Court Confirms that Priority of Receivers’ Charges is Discretionary

Justice R. Graesser of the Court of Queen’s Bench of Alberta (Court) recently released his decision in Royal Bank of Canada v. Reid-Built Homes Ltd. (Decision), where he held that the Court has the discretion, but not the obligation, to grant a super priority for receivers’ fees and disbursements ahead of the claims of secured creditors. The Decision also held that court-order charges provided for the benefit of receivers may be subordinated to municipal tax claims against property of the debtor’s estate.

BACKGROUND

On November 2, 2017, the Reid-Built group of companies (Reid-Built Group) was placed into receivership pursuant to a consent receivership order (Receivership Order). The Receivership Order was based on the Alberta Template Receivership Order (Template Order), but provided that creditors and other affected parties could apply to vary its terms on November 29, 2017 (Comeback Hearing).

At the Comeback Hearing, two creditors applied (Creditor Applications) to vary the priority of the receiver’s (Receiver) fee, disbursement and borrowing charge (Receiver’s Charges). Both creditors argued that it was unfair that the Receiver’s Charges be granted super priority status over their secured claims against certain of the Reid-Built Group’s real property. ICI Capital Corporation (ICI), a first mortgagee on several properties, objected to the priority of the Receiver’s Charges and sought to have the stay of proceedings lifted so that it could institute its own proceedings under its mortgage. Standard General Inc. (Standard General) sought similar relief to ICI, but had filed builders’ liens under the Builders’ Lien Act (BLA) against certain lands worked on for the Reid-Built Group. The Receiver and its appointing creditor opposed the Creditor Applications.

Before Justice Graesser issued his decision on the Creditor Applications, the City of Edmonton (Edmonton) brought a separate application seeking for its property tax claims (PT Claims) to be placed in priority to the Receiver’s Charges. Edmonton argued that section 348 of the Municipal Government Act provides for a special lien on levied land for certain taxes that has priority over the claims of every person except the Crown. It alleged that it did not participate in the Comeback Hearing because its position was that the Receiver’s Charges did not take priority over its PT Claims. The Receiver and its appointing creditor also opposed Edmonton’s application.

Justice Graesser dismissed the Creditor Applications. He found that ICI did not meet its burden to lift the stay of proceedings or to be removed from the receivership. He also found that Standard General’s priority claims were stayed from enforcement by the doctrine of paramountcy. He confirmed that where there is a conflict between provincial legislation related to priorities and the provisions of the Bankruptcy and Insolvency Act (Canada) (BIA) (or the exercise of powers by the Court under the BIA) the provisions of the BIA prevail. Consequently, he concluded that the Receiver’s Charges had priority over the claims of ICI and Standard General.

Justice Graesser did, however, hold that the doctrine of paramountcy did not apply in respect of Edmonton’s PT Claims. While the Court confirmed it has the power to grant a super priority for the Receiver’s Charges ahead of the claims of secured creditors, such power must be exercised equitably, having regard to the purposes of the legislation and the receivership proceeding. In effect, the priority of court-ordered charges in insolvency proceedings is always in the discretion of the Court in each case.

Justice Graesser also confirmed that it is generally appropriate to have court-ordered charges rank ahead of claimants who benefit from the receivership. Nevertheless, as there was no anticipated benefit to Edmonton accruing out of this particular receivership, it was determined that this was not an appropriate case to provide the Receiver’s Charges with priority over the PT Claims. He therefore held that the appropriate priority for the PT Claims was ahead of the Receiver’s Charges.

The Decision highlights the discretionary nature of court-ordered charges in insolvency proceedings and the importance of drafting specific priority provisions in receivership orders that take into account the claims of unique creditors. While the use of the Template Order is highly desirable, they are not statutory or regulatory forms with the force of law. Ultimately, the priority of court-ordered charges in receivership proceedings remains at the discretion of the Court.

For further information, please contact:

Ryan Zahara          403-260-9628
Chris Nyberg          403-260-9707

or any other member of our Restructuring & Insolvency group.

Blakes periodically provides materials on our services and developments in the law to interested persons. For additional information on our privacy practices, please contact us at privacyofficer@blakes.com. Blakes Bulletin is intended for informational purposes only and does not constitute legal advice or an opinion on any issue. We would be pleased to provide additional details or advice about specific situations if desired.

For permission to reprint articles, please contact the Blakes Client Relations & Marketing Department at 416-863-4345 or teona.baetu@blakes.com. © 2018 Blake, Cassels & Graydon LLP