Receivership Flashcards
What is the role of a receiver in a debtor’s financial situation?
A receiver is a person appointed to take possession of a debtor’s assets, acting in a fiduciary capacity. The receiver’s role includes securing property and, in some cases, selling it for the benefit of the creditor(s). When the receiver is granted the power to operate the business, they are known as a “receiver-manager” or “receiver-administrator” and can manage the property during restructuring.
Why are receivers typically appointed in a debtor’s financial affairs?
Receivers are appointed due to lender dissatisfaction with the debtor’s financial performance, which can result from issues like operating losses, insufficient asset coverage for loans, or under-capitalization. A breakdown in communication between the debtor and lender can also lead to receiver appointments.
What sequence of events typically leads to the appointment of a receiver?
The sequence leading to a receiver’s appointment involves a corporation conducting business, borrowing money from a lender, and pledging property as security for the debt. If the debtor defaults on its obligations and fails to rectify the default or reach an agreement with the lender, the lender may issue notices demanding repayment and the intention to appoint a receiver. If the debtor doesn’t meet the repayment deadline, a receiver is appointed to take possession of and realize the secured property for the lender’s benefit.
What is the primary purpose of appointing a receiver in a debtor’s financial situation?
The primary purpose of appointing a receiver is to take possession of the property pledged as security and realize its value to satisfy the debt owed to the secured creditor, subject to any prior ranking claims, deemed trusts, and statutory liens.
What are the two primary methods by which a receiver may be appointed?
A receiver may be appointed either privately, as stipulated in a security agreement, or by order of the court, in accordance with legislation or a rule of law allowing such appointments.
In what situations may a court appoint a receiver, and for what purposes?
A court may appoint a receiver for various purposes, including:
- Administering property that is the subject of a dispute, to preserve and protect it during litigation.
- Administering property or a business to prevent oppressive or prejudicial exercise of powers.
- Administering property or a business of a deceased or incapacitated person.
- Taking possession of and administering property for the benefit of creditors in cases of disputes, conflicts among security agreements, or within legal proceedings, such as foreclosure.
How is the term “receiver” defined in the Bankruptcy and Insolvency Act (BIA)?
In the BIA, a “receiver” is defined as a person appointed either by the court, pursuant to a court order under s. 243 of the BIA, by a court order under federal or provincial law, or under a security instrument. This receiver takes possession or control of all or substantially all of the inventory, accounts receivable, or other property of an insolvent person or a bankrupt related to a business carried on by the insolvent person or bankrupt.
Under s. 243 of the BIA, who can be appointed to act as a receiver, and what term is often used to refer to receivers appointed by court order under this section?
According to s. 243 of the BIA, only a trustee may be appointed to act as a receiver, whether court-appointed or privately appointed. Receivers appointed by court order under s. 243 of the BIA are often referred to as “national receivers” because their powers extend over property in each province and territory.
How did the 2009 amendments to the BIA impact the appointment of receivers in Quebec, and what provisions in Quebec law are relevant to the appointment of receivers?
The 2009 amendments to the BIA made it possible to appoint a receiver in Quebec by a court order issued under the BIA, the CBCA (Canada Business Corporations Act), or the Quebec Business Corporations Act. Additionally, provisions in the CBCA and the Quebec Business Corporations Act also provide for the appointment of a receiver. Agents privately appointed by secured creditors in Quebec often qualify as receivers within the meaning of the BIA.
What is the role of an interim receiver under the BIA, and when is an interim receiver typically appointed?
An interim receiver, as appointed under the BIA, serves to protect the estate of a debtor and the interests of a creditor or creditors during specific periods. They are appointed either between the filing of an application for a bankruptcy order and before the bankruptcy order is made or within the context of a proposal or a notice of intention to make a proposal. An interim receiver may also be appointed when a secured creditor has sent, or is about to send, a notice of their intention to appoint a receiver.
What is a judicial receiver, and in what circumstances might one be appointed?
A judicial receiver may be appointed by a court, particularly in the province of Quebec, in situations involving litigation between two parties or two secured creditors related to a specific property or asset. The primary purpose of appointing a judicial receiver is to preserve and safeguard assets while legal proceedings are ongoing, with the goal of protecting the property until the litigation’s outcome. Unlike other receivers, a judicial receiver does not typically handle the realization or sale of assets. It’s essential to note that, despite the title, a judicial receiver may not necessarily align with the traditional understanding of a receiver, although they could fulfill that role as defined in section 243 of the BIA.
Who can be appointed as a receiver under the BIA, and what are the conditions for such an appointment?
According to the Bankruptcy and Insolvency Act (BIA), only a trustee can be appointed as a receiver within the meaning of the BIA, as defined in section 243. However, it’s important to note that a person may be appointed as a receiver without necessarily fitting the BIA’s definition of a receiver. Several conditions must be met for such an appointment, including the insolvency of the debtor and the property subject to receivership consisting of all or substantially all of the debtor’s property used in its business. If these conditions are not met, the BIA does not apply.
Why is the debtor’s cooperation important in a receivership engagement?
The debtor’s cooperation is crucial in a receivership engagement because it allows for tasks like locating inventory, updating accounting information, identifying potential purchasers, and collecting accounts receivable. This cooperation reduces the risk of litigation and helps secure creditors achieve a better recovery.
How does debtor cooperation impact the outcome for secured creditors?
Debtor cooperation positively impacts secured creditors by optimizing results, which is more important than merely maximizing value. This optimization is measured by the difference between the gross realizable value of encumbered property and realization costs, leading to better recovery for secured creditors.
Who are the third parties related to the debtor and why might they cooperate with the receiver?
Third parties related to the debtor can include shareholders, directors, or other stakeholders who may have granted personal guarantees on loans. They have an interest in helping the receiver optimize the secured creditor’s net recovery and may cooperate to protect their interests.
Why is reviewing the debtor’s business before appointing a receiver preferable?
Reviewing the debtor’s business before appointing a receiver can help the debtor understand why restructuring may not be an option, potentially reducing the risk of litigation and improving cooperation. It also allows the secured creditor and receiver to gain valuable knowledge about the debtor’s business for better decision-making during realization.
What is one of the principal objectives of the BIA, and why is it important for insolvency professionals to be aware of it?
One of the principal objectives of the BIA is to promote the restructuring or reorganization of insolvent companies. Insolvency professionals should be aware of this objective to explore alternatives to receivership, as restructuring may be a viable option that could lead to the satisfaction of all parties involved.
What are forbearance agreements in the context of financial arrangements?
Forbearance agreements are negotiated between parties in a financial arrangement to allow for the continuation of existing terms or modifications as needed. Typically, lenders request borrowers to have their operations monitored by an insolvency professional for a specified period. The professional provides regular reports to both the borrower and lender to assess if agreed-upon targets, such as specific revenue or sales goals, are being met.
Are restructuring and receivership mutually exclusive concepts?
Restructuring and receivership are not necessarily mutually exclusive. Receivership can be a tool to achieve the restructuring of a business or ensure its continuation in a different corporate framework. Restructuring primarily focuses on the economic activity of the business rather than the legal entity, allowing for more effective financial recovery.
Is receivership an alternative to bankruptcy?
Receivership is not an alternative to bankruptcy, and they can coexist. Receivership is used by secured creditors to realize specific property encumbered by security to repay secured loans. Bankruptcy, on the other hand, is a remedy for the benefit of all creditors, allowing for equitable distribution of the debtor’s property, investigations of financial affairs, and the realignment of priorities as per the Bankruptcy and Insolvency Act (BIA). Unsecured creditors typically use bankruptcy proceedings when the debtor commits an act of bankruptcy.
Can bankruptcy and receivership occur simultaneously or alternatively?
Yes, bankruptcy and receivership can occur simultaneously or alternatively. The decision to use one or both procedures is strategic and depends on factors such as cost considerations, the desire to utilize the trustee’s investigative powers, the possibility of benefiting from specific remedies, and the potential for a change in the order of priorities among creditors due to the Bankruptcy and Insolvency Act (BIA) provisions.
What is the concept of a dual mandate in insolvency proceedings?
A dual mandate refers to a situation where an insolvency professional serves in both the capacity of a receiver and as a trustee in a bankruptcy. Depending on which engagement begins first, there are specific requirements and limitations. Section 13.4 of the BIA mandates that before accepting a receiver assignment, the trustee must obtain a legal opinion confirming the validity of the secured creditor’s security interest from a lawyer not representing the secured creditor. Section 13.3 of the BIA states that a receiver acting for a debtor’s property cannot accept the position as trustee in a bankruptcy for the same debtor without disclosing the potential conflict of interest. CAIRP’s Rules of Professional Conduct also require full disclosure and consent to avoid impairing professional judgment or objectivity.
What risks do insolvency professionals face during a receivership?
Insolvency professionals conducting receiverships encounter several risks:
- Risk of litigation if the receivership plan falls short.
- Potential blame from creditors, debtors, or lenders afterward.
- Hindsight criticism for not choosing a better alternative.
- Litigation risk exists in any process.
Insolvency professionals can reduce these risks by:
- Thoroughly exploring restructuring alternatives.
- Carefully analyzing and documenting their decisions.
- Adhering to Canadian Association of Insolvency and Restructuring Professionals (CAIRP) Rules of Professional Conduct, especially Rules 1 and 2.
- Maintaining professionalism and independence.
- Upholding transparency and ethical standards to minimize blame or litigation risk.
What is a security instrument in the context of receiverships?
A security instrument is an agreement between a secured creditor and a debtor that establishes a charge on one or more assets as collateral to secure the repayment of a debt or obligation. It can be created through a written document or the delivery of property.
What is the difference between a pledge and conventional security in the creation of a security instrument?
A pledge is created when security is established by the delivery of property, while conventional security is created through a written document. This text mainly focuses on conventional security.
What essential elements are required for the validity of a security instrument?
To be valid, a security instrument must have:
- Consideration: It can’t be purely gratuitous and typically involves something provided by the secured creditor in exchange for the debtor’s undertaking.
- Consent from the debtor.
- A charge or real right created on the property, establishing it as collateral for the obligation.
What are the two main categories of charges in the context of security instruments?
Charges are divided into two categories: fixed (or specific) charges and floating charges.
What is a fixed charge, and how does it differ from a floating charge?
A fixed charge is a charge placed on specific identified property, while a floating charge does not encumber specific property until a certain event occurs, at which point it becomes fixed. Historically, the main difference was in when the security interest attached, with fixed charges attaching immediately and floating charges attaching upon crystallization.
Has the distinction between fixed and floating charges remained relevant with the adoption of Personal Property Security Acts (PPSAs) in Canada?
The relevance of the fixed vs. floating charge distinction has diminished with the adoption of PPSAs in Canada. The PPSA framework allows for flexibility in defining security interests, and the distinction between fixed and floating charges is no longer as critical as it once was. Intent and attachment no longer rely on the concept of crystallization, making the distinction less significant.
Under what circumstances can security be created under s. 427 of the Bank Act, and who can avail of this type of security?
Security under s. 427 of the Bank Act is available to financial institutions listed on Schedule I or Schedule II of the Bank Act and applies to borrowers involved in activities such as wholesale or retail purchasing, manufacturing, aquaculture, farming, fishing, or forestry. It typically covers inventory, raw materials, equipment, and more.
Source: Bank Act s. 427 Security
How does the registration process differ for security interests in immovable property (real property) versus movable/personal property in Canada?
For security interests in immovable property (real property), the security must be registered in a land registry/land titles office. For security interests in movable/personal property, the registration process varies by province. Common law provinces have Personal Property Security Acts (PPSAs) that dictate the method of registration, typically involving filing a financing statement with details such as debtor and creditor information, collateral description, serial numbers, and more. In Quebec, publication of rights for encumbered movable property is done by filing a declaration with the Register of Personal and Movable Real Rights, containing details like the nature of the right, description of the property, parties’ names, obligation amount, effective dates, and other relevant facts.
What type of charge does s. 427 security under the Bank Act create, and when does it attach to the debtor’s property?
s. 427 security creates a fixed charge. This charge attaches to the debtor’s presently owned property covered by the security and to after-acquired property as soon as the debtor becomes the owner of that property.
Source: Bank Act s. 427 Security
Are there any exemptions to the priority of s. 427 security?
Yes, there are exemptions to the priority of s. 427 security, including Purchase Money Security Interests (PMSIs) and certain conditional sales contracts.
Source: Bank Act s. 427 Security
What is the purpose of the notice of intention to enforce security under the BIA, and when is it required?
The notice of intention to enforce security is a component of the Code of Conduct for the secured creditor/debtor relationship in the BIA. It obligates a secured creditor to give prior notice to the debtor before enforcing their security interest if it encumbers all or substantially all of the accounts receivable, inventory, or other property of an insolvent debtor used in the course of the debtor’s business. Exceptions to this requirement include cases where the debtor is bankrupt, a receiver has already been appointed, a proposal procedure is initiated without an offer to secured creditors, or if secured creditors reject the proposal. The notice period is typically 10 days unless the debtor consents to earlier enforcement.
Source: BIA s. 50, 244; BIA Rule 124
What are the prescribed form and manner for giving prior notice of intention to enforce security under the BIA?
Section 244 of the BIA outlines the requirement for prior notice of intention to enforce security. The notice must be in the prescribed form and manner. Section 124 of the Bankruptcy and Insolvency Rules and BIA forms set out the prescribed form. The notice should be sent in the manner provided for in the security agreement, or in the absence of such provision, it can be sent by registered mail, courier, or, if agreed upon by the parties, by electronic transmission. It’s important to note that minor deviations from the prescribed form do not necessarily invalidate the prior notice.
Source: BIA s. 50, 244; BIA Rule 124
Does the 10-day prior notice period provided in the BIA completely displace the concept of ‘reasonable notice’?
While the BIA establishes a 10-day prior notice period on demand, this does not necessarily eliminate the concept of ‘reasonable notice.’ Depending on the circumstances, it may still be necessary to consider whether additional time should be given to the debtor before security enforcement. The court has the discretion to make the appointment of a receiver even before the 10-day period expires in the context of a court application for the appointment of a receiver under s. 243 of the BIA, if the court deems it appropriate.
Source: BIA s. 50, 244
What is the significance of provincial laws in relation to conventional security and notice requirements?
Provincial laws govern the creation of rights under conventional security, including the requirements for giving notice before security enforcement or the sale of encumbered property. These notice requirements may vary depending on the type of property (movable or immovable), the chosen remedy, or the province where the security is governed. It’s crucial to note that provincial notice requirements do not replace any obligations set forth in the BIA. Even if provincial law does not demand notice before realizing accounts receivable under a general assignment of book debts or a hypothec on claims, the secured creditor is still subject to the prior notice of intention to enforce security as outlined in s. 244 of the BIA.
Source: BIA s. 50, 244
What are some examples of notice requirements in Ontario for conventional security on immovable and movable property?
In Ontario, notice requirements for conventional security vary based on the type of property:
- For security on immovable property (similar to a mortgage), the Mortgages Act mandates a notice to the debtor and all known interested parties before proceeding with a sale, with the notice period typically being 35 or 45 days. This notice can only be issued after the debtor’s default has continued for at least 15 days.
- For security on chattels subject to the PPSA, the secured creditor must give 15 days’ notice to the debtor and other parties with security interests before realizing the property, except for specific collateral types.
- No notice is necessary under the PPSA for security involving assignments of book debts.
Source: Ontario Mortgages Act
What are the requirements for providing prior notice in Québec before exercising a hypothecary right?
In Québec, prior notice of exercise of a hypothecary right is a crucial step before enforcing security or selling encumbered property. The notice must include:
- Selection of a hypothecary right and notice of default to the debtor and grantor (if different).
- Reminder to the debtor and/or third party of their right to remedy the default.
- Indication of the claim amount (principal and interest).
- Specification of the chosen hypothecary recourse.
- Description of the encumbered property.
- A summons to the debtor to surrender the property when the deadline expires. Publication of the prior notice in the Register of Personal and Movable Real Rights (for movable property) and in the Land Register (for immovable property) is also required. The prior notice periods vary depending on the type of security and remedy chosen.
Source: Civil Code of Québec, Québec Land Register
What are the hypothecary rights available in Québec, and what are the corresponding prior notice periods for exercise?
In Québec, there are four hypothecary rights, each with specific prior notice periods for exercise:
- Taking possession for purposes of administration: 10 days.
- Taking in payment (immovable property): 60 days.
- Sale by the creditor (immovable property): 60 days.
- Sale by judicial authority (immovable property): 60 days.
- Taking in payment (movable property other than claims): 20 days.
- Sale by the creditor (movable property other than claims): 20 days.
- Sale by judicial authority (movable property other than claims): 20 days.
- Hypothec on claims: No notice required for withdrawal of debtor’s right to collect claims, but it does not remove notice requirements under s. 244 of the BIA.
Source: Civil Code of Québec
What are the notice requirements for security granted under the Bank Act, particularly in the context of property sales by public auction?
In the case of security granted under the Bank Act, notice must be provided to the grantor of the security before selling the property through public auction. The notice period for property specified in sections 426 and 427 of the Bank Act is typically 10 days, except for forest property, which requires a 30-day notice. Additionally, the Bank Act mandates the publication of a notice in newspapers at least 2 days before the sale. For livestock, a Notice of Sale must be posted at the nearest post office at least 5 days before the sale. Although the Bank Act requires property subject to security under sections 426 or 427 to be sold at auction, alternative methods of realization may be used if both the debtor and the bank agree to such an alternative.
Source: Bank Act s. 426, 427
What are the notice requirements for a receiver appointed under the Bankruptcy and Insolvency Act (BIA)?
Notice requirements for a receiver under the BIA include notifying the Superintendent of Bankruptcy, known creditors, the debtor (or trustee if the debtor is bankrupt), and providing specific information.
When should the receiver notify these parties?
The receiver must notify these parties within 10 days of their appointment.
What specific information should be included in the notice?
- A summary description of the encumbered property.
- Details about how the receiver was engaged (private appointment or court order).
- The date when possession of the property was taken.
- General information about the debtor.
- A list of creditors.
Are there additional requirements for the receiver’s statement regarding their duties and performance?
Yes, according to Section 246 of the BIA and Section 125 of the Bankruptcy and Insolvency Rules, the receiver’s statement should also include:
- Names of known creditors and amounts owed.
- A list of property in the receiver’s possession and its book value.
- The receiver’s intended plan of action during the receivership, if established.
To whom should the receiver send this statement?
The receiver must send this statement to the Superintendent of Bankruptcy, the debtor (or trustee if applicable), and any creditor who requests it.
What is typically included in a single document for reporting?
Typically, all the required information under Sections 245 and 246 of the BIA, as well as Section 125 of the Bankruptcy and Insolvency Rules, is combined into a single document for reporting purposes.
In what situations might a secured creditor privately appoint a receiver?
A secured creditor might privately appoint a receiver when the debtor defaults on obligations, and the creditor has called their loans or when another act of default occurs. The right to make a private appointment can arise from legislative provisions or loan and security agreements.
Where do the powers of a privately appointed receiver originate?
The powers of a privately appointed receiver come from the appointment letter, the security agreement, or relevant legislative provisions. These powers should be consistent with the security agreement and applicable laws.
Is court involvement necessary for the appointment of a receiver through a security agreement?
Court involvement is not typically necessary for a receiver appointed through a security agreement. However, it might become necessary if the debtor refuses to acknowledge the receiver’s right to possess the property, which would be a remedy for addressing such a problem rather than a requirement.
How do security agreements impact a receiver’s powers?
Security agreements may outline the powers, terms, and conditions governing property realization. However, these powers must align with the legislative provisions applicable to the security. A letter of appointment can clarify or amend the receiver’s powers, but these must also align with the law.
Are there limitations on the powers of a receiver when dealing with hypothecs in Québec?
Yes, in Québec, if the security is a hypothec, the powers for property realization are limited to those defined in the Civil Code of Québec (CCQ). Security documents cannot deviate from the CCQ’s requirements, even if they outline another method of property realization.
What governs the powers and method of realization for conventional security in common law provinces?
In common law provinces, the powers and method of realization for conventional security governed by provincial law are typically outlined in the agreement creating the security.
What are some of the powers that a security agreement may provide for a receiver?
A security agreement may grant a receiver powers such as:
- Taking possession of all secured property.
- Managing the property and the debtor’s business.
- Collecting owed money.
- Accepting settlements on debts or accounts receivable.
- Selling encumbered property.
- Initiating or continuing legal proceedings.
- Borrowing funds, especially for business operations.
What is the concept of dual agency in receivership?
Dual agency in receivership refers to a situation where the receiver serves as the agent of both the debtor and the appointing secured creditor. The receiver may act as the agent of the debtor for business operations and as the agent of the creditor for distributing proceeds.
When is the concept of dual agency not applicable?
The concept of dual agency doesn’t apply when the receiver is appointed by the court. In such cases, the receiver doesn’t represent the debtor or the creditor but acts as an officer of the court, responsible for court-approved actions.
In which Canadian province does a privately appointed receiver always act as the agent of the secured creditor?
In Québec, a privately appointed receiver always acts as the agent of the secured creditor who appointed them. In other provinces, most security agreements and letters of appointment specify that the receiver acts as the agent of the debtor.
What is the purpose of the concept of dual agency in receivership?
The purpose of defining the receiver as the agent of the debtor rather than the creditor is to insulate the creditor from risks related to the receiver’s activities. This concept of dual agency aims to protect the creditor’s interests. In practice, the receiver often acts as the agent of the secured creditor despite the theoretical agency being with the debtor.
How should insolvency and restructuring professionals approach their appointments as receivers?
Insolvency and restructuring professionals should ensure they have the necessary skills, competencies, and resources required before accepting an appointment as a receiver. It’s prudent to seek advice from colleagues or resources when dealing with appointments in provinces other than their usual practice location.
What is the significance of Rule 4 in the CAIRP’s Rules of Conduct?
Rule 4 is significant because it requires members to be free of any influence, interest, or relationship that impairs their professional judgment or objectivity. Members should avoid conflicts of interest and not accept appointments that are prohibited by law or that involve conflicts related to insolvent persons or corporations they are related to or have audited.
Are the examples given in Rule 4 of the CAIRP’s Rules of Conduct exhaustive?
No, the examples given in Rule 4 are not exhaustive. They are provided to assist professionals in the decision-making process, and the ultimate principle to be observed is the one laid down in Rule 4.
What are the general requirements for someone before they can accept a receiver appointment in a bankruptcy or insolvency context?
The general requirements for someone to accept a receiver appointment in a bankruptcy or insolvency context involve adhering to codes of ethics, avoiding conflicts of interest, and maintaining professional judgment.
What measures can be taken to manage conflicts that may arise during a receivership assignment?
Various measures can be taken to manage conflicts during a receivership assignment, including disclosure, acceptance by affected parties, safeguards, increased consultation, or, in some cases, replacing the professional if conflicts are unavoidable.
What should a secured creditor verify regarding its security interest before appointing a receiver?
A secured creditor should ensure that its security interest has been correctly recorded, registered, or published, typically through legal counsel. This verification is crucial to establish the security’s enforceability, especially against third parties.
What factors determine the registration or publication requirements for security interests?
The registration or publication requirements depend on factors such as the nature of the property (movable or immovable) and the provincial laws applicable in the jurisdiction. For example, in Québec, movable hypothecs may need publication in the Register of Personal and Movable Real Rights.
What are the Bank Act s. 427 requirements for security registration?
If security is created under section 427 of the Bank Act, it must be registered according to the provisions of the Bank Act. This often includes registering a Notice of Intent to Give Security within three years of creating the security. (Source: Engagement Considerations - Registration or Publication of Security)
Why is it important for a receiver to obtain an independent legal opinion regarding security?
Obtaining an independent legal opinion helps ensure the validity and enforceability of the secured creditor’s security interest. This safeguards the receiver’s position, especially in complex cases or when litigation is anticipated.
Under what circumstances might an independent legal opinion not be necessary for a receiver?
If the secured creditor provides an adequate indemnity to the receiver and has already reviewed the security for validity, an independent opinion may not be needed. In such cases, the receiver can rely on confirmation from the secured creditor or their counsel.
Why is it advisable for both the secured creditor and the receiver to use independent legal counsel for reviewing and opining on security?
Independent legal counsel ensures unbiased and impartial opinions. It is generally prudent for both parties to avoid potential conflicts of interest and to maintain the integrity of the process.
What are the essential prerequisites that need to be addressed before appointing a receiver?
Before appointing a receiver, essential prerequisites may include a debtor’s default, a demand for loan repayment, issuance of a notice of intention to enforce security under the BIA and relevant provincial statute, and potentially seeking court permission for possession of encumbered property. The specific steps required may vary depending on the circumstances.
Why is it important to review pre-existing charges and rights ranking ahead of secured creditors?
Reviewing pre-existing charges and rights is crucial because it helps determine their impact on the receivership process. This includes assessing the rank and rights of prior creditors, which can affect the realization strategy and the distribution of proceeds.
What factors may affect the rank of a security interest in comparison to other charges on the same property?
Factors affecting the rank of a security interest may include the date of registration, the nature of the security, and the method of realization chosen. These factors determine which charge takes precedence.
Why might coordination of the realization process be necessary when multiple secured creditors are involved?
Coordination of the realization process is essential when multiple secured creditors have different security interests. It ensures that the optimal strategy is employed and may involve agreements regarding the use of encumbered property to enhance its realizable value.
What are priority claims in insolvency, and how are they created?
Priority claims in insolvency are created by the effect of law and take the form of prior claims, liens, charges, or deemed trusts. They often affect assets, property classes, or all of a debtor’s property. Common priority claims include government-deemed trusts for tax debts, garnishment rights for tax debts, rights of suppliers who recently delivered merchandise, employee wages and expenses, unpaid wages or vacation pay, pension plan contributions, and amounts related to construction industry rights. These claims are established by various federal and provincial laws.
What is a government-deemed trust in the context of priority claims?
A government-deemed trust is established by tax laws, creating a prior right that often prevails over conventional security interests. It ensures the payment of tax debts, such as source deductions and sales taxes, and can apply to movable and immovable property.
What are garnishment rights concerning priority claims?
Garnishment rights are created by tax laws and give the government a prior right that prevails over conventional security interests in the debtor’s accounts receivable and other claims. These rights come into play when the government notifies third parties who owe debts to the tax debtor.
What priority does the Bank Act provide for employees’ unpaid wages?
The Bank Act grants employees a priority claim for unpaid wages if the debtor is bankrupt and the bank has realized its security under s. 427 of the Bank Act. This priority claim is limited to the lesser of the net amount realized by the bank and three months of unpaid wages.
What types of amounts related to rights of retention are included as priority claims?
Rights of retention provided by various provincial statutes in favor of individuals who transported, stored, or repaired property can be considered priority claims. These rights grant priority security for specific amounts related to their services.
Why is it essential to assess the environmental impact of a debtor’s operations in receivership?
It is crucial to assess the environmental impact to determine the extent of potential environmental issues that may arise during the receivership. Environmental problems could complicate the receivership process, leading to increased costs and reduced productivity.
What protection does the receiver have under the BIA concerning pre-existing environmental matters?
Receivers, subject to the provisions of the BIA, have some protection regarding pre-existing environmental matters. However, it is still necessary to analyze potential environmental issues that may arise during the engagement.
When should an environmental analysis be conducted in the context of receivership?
An environmental analysis should be conducted before proceeding with receivership if there are doubts about the possibility or extent of contamination or potential remedial costs. It is also advisable to consult government authorities responsible for the environment and check for any past environmental lawsuits, censures, or orders against the debtor.
How can the results of an environmental analysis impact the receivership process?
The results of an environmental analysis can impact the decision to take possession of the debtor’s property or the realization strategy. For example, if contamination renders the property worthless, it may be prudent not to take possession. Similarly, if the debtor’s activities pose a high risk of future contamination, the realization strategy may need to be adjusted accordingly.
Who monitors and controls environmental issues at different government levels, and what aspects do they oversee?
Environmental monitoring and control can be exercised at various government levels (municipal, provincial, and federal). These agencies oversee pollution and contamination control in air, water, and land, and their requirements are closely monitored by regulatory agencies and advocacy groups.
What is the purpose of an engagement letter in receivership?
The engagement letter serves as a contract between the receiver and the appointing creditor. It outlines the terms and conditions that define the roles of the receiver and the expectations of the creditor in the receivership process.
According to CAIRP Standard of Professional Practice No. 3, what should engagement documentation include?
Engagement documentation should be prepared for all mandates, and it may consist of a written engagement letter, a court order, or statutory provisions, depending on the circumstances of the engagement.
What key information should be included in an engagement letter for a receiver?
An engagement letter for a receiver may include provisions addressing:
- Basis of remuneration
- Frequency, form, and content of reporting
- Indemnities given to the receiver
- Sale process
- Continuing operations
- Other relevant aspects of the receivership and the relationship between the receiver and the creditor.
Why is it important for the receiver to sign the engagement letter?
The receiver’s signature on the engagement letter indicates their acceptance of the engagement and the date and time of this acceptance. It formalizes the contractual relationship between the receiver and the appointing creditor.
What is the purpose of including an indemnity clause in an engagement letter for a receiver?
The purpose of an indemnity clause is to ensure that the receiver is held harmless and indemnified by the secured creditor from claims, obligations, or losses arising from the engagement, except for losses due to negligence or willful misconduct. It provides a level of protection for the receiver against potential liabilities.
Why might creditors be reluctant to grant indemnification in the engagement letter?
Creditors may be hesitant to grant indemnification due to concerns about potential financial liability. In such cases, the receiver must assess the level of indemnity that may exist automatically by law and make a business decision regarding the assumed risk.
What is the nature of the indemnity provided by the effect of law in a dual agency relationship?
In a dual agency relationship between the secured creditor and the receiver, an indemnity may exist by the effect of law. However, this indemnity is limited, subject to discussion or interpretation, and may not cover all aspects of the receiver’s engagement. It is preferable to obtain a clear commitment from the appointing creditor regarding the receiver’s liability.
How does court appointment affect indemnities for receivers?
Court-appointed receivers typically receive indemnities as part of the receivership order. These standard indemnities cover various aspects, including employee liabilities and environmental issues. Court-appointed receivers are usually indemnified out of the assets they administer and are protected as long as they act prudently and in accordance with the court order.
What is the typical indemnity request by a privately appointed receiver from a secured lender?
A privately appointed receiver typically requests a written indemnity from the appointing secured lender, seeking protection from liabilities, claims, or lawsuits arising from the receiver’s actions, except those due to willful misconduct or negligence. This indemnity is often requested at the beginning of the engagement.
What is the primary purpose of an indemnity in receivership?
The primary purpose of an indemnity in receivership is to protect the receiver against litigation, obligations, or losses that may arise from the performance of their engagement. It serves as a form of financial protection.
What are some of the principal risks that an indemnity in receivership aims to mitigate?
Some of the principal risks that an indemnity seeks to mitigate include:
- Damages resulting from trespass, where the receiver takes possession of property, and the debtor’s rights are harmed due to invalid security or insufficient prior notice.
- Environmental problems, which can be complex and involve multiple stakeholders, potentially leading to significant costs and litigation for the receiver.
- Problems related to the continuation of the debtor’s activities, such as product quality issues or civil liability, where insurance coverage may be insufficient.
- Problems related to employment of the debtor’s personnel, which can be complicated and involve various stakeholders, even though the receiver is not personally liable under the BIA.
What limitations should be considered when seeking indemnifications?
Professionals should be aware that there are circumstances in which they may be precluded from obtaining indemnification. For example, members of certain professional organizations, like the Order of Chartered Professional Accountants of Québec (OCPAQ), may have restrictions on seeking indemnities that fully exclude or limit their professional liability. The indemnity sought should be carefully crafted to ensure it complies with the relevant ethical and legal requirements.
How does the requirement related to indemnification in Québec, as outlined by the OCPAQ, impact insolvency professionals practicing in the province?
In Québec, members of the OCPAQ are subject to specific requirements regarding indemnification, and they must be cautious about the nature and extent of the indemnities sought to avoid breaching the OCPAQ’s Code of Ethics. While insolvency professionals in Québec can still request indemnities, these indemnities must be crafted to comply with the ethical standards in Québec. The requirement is linked to membership in the OCPAQ, not the right to practice as an insolvency professional with the LIT designation.
What are the two methods by which a receiver can be appointed in receivership?
A receiver can be appointed either privately or by the court. Private appointments are made through agreements between the receiver and the creditor, while court appointments involve an application to the court.
When might a secured creditor choose to request the appointment of a receiver by the court rather than exercising a remedy under a security agreement?
A secured creditor may opt for a court-appointed receiver when they anticipate difficulties in taking possession. This could be due to multiple secured creditors intending to take possession simultaneously, unclear or conflicting rights under the security, or the need to protect the asset and resolve disputes regarding rights against the property.
What are some key similarities between privately appointed receivers and court-appointed receivers in terms of requirements and concepts?
Several requirements and concepts applicable to privately appointed receivers also apply to court-appointed receivers. These include considerations related to conflicts of interests, skills and competencies, engagement documentation, obtaining indemnities, preparing checklists, establishing cooperation with the debtor, and complying with specific sections of the BIA.
In many provinces, what has been agreed upon by the provincial bar and the bench to facilitate court-appointed receiverships?
In many provinces, the provincial bar and the bench have agreed upon a “model” order for receivership applications. This model order outlines the basic powers and responsibilities for a court-appointed receiver. It helps streamline the process by providing a standard template, allowing for quicker review of specific variations required for unique situations.
In which provinces of Canada, except for Québec, can a receiver be appointed by the court?
In all provinces of Canada except Québec, the provincial legislation addressing the relationship between debtors and creditors provides for the possibility of appointing a receiver when the court deems it appropriate.
What section of the Ontario Courts of Justice Act allows for the appointment of a receiver in Ontario?
In Ontario, the appointment of a receiver can be sought under section 101 of the Ontario Courts of Justice Act. This section allows the court to appoint a receiver if it is considered a just or convenient remedy.
Who typically requests the appointment of a receiver under provincial legislation in cases involving secured creditors?
Secured creditors most commonly request the appointment of a receiver under provincial legislation. They must establish an apparent right to enforce the security and that the debtor has not remedied the defaults. A motion for an interlocutory order appointing a receiver can be filed in the context of legal proceedings between the secured creditor and the debtor.
Under which circumstances might a receiver be appointed under corporate legislation like the Ontario Business Corporations Act or the Canada Business Corporations Act?
The appointment of a receiver under corporate statutes is typically related to a complaint that the corporation or an insider has engaged in oppressive, abusive, or inequitable conduct. The appointment of a receiver is sought to prevent such conduct and provide appropriate relief as determined by the court. The application for this appointment should outline the alleged improper conduct.
What is the process for requesting the appointment of a receiver under the Bankruptcy and Insolvency Act (BIA)?
Under the BIA, the application for the appointment of a receiver must be made by a secured creditor. The application should include details about the defaults, reasons for requesting the appointment of a receiver, whether a notice was given under section 244 of the BIA, and the date on which this notice was provided. If the secured creditor wants the court to shorten the 10-day notice period, they must provide a reason for doing so.
What are some of the main reasons that would justify seeking the appointment of a receiver by the court rather than a private appointment?
Some reasons for seeking a court appointment of a receiver include oppressive conduct, the need for a court-ordered stay of proceedings, very complex problems, property in multiple jurisdictions, conflicts or competing claims among secured creditors, environmental problems, a high probability of litigation, and, in some jurisdictions, the desire to sell real estate as an encumbered asset.
Where do the powers and authority of a receiver come from?
The powers and authority of a receiver come from the court order appointing the receiver. The court order may include various provisions, including the appointment itself, a description of the property and charges against it, rights of access to the debtor’s assets and records, the power to continue or initiate legal proceedings within the framework of receivership, and more.
What is a “stay of proceedings” in the context of appointing a receiver by the court?
A stay of proceedings, addressed to creditors or other claimants, prevents them from pursuing legal remedies against the debtor, the debtor’s property, or the receiver without obtaining permission from the court. It is often included in the court order appointing a receiver.
How can a receiver obtain funds for the receivership process, and what is the priority of such borrowing?
Receivers may obtain funds for the receivership process through borrowing, and the court order can grant them the right to borrow or give security for such borrowing by issuing receiver’s certificates. Such borrowing is typically given priority over existing charges on the debtor’s property.
What is the purpose of a taxation procedure mentioned in the court order appointing a receiver?
The taxation procedure involves the court’s approval of the receiver’s accounts and the distribution of residual amounts among creditors based on their respective rights. It ensures transparency and fairness in the distribution of assets during the receivership process.
What is the immediate goal of taking possession in a receivership?
The immediate goal of taking possession in a receivership is to gain control of the assets and safeguard and protect them.
Why is it important to have a plan when taking possession?
Having a plan is important to ensure that the process is organized and communicated effectively to the engagement staff and employees of the debtor assisting in the administration.
In what circumstances might a trustee exercise caution and discretion when taking possession of assets?
A trustee may exercise caution and discretion when taking possession of assets, especially when there is a privately appointed receiver of a secured creditor whose security is not being challenged. In such cases, taking possession may result in disputes and additional costs.
What should be considered to determine the specific assets that fall under the care and control of a receiver?
The specific assets falling under the care and control of a receiver are typically described in the security documents or court order that appoints the receiver. Reference to these documents is necessary to determine the assets in question.
How can checklists be helpful when taking possession of a debtor’s assets in a receivership?
Checklists can be useful tools to ensure that all necessary steps and controls are considered, assigned to personnel, and executed efficiently. They serve as quick references, help in planning and executing the engagement, and assist in coordinating efforts.
What are some items that may be included in a comprehensive checklist for taking possession?
A comprehensive checklist for taking possession may include items such as:L
- physical security of assets
- inventory control procedures
- instructions to employees
- communication planning, sales controls
- shipping and receiving controls
- cash and collection controls
- purchasing controls, and
- environmental considerations.
How should checklists be used in the context of taking possession?
Checklists should assist but not replace supervision of personnel, and they should not substitute for professional judgment. They should be reviewed with all personnel assigned to the engagement to ensure that all steps and issues are considered.
What is the first step when a receiver is appointed and needs to take possession of the debtor’s assets?
The receiver will ordinarily attend the debtor’s premises immediately upon appointment and serve the debtor with the engagement letter, court order, bankruptcy order, or Official Receiver’s Certificate of Appointment.
When the debtor operates at multiple locations, what should be done regarding the appointment document?
Simultaneous attendance by engagement personnel should be coordinated, and a copy of the appointment document must be delivered to the person in charge at each location.
Why is a notice of appointment generally posted at the debtor’s premises?
A notice of appointment is posted on the front door of the debtor’s premises to serve as notice to lessors, customers, suppliers, and interested third parties. It provides information about the receivership and contact details in case of emergencies.
In addition to physical posting, where else might the receiver consider posting notices of appointment for modern businesses?
For modern businesses with internet presence, the receiver may consider posting similar notices on the company’s website to ensure that all visitors to the website are provided with the same information.
What is the purpose of meeting with the owner, shareholders, directors, and key personnel of the debtor upon taking possession?
The purpose of the meeting is to announce the appointment of the receiver, explain the impact of the receivership on stakeholders’ rights, advise management of their duties and responsibilities, discuss immediate matters, consider continuation of operations, identify key personnel, seek support, respond to questions, coordinate future meetings, review significant matters related to assets, discuss realization strategy, and take control of operations.
Why is it important for a receiver to provide clear instructions to employees of the debtor when taking possession of assets?
Clear instructions are necessary because employees may be unfamiliar with receivership proceedings and the receiver’s duties and obligations. Instructions help employees understand their roles and responsibilities during the receivership.
What should be included in the instructions regarding physical security for employees?
Employees should be advised of new procedures for access to the company’s premises and information systems. They should also be informed about emergency contacts in case of incidents like burglary or fire.
How should receptionists or operators handle creditor and customer calls during the initial stages of a receivership?
Front-line staff should receive guidance on referring inquiries and providing general information to callers to minimize inquiries directed to the receiver. Temporary receptionists or operators may be hired to handle these inquiries more cost-effectively.
How is communication with the media typically managed in a receivership?
The receiver usually personally deals with all media inquiries and instructs employees not to speak to or release information to the media. Statements to the media are made by a designated spokesperson, often a senior member of the receiver or trustee’s firm.
What factors does the receiver consider when deciding whether to allow new sales during a receivership?
The receiver considers factors such as sales on credit terms, which customers may be allowed credit, whether customers are also creditors and may claim setoff rights, pricing for new sales, and authorization procedures for sales and early payment discounts.
How should the receipt and shipment of goods be controlled during a receivership?
Delivery of goods should only be accepted with the prior written authorization of the receiver. The receiver establishes controls to prevent unauthorized orders or liabilities. Shipments to customers should be reconsidered when the collectability of accounts is in doubt, and customers may be required to sign back letters acknowledging terms set by the receiver.
What is the primary duty of a receiver immediately after appointment?
The primary duty of a receiver after appointment is to take possession of all the assets and undertakings of the debtor company and preserve them as against the debtor and third parties.
Why is it important for the receiver to take possession of the assets immediately upon appointment?
Taking possession immediately is important because the debtor’s property may dissipate or decline in value, and the receiver may be held liable if they do not act quickly and assets are lost or decrease in value
How can possession or control of assets be effected?
Possession or control can be achieved by giving responsibility for custody to a responsible individual, especially in cases where assets are held by third parties. It may not be feasible to relocate assets held by third parties immediately.
What should be done with property held by employees of the debtor?
Employees should be advised to return property of the debtor they may be holding, or arrangements should be made for employees to acknowledge they are holding such property, especially if it is necessary for employees to continue holding such property in the context of their continued employment with the receiver.
Why should locks to the premises be changed in locations with physical assets of more than nominal value?
Changing locks is important to enhance security and restrict access to the premises. It helps prevent unauthorized entry and protects the assets under the receiver’s control.
When might a receiver consider hiring security guards?
A receiver might consider hiring security guards based on the location of the premises and assets, as well as the nature of the business. Security guards may be required, especially in cases where there is a need to protect assets during and after normal business hours.
What should be done with the debtor’s alarm system after the receiver’s appointment?
The debtor’s alarm system should be inspected to ensure it is operating properly. The alarm company should be notified of the appointment of the receiver, access codes must be changed, and the receiver’s name should be added to the list of contacts in case of emergencies.
What should a receiver do with cash and cheques on hand after appointment?
All cash and cheques on hand must be collected for safekeeping. Bank accounts should be opened in the name of the receiver, and all cash on hand and cash receipts should be deposited into these accounts.
How should utilities be managed if the decision is made to occupy the premises or continue operations?
If the decision is made to occupy the premises or continue operations, utility services required for continued occupation and operations should be maintained. Accounts should be in good standing, and new accounts may need to be opened to avoid the discontinuation of essential services.
What should the receiver do regarding portable electronic devices such as laptops and cell phones?
The receiver should take steps to cut off the remote access of portable electronic devices and obtain a detailed listing of such items in the possession of employees to ensure their return to the receiver. This is important to prevent potential liabilities associated with continued use of these devices.
