Redemption in a receivership

A recent decision of the Ontario Superior Court of Justice (Commercial List) (the “Court”)  in the receivership proceedings of The Clover on Yonge Inc.[1] (the “Clover Project”) has addressed the question of whether a debtor in receivership can avoid a sales process by redeeming its outstanding debt.

Three high-rise condominium projects were assigned into receivership in late March, 2020 by their lenders, BCIMC Construction Fund Corporation and BCIMC Specialty Fund Corporation (together, “BCIMC”). Each condominium project was owned by a single purpose, project specific general partner on behalf of a limited partnership.

The Receiver of the projects brought a motion in June to approve a sale and investor solicitation process (“SISP”) for each of the projects. The SISP was approved for two of the three projects. The Receiver’s SISP proposal for the Clover Project was opposed by several parties as a result of a separate proposal by Concord Land Developments Limited (“Concord”). Concord was proposing to pay out BCIMC’s debt in full, including general costs and receivership costs. It is important to note that prior to putting forward its proposal, Concord had completed a transaction to become the sole shareholder of the Clover Project.

The Receiver, BCIMC and certain other stakeholders objected to Concord’s proposal on three grounds: (i) Concord had no standing, (ii) the proposal was too unclear, and (iii) the proposal improperly interfered with the receivership process.

1. Concord’s Standing

The Court noted that “Concord’s proposal” was more properly referred to as “the debtor’s proposal”; Concord was simply proposing to lend money to the debtor to facilitate the payout of BCIMC. More importantly, however, Concord had become the sole shareholder of the debtor. Accordingly, standing was not at issue.

2. Lack of Clarity in the Concord Proposal

Concord was proposing to convert the receivership to a Companies’ Creditors Arrangement Act (“CCAA”) proceeding and renegotiate condominium unit purchase agreements with unit purchasers. The Court acknowledged that such a path involved some uncertainty for unit purchasers. However, the Court recognized that any bidder in the SISP would likely also be looking to disclaim such agreements and enter into similar negotiations. While the competitive nature of the SISP might produce a better result for unit purchasers, it would not necessarily provide the certainty and speed that unit purchasers were seeking. By contrast, Concord’s proposal contemplated the repayment of all creditors in full such that negotiations with unit purchasers would be a central feature of the proposed process.

3. Interference with the Receivership Process

The Receiver submitted that allowing Concord’s proposal would create a dangerous precedent by giving a debtor a preferential right to redeem property in a receivership proceeding, thus discouraging potential purchasers from entering a SISP and threatening the utility of receivership processes generally. The Court noted that the SISP had yet to be approved and emphasized the need to balance such a concern against a debtor’s right to redeem, which remains a core principal of real estate law.

The Court also considered the history of the proceedings and prejudice to different stakeholders. The debtor had engaged in misconduct by misleading its mortgagee prior to the receivership proceedings, but the Court noted that such misconduct did not necessarily mean that a debtor should be deprived of its property.

The Court addressed the concerns raised by would-be bidders that Concord was receiving privileges over other bidders. However, the Court re-iterated that Concord’s role was being misconceived. Concord was a financier and had become the sole shareholder of the debtor; it was not competing with other bidders. While it was understandable that would-be bidders were frustrated at being deprived of the opportunity to bid, that frustration couldn’t justify quashing a debtor’s right to redeem.

In fact, the Court found no evidence that it would be prejudicial to allow the debtor to redeem its property. While the unit purchasers believed that they would achieve a better result in a competitive SISP, they had not suffered prejudice to date. The debtor was simply asking for relief that would have been available at the initial receivership application. The position of the unit purchasers had not changed since the hearing of that application and any arguments they may have had could still be heard when the debtor moved to convert the receivership into a CCAA proceeding.

The Court ultimately declined to approve the SISP for the Clover Project and ordered that the debtor have the opportunity to pay out the BCIMC debt, the receivership debt and interest on both within 72 hours of receiving a payout statement.

This decision raises important questions for lenders and potential purchasers of distressed assets. It highlights the importance of moving quickly towards commencement of a sales process to avoid an unexpected turn of events after enforcement steps have been taken. In this case, a redemption likely would not have been allowed if the SISP had already been approved. It also underscores that the court will reconsider its views if it is equitable to do so. In this case, despite the debtor not having entirely “clean hands”, the Court was reluctant to extinguish the debtor’s equity of redemption where creditors’ claims were being otherwise addressed in a subsequent proposal.

If you have any questions or matters you would like to discuss, please contact a member of our Restructuring team or our  Financial Services team.

[1] 2020 ONSC 3659