2017 ONSC 4107, 2017 ONSC 4107

CITATION : Royal Bank of Canada v. Casselman PHBC Ltd., 2017 ONSC 4107 COURT FILE NO.: 16-70182 DATE: 2017/07/04 COURT OF ONTARIO, SUPERIOR COURT OF JUSTICE In the matter of the court-appointed receivership of Casselman Plywood Hardware Building Centre Ltd. And in the matter of the bankruptcy of Casselman Plywood Hardware Building Centre Ltd., file no. 33-2183656 RE: ROYAL BANK OF CANADA, Applicant AND: CASSELMAN PLYWOOD HARDWARE & BUILDING CENTRE LTD, Respondent BEFORE: Mr. Justice Calum MacLeod COUNSEL: André A. Ducasse, for the receiver Jean-François Laberge, for the debtor Martin Z.

Black, for the trustee in bankruptcy Samantha Gordon, for the Sexton Group Ltd. Stéphanie Lauriault, for the Attorney General of Canada HEARD: May 25, 2017, written submissions received ENDORSEMENT [ 1 ] There were three motions brought before the court at a special appointment on May 25 th , 2017. The first was a continuation of a motion for approval and directions brought by the receiver. The second was a motion by counsel for the debtor permitting him to withdraw as lawyer of record.

The third was a motion brought by one of the secured creditors to stay the bankruptcy proceeding. [ 2 ] With regard to the motion to be removed as counsel, that motion was unopposed and in light of the bankruptcy it was entirely appropriate. The motion was granted and counsel was permitted to withdraw.

All rights of the debtor corporation are now vested in the trustee and counsel for the trustee was present. [ 3 ] As I will explain in more detail the motion to stay was based on the fact that the debtor made an assignment into bankruptcy after the receivership order was granted and without obtaining leave of the court. While I agree that either written approval from the receiver or leave of the court ought to have been sought, no one is asking to have the bankruptcy annulled. [ 4 ] The practical issue is at what point the receivership should be terminated and the trustee take over.

The immediate question is whether the receiver or the trustee should have responsibility for evaluating the claims of secured creditors. Flowing from that decision is whether or not the Sexton Group Ltd. must appeal the disallowance of its secured claim issued by Ginsberg, Gingras & Associates Inc. as trustee in bankruptcy. [ 5 ] For the reasons that follow I am assigning this responsibility to the receiver and making certain ancillary orders in both the receivership and in the bankruptcy. This requires a brief

summary of the factual background and the law. Background [ 6 ] The respondent corporation is insolvent. It has debts that exceed the value of its assets and by sometime last year it had ceased to meet its liabilities as they came due. In particular in 2016 the corporation was in default under its credit facilities with the Royal Bank of Canada (“the Bank”). The Bank was also of the view that the debtor had committed several acts in breach of its obligations such as depositing funds with another bank. [ 7 ] The debtor corporation is solely owned by a numbered company and it has a single director and officer.

She is the daughter of the founder of the company and her father was a guarantor of certain company debts. He may also be a secured creditor. At the time of the application for receivership the debt to the bank approximated $1.3 million dollars. Apparently there were various efforts to refinance and a number of indulgences but eventually the Bank decided to act. [ 8 ] In September of 2016 the Bank sued the guarantors in the Superior Court of Quebec (District of Laval, Court file no. 54017- 012258-165). [ 9 ] The Sexton Group Ltd. also commenced an action against the guarantors in Toronto (Action CV-16-551205)

[ 10 ] On October 6 th , 2016 the Bank commenced this proceeding in Ontario to enforce its security by appointing a receiver. [ 11 ] Under its security agreement the Bank had the power to appoint a private receiver (“séquestre et administrateur judiciaire") and could have done so without court approval but on October 6 th , 2016 the Bank brought this application for a court appointed receiver. The distinction of course is that a privately appointed receiver answers primarily to the secured creditor while a court appointed receiver is an officer of the court and acts under court supervision.

As well a court appointed receiver has a fiduciary obligation to all interested parties [1] and has certain protections and duties set out in the order and in applicable legislation. [ 12 ] The power to appoint a receiver on application by a secured creditor is specifically set out in s. 243 of the Bankruptcy and Insolvency Act (“ BIA” ) in

Part XI of the Act. Providing certain preconditions are met, s. 243 permits the court to appoint a receiver to take possession of the inventory, accounts receivable or other property of an insolvent business or a business carried on by an insolvent person. Importantly however

Part XI specifies duties and obligations of receivers over the property of insolvent or bankrupt businesses whether they are appointed under the BIA, under a security agreement or under provincial legislation. [ 13 ] As part of the credit facility, the Bank held security over the equipment and inventory under the Bank Act and also a Convention De Sûreté Générale (General Security Agreement or “GSA”) registered under the Personal Property Security Act (“PPSA”) . There is no dispute about the validity of the security.

Appointment of a receiver was also available under provincial legislation specifically the general powers under Section 67 (1) of the Personal Property Security Act or the power to grant an interlocutory receiving order under

Section 101 of the Courts of Justice Act. [ 14 ] For purposes of this decision, it is important to note that the powers and duties under

Part XI of the BIA function independently of the bankruptcy provisions of the statute and are distinct from the power to appoint an interim receiver in a bankruptcy or proposed bankruptcy under s. 46 of the Act. That is to say that the secured creditor may act and the receiver must comply with the BIA when there is an insolvency but it is not necessary for there to be an assignment into bankruptcy.

Nevertheless the Act requires that the person appointed as receiver under the BIA must be a trustee in bankruptcy ( s. 243 (4) ). [ 15 ] It originally appeared the debtor would resist the Bank’s application as it had delivered materials in opposition to the application and was attempting to put together a proposal. In its material the debtor alluded to the prospect of refinancing and declared that the appointment of a receiver would do irreparable harm. Ultimately, however, the debtor consented to the order and a receiving order was granted by Maranger J. on October 20 th , 2016.

The order was substantially in the form of the model receivership order adopted by the Commercial List and available on the court’s web site. Pursuant to that order the receiver was empowered inter alia to take control of the business and in its discretion to liquidate and sell any of the undertaking and assets. Raymond Chabot Inc. was appointed as receiver “of all of the assets, undertakings and properties of the debtor”. [ 16 ] Amongst its other terms, the order imposed several stays and limits on other legal proceedings.

In particular there was a stay on any proceedings against or in respect of the debtor or the property and the order provided that no proceeding “shall be commenced or continued except with the written consent of the receiver or with leave of this court”. [ 17 ] The only order sought or granted to lift the stay was an order granted by me on December 16 th , 2016 at the request of the Sexton Group Ltd. At that time, leave was granted to proceed against the guarantors in Toronto action CV-16-551205. That was the action commenced prior to the receivership and in which there was at the time a pending

summary judgment motion. [ 18 ] In the meantime the receiver had been successful in effecting a sale of all of the undertaking, properties and assets of the debtor. On December 14 th , 2016 I granted orders approving the first report of the receiver, authorizing the sale of the assets of the business and the assignment of its leasehold interest in the premises. The sale produced sufficient funds to pay out the secured claim of the Bank in its entirety and to generate a surplus of approximately $600,000.00.

A subsequent order made by the Beaudoin J. on March 9 th , 2017 approved the second report of the receiver and authorized distribution to the the Bank. As a consequence interest has stopped running on the bank debt and the bank has now been paid in full. [ 19 ] In addition to the bank indebtedness, there are other creditors with security registered under the PPSA. The Sexton Group Ltd. holds certain limited security and the founder purports to hold general security. It is possible that if both of these secured claims are valid, there will be no surplus.

A preliminary analysis conducted by the trustee suggests there is something on the order of $2 million owed to unsecured creditors. [ 20 ] Often when there is a receivership there is also a bankruptcy and when a receivership precedes a bankruptcy it is not uncommon for the receiver to be appointed as the trustee. One potential benefit of bankruptcy was thought to be its impact on the priority trust claims otherwise available to the Canada Revenue Agency (“CRA”) in respect of HST claims.

Interestingly counsel for the Attorney General advises that this issue is currently before the Federal Court of Appeal [2] but in any event the receiver had been discussing the possibility of an assignment into bankruptcy with the debtor. [ 21 ] Up until the order authorizing the sale of the assets, the debtor had continued to hold out hope for a proposal and in fact had been to the bankruptcy court on November 30 th to obtain an extension of time. Following the approval of the sale, however, on December 16 th , 2016 the debtor filed a voluntary assignment into bankruptcy.

The debtor did not appoint the receiver as trustee but instead appointed Ginsberg, Gingras & Associates Inc. [3] There is some dispute as to whether or not the Receiver was aware of this step but there is no doubt this was done without written authorization and without seeking leave of the court. [ 22 ] In Ed Mirvish Enterprises Limited v. Stinson Hospitality Inc. [4] Peppal J. concluded that notwithstanding the residual powers remaining with the directors of a corporation in a receivership, the stay provisions in the model order encompassed an assignment into bankruptcy.

She held that the assignment into bankruptcy in the face of her order was improper and annulled the bankruptcy of four companies. This was upheld by the Court of Appeal. [5] It is therefore clear that the director of the debtor corporation did not have the right to assign the corporation into bankruptcy without leave of the court or the written consent of the receiver.

[ 23 ] Notwithstanding the lack of approval, all parties have known about the bankruptcy since December of last year and no one did anything to interfere with the trustee in the discharge of its duties. As I understand it the trustee has called a first meeting of creditors and received proofs of claim. [ 24 ] The trustee also purported to disallow the secured claim of the Sexton Group Ltd. Sexton’s overall claim is for $846,650.31 but its security only attaches to an investment made by the debtor in Home Hardware. That investment is worth $350,000.00 and generates a modest income stream.

Since December, the receiver has apparently received $15,000.00 in revenue from the Home Hardware investment but there have been no steps taken to liquidate it. [ 25 ] Sexton filed a proof of claim in the bankruptcy. The debt to Sexton is pursuant to amounts owing on a term sheet or detail sheets pursuant to a group purchasing agreement. Apparently Sexton had agreed to postpone $500,000.00 of its debt and to extend further credit in October of 2015 in exchange for assignment of Casselman’s investment in Home Hardware Stores Limited and certain other terms. The assignment was then registered under the PPSA .

This is the basis for Sexton’s claim to be a secured creditor. [ 26 ] On February 3 rd , 2017 the trustee purported to disallow the secured claim on the following basis: “Funds were originally advanced in fall of 2015, at which time no security was granted. The “term sheet” referred to in your Proof of Claim does not constitute a security agreement and did not create a security interest in the bankrupt’s personal property. No security agreement was signed by the bankrupt in favour of the creditor.

In any event the “term sheet” was subject to a condition subsequent which was never satisfied or waived by the bankrupt. Registration / perfection of the creditor’s alleged security only occurred on May 25 th , 2016, after the deadline for satisfying the aforesaid condition, and when the bankrupt was insolvent” [ 27 ] When Sexton received this notice it did three things. Firstly, it demanded particulars of the “condition subsequent” alleged in the trustee’s notice.

Secondly, it brought a motion in the bankruptcy file seeking an order extending the time for appealing the disallowance until 10 days after the trustee’s response. That order was granted by Kershman J. on consent but to date the trustee has not provided particulars. The third step was to bring this motion to stay the bankruptcy proceeding until after the receiver has completed its evaluation of the claims of the secured creditors. Position of the Parties [ 28 ] In the case before me, no one is asking to annul the bankruptcy.

Instead Sexton, which is the moving party on that issue asks that the bankruptcy be stayed and the disallowance of its secured claim by the trustee be put in abeyance or set aside. Sexton is of the view that the validity of the security is a matter to be determined by the receiver under the existing order. The receiver is prepared to continue with the tasks envisioned in the order appointing it but has ceased work on evaluating the secured claims until there is direction from the court.

The receiver does not seek to be appointed trustee in bankruptcy and does not seek to annul the bankruptcy now under way. [ 29 ] For its part, the trustee commends the work done by the receiver. The trustee however is of the view that the receiver should be discharged and the surplus paid to the trustee. In the trustee’s view it has disallowed the secured claim by Sexton and the validity of that claim should be determined under the BIA which is to say by way of an appeal to the bankruptcy court.

The trustee has not yet reviewed the claim of the other secured creditor as it is awaiting necessary information. [ 30 ] For its part the receiver does not ask to be made trustee nor does it ask to annul the bankruptcy. It does propose that it be tasked to complete the vetting of the secured claims and then return to court with a proposed distribution. In any event the receiver required directions. [ 31 ] All parties agree that the original order in the receivership permitted the receiver to evaluate the claims of other creditors but did not require it to do so.

Analysis [ 32 ] As stated above, there appears to be no benefit in annulling the bankruptcy. Leave for an assignment into bankruptcy will therefore be given after the fact and subject to the directions set out herein, the trustee may continue with its assigned duties under the BIA . As I set out earlier, the practical question is how to deal with the claims of the secured creditors without duplicating effort and further eroding the value of the estate. [ 33 ] In my view, it is significant that the receivership preceded the bankruptcy. The receiving order was comprehensive.

It granted the receiver control over “all of the assets, undertakings and properties” of the debtor. Although technically this does not vest ownership of the assets in the receiver, the scope of the order permitted the receiver to sell the assets and apply to the court to vest ownership in the purchasers. The subsequent order permitted the sale and passed title to the purchasers, after payment of the Bank debt which was also approved by the court, the surplus funds remain subject to the same priority as the former assets with respect to security interests.

As such, at the moment, the surplus funds are in the hands of the receiver impressed with a trust and until the court orders otherwise, there is no estate to pass to the trustee. [ 34 ] Unlike a bankruptcy, however, the receiver does not step into the shoes of the debtor corporation. The debtor continues its

corporate existence along with all of its residual rights. Those residual rights may be minimal but they include the right to challenge the work of the receiver, to oppose confirmation of any reports and to otherwise be heard in the current litigation. Those rights are now vested in the trustee since I am validating the bankruptcy.

I also understand that the trustee is in possession of all of the books and records of the debtor. [ 35 ] Ordinarily the receiver would proceed to evaluate the priority, quantum and quality of the claims by the remaining secured creditors and report to the court with a proposed distribution of the remainder of the net proceeds of sale. This work has been interrupted by the need to bring these motions. It would be unfortunate if the receiver and trustee either have to duplicate work or if they work at cross purposes.

They are both officers of the court and subject to court supervision. [ 36 ] The court is faced with two practical options. One option is to direct the receiver to complete its work and then to report to the court with a proposal for disposition of the remaining assets.

In that circumstance, the trustee in bankruptcy would stand in the shoes of the debtor having the right to be heard in this proceeding but also the obligation to co-operate by providing information and access to the books and records. [ 37 ] The other option is to wind up the receivership and to transfer the net proceeds of sale to the trustee in bankruptcy.

The trustee would then evaluate the claims of the secured creditors and determine whether those claims should be paid in priority to the general creditors. [ 38 ] Because the receivership was put in place first and because the bankruptcy was initiated without approval by the court, I am of the view that the receiver should be authorized to complete its work.

The trustee will have the right to be informed of steps taken by the receiver and to take a position when the report is submitted to the court for approval. [ 39 ] In the event the receiver and the trustee reach different conclusions on the status and quantum of the secured claims, a hearing will be required in the receivership.

There is no reason that this cannot also be combined with an appeal under the BIA and if necessary the court may hear oral evidence. [ 40 ] Of course it may also transpire that the parties agree with the receiver when it makes its report and in that event all necessary orders may be made to wind up the receivership and to permit an orderly transfer to the trustee. Order [ 41 ] In

summary I am making a number of orders; I. Firstly I am approving the bankruptcy proceeding and granting leave for it to continue notwithstanding there should have been leave before the bankruptcy process was initiated; II. Secondly there will be an order that the bankruptcy file and the receivership proceed in tandem before the same judge. Unless I am not available and there is a need for an urgent hearing, I will be seized of both matters; III. The receiver is charged with the responsibility of evaluating the claims of the secured creditors and making recommendations to the court.

The trustee will have a right to be heard both in its own right as trustee and as the holder of the residual rights of the debtor corporation; IV. The trustee may continue with the tasks imposed by the act insofar as it is possible to discharge them. The time extension granted by Justice Kershman remains in effect and is varied so that no appeal need be launched until the trustee provides the particulars and until the report of the Receiver is approved by the court; V. I will provide further direction as may be required; VI. I do not consider this a case for awarding costs as between the parties to the motions.

The court will consider what costs relating to the motions may be charged to the estate when and if it is necessary to approve the fees of the receiver and the trustee. Sexton Group’s entitlement to costs will be reserved until the validity of the security is determined; VII. The parties are to advise the court of the status of the Toronto and the Montreal actions; and VIII. I may be spoken to if further directions are required. [ 42 ] A copy of this endorsement will be placed in the bankruptcy file as well as in the receivership file. Mr. Justice C. MacLeod Date: July 4, 2017

CITATION : Royal Bank of Canada v. Casselman PHBC Ltd., 2017 ONSC 4107 COURT FILE NO.: 16-70182 DATE: 2017/07/04 In the matter of the court-appointed receivership of Casselman Plywood Hardware Building Centre Ltd. And in the matter of the bankruptcy of Casselman Plywood Hardware Building Centre Ltd., file no. 33-2183656 ONTARIO SUPERIOR COURT OF JUSTICE RE: ROYAL BANK OF CANADA, Applicant AND CASSELMAN PLYWOOD HARDWARE & BUILDING CENTRE INC., Respondent BEFORE: Mr. Justice Calum MacLeod COUNSEL: André A. Ducasse, for the receiver Jean-François Laberge, for the debtor Martin Z.

Black, for the trustee in bankruptcy Samantha Gordon, for the Sexton Group Ltd. Stéphanie Lauriault, for the Attorney General of Canada ENDORSEMENT MacLeod J . Released: July 4, 2017