Jun 15, 2020

Can a receiver partially disclaim a contract?

Yukon (Government of) v., 2020 YKSC 16 (CanLII)

1. On March 1, 2018, the Debtor sold equipment, tools, vehicles and infrastructure associated with a mine to Maynbridge for $5,060,000. Maynbridge and the Debtor also entered into a Master Lease agreement for the lease of all 572 items.

2. From May to August 2018, the Debtor and the Creditor entered into three loan agreements in the amount of $1,000,000, $1,000,000 and $6,550,000, respectively. The Debtor used the monies from the loans to purchase from Maynbridge the 572 Master Lease items for the sum of $6,550,000, by exercising the purchase option under the lease agreement. The Debtor sold these items to the Creditor that same day for $5,060,000, which reduced the Debtor’s loan debt to the Creditor to $3,490,000.

3. The Debtor and the Creditor subsequently entered into a lease agreement in respect of the same 572 items that had been sold to Maynbridge and leased back to the Debtor. The Debtor did not make repayments on the outstanding amount of the loan of $3,490,000. The Creditor began charging 50% interest, and at the date of the receivership, it claimed the outstanding amount under the loan agreement was $6,820,000.

4. The Receiver identified 79 of the 572 Master Lease Items as essential for the continuing and necessary care and maintenance and environmental remediation of the mine (the “Essential Items”). After several months of unsuccessful negotiations with the Creditor, the Receiver issued a notice of partial disclaimer to the Creditor. It provided that the Receiver intended to disclaim or resiliate the Master Lease but was preserving the Receiver’s right to use the Essential Items, for a monthly payment of $13,500 as compensation for their use.

5. The main issue in the application was whether the Receiver had the authority to partially disclaim the Master Lease. The Creditor argued that at law, the Receiver has a binary choice—affirm the entire contract or disclaim the entire contract. Moreover, the partial disclaimer was viewed as an attempt to alter unilaterally the material terms of the lease, which was beyond the Receiver’s authority and beyond the terms of the Court Order appointing them as Receiver.

6. In the insolvency context, the receiver’s ability to disclaim or affirm contracts of the debtor is permitted by the operation of s. 243(1) of the Bankruptcy and Insolvency Act, the order appointing a receiver, and the common law. Where a receiver affirms a contract, it will be subject to its terms and liable for its performance. Where a receiver disclaims a contract, it will not be personally liable for its performance.

7. The decision of a receiver about the future of the contracts of the debtor is made after they analyze the specific fact situation before them, guided by their general duties set out in the BIA, applicable principles at common law and the terms of the order appointing them.

8. In this case, the Receiver’s general powers under the Receivership Order included protecting and preserving the “property”, which was defined as the assets, undertakings and property, including all proceeds, of the Debtor. The Receiver’s responsibilities for the property must be understood in the context of the definition of ‘property’ set out in s. 2 of the BIA, which includes “obligations arising out of or incidental to property”. In this case, the obligations arising out of or incidental to the property necessarily included carrying out the care and maintenance and environmental remediation at the mine. The Essential Items were necessary to carry out that work.

9. While maximizing value for all the creditors is the ultimate objective, the use of the Essential Items is not in conflict with that goal. The use of the Essential Items was necessary in order to preserve all of the Debtor’s assets at the mine, and those related to those assets, and to enhance their value beyond their current state, in turn maximizing the value for all creditors.

10. The Receiver’s actions were not an intrusion on the property and civil rights of the Creditor. The Receiver continued to pay the Creditor monthly for their use of the Essential Items. Therefore, the use by the Receiver of the Essential Items is a disclaimer of the Master Lease and a permissible variation for the reason that its terms are onerous and not commercially reasonable in the circumstances.