Jul 14, 2020

When will the court allow a debtor in receivership to pay out its lenders and not be subject to a sales process?

BCIMC Construction Fund Corporation et al. v. The Clover on Yonge Inc., 2020 ONSC 3659 (CanLII)

1. Three large condominium construction projects in Toronto were assigned into receivership at the end of March 2020 at the request of their lender, BCIMC. Each project is owned by a single purpose, project-specific general partner on behalf of a limited partnership. The general partner and the limited partnership of each of the three projects were assigned into receivership. The Receiver of those projects brought a motion to approve a Sale and Investor Solicitation Process (“SISP”) for each of the projects.

2. The relief sought for two of the three projects was largely uncontroversial. The third project, the Clover project, was the most contentious. It is located at 595 Yonge St., north of Wellesley St. in Toronto. It comprises two towers with 522 residential units. There are 499 purchasers of units in Clover who have paid a total of approximately $49 million in deposits. Building is well underway with the higher floors now under construction.

3. BCIMC has both first and third ranking security against the Clover project. The Receiver’s SISP proposal was supported by BCIMC, counsel for the unitholders and counsel for one potential bidder apart from the stalking horse bidder. The Receiver’s proposal was opposed by the other secured creditors and at least one unsecured creditor.

4. Opposition to the SISP was based on a proposal by one of the opposing parties, Concord, to pay out immediately the BCIMC debt, all of its costs and all of the receivership costs. The Receiver and those who support the SISP objected to the Concord proposal on three grounds:
  • Concord had no standing;
  • the proposal was too unclear; and
  • the proposal improperly interfered with the receivership process.
5. First, proponents of the SISP submitted that Concord had no standing to pay out the BCIMC debt because it was a stranger to the receivership. However, to the extent Concord’s status was an issue, Concord advised the Court that it had completed a transaction pursuant to which it had become the sole shareholder of Clover.
6. Second, the Receiver submitted that it would create a dangerous precedent to give a debtor a preferential right to redeem property well into a receivership. The Receiver argued that the purpose of a receivership is to have the Receiver take control of the entire process and that it would be inappropriate to permit others to do an “end run around” the receivership. Here, the debtor was seeking to redeem before a SISP is approved.
7. The history of the proceedings and prejudice to different stakeholders were factors to consider when determining whether the debtor should have the right to redeem. BCIMC submitted that it had funded the receivership and had spent time, money and energy into submitting a stalking horse bid. In the circumstances of this case, those factors did not outweigh the debtor’s equity of redemption. This was because, in addition to paying out the original BCIMC debt, the debtor offered to pay out the entire receivership debt, interest on the receivership debt, the costs of the receivership and the costs of BCIMC.
8. Proponents of the SISP also argued that Concord should not be given any privileges over other bidders who waited patiently for the bidding process to occur. The Court held that these arguments misunderstood Concord’s role. Concord was not a bidder—it was the debtor’s source of financing and now the debtor’s sole shareholder. While a potential bidder’s frustration at being deprived of the opportunity to bid on a project is understandable, that is not enough to quash a debtor’s right to redeem.
9. There was no evidence that it would be prejudicial to receivership processes at large to allow the Clover debtor to redeem. The parties most likely to suffer prejudice by allowing the debtor to redeem were the unit purchasers, who believed that they could achieve a better result in the competitive bidding process of a SISP than they could in a CCAA proceeding. The Court held that the unit purchasers had suffered no prejudice to date.
10. The Court declined to approve the SISP for Clover and ordered that the debtor should have the opportunity to pay out the BCIMC debt, the receivership debt, and interest on both within 72 hours of receiving a pay out statement in respect of those debts.