THE INTERPRETATION OF A PROGRESS PAYMENT AGREEMENT BY A BANKRUPTCY JUDGE SITTING IN THE PROVICE OF QUEBEC

General Editor: Steven J. Weisz Blake, Cassels & Graydon LLP VOLUME 25, NUMBER 4 Cited as 25 N.C.D. Rev. DECEMBER 2010 THE INTERPRETATION OF A PROGRESS PAYMENT AGREEMENT BY A BANKRUPTCY JUDGE SITTING IN THE PROVICE OF QUEBEC A recent Superior Court decision (in Re: Desrosiers Golf inc., [2009] J.Q. no 15696, 2009 QCCS 5773) rendered in the Province of Quebec is of interest. This decision rendered by Judge Jean-François Emond, sitting in Bankruptcy division for the Superior Court in the District of Quebec City, deals with a Progress Payment Agreement and a Master Lease Agreement between a financing company, Maxium Financial Services Inc. ( Maxium ) and a golf cart rental company, Desrosiers Golf Inc. ( Desrosiers ). Desrosiers is a company involved in the leasing and sale of golf carts. Maxium had financed for Desrosiers In This Issue THE INTERPRETATION OF A PROGRESS PAYMENT AGREEMENT BY A BANKRUPTCY JUDGE SITTING IN THE PROVINCE OF QUEBEC Luc Thibaudeau...57 IS THE AMOUNT SECURED BY THE SECURITY INTEREST IN BOTH THE COLLATERAL AND ITS PROCEEDS, LIMITED TO THE AMOUNT OF THE SECURED DEBT OR THE VALUE OF THE COLLATERAL? Jennifer E. Babe...59 BITTER BIDDER BITES THE DUST Jean Yves Simard...60 SALLY CREEK: A CAUTIONARY TALE FOR TRUSTEES IN BANKRUPTCY Craig Mills and Margaret Sims...63 Luc Thibaudeau, Lavery, de Billy LLP approximately 200 golf carts, which it purchased and delivered to Desrosiers under the terms and conditions of a Master Lease Agreement and a Progress Payment Agreement. The Master Lease Agreement stated that when particular units were to be leased to third parties by Desrosiers, Schedules would be filled out which would state the particular units to be leased by Maxium to Desrosiers under the terms and conditions of the Master Lease Agreement. The Progress Payment Agreement stated that Desrosiers had 90 days from the delivery of a particular unit to lease it and enter into a Schedule or to purchase it from Maxium: 4. You will, not later than 90 days subsequent to the date on which any unit of Equipment has been purchased by Maxium hereunder (the Purchase Period ), lease such unit from Maxium pursuant to the Master Agreement. If for any reason whatsoever, including failure of the parties to agree on rental terms, failure or loss of any of the Equipment, or default by You pursuant to the Master Agreement, You and Maxium do not enter into such a lease with respect to any unit of the Equipment that has been purchased by Maxium hereunder, You will purchase from Maxium, and Maxium will sell to You, on the next business day following the expiry of the applicable Purchase Period, at a price equal to 102% of the Price for such unit, all right, title and interest of Maxium in and to such unit. Each such purchase and sale transaction will be made on an as is, where is basis without any representation or warranty by Maxium, other than Maxium has done no act to encumber such unit and is fully entitled to sell its right, title and interest therein as contemplated hereby.

December 2010 Volume 25, No. 4 National Creditor/Debtor Review NATIONAL CREDITOR/DEBTOR REVIEW The National Creditor/Debtor Review is published quarterly by LexisNexis Canada Inc., 123 Commerce Valley Drive East, Suite 700, Markham, Ontario L3T 7W8 Design and Compilation LexisNexis Canada Inc. 2010. Unless otherwise stated, copyright in individual articles rests with the contributors. All rights reserved. No part of this publication may be reproduced or stored in any material form (including photocopying or storing it in any medium by electronic means and whether or not transiently or incidentally to some other use of this publication) without the written permission of the copyright holder except in accordance with the provisions of the Copyright Act. ISBN: 0-409-91077-5 ISSN: 0829-2019 Publications Mail Registration No. 180831 ISBN: 0-433-44391-X (Print & PDF) ISBN: 0-433-44689-7 (PDF) Subscription rates: $310 + GST/year (Print or PDF) $350 + GST/ year (Print & PDF) Please address all editorial inquiries to: Boris Roginsky, Journals Editor LexisNexis Canada Inc. Tel. (905) 479-2665; Toll-Free Tel. 1-800-668-6481 Fax (905) 479-2826; Toll-Free Fax 1-800-461-3275 Internet e-mail: ncdr@lexisnexis.ca. GENERAL EDITOR EDITORIAL BOARD Steven J. Weisz, Blake, Cassels & Graydon LLP, Toronto EDITORIAL BOARD MEMBERS Françoise Belzil, Belzil Law Office, Edmonton D. Bruce Clarke, Burchell Green Hayman Parish, Halifax Bertrand Giroux, Brouillette Charpentier Fournier, Montréal John Sandrelli, Fraser Milner Casgrain, Vancouver Rick Schwartz, Scurfield Tapper Cuddy, Winnipeg Note: This newsletter solicits manuscripts for consideration by the General Editor, who reserves the right to reject any manuscript or to publish it in revised form. The articles included in National Creditor/Debtor Review reflect the views of the individual authors. This newsletter is not intended to provide legal or other professional advice and readers should not act on the information contained in this report without seeking specific independent advice on the particular matters with which they are concerned. All units that became the object of such Leasing Schedules (the Lease Plan ) were the object of the Lessor s reserves of ownership which were filed and registered at the Registre des droits personnels et réels mobiliers, L.R.Q., c. B-9, a. 8 [RDPRM], the Quebec equivalent of the Personal Property Security Act, R.S.O. 1990, c. P.10 [PPSA]. The Master Lease Agreement was also registered with the RDPRM. However, the Progress Payment Agreement was not registered. The units that were delivered to Desrosiers but not leased to a third party remained on Desrosiers Floor Plan (the Floor Plan ). In February 2009, Desrosiers was declared bankrupt. On the bankruptcy date, approximately 50 units were part of the Lease Plan and the object of Schedules under the terms and conditions of the Master Lease Agreement. Another 70 units that had been delivered had not been sold or leased to third parties and were still part of the Floor Plan, e.g. they had not yet been the object of Schedules, and no particular filing or registration to the RDPRM had been made in relation thereto; these units had not been purchased by Desrosiers and were therefore still governed by the Progress Payment Agreement. However, on the bankruptcy date, the 90 days stated in the Progress Payment Agreement had elapsed. Maxium filed its proof of claim with the Trustee to the Bankruptcy of Desrosiers and claimed ownership of all units it had financed and delivered and that were part of both the Lease Plan and the Floor Plan. The Trustee granted Maxium s proof of claim for the 50 units on the Lease Plan, but not for the 70 units of the Floor Plan, alleging that these had not been any particular registration for these at the RDPRM and also alleging that by virtue of s. 4 of the Progress Payment Agreement, ownership of the carts had been transferred to Desrosiers and the carts were therefore in the estate of Desrosiers ( You will purchase from Maxium and Maxium will sell to you ). The Trustee alleged that s. 4 of the Progress Payment Agreement contained a bilateral promise of sale and purchase that affected sale and transfer of ownership of the units, even if Desrosiers had not paid the purchase price. Maxium appealed the decision of the Trustee before the Superior Court sitting in Bankruptcy. Maxium alleged it still owned the units of the Floor Plan and that the units could not have been transferred to Desrosiers since Desrosiers had not paid for them. Maxium also stated that the Progress Payment 58

National Creditor/Debtor Review December 2010 Volume 25, No. 4 Agreement stipulates that the units were to remain the sole property of Maxium at all times. Judge Emond confirmed the enforceability and the opposability to the Trustee of the Payment Progress Agreement, even in a context where it had not been filed and registered at the RDPRM. Judge Emond stated that the Progress Payment Agreement did not have the same value as a security. The Payment Progress Agreement is a contract between the parties stating that the units delivered will either (a) be the object of a Schedule under the Master Lease Agreement or (b) be purchased by Desrosiers if not leased or sold to third parties within 90 days. According to the Court, the Payment Progress Agreement confirmed Maxium s argument that right of ownership could not be transferred to Desrosiers as long as the conditions stated therein were not fulfilled. Amongst these conditions was the payment of the units by Desrosiers, which had not been made. Judge Emond stated that even if the Progress Payment Agreement contained a bilateral promise to sell and purchase, such a promise did not amount to a sale, but only to a pre-contract. Even if Desrosiers was in possession of the units that were the object of this promise, it did not possess them in its quality of owner. Maxium remained the owner of the Floor Plan as long as a sales agreement had not been executed and payment made. Judge Emond stated that the presence of a default clause allowing Maxium to repossess the units also supported this interpretation of the Progress Payment Agreement. To pretend the opposite would amount to saying that Desrosiers could take advantage of its default, which was clearly not the parties intent. The Court therefore reversed the Trustee s decision and declared that Maxium had remained at all times the owner of all units delivered to Desrosiers (Floor Plan and Lease Plan) since the conditions of the Progress Payment Agreement had not been fulfilled and since payment of the Floor Plan units had not been made by Desrosiers. To our knowledge, there has been no other decision rendered in Quebec on the enforceability of a Progress Payment Agreement. This decision demonstrates that units delivered under a Progress Payment Agreement but not yet the object of a lease schedule will remain the ownership of the Lessor, even though no reserve of ownership has been filed in the public registers. However, as a precautionary measure, it would be advisable to ensure that any document susceptible to provide help in evidencing rights of ownership be filed and published in the appropriate registers, such as the Registre des droits réels et personnels mobiliers, which is used in the Province of Quebec. [Editor s note: Luc Thibaudeau is a partner at Lavery, debilly LLP in Montreal. He practises primarily in the field of commercial litigation, concentrating on financing contracts, payment processing and consumer law, and representing a wide variety of clients including corporations, financial institutions, lessors, lenders and brokerage firms. These clients regularly retain him to represent them in injunction or repossession proceedings and other special or urgent proceedings.] IS THE AMOUNT SECURED BY THE SECURITY INTEREST IN BOTH THE COLLATERAL AND ITS PROCEEDS, LIMITED TO THE AMOUNT OF THE SECURED DEBT OR THE VALUE OF THE COLLATERAL? Bank of Nova Scotia v. IPS Invoice Payment Systems Corporations, [2010] O.J. No. 1676, 2010 ONSC 2101 1429030 Ontario Inc., carrying on business as Blooming Rose ( Debtor ), borrowed funds from the Bank secured by a general security agreement registered first in time under the Personal Property Security Act, R.S.O. 1990, c. P.10 [PPSA]. The Bank margined the line to the Debtor against the value of its inventory and receivables. The GSA provided the Jennifer E. Babe Miller Thomson LLP Debtor was to receive all amounts from its account debtors in trust for the Bank. In the Debtor s insolvency, the Bank claimed amounts paid by the Debtor s customers to the two other creditors mentioned below, in amounts to retire the debt owed to the Bank amounting to about $500,000. Under a subsequent PPSA registration, IPS Invoice Payment Systems Corporations ( IPS ) factored certain receivables for the Debtor on a recourse 59

December 2010 Volume 25, No. 4 National Creditor/Debtor Review basis and paid $1.7 million into the Debtor s account with the Bank, reducing its bank line of credit. IPS collected in about $100,000 less from the factored account debtors than it had paid to the Debtor. IPS argued that the Bank knew of the factoring, acquiesced to the factoring, and allowed the Debtor to deal in its receivables, and the Bank had already received $1.7 million of proceeds from the original account receivable collateral, and that to allow the Bank to be paid anything more from IPS would be letting the Bank double dip. Under a subsequent deal, the Debtor obtained funding from Integrated Business Concepts Inc. ( IBC ) to help the Debtor acquire raw materials to make seasonal products to sell to Wal-Mart. IBC did not secure its inventory financing with the Debtor, but took a personal guarantee and other security. As directed by the Debtor, Wal-Mart paid $216,000 to IBC directly for the finished goods. IBC argued that the Bank gave permission to the Debtor to deal in its inventory and licenced the Debtor to satisfy its obligations that are immediately incidental to an actual sale of the inventory to third parties, as set out in Royal Bank of Canada v. Sparrow Electric Corp., [1997] S.C.J. No. 25, [1997] 1 S.C.R. 411. In coming to its decision in favour of the Bank, the Court held that: a) the Bank did not authorize the factoring to IPS or the IBC inventory arrangements with the Wal- Mart receivable. The facts did not show the Bank knew of or authorized this sale of the accounts receivable, and it did not grant an implied licence to deal with this inventory as happened; b) proceeds under s. 25 can be both (i) the sale money paid by IPS into the Debtor s bank account and (ii) the further proceeds generated from the purchased accounts from the customers; Abitibibowater inc., Re, [2010] Q.J. No. 3855, 2010 QCCS 1742 (S.C.) On May 3, 2010, Justice Clément Gascon of the Superior Court rendered an interesting decision in the context of a motion for authorization of the sale BITTER BIDDER BITES THE DUST Jean Yves Simard Lavery, de Billy LLP c) the more difficult question before the Court was whether the recovery of the proceeds pursuant to s. 25 is limited only by the full amount of the outstanding indebtedness secured by the GSA or whether it is also limited to the value of the collateral [para. 21]; d) there was no case law on this issue and every PPSA in Canada, other than Ontario s PPSA, limits recovery to the value of the collateral on the date of dealing where the secured party enforces against both the collateral and the proceeds [para. 25]; e) having reviewed various learned articles on proceeds, the Court held that recovery under s. 25 is limited to the value of the collateral on the date of dealing, and in the case of accounts receivable, is the face value of the receivable [para. 33]; f) section 28 of the PPSA provides for a free and clear sale of the Debtor s goods in the ordinary course of its business, but this does not extend to accounts as an intangible ; and g) IPS was ordered to pay the amount of its discount deducted from the face value of the receivables paid to the Debtor for the factored receivables, and IBC was ordered to pay sufficient funds from the Wal-Mart payment to make up the shortfall remaining owing to the Bank, and IBC as an unsecured creditor of the Debtor was subordinate to both the Bank and IPS. [Editor s note: Jennifer E. Babe is a partner in the Toronto office of Miller Thomson LLP practising in the area of commercial law. She has written Sale of a Business and co-authored Creditors' Remedies in Ontario. She is listed in the 2008, 2009 and 2010 editions of the Lexpert Directory for the Leading 500 Lawyers in Canada.] to American Iron & Metal LP ( AIM ) of assets belonging to Abitibibowater Inc. ( Abitibi ) in connection with Abitibi s restructuring under the Companies Creditors Arrangement Act [CCAA]. 1 More specifically, the court considered the fairness 60

National Creditor/Debtor Review December 2010 Volume 25, No. 4 of the sale process and a rejected bidder s legal standing to intervene in and contest the approval of the sale sought by Abitibi, by its monitor and the chosen purchaser. FACTS In the context of its restructuring, Abitibi decided to slow down its operations and, ultimately, to sell some of its plants that were no longer necessary to meet market demand, and which were no longer a part of its post-restructuring plans. Thus, Abitibi put four of its pulp and paper plants 2 up for sale by tender as a single block. Although Abitibi received higher bids than the amount tendered by AIM, it considered that no other bidder had satisfactorily shown the ability to consummate the transaction within a reasonable time and according to financial conditions that met its approval. Therefore, Abitibi brought a motion for authorization by the court to sell the block of plants to AIM. However, Arctic Beluga ( Beluga ), an unsuccessful bidder in the sale of the plants, applied to intervene in the motion, objecting to the order sought. It pleaded, in particular, that since its bid for the plants was substantially higher than the bid of AIM, it was unfairly denied the opportunity to purchase the plants, and that the tender process was therefore tainted. In substance, Beluga claimed that it had been treated unfairly because its monetary bid, although much higher, was rejected in favour of another bidder (AIM). In response, Abitibi argued, among other things, that Beluga did not have a sufficient legal interest to contest the court s approval of the sale. It is relevant to note that the tendering process conducted by Abitibi had not received the court s prior approval. Also, both the monitor and a number of key creditors openly supported Abitibi s motion. Furthermore, the court pointed out that none of Abitibi s numerous creditors in this case objected to the proposed sale. ANALYSIS OF SALE PROCESS The Superior Court reviewed the following criteria laid down in the case of Royal Bank v. Soundair Corp., 3 noting that these criteria apply in the context of a motion to authorize the sale of assets in arrangement proceedings under the CCAA: Was there a sufficient effort to obtain the best price and did the parties act providently? Was the process conducted effectively and with integrity? Were the interests of the parties involved considered? Was the sale process fair? Regarding the sale process as such, the court dismissed Beluga s claims of unfairness. It found that the sale process carried out by Abitibi and the monitor was unimpeachable and held that, in attempting to obtain the best possible price in the shortest possible time, Abitibi and its monitor conducted a fair, reasonable, transparent and effective sale, adding that there was simply no factual basis for Beluga s claims. Indeed, Beluga submitted several bids that were all diligently considered by Abitibi, even some unsolicited bids, which were submitted after Abitibi had already accepted AIM s bid. The court noted that Beluga had had every opportunity to improve its offer, to provide particulars and documents, and to give sufficient financial commitments, and that it had simply failed to do so. Therefore, the court found that Beluga had participated actively in the tender process and that it was paradoxical, to say the least, for Beluga to argue that the process was unfair when it had participated in the process and had had every opportunity to submit its bids. In addition, the court considered the grounds that led Abitibi and the monitor to prefer AIM s bid, namely: the purchase price supported by an in-depth market study was fair and reasonable; the bid included a profit-sharing formula for the sale of the equipment in the plants; AIM required no further due diligence and provided sufficient evidence of its ability to assume any potential environmental liability for the facilities; AIM s bid contained no financing conditions and it provided satisfactory evidence of its financial ability to consummate the sale. Conversely, Beluga did not provide satisfactory proof of its financial ability to consummate the sale. Also, it was unable to show that it could contend with the possibility of exposure to future environmental liability of as much as $10 million. The court observed that, contrary to Beluga s bid, AIM s bid responded to Abitibi s legitimate con- 61

December 2010 Volume 25, No. 4 National Creditor/Debtor Review cerns both in terms of the environmental risk and the financing conditions. Therefore, the court held that the parties properly used their business judgment (business judgment rule) in deciding that AIM s was the better bid, and that it was not the court s role to intervene in the exercise of this judgment in connection with the asset sale process, if this process was found to be fair and reasonable and there was no wrongful conduct by the monitor. Accordingly, the court acknowledged that Abitibi and its monitor had rejected Beluga s bid for reasonable and defensible grounds. In this regard, the court added that the parties duty during the sale process is not to obtain the highest possible price at any cost, but to make every possible effort to obtain the best price, and that the amount of Beluga s bid was not relevant unless Abitibi and its monitor had acted improvidently: In prior decisions rendered in similar context, courts in this province have emphasized that they should intervene only where there is clear evidence that the monitor failed to act properly. A subsequent, albeit higher, bid is not necessarily a valid enough reason to set aside a sale process short of any evidence of unfairness. In the circumstances, the court agrees that the petitioners and the monitor were entitled to prefer a bird in the hand to two in the bush and were reasonable in preferring a lower-priced unconditional offer over a higher-priced offer that was subject to ambiguous caveats and unsatisfactory funding commitments. 4 SUFFICIENT LEGAL INTEREST TO INTERVENE Although the court dismissed Beluga s arguments, it did consider the issue of whether Beluga had a sufficient legal interest to object to the motion for authorization of the asset sale. In this regard, the court noted that the standing of a rejected bidder has not yet been considered in Quebec: Interestingly, the court notes that in the few reported decisions of this province s courts dealing with the contestation of sale approval motions, the standing issue of the disgruntled bidder has apparently not been raised or analyzed. 5 The court referred to the decision by the Ontario Court of Appeal in Skyepharma v. Hyal Pharmaceutical Corporation [Skyepharma], 6 and identified the following principles regarding the legal interest of the bidder or potential purchaser at the stage of the court s approval of the sale: Its interest in the sale is purely commercial; If a prospective purchaser does not acquire a sufficient interest to be a party to the motion for the authorization of the asset sale, it follows that no rights of such purchaser will be decided by the order issued on the motion; This being said, there are two reasons underlying the principle that an approval order has no effect on the rights or interest of an unsuccessful bidder in the sale process: the prospective purchaser has not yet acquired ownership in the property being sold, and therefore, the submission of a bid creates no rights in favour of the bidder; the fundamental objective of the process of approving the sale by the court is to consider the interests of the persons with a direct interest in the sale process, including, first and foremost, the creditors. At this stage, the prospective purchaser does not hold a sufficient interest. Conversely, the involvement of a prospective purchaser, who was previously eliminated from the sale process, in the motion to authorize the sale of the assets could confuse the debate by adding extraneous issues that could lead to additional expense and delay. Certain policy reasons have prompted the courts to restrict the presence of prospective purchasers as much as possible in the sale approval process given that, as a general rule, there is a measure of urgency to such proceedings, and the presence of such purchasers can add a degree of uncertainty to, and delay, the process. In some cases, such uncertainty and potential for delay can be used as leverage by the unsuccessful purchaser contrary to the interests of those for whose benefit the sale is intended. The court noted also that the Ontario Superior Court of Justice, in the Nortel Networks Corporation case, recently confirmed that the principles elucidated in the Skyepharma case could serve as a precedent in the context of proceedings instituted under both the CCAA and Chapter 11 of the U.S. bankruptcy code. 62

National Creditor/Debtor Review December 2010 Volume 25, No. 4 Finally, the Court considered that Beluga s attempted opposition to the sale of Abitibi s facilities to AIM was a typical example of the situations that underlie the policy reasons for the courts exclusion of prospective purchasers from the sale approval process. Indeed, the court noted that Beluga was the only person to contest the sale; nor was it supported by any of the creditors. Beluga s contestation was based purely on its own commercial interests. As a result, it created uncertainty surrounding the sale and delayed its approval, while the parties with a legitimate interest in the sale were concerned that it should proceed as quickly as possible. In other words, Beluga had no legal standing either to contest the sale process or to intervene at the sale authorization stage. Its intervention, motivated solely by its own commercial interests, was detrimental to the definite interests of the parties notably the creditors who were entitled to have the process concluded as quickly as possible. CONCLUSION This decision is particularly important because, in addition to providing a comprehensive review of the principles governing the asset sale process under the CCAA, it is the first time the courts of Quebec have ruled on the lack of legal standing of a prospective purchaser, who is unsuccessful in bidding for an asset in the sale process, to contest the application for approval of the sale. [Editor s note: Jean Yves Simard is a partner at Lavery, de Billy LLP in Montreal. His practice focuses on bankruptcy, insolvency and restructuring, as well as commercial litigation. Mr. Simard is a current Member of the Executive of the National Bankruptcy, Insolvency and Restructuring Law Section of the Canadian Bar Association. He is a frequent speaker at conferences and teaches at the Quebec Bar admission's course (École du Barreau).] 1 R.S.C., 1985, c. c-36. 2 The plants being sold were in Dalhousie, New Brunswick; Donnacona, Quebec; Beaupré, Quebec; and Fort William, Ontario. 3 [1991] O.J. No. 1137, 7 C.B.R. (3d) 1 (Ont. C.A.). 4 [2010] Q.J. No. 3855 at paras. 72-73. 5 Ibid. at para. 81. 6 [2000] O.J. no. 467 (Ont. C.A.). SALLY CREEK: A CAUTIONARY TALE FOR TRUSTEES IN BANKRUPTCY Craig Mills and Margaret Sims Miller Thomson LLP The recent Ontario Court of Appeal decision in Murphy v. Sally Creek Environs Corporation [Sally Creek], 1 is a cautionary tale for Trustees in bankruptcy ( Trustees ) and the counsel who represent them. In that case, the Trustee s fees and those of its legal counsel were drastically reduced on taxation; a cost award was made against the Trustee personally; and the Trustee s conduct was impugned in a detailed decision of the Bankruptcy Registrar and the Court of Appeal. Beyond the particular facts in Sally Creek, the decision serves as a strong reminder to Trustees and their counsel of the duties of the Trustee as an impartial officer of the Court. The decision also highlights the remark of Mr. Justice Farley in Confederation Treasury Services 2 that woe be to [the Trustee] if it does not act impartially towards the creditors of the estate. The key requirements for Trustees as highlighted in the Sally Creek decision include: A Trustee must act fairly and evenhandedly, keeping in mind its role as an officer of the court and the duties it owes to all creditors. Trustees receive their authorization from the inspectors with respect to the administration of the estate. If a Trustee is concerned that the inspectors are inappropriately conflicted in giving or withholding authorization or instructions, the Trustee should apply to Court for directions in keeping with its duties to the estate. Without Court authorization, the Trustee cannot simply choose to ignore, fail to seek or contravene the inspectors instructions. Inspector approval is required before a Trustee can retain a lawyer for the estate. If counsel is retained prior to the appointment of inspectors at the first meeting of creditors, then counsel s appointment needs to be confirmed by the inspectors. 63

December 2010 Volume 25, No. 4 National Creditor/Debtor Review Where a Trustee hires a solicitor or undertakes litigation without the approval of the inspectors, the Trustee can be held personally liable for the costs and may be prevented from being reimbursed from the estate. A solicitor s retainer for a bankrupt estate is limited to providing the services that have been approved by the inspectors. If the inspectors make it clear that they do not wish the solicitor to be involved in certain matters, the Trustee will normally be expected to respect such limits and, if the Trustee does not, he does so at his peril. Bills of costs submitted at taxation should be supported with greater detail than one omnibus fee for services rendered for a period of time. The Bankruptcy Registrar has a wide discretion under s. 152 of the Bankruptcy and Insolvency Act 3 to set the appropriate amount of a Trustee s taxed fee. General principles to be considered in determining a Trustee s fees are: a) to allow the Trustee a fair compensation for his services; b) to prevent unjustifiable payments for fees to the detriment of the estate and the creditors; and c) to encourage, rather than to discourage, efficient, conscientious administration of the bankrupt estate for the benefit of the creditors and, so far as the public is concerned, in the interests of the proper carrying out of the principles and objectives of the Bankruptcy and Insolvency Act. Although the circumstances leading to the decision in Sally Creek are extreme, it is a good reminder of the important role that a Trustee plays as an officer of the court in an insolvency proceeding. As courts routinely rely upon a Trustee s recommendations, it emphasizes the need for a Trustee to be impartial and to act with integrity throughout a bankruptcy proceeding. [Editor s note: Craig Mills and Margaret Sims are lawyers in the Financial Services and Insolvency Group of Miller Thomson LLP. Craig is a partner representing Court appointed monitors and trustees, debtors, lenders, and other creditors in the insolvency context. Margaret is associate counsel with the firm on a limited basis as she recently took on the role as President of Distility, a branding technology company.] 1 2 3 [2010] O.J. No. 1773, 2010 ONCA 312. Confederation Treasury Services Ltd. (Re), [1995] O.J. No. 3993, 37 C.B.R. (3d) 237 (Ont. Ct. J. (Gen. Div.)). R.S.C. 1985, c. B-3. 64