AFFINITY CREDIT UNION 2013 APPLICANT - v. -, 2023 SKKB 195

KING’S BENCH FOR SASKATCHEWAN Citation: 2023 SKKB 195 Date: 20 23 08 17 Docket: KBG-RG-00909-2023 Judicial Centre: Regina BETWEEN: AFFINITY CREDIT UNION 2013 APPLICANT - and - F & L CONCRETE SERVICES LTD. RESPONDENT CORRECTED JUDGMENT: The text of the original judgment has been changed per the corrigendum released September 20, 2023. (A copy of the corrigendum is appended to this corrected judgment.) Counsel: Ryan Pederson for the applicant Grant Schmidt for the respondent M. Kim Anderson and Travis K. Kusch for MNP Ltd. JUDGMENT BERGBUSCH J.

August 17, 202 3 Introduction [ 1 ] Affinity Credit Union 2013 [ACU] applied for an order pursuant to s. 243 of the Bankruptcy and Insolvency Act , RSC 1985, c B-3 [ BIA ], s 65(1) of The Queen’s Bench Act, 1998 , SS 1998, c Q-1.01 (repealed by The King’s Bench Act , SS 2023, c 28 [ KBA ]), and s. 64(8) of The Personal Property Security Act, 1993 , SS 1993, c P-6.2 [ PPSA ], appointing MNP Ltd. [MNP] the receiver-manager of the property, assets, and undertakings [Property] of F & L Concrete Services Ltd. [F & L].

Given the recent enactment of the KBA , I have considered the order sought by ACU under the applicable provisions of that statute. ACU submits that F & L is insolvent and that the appointment of a receiver is just and convenient. [ 2 ] F & L opposed the receivership order, contending that the application should be adjourned until F & L’s financial statements for the years ending March 31, 2022 and March 31, 2023, can be prepared, so that F & L can seek replacement financing.

Alternately, F & L requested that the application be dismissed, arguing that it is not insolvent, that ACU is misusing the BIA to circumvent The Queen’s Bench Rules , and that a receivership would destroy its business. F & L also alleges that MNP is in a conflict of interest because it prepared the financial statements of F & L for the year ended March 31, 2021, and had been engaged by F & L to prepare the financial statements for F & L’s two subsequent fiscal years. [ 3 ] ACU commenced this proceeding by originating application returnable on April 26, 2023.

On April 25, F & L served and filed a responding affidavit sworn by its president, Norman Fichter. By consent of the parties, the application was adjourned to May 25, 2023. In accordance with The Queen’s Bench Rules , ACU served two response affidavits on F & L’s counsel on May 18, 2023. On May 24, 2023, F & L served and filed two additional affidavits, as well as an appraisal dated April 5, 2023, which opines that the market value of F & L’s business premises is $1,970,000.

Despite the late filing of F & L’s materials, I exercised my discretion to admit them for consideration on this application. [ 4 ] Based upon the evidence filed by the parties, I have determined that F & L is insolvent within the meaning of the BIA . Further, I have determined that it is just and convenient to appoint a receiver, taking into account the relevant factors identified in the case law. I have also determined that MNP should be appointed the receiver of the Property of F & L. F & L has not demonstrated

that MNP is in a conflict of interest that would preclude its appointment. [ 5 ] I provided a

summary of my decision to the parties on August 3, 2023, explaining that my reasons in full would follow. Background [ 6 ] F & L is a concrete, aggregate, and gravel supplier and it also operates an equipment rental business [Business] in the Estevan, Saskatchewan area. F & L owns a property in Estevan from which it conducts its business [Business Land], as well as two rental properties in Estevan [Rental Lands]. Depending upon the season, F & L employs approximately 35 full- and part-time workers. [ 7 ] ACU has provided banking services to F & L for approximately 30 years. During that period, ACU has made numerous loans to F & L, including the following: (

a) A revolving line of credit [LOC], with a limit of $400,000, used by F & L to operate its business; (

b) A revolving capital loan [Loan #1], with a limit of $500,000, used by F & L to purchase equipment for use in its business; and (

c) A loan in the original amount of $1,192,400 [Loan #12], to be used for working capital. [Demand Loans] [ 8 ] ACU also provided a term loan in the original amount of $93,741.41 to finance F & L’s purchase of a 2019 Dodge truck. This loan is not in default and is not relevant to this decision. [ 9 ] The LOC is subject to a revolving line of credit agreement [LOC Agreement] dated August 11, 2015, and is secured by a mortgage dated July 27, 2015, in the amount of $400,000 registered against title to the Rental Lands.

Loan #1 is subject to a revolving capital loan agreement dated August 11, 2015, and a general security agreement dated November 24, 2016, granting ACU a security interest in all of F & L’s present and after-acquired property. Finally, Loan #12 is secured by a demand mortgage dated June 21, 2016, in the amount of $1,192,400 registered against title to the Business Land. [ 10 ] The LOC and Loan #1 are payable on demand, with interest at ACU’s prime rate of interest plus 2% per annum.

In addition, F & L is obligated to pay monthly instalments of $9,405 on Loan #1, reduced to $4,705 if the outstanding balance is $250,000 or less. Loan #12 is also payable on demand, with interest at 4.20% per annum. F & L was required to make monthly payments of $6,405 from July 31, 2016 to June 30, 2019, when the full balance of principal and interest became due. It appears that F & L continued to make monthly payments on Loan #12 after June 20, 2019.

According to ACU, the last payment received from F & L in respect of Loan #12 was $8,021.12 on March 23, 2023. [ 11 ] F & L has certain obligations to report financial information to ACU: (

a) Paragraph 17 of the LOC Agreement states: 17. FINANCIAL REPORTS The Borrower shall provide the Credit Union with financial reports showing, among other things, the value of inventory owner [sic] and accounts receivable outstanding. The financial reports shall be provided at such times in such manner as the Credit Union may request. Unless the Credit Union shall otherwise advise in writing, the financial reports shall be provided annually. The Borrower agrees to provide such further financial or other reports or information as the Credit Union may require from time to time. (

b) The revolving capital loan agreement for Loan #1 contains the following clause: Financial Reports . The Member shall provide the Credit Union with a financial report showing, among other things, the value of inventory owned, accounts receivable outstanding and a listing of current equipment. The financial reports shall be provided at such times in such manner as the Credit Union may request. Unless the Credit Union shall otherwise advise in writing, the financial report shall be provided annually.

The Member agrees to provide such further financial or other reports or information as the Credit Union may require from time to time. [ 12 ] Under para. 8 of the mortgage agreement related to the Business Land, F & L is also required to maintain property insurance for the building on the property to the full extent of its insurable value. [ 13 ] F & L provides monthly borrowing limit certificates (also referred to as “margining certificates”) to ACU so that ACU can determine the credit to advance under the LOC.

The borrowing limit is reduced by potential preferred claims, which are those payables that rank in priority to ACU’s security. These include amounts owing for wages, employee deductions, workers compensation, sales tax, income tax, and overdue rent . [ 14 ] ACU filed affidavits sworn by Christine Bunch, loan rehabilitation officer for ACU, and Judy du Chalard, director, loan rehabilitation and recovery for ACU, both of whom had extensive dealings with F & L. [ 15 ] Ms. Bunch has had responsibility for the F & L loan accounts since May 2021.

She averred that F & L has been delinquent in meeting its payment obligations under one or more of the Demand Loans, causing ACU to send delinquency notices seven times between March 31, 2021 and June 8, 2022. She also outlined her efforts to obtain copies of financial information from F & L, including its financial statements. ACU received F & L’s financial statement for the year ending March 31, 2020 on March 10, 2022. In response to Ms. Bunch’s inquiry about the 2021 and 2022 financial statements, Kurt Schmidt, F & L’s controller, replied on March 10,

2022 that changes were being made to those financial statements and he hoped to have the 2021 financial statement completed in a few weeks and the 2022 financial statement completed by May 15, 2022. [ 16 ] Between April and October 2022, Ms. Bunch followed up numerous times with Mr. Schmidt regarding the status of the financial statements and two instances when F & L’s chequing account was in overdraft. She also communicated directly with a representative of MNP (F & L’s external accountants), who advised on May 31, 2022, that he had not received information to prepare F & L’s financial statements.

On June 7, 2022, MNP advised that it “did not even have sufficient information to start preparing [F & L’s] 2021 financial statements and that MNP did not have any information for 2022.” (Christine Bunch affidavit sworn April 11, 2023 at para. 15). [ 17 ] At ACU’s request, a conference call took place between Ms. Bunch, Ms. du Chalard, and Mr. Schmidt on October 7, 2022. Norman Fichter did not participate despite Ms. Bunch having advised F & L that his participation was imperative. Mr. Schmidt advised that F & L’s 2021 financial statement would not be completed until November 2022, which was unacceptable to ACU.

Ms. Bunch asked whether ACU would permit MNP to conduct a review of F & L’s business [Business Review] and warned that ACU would end its banking relationship with F & L if F & L refused. [ 18 ] After this conference call, MNP provided information to F & L regarding the Business Review process, including the estimated cost, and sent F & L an engagement letter. Ms. Bunch advised Mr. Schmidt that ACU expected F & L to decide on the Business Review by November 1, 2022. ACU continued to press F & L regarding the engagement letter and the Business Review. Ms.

Bunch advised that MNP did not require F & L’s financial statements to be completed before embarking on the Business Review. Ms. Bunch next told Mr. Schmidt that ACU needed F & L to decide on the Business Review by December 23, 2022. [ 19 ] Ms. Bunch spoke to Norman Fichter directly about the Business Review on January 10, 2023, explaining that the review was necessary for ACU to continue its business relationship with F & L. Mr. Fichter was sceptical of MNP’s estimate that the fees for the Business Review would be $10,000 to $15,000, believing that the fees would more likely be $40,000. On January 12, 2023, Mr.

Fichter told Ms. Bunch that the Business Review was a “waste of money,” that he thought all ACU needed was the 2022 financial statement, and that it was not F & L’s year-end yet. Ms. Bunch responded that ACU had not received F & L’s financial statements for its previous two fiscal years. [ 20 ] Ms. du Chalard also communicated with Mr. Schmidt on several occasions about F & L’s failure to provide its financial statements and ACU’s lack of confidence in F & L’s financial strength. On December 22, 2022, Ms. du Chalard told Mr.

Schmidt that ACU needed an updated margining statement, the 2021 financial statement, and F & L’s agreement to the Business Review. Ms. du Chalard advised that ACU wanted to renew Loan #12 and the associated mortgage for a one-year term, with a 7% interest rate. On January 4, 2023, Ms. du Chalard followed up with Mr.

Schmidt, advising him that ACU had not received financial statements for nearly three years and ACU would terminate its business relationship with F & L unless F & L agreed to the Business Review by January 6, 2023. [ 21 ] Ms. du Chalard determined on January 15, 2023 that Loan #12 should be extended for one year in order to fix the interest rate at 7% per annum. As a result, ACU sent to F & L an extension agreement for Loan #12, which was accepted by F & L on February 2, 2023. [ 22 ] When ACU offered to extend Loan #12, ACU did not plan to demand immediate repayment of the Demand Loans.

Rather, ACU intended to communicate that it was going to end its banking relationship with F & L and it would call in the Demand Loans if F & L did not refinance them by a specified date. However, on January 25, 2023, after reviewing ACU’s recent correspondence with F & L, Ms. Bunch determined that ACU should call in the loans immediately because of F & L’s long-term lack of co-operation with its lender. [ 23 ] ACU finally received F & L’s financial statement for the year ended March 31, 2021 [2021 Financial Statement] on January 27, 2023.

It revealed that F & L had been in precarious financial condition during the effective period of the report. Most significantly: (

a) Working capital was negative $172,554; (

b) F & L recorded a loss of $633,465, which would have been significantly higher but for government assistance of $461,177; (

c) Retained earnings were in a deficit position; and (

d) Government remittances payable increased from $74,500 at the end of the previous fiscal year to $584,489. [ 24 ] After comparing the 2021 Financial Statement to the margining certificates F & L had provided to ACU for March 31, 2021 to April 30, 2021, ACU concluded that F & L’s equity had been overstated by more than $2.7 million.

As result, ACU suspected that more recent margining certificates provided by F & L were not reliable. [ 25 ] Through counsel, ACU demanded payment of the Demand Loans on February 2, 2023 [Demand Letter] and gave notice that it was terminating the LOC Agreement and the revolving capital loan agreement and closing F & L’s chequing accounts. At that date, the amounts owing on each of the Demand Loans were as follows: (

a) LOC: $261,253.12; (

b) Loan #1: $163,303.08; and (

c) Loan #12: $1,041,873.59. [ 26 ] On February 17, 2023, ACU served F & L with a notice of intention to enforce security pursuant to s. 244 of the

BIA . The total indebtedness secured by ACU’s security was $1,627,440.38 as at February 15, 2023. [ 27 ] On March 1, 2023, ACU received notice of cancellation of insurance for the shop located on the Business Land. The policy naming ACU as first loss payee expired on February 24, 2023. As noted above, under the mortgage F & L was required to maintain insurance on the property. [ 28 ] On April 24, 2023 (the day before the original hearing date of ACU’s receivership application), F & L paid to ACU proceeds of sale from three items of equipment.

ACU applied those proceeds to pay out Loan #1 and to reduce the balance owing on the LOC. [ 29 ] Norman Fichter admitted that, during the COVID-19 pandemic, F & L fell into arrears on payment of employee source deductions. He said that “Revenue Canada is working with the company to pay current deductions and slowly pay off arrears.” (Norman Fichter affidavit sworn on April 24, 2023 at para. 7). F & L’s controller, Mr.

Schmidt, attested that Canada Revenue Agency [CRA] “has been paid current deductions and has been patient with clearing arrears from the pandemic.” (Kurt Schmidt affidavit sworn on May 24, 2023 at para. 7). None of the affidavits filed on behalf of F & L provided details of any agreement with CRA whereby CRA had agreed not to enforce, or to delay enforcing, F & L’s obligation to pay source deductions. [ 30 ] Mr. Fichter’s evidence on April 24, 2023 was that the financial statement for the year ending March 31, 2022 was very near completion by MNP.

He asserted that F & L has assets that far exceed its liabilities, citing an appraisal of the Business Lands and a list of one-year old equipment showing a gross value of $11,500,000. He also averred that F & L was selling surplus equipment to pay down the Demand Loans. [ 31 ] In his affidavit, Mr. Schmidt stated that F & L had been working in 2022 and 2023 to improve its cash flow. F & L’s large customers are oil companies, their subcontractors, and rural municipalities, and according to Mr. Schmidt they are all slow to pay their accounts.

However, he claimed that they are now doing more work, which has improved F & L’s cash flow. He indicated that he could not arrange for alternate financing until MNP had completed the company’s 2022 and 2023 financial statements.

He also filed in evidence property assessments of the Rental Lands, showing appraised values for assessment purposes of $111,200 and $127,000. [ 32 ] Chris Fichter, the general manager, secretary-treasurer and a director of F & L, stated that F & L has been able to operate without a line of credit through improved collection of accounts receivable, the co-operation of creditors, and some shareholders’ loans. He described problems with F & L’s bookkeeper and its former accountants, which forced F & L to engage MNP to prepare its 2020 and 2021 financial statements.

He also explained that F & L had sold some surplus equipment, using the proceeds to pay off Loan #1 and to make regular mortgage and loan payments to ACU. As at May 22, 2023, the balances F & L owed to ACU on the Demand Loans were as follows: (

a) LOC: $334,063.88; (

b) Loan # 1: Nil; and (

c) Loan #12: $1,033,976.44. [ 33 ] Contrary to Norman Fichter’s earlier evidence that the 2022 financial statement was “very near to completion by MNP Ltd.” (Norman Fichter affidavit at para. 29), Chris Fichter stated that MNP had informed him they were too busy to work on this report until after June 20, 2023. Mr. Fichter asserted that F & L’s work-in-progress, accounts receivable, and cash flow were adequate to operate F & L’s business until the 2022 and 2023 financial statements have been completed and replacement financing can be arranged.

He also attached to his affidavit two lists, purporting to be F & L’s equipment, with estimated values totalling $3,545,700 and $6,511,625. These lists are difficult to reconcile with the notes to F & L’s 2021 Financial Statement, which list the net book value of F & L’s equipment at $502,377 and the net book value of equipment under capital lease at $2,180,907.

Issues [ 34 ] The issue to be determined is whether the court should appoint a receiver-manager pursuant to s. 243 of the BIA , s. 10 - 15 of the KBA , and/or s. 64(8) of the PPSA , or whether the court should adjourn or dismiss ACU’s application, as F & L requests. [ 35 ] In the event that the court decides the appointment of a receiver-manager is warranted, the court must also determine whether MNP is in a conflict of interest that precludes its appointment. Applicable Law [ 36 ] ACU relies upon s. 243 of the BIA , which reads: 243

(1) Subject to subsection (1.1), on application by a secured creditor, a court may appoint a receiver to do any or all of the following if it considers it to be just or convenient to do so: (

a) take possession of all or substantially all of the inventory, accounts receivable or other property of an insolvent person or bankrupt that was acquired for or used in relation to a business carried on by the insolvent person or bankrupt; (

b) exercise any control that the court considers advisable over that property and over the insolvent person’s or bankrupt’s business; or (

c) take any other action that the court considers advisable. … [ 37 ] On the application of a secured creditor pursuant to s. 243 of the BIA , the court may appoint a receiver over all of the property of an insolvent person or a bankrupt and may, inter alia , authorize the receiver to “take any other action that the court considers advisable.” This phrase has been interpreted as giving the court the power to do what “justice dictates” and “practicality

demands”: see discussion in Third Eye Capital Corporation v Ressources Dianor Inc./Dianor Resources Inc. , 2019 ONCA 508 at paras 48 – 58 , 435 DLR (4th) 416. [ 38 ] ACU is a secured creditor of F & L. F &L has not made an assignment in bankruptcy and no bankruptcy order has been made against F & L. Accordingly, the court cannot make an order under s. 243 of the BIA in this proceeding unless F & L is an “insolvent person,” defined at s. 2 of the BIA as follows: 2 In this Act … insolvent person means a person who is not bankrupt and who resides, carries on business or has property in Canada, whose liabilities to creditors provable as claims under this Act amount to one thousand dollars, and (

a) who is for any reason unable to meet his obligations as they generally become due, (

b) who has ceased paying his current obligations in the ordinary course of business as they generally become due, or (

c) the aggregate of whose property is not, at a fair valuation, sufficient, or, if disposed of at a fairly conducted sale under legal process, would not be sufficient to enable payment of all his obligations, due and accruing due; [ 39 ] If this statutory test is met, the court must decide whether it is just and convenient to appoint a receiver. This is a discretionary decision.

The non-exhaustive factors to be considered on such an application were summarized in Lemare Lake Logging Ltd. v 3L Cattle Company Ltd ., 2014 SKCA 35 at paras 98-100 , 371 DLR (4th) 663 [ Lemare Lake Logging ] (rev’d on constitutional grounds 2015 SCC 53 , [2015] 3 SCR 419): [98] The case law relating to the appointment of receivers has identified a broad range of considerations that can bear on the issue of whether an appointment is appropriate.

A number of decisions refer to the list of factors found in the second edition of Bennett on Receiverships [ Bennet on Receiverships , 2nd ed (Toronto: Carswell, 1999)] , supra at pp. 130-132.

These include matters such as: ▪ Whether irreparable harm might result if the order is not made; ▪ The risk to the security holder taking into consideration the size of the debtor’s equity in the collateral; ▪ The nature of the property or collateral; ▪ The need to protect or safeguard the debtor’s assets while litigation takes place; ▪ The need to prevent waste of the debtor’s assets; ▪ The balance of convenience as between the parties; ▪ The fact that the creditor has a right to appoint a receiver under the loan agreement in question; ▪ The conduct of the parties; ▪ The impact of the order on the parties; ▪ The cost of the receivership to the parties; ▪ The likelihood of maximizing return to the parties.

See, for example: Maple Trade Finance Inc. v. CY Oriental Holdings Ltd. 2009 BCSC 1527 , 60 C.B.R. (5th) 142 at para. 25 . [99] The third edition of Bennett on Receiverships , (Toronto: Carswell, 2011), at pp. 155-162, suggests that the following factors are typically taken into consideration in deciding whether to appoint a receiver: (

a) whether irreparable harm might be caused if no order is made; (

b) whether the security holder’s position will be prejudiced if no receivership order is made; (

c) whether it is necessary to apprehend or stop waste of the debtor’s assets; (

d) whether it is necessary to preserve and protect property pending a judicial resolution of matters outstanding; and (

e) the balance of convenience between the parties. See also: Houlden, et al, The 2013 Annotated Bankruptcy and Insolvency Act (Toronto: Carswell, 2013) at p. 1005. [100] These sorts of factors will inform judicial reasoning on an application such as the one brought by Lemare Lake in this case but, of course, the bottom-line issue remains the one specified in s. 243(1) of the BIA : Is the appointment of a receiver “just or convenient”?

See also Affinity Credit Union 2013 v The Lighthouse Supported Living Inc ., 2023 SKKB 82 at para 13 . [ 40 ] The applicant does not need to show irreparable harm if it is entitled, under its contract with the respondent, to appoint a receiver: see Affinity Credit Union 2013 v Vortex Drilling Ltd. , 2017 SKQB 228 at para 19 , 50 CBR (6th) 220 [ Vortex Drilling ]. Court appointment of a receiver is not considered extraordinary equitable relief if the debtor assented to the creditor’s right to appoint a receiver upon default: Bank of Montreal v Sherco Properties Inc ., 2013 ONSC 7023 at para 42 .

However, even when the security agreement grants to the creditor the right to appoint a private receiver, the creditor must still establish that court appointment of a receiver is just and convenient: Norcon Marine Services Ltd., (Re) , 2019 NLSC 238 at paras 50-51 . [ 41 ] As ACU has the contractual right to appoint a receiver, the extraordinary and intrusive nature of a receivership order weighs less heavily, but court appointment of a receiver must nonetheless be a “just and convenient” remedy for the purpose of protecting and preserving the insolvent person’s assets.

[ 42 ] ACU relies on additional statutory authority in support of the requested orders.

Section 10 - 15 of the KBA authorizes a judge to appoint a receiver on an interlocutory application if it appears “appropriate or convenient”. Section 64(8) of the PPSA also empowers the court to appoint a receiver on the application of an interested person. As I have decided that a court-appointed receiver is warranted under s. 243 of the BIA , I will not address these alternate bases for a receiver. Analysis Is F & L insolvent? [ 43 ] As required by s. 243 of the BIA , I will first address whether F & L is an “insolvent person.” [ 44 ] ACU’s counsel sent the Demand Letter on February 2, 2023.

As a result of ACU’s demand, F & L was obligated to repay immediately the total balances then due and owing under the Demand Loans, which totalled $1,466,429.79. F & L has not disputed that ACU was entitled to demand repayment of the Demand Loans, nor do I see any basis on which it could. [ 45 ] Since the date of the Demand Letter, F & L has sold some equipment in order to repay in full Loan #1 (which had a balance of $163,303.08) and has made payments to reduce the amounts owing under Loan #12.

Despite these efforts, as of May 22, 2023, the balance due under the LOC had risen to $334,063.88, while $1,033,976.44 was still owing on Loan #12. Looking only at F & L’s debt to ACU, the evidence demonstrates that F & L was unable to meet its obligations as they became due. [ 46 ] Looking at F & L’s finances from a broader perspective, it is apparent that F & L had ceased paying its current obligations in the ordinary course of business as they generally came due.

The most glaring example is unpaid government remittances, which stood at $584,489 at March 31, 2021, the most recent year for which financial statements are available. F & L’s affiants all admitted that, as at May 25, 2023, F & L was not current on employee source deductions. F & L is in the best position to provide more current information if F & L’s financial position has materially improved but it has not done so. F & L’s principals also acknowledged that F & L was managing its finances in the absence of an operating loan by relying, in part, on the indulgence of other creditors.

While, again, F & L’s evidence was short on specifics on this point, I infer that F & L was not making timely payment to other creditors in the ordinary course of business. [ 47 ] Given F & L’s large debt due and owing to ACU and its substantial unpaid government remittances, I conclude that F & L is an “insolvent person” within the meaning of the BIA . Is the appointment of a receiver just and convenient? [ 48 ] With that precondition satisfied, the court must determine whether this is an appropriate circumstance to appoint a receiver pursuant to s. 243 of the BIA .

ACU bears the burden of satisfying the court that such appointment would be just and convenient. [ 49 ] I will now consider and weigh the factors outlined by the court in Lemare Lake Logging at para 98 and in Vortex Drilling at para 19 , some of which were addressed specifically by ACU in its submission. Where I do not comment on a specific factor listed in those decisions, I concluded that the factor was not relevant or neutral in the present circumstances. Irreparable Harm and Risk to the Security Holder [ 50 ] These factors can be considered together.

As discussed above, ACU was not required to show irreparable harm given its contractual right to appoint a receiver. ACU acknowledged that it was not clear whether it would suffer irreparable harm if the court declined to appoint a receiver because the value of F & L’s assets was not known.

However, ACU submitted that the test is whether irreparable harm “might” result if a receiver were not appointed, relying upon Vortex Drilling . [ 51 ] ACU pointed to the large increase in F & L’s unpaid government remittances between 2020 and 2021 and raised the concern that those debts might have risen further since March 2021.

F & L admitted that it continues to have outstanding unpaid government remittances but has not disclosed the current amount due or any explanation of how it intends to become current. [ 52 ] ACU argued that government claims for unpaid statutory remittances would have priority over ACU’s security. Depending upon the amounts due, this could result in a portion of the Demand Loans becoming unsecured. Moreover, payments made by F & L to ACU since the Demand Letter was sent were likely subject to a deemed trust in favour of the Receiver General of Canada, exposing ACU to liability.

In support of this submission, ACU referred to First Vancouver Finance v M.N.R. , 2002 SCC 49 , [2002] 2 SCR 720 at paras 40-42 [ First Vancouver Finance ], and Canada (Deputy Attorney General) v Schwab Construction Ltd ., 2002 SKCA 6 , [2002] 4 WWR 628 [ Schwab Construction ]. [ 53 ] In First Vancouver Finance , the Supreme Court reviewed the scheme in ss. 227(4) and 227(4.1) of the Income Tax Act , RSC 1985, c 1 (5th Supp ) [ ITA ] determining that the deemed trust created in those provisions operates in a manner similar to a floating charge over the assets of a tax debtor.

The trust has priority over secured interests from the time that source deductions are made and remains in existence so long as the default continues. Since the trust is similar to a floating charge, it does not attach to particular assets and the debtor is free to dispose of property in the ordinary course. When this occurs, the proceeds of such disposition are then subject to the trust. [ 54 ] ACU asserts that F & L’s use of the proceeds of equipment sales to pay down the Demand Loans places ACU at risk as the recipient of funds subject to the deemed trust in favour of the Minister of National Revenue.

While First Vancouver Finance does not address this point specifically, ACU’s concern is well-founded. In Canada (Attorney General) v National Bank of Canada , 2004 FCA 92 , 3 CBR (5th) 1, the Federal Court of Appeal noted that s. 227(4) of the ITA and s. 86(2) of the Employment Insurance Act , SC 1996, c 23 [ EIA ] both stipulate that every person who deducts or withholds any amount under those Acts is deemed to hold the amount in trust for the Crown.

Subsection 227(4.1) of the ITA and s. 86(2.1) of the EIA provide that, where the amount is not paid, the “ trust extends as well to the property of the person, including property held by a secured creditor which, absent such secured interest, would be

that of the person, and stipulate that the Receiver General ‘shall be paid’ in priority out of the proceeds of such property”: Canada (Attorney General) v National Bank of Canada at para 5 . The proceeds of sale of property over which a secured creditor asserts a security interest are also subject to the deemed trust and must be paid to the Receiver General in priority to the creditor’s security interest: at para 30. Further, s. 222 of the ITA and s. 86(1) of the EIA impose liability on secured creditors to pay the Receiver General the proceeds from the property subject to the trust: at paras 37 and 40.

See also Innovation Credit Union v Keshe Holdings Inc ., 2023 SKKB 113 . [ 55 ] The 2021 Financial Statements refer to “government remittances payable” in the amount of $584,489. ACU is concerned that this amount comprises unpaid source deductions subject to the deemed trust provisions of the ITA and the EIA . The current balance payable to the Receiver General is unknown. However, there is a meaningful risk that ACU’s security is impaired in the circumstances. Further, ACU is also exposed to liability to the Receiver General for the amounts that it has received from F & L and applied against the Demand Loans.

In principle this liability extends to all amounts ACU has been paid by F & L since F & L defaulted on its statutory obligation to remit source deductions. [ 56 ] ACU cited Schwab Construction for the proposition that equipment leased to F & L is not property subject to the Crown’s deemed trust under the ITA . To the extent that equipment F & L has listed in its affidavit evidence is in fact leased rather than owned by F & L, the equipment would not be available to satisfy any claims by the Crown.

The 2021 Financial Statement shows the net book value of equipment under capital lease as $2,180,907. [ 57 ] The factors of irreparable harm and risk to the security-holder weighed heavily in favour of the receivership order. Apprehended waste of assets [ 58 ] Apart from assets under capital lease, the 2021 Financial Statement shows a decline in the net book value of F & L’s assets from $3,174,125 in 2020 to $2,741,371 in 2021. F & L suffered a significant loss for the year ended March 31, 2021, despite receiving $461,177 in government assistance, and F & L’s retained earnings were - $94,177 ( i.e. , in deficit).

F & L has been selling some equipment in order to make payments to ACU and to finance continuing operations, but which equipment is being sold and what remains is unexplained. This factor favours granting the receivership order. Creditor’s right to appoint a receiver under the loan documentation [ 59 ] In its agreements with ACU, F & L consented to the appointment of a receiver in the event of a default.

F & L has not repaid the Demand Loans in full, complied with its financial reporting obligations to ACU despite repeated requests for such information, or maintained property insurance on the building located on the Business Land as required. F & L is in default and accordingly ACU is entitled under their agreements to appoint a receiver. This factor favours a court appointment as well. Expectation of difficulty of enforcement of security-holder’s rights [ 60 ] ACU expressed the concern that it would have difficulty enforcing its rights in the absence of a court-appointed receiver.

ACU refers to its frustrated efforts to obtain current and accurate financial information from F & L, F & L’s refusal to cooperate with the Business Review, and the failure of F & L’s principals to meet with ACU representatives to discuss F & L’s financial circumstances. [ 61 ] The evidence demonstrates that F & L has not cooperated with ACU’s reasonable efforts to obtain clarity on F & L’s financial position and has failed to provide requested financial information on a timely basis or at all, including financial statements for the last two fiscal years, in breach of its contractual obligations.

F & L has also rebuffed requests to meet with ACU and the proposed Business Review. This factor also supports court-appointment of a receiver. Whether court appointment is necessary to enable a receiver to carry out its duties [ 62 ] F & L’s recent history of lack of cooperation with ACU also suggests that a court order was required in the present circumstances. Balance of convenience and effect of the order on the parties [ 63 ] F & L argued that appointment of a receiver would destroy its business. The evidence shows that F & L is already in precarious financial circumstances.

MNP is an experienced trustee and has undertaken such assignments on many occasions. A receiver-manager may bring a fresh perspective to the business’s viability as a going concern.

If F & L’s fortunes are not dire, as its principals claim in their affidavits, this should become apparent to the receiver. [ 64 ] A court-appointed receiver will have authority to communicate directly with F & L’s creditors, including the Receiver General, so that ACU has an accurate understanding of F & L’s financial circumstances. [ 65 ] Undoubtedly the imposition of a receiver on the business affairs of F & L will be disruptive to its day-to-day operations.

This must be weighed against ACU’s demonstrated need to achieve transparency into the true state of F & L’s finances, especially in light of the fact that less intrusive measures, such as a Business Review, were rebuffed by F & L. Overall, this factor is neutral to my conclusion regarding the appointment of a receiver. Conduct of the parties [ 66 ] ACU refers again to F & L’s failure to provide financial information despite ACU’s many requests.

In addition, ACU notes the significant discrepancies between the 2021 Financial Statement and the margining certificates received for March and April 2021, which cast doubt on the reliability of subsequent margining certificates provided by F & L. ACU says that it has lost

confidence in F & L’s management. [ 67 ] In contrast, ACU submits that it showed patience toward F & L throughout its efforts to obtain financial disclosure and only turned to the court after those efforts had failed. [ 68 ] Having regard for all of the evidence on this point, I am persuaded that the parties’ conduct also favours appointment of a receiver. Cost to the parties [ 69 ] The receivership order provides for $250,000 in additional borrowing to fund the receivership. While this is a significant sum, it is not disproportionate given the nature of the Business.

Conclusion [ 70 ] Based upon my review of the relevant factors, and looking at the circumstances holistically, I am persuaded that the appointment of a receiver pursuant to s. 243 of the BIA is just and convenient. I have also considered whether alternate remedies are also available to ACU, such as the right to commence foreclosure proceedings or to enforce its security under the PPSA . However, ACU would have to initiate multiple proceedings in order to enforce its rights.

More importantly, those alternate remedies would not clarify what amounts F & L owes to the Crown and what arrangements may be in place regarding enforcement of F & L’s statutory obligations. ACU is entitled to understand whether F & L’s property is subject to deemed trusts in favour of the Crown and whether ACU is also at risk of liability. [ 71 ] It follows from my conclusion that appointment of a receiver is just and convenient that I did not accept F & L’s position that the application should be adjourned until F & L’s financial statements for 2022 and 2023 can be completed.

F & L provided ACU repeated assurances that its financial statements were nearing completion, which proved not to be the case. The financial statements for the fiscal years ended March 31, 2022 and March 31, 2023 are now long overdue. An adjournment to an uncertain date so that F & L could have its financial statements prepared, in the hope that they would show an improved financial position, was not appropriate.

Is MNP precluded from acting as receiver? [ 72 ] In support of its application, ACU filed MNP’s written consent to act as a court-appointed receiver of the assets and undertakings of F & L. [ 73 ] During the hearing, F & L’s counsel argued that MNP is in a conflict of interest and is precluded from acting as a court-appointed receiver in this case. F & L referred to the facts that MNP had prepared F & L’s 2021 Financial Statements and F & L had been communicating with MNP about preparing its financial statements for the years ending March 31, 2022 and March 31, 2023.

The terms of MNP’s engagement by F & L were not in evidence. [ 74 ] In the circumstances, I granted leave to MNP to file an affidavit to respond to this issue. MNP’s counsel subsequently advised the court by letter that, pursuant to its professional obligations and code of conduct, MNP was not permitted to file affidavit evidence with respect to its involvement with F & L. Thereafter, counsel for F & L informed the court that MNP had declined the engagement to complete F & L’s 2022 and 2023 financial statements.

F & L did not indicate whether its objection to MNP’s appointment was withdrawn in light of this development, so I have proceeded on the basis that this remains a live issue. [ 75 ] In argument, counsel for MNP referred to the decisions in Wabush Hotel Limited v Business Development Bank of Canada , 2017 NLCA 35 at paras 10-13 , 48 CBR (6th) 181 [ Wabush ] and in 620630 Saskatchewan Ltd. v PriceWaterhouse Coopers Inc ., 2003 SKQB 175 , 235 Sask R 239 [ 620630 Sask ].

In the former case, PriceWaterhouse Coopers [PWC] had assisted the debtor in its unsuccessful financial restructuring efforts while, in the latter, PWC had acted as a monitor to assess and report on loans made to a third party. In both cases, the question was whether PWC’s prior engagement created a conflict with its subsequent appointment as receiver. A distinguishing feature of both cases from the present situation is that PWC’s engagement letters expressly provided that it would not be conflicted out from other mandates, including appointments by court order.

As noted, MNP’s engagement letter is not before the court. [ 76 ] However, in 620630 Sask at para 4, Registrar Herauf (as he then was) reasoned that PWC could have been appointed receiver in that case even without the acknowledgement in its engagement letter: [4] I mention the point relating to PWC as both a “monitor” and receiver to show that it was specifically recognized that there would be no conflict if PWC was appointed receiver.

In fact, even without the acknowledgement in the engagement letter, it would appear logical and cost effective to ensure that the monitor would be the receiver if that eventuality occurred .

This would avoid the potential for duplication and increased fees by the appointment of an entity that had not already become familiar with the debtor companies through the previous work carried out as a monitor. [Emphasis added] [ 77 ] After citing this passage with approval in Wabush , Harrington J.A. added that the evidence did not show any negative effects related to the alleged conflict; for example, the evidence did not show that PWC contributed to the debtor’s default. [ 78 ] The evidence in the present instance does not establish that MNP is in a conflict of interest preventing it from acting as a court-appointed receiver.

Moreover, having prepared the 2021 Financial Statement, MNP will have some familiarity with F & L’s business, saving time and expense compared to what would be necessary if another trustee were appointed. Conclusion [ 79 ] For the foregoing reasons I appointed MNP the receiver-manager of the Property of F & L Concrete Services

Ltd. by granting the order in the form of the draft proposed receivership order filed on behalf of ACU. J. P.T. BERGBUSCH KING’S BENCH FOR SASKATCHEWAN Citation: 2023 SKKB 195 Date: 2023 09 20 Docket: KBG-RG-00909-2023 Judicial Centre: Regina BETWEEN: AFFINITY CREDIT UNION 2013 APPLICANT - and - F & L CONCRETE SERVICES LTD. RESPONDENT Counsel: Ryan Pederson for the applicant Grant Schmidt for the respondent M. Kim Anderson and Travis K. Kusch for MNP Ltd. ( September 20, 2023 ) BERGBUSCH J.

CORRIGENDUM to JUDGMENT of (August 17, 2023) [ 80 ] The first sentence in paragraph 27 should read as follows: On March 1, 2023, ACU received notice of cancellation of insurance for the shop located on the Business Land. [ 81 ] The last sentence in paragraph 58 should read as follows: This factor favours granting the receivership order.

J. P.T. BERGBUSCH