Thanks to a decision of the Supreme Court of British Columbia released on June 13, 2013, Court-appointed receivers can now accept appointments with greater confidence that their fees and expenses incurred in passing their accounts are recoverable from the estate - or possibly from a third party who raises opposition, if no assets remain in the estate.
In Re Avant Enterprises Inc., the Supreme Court of British Columbia expressed its reluctance to leave its receiver exposed in respect of costs incurred in the passing of its accounts.
In Avant, Fasken Martineau acted for Ernst & Young Inc. (the “Receiver”) in its capacity as Court-appointed receiver of Bay City Auto Inc. (“Bay City”) and Abenante Motor Sports Inc. (“AMS”), as well as interim receiver of Avant Enterprises Inc. (“Avant”). Avant was a guarantor of the obligations of Bay City and AMS to the petitioning creditor (the “Bank”).
Upon paying in full all outstanding obligations of Bay City and AMS (together, the “Debtors”) to the Bank, by order of the Court, Avant took an assignment of the Bank’s claims against the Debtors and all related security. At that point the Receiver, in essence, had an enemy in its camp, and did not have an indemnity from the Bank. The order also authorized the Receiver to distribute to Avant “such amounts from time to time as the Receiver, in its sole discretion, deem[ed] to be available for distribution to Avant after making provision for all future and accrued Receivership liabilities …” up to the specified limits, and was without prejudice to the Receiver’s obligation to pass its accounts (including those of its legal counsel) in accordance with the receivership orders. The receivership orders included the standard provision that the Receiver could pass its accounts on a summary basis.
In July 2011, prior to applying for its discharge and summary passing of its accounts, the Receiver paid from the funds in its possession a total of $80,000 to Avant on the express condition that, if the Receiver’s costs in applying for its discharge exceeded the amount the Receiver had retained, Avant would pay back such amount as was necessary to make up the shortfall.
In October 2011, the Receiver applied for its discharge as well as the summary approval of its accounts and those of its legal counsel. Those applications were opposed by Avant, which concurrently filed an application seeking, among other things, an assessment of the Receiver’s accounts before the Registrar. In April 2012, in the face of Avant’s opposition, the Court ordered that the Receiver’s accounts be assessed before the registrar.
Avant’s opposition to the passing of the Receiver’s accounts was premised on the general allegation that they were “too high”. Despite several requests and an order of the Registrar, Avant failed to provide any further particulars. The hearing before the Registrar was set down for five days in January, 2013.
As a result of Avant’s opposition to the summary passing of the Receiver’s accounts and several interim steps taken by the Receiver in preparation for the assessment of those accounts before the Registrar, the Receiver incurred significantly higher costs in seeking its discharge than it had anticipated. By December 2012, the Receiver was facing a significant projected shortfall to the conclusion of the receiverships.
In light of the foregoing, Fasken Martineau wrote to counsel for Avant seeking the return of the $80,000. Avant refused to repay any of those funds. Accordingly, the Receiver applied for, among other things, an order that Avant repay the $80,000 to the Receiver or, alternatively, post security for the Receiver’s costs. In response, the principal of Avant deposed that Avant had used all of the funds in the ordinary course of its business, and that Avant’s only remaining asset consisted of any funds that it might recover should the Receiver’s accounts be reduced in connection with the assessment before the Registrar.
In granting the Receiver’s application, the Court accepted Fasken Martineau’s submissions on behalf of the Receiver and held that:
the Receiver has a prima facie right to be paid its fees and disbursements, including the fees and disbursements of its legal counsel, from the estate, and that the creation of a Receiver’s Charge is the recognition of that right;
by seeking its discharge and passing its accounts, a receiver is completing the administration of the estate, and therefore is entitled to be paid its associated fees and disbursements and those of its legal counsel on a full indemnity basis, unless the receiver is guilty of scandalous, outrageous or reprehensible conduct;
where appropriate, the Court will grant a receiver security for its costs in seeking its discharge and passing its accounts; and
by requiring the Receiver to pass its accounts before the registrar and by refusing to return the $80,000, Avant was asking the Receiver to forego is own fees and expenses and be thousands of dollars out of pocket for costs incurred by it to complete its duties as the Court’s officer.
Referring to the British Columbia Court of Appeal decision in 269893 Alberta Ltd. v. Otter Bay Developments Ltd. (2011), 16 B.C.L.R. (5th) 298 (C.A.), the Court stated:
The Court will not countenance a situation where a Court-appointed receiver will be asked to forego its own fees and expenses and be out of pocket hundreds of thousands of dollars incurred as it endeavours to complete the receivership. As indicated in Otter Bay, supra, a Court-appointed receiver would never take a risk of that kind and should never be required to do so.
Passing its accounts and, ultimately, seeking its discharge are duties that every Court-appointed is tasked to complete. The Avant decision makes clear that the Court will protect its officer in carrying out those duties imposed upon it by the Court, and will not allow debtors or other parties to challenge the receiver’s conduct without providing the receiver with a safety net in respect of its costs.
Where there are no longer any assets in the estate to which the receiver can look to recover its costs, in light of the decision in Avant, the Court should not allow a party to put the receiver to considerable expense in passing its accounts without also requiring that party to provide security for the receiver’s costs. In essence, the Court will not allow a party to take a ‘free shot’ at its officer.