required from applicants seeking the appointment of a receiver and the approval of a 'quick-flip' sale of a debtor company's assets in circumstances where the debtor, secured party and proposed purchaser are related parties.
A typical quick-flip sale transaction involves the appointment of a receiver and court approval of a sale of the debtor's assets on the same day, without a lengthy sale process or a subsequent court appearance to approve the sale. With respect to the request for the appointment of a receiver to facilitate a sale transaction, the 9-Ball decision establishes that in circumstances where the secured creditor, debtor and purchaser are related entities and a privately appointed receiver appears to be a viable option, the applicant secured creditor must establish sufficient grounds for the court to intervene and assist it with enforcing its rights. Without an evidentiary basis to establish the need for a court-appointed receiver rather than a privately appointed one, the court will assume that its assistance is unwarranted in the circumstances.
Thus, in determining whether the statutory test for the appointment of a receiver was met, the court in 9-Ball focused on whether a court-appointed receiver was preferable to a privately appointed receiver in the circumstances. The court determined that a court may need to appoint a receiver if:
- it foresees that a privately appointed receiver would encounter problems in taking possession of the debtor's property;
- numerous creditors are exercising their remedies against the debtor; or
- there are issues as to the relative priority of the debtor's creditors.
In 9-Ball the applicant secured party had the power under its security agreement to appoint a private receiver. The court held that, given the close relationship between the debtor and secured party, there was no prospect of resistance to the appointment of a private receiver and no complexity of secured claims, as the applicant was the debtor's only secured creditor. Furthermore, the debtor had no employees, only a few contract consultants; as such, there was no threat that the cessation of the debtor's business would result in significant job losses, necessitating the appointment of a receiver to bring stability to the debtor's operations.
The court inferred that the appointment of the receiver had been requested in order to dispense with the notice provisions in the Personal Property Security Act (Ontario) (ie, the equivalent to Article 9 of the Uniform Commercial Code), and did not reflect any need for court assistance on the part of the secured party in enforcing its rights.
Turning to the request for approval of the quick-flip sale transaction, the court noted that in certain circumstances, this type of sale may be the best or only option; however, the customary principles governing sale by a receiver(1) were applicable and had to be considered. These principles require an examination of whether:
- there has been sufficient effort on the part of the debtor or receiver to get the best price;
- the sale of the debtor's assets is in the interests of all parties;
- the process by which offers were obtained is one of integrity; and
- there was unfairness in the working-out of the sales process.
The court held that it had seen insufficient evidence to enable it properly to assess the request to approve the sale transaction. It noted that the debtor appeared to have granted the security to the applicant secured creditor at a time when it was insolvent; despite the reference to a security opinion in its materials, the applicant had not adequately addressed this fact. Moreover, the applicant had failed to file independent valuations of the debtor's assets, such as valuations from liquidators, leaving the court to assess the proposed purchase price without the benefit of comparisons. This absence of evidence as to the value of the assets being sold, coupled with a sales process that the court described as "cursory", left the court without an evidentiary basis on which to ascertain whether the consideration to be received was superior to the consideration that would be received if an extended sales process were undertaken.
The court concluded that insufficient evidence had been placed before it to establish that:
- a court appointment was necessary to enable the receiver to carry out its work and duties more efficiently; and
- the proposed receiver acted to get the best price and did not act improvidently.
On this basis, the court dismissed the application, without prejudice to the applicant reapplying with better evidence.
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