Occasionally, when creditors are concerned about the value of their security or their ability to recover from a debtor, they may seek the assistance of a receiver.  Generally speaking, a receiver is a third party appointed to take control of and manage a business or property, liquidate assets and/or settle debts.  Receivers can be privately appointed under the terms of applicable security documentation, such as debentures or mortgages, or court-appointed.  

This blog post will consider some laws applicable to the court-appointment process.

Statutory Bases For Seeking Court Appointment of a Receiver

Receivers are usually appointed after a contractual default by a debtor. 

Section 243(1) of the Bankruptcy and Insolvency Act empowers a court to appoint a receiver on the application of a secured creditor.  The court must consider whether it is “just and convenient” to make the appointment.  

Under that section, a court may empower the receiver to “take possession of all or substantially all of the inventory, accounts receivable or other property take possession of all or substantially all of the inventory, accounts receivable or other property of an insolvent person or bankrupt.”  This power applies to property that was “acquired for or used concerning a business carried on by the insolvent person or bankrupt.”  A court may also empower the receiver to “exercise any control” over either that property or the insolvent or bankrupt person’s business. Further, the Court may also “take any other action” that it considers advisable.  The powers of the court under this section are quite broad.  

In addition, the Personal Property Security Act grants the Superior Court of Justice broad discretion to enforce a variety of remedies available to a secured creditor, including those related to receivers (see section 67, for example).

The Business Corporations Act also permits a court to appoint a receiver within certain contexts, such as an oppression remedy (see section 248(3)).

However, the broad general discretion of a court to appoint a receiver or receiver and manager can be found in section 101 of the Courts of Justice Act.  That section provides that the Superior Court of Justice may make such an appointment “by an interlocutory order” where it appears to the judge to be “just and convenient to do so.”

This post will consider the application for the appointment of a receiver under section 101.  It should be noted, however, that such an application is often brought based on more than one of the above statutory sources of authority.

Appointment Under the Courts of Justice Act

Subject to the discussion below regarding interlocutory matters, a court may appoint a receiver under section 101 of the Courts of Justice Act when it is “just and convenient” to do so.  This is the same test applied when seeking an appointment under section 243 of the Bankruptcy and Insolvency Act (see RBC v. 2531961 Ontario Inc. et al.).  

In making its determination, a court must consider all of the circumstances of the case, “but in particular the nature of the property and the rights and interests of all parties in relation thereto.”  The rights of a secured creditor under its security are relevant to this consideration (see RBC).

The appointment of a receiver is generally considered an “extraordinary remedy.”  However, where a secured creditor has the right to seek the appointment of a receiver under the terms of its security, the burden on the applicant seeking the appointment is lower.  In that situation, the secured creditor is regarded simply as seeking to enforce terms previously agreed upon by the debtor.  Regardless, the existence or absence of a contractual right to appoint a receiver is not determinative.

A variety of factors are to be considered by a court when deciding whether or not to appoint a receiver (see RBC).  The list is not exhaustive but “a collection of considerations to be viewed holistically.”  These factors include:

• Whether irreparable harm might result without the appointment (although this need not be established if the right to appoint is set out in security documentation);
• the risk to the secured creditor, taking into account the size of the debtor’s equity in the property and the need to protect or safeguard the property during litigation;
• the nature of the property;
• the “apprehended or actual waste” of the debtor’s assets;
• the balance of convenience to the parties;
• whether or not the creditor has a right to appoint a receiver under the security documentation;
• the enforcement of rights under security documentation where the secured creditor expects to “encounter difficulties with the debtor;”
• the principle that a court should be cautious when appointing a receiver;
• consideration of whether the appointment is necessary for the receiver to carry out its duties efficiently;
• the effect the order will have on the parties;
• the parties’ conduct;
• how long the receiver may be in place;
• the cost to the parties; and
• the “likelihood of maximizing return” to the parties.

Courts should give limited to no weight to any objections from the debtor on whether a receivership is the best remedy for the secured creditor where the debtor’s conduct has “directly” led to the application (see GE Commercial Distribution Finance Canada v. Sandy Cove Marine Co.).

It is not “essential” that the applicant prove that it will suffer irreparable harm without the appointment or “that the situation is urgent” (see Bank of Montreal v. Carnival National Leasing Ltd.).

“Just and Convenient” Test Vs. Injunction Test

Creditors should note that the law appears to draw some distinction between the appointment of a receiver on an interlocutory basis and an appointment that is more final.

In the recent case of Milborne v. Kempinski, the parties before the Court of Justice disagreed on the legal test to be applied in the context of an application for the appointment of a receiver on an interlocutory basis.  The Court noted prior case law in which the test applied by the courts had been similar to that applied in the context of motions for a Mareva injunction.  That test requires:

• consideration of the merits of the case to determine whether there is a serious issue to be tried (and where the appointment amounts to a form of execution before judgment, the consideration of the merits of the case must meet a higher threshold – that is, there must be a “strong prima facie case”);
• a finding that the applicant would suffer irreparable harm if the application was refused, and
• consider the balance of convenience (that is, which party would suffer greater harm from the granting or refusing the application).

The Court ultimately found that where the “very thing the receiver was being called upon to do would end the proceedings,” the “just and convenient” test applies.  But if that is not the case and the application is truly interlocutory, then the test for an injunction likely applies.  

Toronto Corporate Commercial Lawyers Providing Guidance On Receiverships

Is your secured debt at risk due to a defaulting debtor? Don’t wait for further losses. Applying for a court-appointed receiver can be the decisive step in safeguarding your assets and maximizing your recovery. Understanding the intricacies of the Courts of Justice Act and other relevant statutes is crucial for a successful application. At Milosevic & Associates, our experienced legal team in Toronto specializes in debt recovery and receivership proceedings. We’ll guide you through the process, assess your situation, and advocate for your rights, ensuring you meet the “just and convenient” test or address any interlocutory concerns. Contact us online or call (416) 916-1387 for a consultation and take control of your recovery.