Re Norcon Marine Services Ltd.: Court-appointed vs. Private-appointed Receivers

June 3, 2020

On December 30, 2019 the Supreme Court of Newfoundland and Labrador (the “NLSC”) released its decision in Re Norcon Marine Services Ltd. (“Norcon”) dismissing both an application by a debtor, Norcon Marine Services Ltd., for creditor protection under the Companies’ Creditors Arrangement Act (the “CCAA”), and a competing application by a secured creditor, the Business Development Bank of Canada (“BDC”), for the appointment of a receiver pursuant to section 243 of the Bankruptcy and Insolvency Act (the “BIA”).

The NLSC’s dismissal of BDC’s application for a court-appointed receiver diverges from previous decisions by Canadian Courts, and imposes a higher threshold for secured creditors seeking the assistance and oversight of the Court in appointing a receiver. The Court in Norcon indicated that any creditor seeking the appointment of a receiver must come armed with clear evidence that a court-appointed receiver is necessary, rather than relying on the argument that it is the “just and convenient” option, as had been the past practice.

Application for CCAA Protection

Based on the requirements under the CCAA, the debtor was only required to (i) meet the low threshold of convincing the Court that, in accordance with paragraph 11.02(3)(a) of the CCAA, circumstances existed that made the order for creditor protection appropriate; and (ii) satisfy the Court that it had acted, and was acting, in good faith and with due diligence, in accordance with paragraph 11.02(3)(b) of the CCAA.

The NLSC followed the Saskatchewan Court of Appeal’s decision in Industrial Properties Regina Limited v Copper Sands Corp. , holding that in order to meet the low threshold of satisfying the Court the appropriate circumstances existed to make the order, the debtor only had to show that there was a “germ of a plan” that suggested “a reasonable possibility of restructuring”. The NLSC noted that this case was slightly different from usual CCAA initial applications, as the debtor filed a Notice of Intention to make a proposal under the BIA just over two weeks prior to the CCAA application. The Court found that as it was being asked to continue an existing restructuring proceeding, there would be a higher threshold in determining whether the applicant had a “germ” of a plan and that any plan should exhibit a slightly higher possibility of coming to life than might otherwise be required.

The NLSC was not satisfied that the debtor’s evidence disclosed a germ of a plan that suggested a reasonable possibility of restructuring or a going concern sale. The evidence suggested that the debtor was “actively seeking new contracts for its vessels” with no other evidence about potential available contracts or chance of success. It also suggested that the debtor intended to reduce operating costs, without any additional information on the amount of said reduction. The NLSC therefore held that the appropriate threshold had not been crossed. In view of this finding, the NLSC did not consider the issues of good faith and due diligence and dismissed the CCAA application.

Application for a Court-Appointed Receiver

The NLSC noted that the appointment of a receiver by the Court engages the exercise of the Court’s discretion to determine whether it appears that the appointment would be “just and convenient” pursuant to section 243 of the BIA. The NLSC held that the word “just” suggests a requirement of fairness and balance while the word “convenient” suggests not just an order which the applicant would find helpful, but one that is necessary for the protection of the assets in question.

The NLSC proceeded to place considerable weight on that fact that BDC, through its security agreements with the debtor, had the ability and contractual authority to privately appoint a receiver without enlisting the aid of the Court. On this point, the NLSC noted a lack of evidence that (i) BDC’s security would be jeopardized under a private appointment, (ii) the debtor’s management would not cooperate with a private receiver, and (iii) a court-appointment was necessary for effective realization of the property, which was mainly comprised of fixed assets that did not risk being moved.

Notwithstanding the facts that BDC’s application for court-appointment was supported by the other secured lender (the Bank of Nova Scotia) and the debtor had admitted insolvency, the NLSC held that the court-appointment was not necessary to protect and preserve the assets and, therefore, did not meet the “just and convenient” test. Accordingly, the NLSC dismissed BDC’s receivership application.

The NLSC’s conclusion contrasts with a line of Canadian cases, particularly in Ontario, in that: 1) The NLSC purported to frame the “just and convenient” test as one of necessity; and 2) the NLSC’s analysis of the existence of a contractual right to privately appoint a receiver significantly impacted its analysis. Previous decisions have held that where the authority to appoint a private receiver exists, it is not necessary for the applicant to demonstrate that the security is in jeopardy; and the question is not whether a Court-appointed receiver is necessary, but rather whether a Court-appointed receiver could more effectively and efficiently perform its duties.

Lessons for Creditors

The Norcon decision has not been subsequently followed or considered; therefore, it is unclear exactly how it will impact court-appointed receivership applications moving forward. However, the decision suggests that future creditors seeking this remedy should consider why a Court-appointed receiver is necessary where a private receiver is already available to that creditor, and be able to demonstrate through the evidence why the Court appointed receiver is necessary. It is noteworthy; however, that subsequent to the Norcon decision, the Saskatchewan Court of Queen’s Bench (the “SCQB”) released its decision in Pillar Capital Corp. v Harmon International Industries Inc. where it granted an order for a Court-appointed receiver pursuant to s. 243 of the BIA. The SCQB did not consider Norcon in its analysis and applied the pre-Norcon interpretation of the “just and convenient” test, holding that while the applicant’s right to make a private appointment is a factor, the real inquiry is whether a court-appointment is the “preferable” option – not the “essential” one.

It is likely that this divergence of approaches will have to be reconciled in subsequent decisions, as it is evident that clarification will be necessary. In the meantime, counsel in all Canadian jurisdictions should ensure they can explain why a Court-appointment is a necessity in the circumstances whenever this order is being sought.

[1] Norcon Marine Services Ltd., (Re), 2019 NLSC 238

[2] Companies’ Creditor Arrangement Act, R.S.C., 1985, c. C-36

[3] Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, as amended

[4] Copper Sands Land Corp. v Industrial Properties Regina Ltd., [2018] S.J. No. 216, 2018 SKCA 36

[5] Pillar Capital Corp. v Harmon International Industries Inc. 2020 SKQB 19

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