\ I TABLE OF CONTENTS SECURED CREDITORS AND RECEIVERS I. BACKGROUND II. DEFINITION OF A RECEIVER 2 III. NOTICE BY SECURED CREDITOR OF ITS INTENTION TO ACT ON ITS SECURITIY 5 IV. RECEIVER'S NOTICES 7 V. RECEIVER'S STATEMENTS AND INTERIM REPORTS 8 VI. FINAL REPORT 9 VII. POWERS OF THE COURT 10 VIII. SUPERVISION AND QUALIFICATIONS OF RECEIVERS 10 IX. CONCLUSION 11
- 2- I. BACKGROUND Historically, Receivers and secured creditors in Canada have had few constraints imposed on them in enforcing secured claims. With few exceptions, the common law governed secured creditors' and Receivers' practices of security realization. The Courts have attempted to apply equity and balance the interests of the various parties. Various equitable principles, such as the concept of reasonable notice, have been dealt with by the Courts in an attempt to balance interests. However, considerable uncertainty remains. The Bankruptcy and Insolvency Act represents Parliament's steps towards codification of secured creditors' and Receivers' rights and responsibilities when moving to realize security as against an insolvent debtor. It is noteworthy that paragraph 89 (2) of Bill C-22 provides that Part XI of the Bankruptcy and Insolvency Act will apply only to persons who become Receivers after the coming into force of the legislation. This will avoia any retroactivity problems for Receivers who are appointed prior to the coming into force of the Act II. DEFINITION OF A RECEIVER Section 243 (2) of the Act provides a definition of Receiver, which definition is very broad. A Receiver is defined as a person appointed either under a security agreement or by the Court who has taken possession or control of all or substantially all of the inventory, ac~ounts receivable, or other property of an insolvent person or a bankrupt that was
- 3 - acquired for, or is used in relation to, a business carried on by the insolvent person or bankrupt. This definition would include an Agent or Bailiff appointed under an assignment of book debts or a security interest in inventory. It would also appear to include an Agent appointed to realize upon Bank Act security. With respect to "the other property", it would appear to be a question as to whether that property constituted all or substantially all of the property of the business in question. The definition would exclude Receivers appointed in consumer or non-business situations. It is very likely that secured lenders will be appointing "Receivers" in situations where an agent or bailiff would previously have done the work. This raises the question as to whether these individuals will be able to adequately comply with the requirements placed on a Receiver under the Bankruptcy and Insolvency Act. Section 247 of the Act provides that a Receiver shall act honestly and in ~ood faith and deal with the property of the insolvent person or the bankrupt in a commercially reasonable manner. There is, ofcourse, no concise definition ofthese terms and a Receiver must look to common law, common sense and professional judgement based on experience in order to determine appropriate courses of action. This statutory duty of care mirrors the duty of care imposed by PPSA legislation. We note that PPSA legislation imposes the duty on the secured creditor, whereas the Bankruptcy and Insolvency Act imposes the duty upon the Receiver. However, given the Principal/Agent relationship that is generally present, this distinction may not be significant.
- 4- Sections 249 and 250 provide the Receiver with the ability to apply to the Court for directions while Sections 251 and 252 provide certain protection to secured creditors or Receivers when their actions are done in "good faith". However, I believe that Receivers must be cautioned to keep in mind the doctrine of commercial reasonableness. Strict compliance with the wording of the security agreement and PPSA legislation may not be sufficient to protect the Receiver from damages. Receivers should take all necessary steps to ensure that disposals are conducted in a commercially reasonable manner, which may vary with file specific circumstances, and an appropriate price is obtained. Off the topic of Receivers for a moment, Sections 13.3 and 13.4 of the Act deal with the conductofthe Trustee as it pertains to conflicts and potential conflicts. Subsection 13.3 (1) sets out certain situations where a Trustee would be disqualified from acting as Trustee of the estate of the debtor. These requirements mirror in part the rules of professional conduct of the Canadian Insolvency Practitioners Association. Also, Subsection 13.3 (2) provides that a Trustee shall not act as Trustee of the estate of the debtor where the Trustee is already acting as Trustee, Receiver, or Liquidator regarding any person related to the debtor without full disclosure at the time of appointment and at the first meetini of creditors. As a Trustee practicing with a National Finn, I have a concern about this requirement in that there are scenarios under which I may not be aware of the fact that our corporate Trustee is acting as Trustee, Receiver or Liquidator for a partyrelated to the debtorin my office. Perhaps clarification is required as to whether "the
- 5 - Trustee" is considered to be the corporate Trustee or the individual licensed Trustee. Full disclosure is not a problem; being aware that disclosure is required may be a problem. Section 13.4 of the Act provides that a Trustee may act for a secured creditor as long as he obtains a written opinion of the validity ofthe security agreement from an independent solicitor and notifies the creditors (or the Inspectors) that he is acting for the secured creditor, the basis of his remuneration, and the fact that the aforementioned legal opinion was obtained. Upon request, the Trustee must provide the Superintendent with a copy of the legal opinion. The Act appears to be recognizing the business reality that there are many situations where it is considerably less costly to have the same person acting as Trustee and Receiver and the Act has not prohibited Receivers from also acting as the Trustee. Ill. NOTICE BY SECURED CREDITOR OFITS INTENTIONTO ACT ON ITS SECURITY Subsections 244 (1) and 244 (2) of the Act provide that a secured creditor may not enforce its security against all or substantially all of the inventory, accounts receivable or other propeny regarding a business loan to an insolvent person without first giving the insolvent person 10 days notice of its intention to enforce its security. Rule 113.1 of the Bankruptcy and Insolvency Act Rules provides the manner in which such notice must be given and references the prescribed form of the notice.
-6- There are certain exceptions to the application ofthis section: 1) The insolvent person may consent to an earlier enforcement of the security provisions (Section 244 (2» but such consent may only be given after the sending of the requisite notice (Section 244 (2.1»; 2) Where a Receiver has already been appointed (Section 244 (4»; 3) Where the debtor is a bankrupt (the definition of an insolvent person excludes a person who is bankrupt); 4) Where the secured creditor's right to realize its security is protected as a result of the debtor having filed a proposal which did not include that secured creditor (Section 244 (3) and Section 69.1 (5» or the secured creditor is in a class of secured creditors who voted to refuse the proposal (Section 244 (3) and Section 69.1 (b»; 5) Where a Court Order has been obtained lifting the "stay" (Section 69.4). We anticipate that there may be significant litigation regarding the application of Section 69.4 and the meaning of "material prejudice".
- 7 - This notice provision excludes a secured creditor that is attempting to realize on assets which would comprise something less than "substantially all" of the relevant property of the debtor. Also, this notice provision excludes consumer situations as the provision pertainsto assets acquired for orused in a business. We note that the secured lender can only apply to the Court for relief from the 10 day stay in a situation where the debtor has filed a Division I commercial proposal. Absent such a filing, the secured lender, in the absence of consent, has no ability to shorten the 10 day stay. In critical situations, this could significantly prejudice the position of the secured lender and Section 47 (1) of the Act provides that the secured lender may apply to the Court for the appointment ofan interim Receiver. This can be done even where the debtor is not in the process of filing a commercial proposal. We note that the powers of an interim Receiver under Section 47 of the Act are significantly broader than the traditional powers granted to an interim Receiver under Section 46. IV. RECEIVER'S NOTICES Section 245 (1) of the Act requires a Receiver to send, no later than 10 days after his appointment, a notice of his appointment to the Superintendent of Bankruptcy, in the case of a bankrupt to the Trustee, to the insolvent person, and to all creditors of the insolvent person. Rule 113.2 of the Bankruptcy Rules references the prescribed form of notice that must be sent. Also, Rule 119 sets a fee of $70.00 payable to the Superintendent of Bankruptcy.
- 8- Section 245 (3) of the Act imposes an obligation on the insolvent person to provide the Receiver with particulars of its creditors. It will be interesting to see how this section operates in the marketplace, as I expectthat many insolvent persons will be less than fully cooperative with the Receiver in providing this information and the Receiver is required to make "reasonable efforts" to obtain the necessary information. We note that this requirement to provide notice is an on going responsibility in the event additional creditors are discovered during the course of the engagement. V. RECEIVER'S STATEMENTS AND INTERIM REPORTS Section 246 (1) of the Act and Rule 113.3 of the Bankruptcy and Insolvency Act Rules require a Receiver, upon taking possessionorcontrol, to prepare a statementcontainingthe names of the creditors and the amounts owing to them, a list of the assets in the possession or control of the Receiver and their book value, and information as to the Receiver's intended plan of action "as far as it may be known at that time". This statement must be sent to the Superintendent of Bankruptcy, the insolvent person or the Trustee in the case of the bankrupt, and to any credfior who requests a copy of same up to six months after the end ofthe Receivership. Section 246 (2) of the Act and Rule 113.5 of the Bankruptcy and Insolvency Act Rules require that a Receiver prepare interim reports at least once every six months with these reports setting out an interim statement of receipts and disbursements, disclosure of
- 9- property remaining in the control of the Receiver and not yet disposed of, and any other significant information regarding the Receivership. These interim reports must be provided to the Superintendent of Bankruptcy, the insolvent person or the Trustee in the case of a bankruptcy, and to any creditor who requests a copy up to six months after the end of the Receivership. VI. FINAL REPORT Section 246 (3) of the Act provides that immediately after completion of a Receivership, the Receiver must prepare a final report as prescribed by Rule 113.6 of the Bankruptcy and Insolvency Act Rules and provide a copy of same to the Superintendent, the insolvent person or the Trustee in the case ofa bankruptcy, and to any creditor who requests a copy of same up to six months after the end of the Receivership. This final report must contain a final statement of receipts and disbursements, an explanation of the disposition of the proceeds, details of the disposition of any property disposed of but not accounted for in the statement of receipts and disbursements, and any other significant information regarding the Receivership. The practical ramifications of the above reporting requirements include the potential increasedcostinvolved, particularly in the case ofa large Receivership. There will also be questions raised as to what information is required to be provided in the reports. There is also the interesting question as to when a Receiver is considered to have completed his duties in that the Superintendent of Bankruptcy, the insolvent person, the Trustee, or the
- 10- creditors may all require the Receiver to have his accounts reviewed by the Court up to six months after the preparation of the final statement ofreceipts and disbursements. vu. POWERS OF THE COURT Section 248 of the Act provides the authorization for anyone of the many interested parties to apply to the Court for an Order requiring a secured creditor, Receiver, or insolvent person to comply with the provisions of Sections 244 to 247 of the Act or restraining a secured creditor or a Receiver from realizing assets until the obligation has been fulfilled. As previously mentioned, Section 248 (2) provides that any interested party may require a judicial review of the Receiver's statement of accounts up to six months after the preparationof the statement of accounts. VID. SUPERVISION AND QUALIFICATIONS OF RECEIVERS Section 5 (4)(c) ofthe Act provides the Superintendent of Bankruptcy with the ability, by wayofdirectives, to supervise the activities of Receivers. Ifthe Superintendent chooses to be active in the Receivership field, it would likely have a significant impact on the future activities of Receivers. At the same time, the Act is silent on the matter of who ma.y or may not act as a Receiver and there are no licensing requirements in effect as there is with a Trustee in Bankruptcy. Given the overall thrust of this legislation, I am somewhat at a loss as to why Receiver qualifications where not addressed in the Act.
- 11 - IX. CONCLUSION It appears that the Act has been reasonably successful in addressing certain issues in the area of secured creditor and debtor relations. The imposition of the IO-day notice requirement and the further stay periods provided under the commercial proposal sections are intended to provide a "cooling off' period and to provide a better balance between"the rights of debtors and creditors. As with all new legislation. only time will. tell whether its stated goals will be achieved.