NORTH OF THE BORDER UPDATE
This article has been contributed to the blog by Dave Rosenblat and Jamie Rosenblatt. Dave Rosenblat is an associate in the Insolvency & Restructuring group of Osler, Hoskin & Harcourt LLP and Jamie Rosenblatt is an articling student at Osler, Hoskin & Harcourt LLP.
In Royal Bank of Canada v. Atlas Block Co. Limited., 2014 ONSC 1531 (“Atlas Block”), the Ontario Superior Court of Justice considered the receiver’s proposed distribution of sale proceeds and allocation of its costs between the two principal secured creditors of the debtors. The Court granted the relief sought by the receiver and in so doing shed light on general principles that may be applicable when a proposed allocation of a receiver’s costs and/or the distribution of sale proceeds is contentious.
KPMG Inc. (the “Receiver”) was appointed as receiver of all of the assets and undertakings of Atlas Block Co. Limited, Atlas Block (Brockville) Ltd. and 1035162 Ontario Inc. o/a Atlas Block Trucking (the “Debtors”). The Debtors manufactured a range of brick and concrete building and landscaping products and had operations in multiple facilities.
As a result of a sales and marketing process, the Receiver entered into two asset purchase agreements (the “APAs”) for the sale of equipment, inventory and real estate of the Debtors to Brampton Brick Limited (“BBL”). The court approved the APAs on December 20, 2013. As noted by Brown J., the motion was not opposed; however, Business Development Bank of Canada (“BDC”) reserved its rights with respect to distribution and the order was made subject to that reservation. The sale was completed on January 6, 2014.
The Receiver moved for approval of the distribution of certain sales proceeds between the Royal Bank of Canada (“RBC”) and BDC, the principal secured creditors of the Debtors. Additionally, the Receiver moved for approval of its proposed allocation of certain fees and costs between RBC and BDC.
Each APA stipulated an allocation of the purchase price to be paid amongst the purchased assets. Pursuant to such terms, $8.2m of the purchase price was allocated to assets subject to security held by BDC. The Receiver used the APA purchase price allocations to determine the proceeds owed to RBC and BDC. The proposed net amounts payable were $7.7m for BDC and $3.46m for RBC, following deduction of the Receiver’s costs.
RBC supported the proposed distribution. BDC objected, claiming it undervalued the land and assets subject to its security. BDC argued that an allocation based on the appraised value of the assets was more appropriate and, if used, would entitle BDC to $10.6m. Additionally, BDC objected to the proposed allocation of the Receiver’s costs.
Allocation of Purchase Price
Brown J. referred to Bank of America Canada v. Willann Investments Ltd., 1992 CarswellOnt 1743 (Gen. Div.) when addressing the issue of purchase price allocation. In that case, the Court noted that courts might refrain from approving a sale that proposed an allocation of the purchase price which differed significantly from the most recent valuation of the assets, because such an allocation would not fairly consider the interests of all creditors. Based on this, Brown J. reasoned that the appropriate time to object to an allocation of the purchase price in a proposed sale is when the sale is brought before the Court for approval. Brown J. went on to note that it is difficult for a creditor to advance an objection about a term of a court-approved sales agreement which contemplates the allocation of the purchase price, given that such an objection constitutes an objection to a material term of such an agreement. In the Atlas Block proceedings, the Court had approved the APAs without opposition from BDC. While BDC did put a reservation of rights on record, it failed to any evidence about the nature of its objection. Brown J. concluded that there was no reason to interfere with the Receiver’s recommendation to distribute the net sale proceeds according to the methodology set out in the APAs.
Allocation of Receivers’ Costs
The Receiver proposed to allocate 69.92% of the shared BDC and RBC realization costs to BDC, given that BDC recovered that portion of the total proceeds. BDC objected, asserting that the costs should be split evenly between RBC and itself. Brown J. began his analysis of this issue by reviewing the general principles regarding the allocation of receivers’ costs:
- The allocation of such costs must be done on a case-by-case basis and involves an exercise of discretion by a receiver or trustee;
- Costs should be allocated in a fair and equitable manner, one which does not readjust the priorities between creditors, and one which does not ignore the benefit or detriment to any creditor;
- A strict accounting to allocate such costs is neither necessary nor desirable in all cases;
- A creditor need not benefit “directly” before the costs of an insolvency proceeding can be allocated against that creditor’s recovery;
- An allocation does not require a strict cost/benefit analysis or that the costs be borne equally or on a pro rata basis;
Where an allocation appears prima facie as fair, the onus falls on an opposing creditor to satisfy the court that the proposed allocation is unfair or prejudicial.
Brown J. approved the Receiver’s proposed cost allocation, noting that this allocation was prima facie reasonable in the circumstances of the case. The Receiver had disclosed the proposed methodology from the start of the administration of the estate with no previous objection from BDC. Moreover, the Receiver provided continual and transparent reporting regarding the fees incurred. Brown J. noted that it was “… difficult to place much credence in an ‘11th hour’ objection by a creditor to the receiver’s proposed allocation of fees when the Receiver disclosed the proposed methodology at the start”.
Atlas Block sends a clear message that a creditor who wishes to object to the allocation of the purchase price in a proposed sale agreement should do so before a court grants approval such. Further, this case provides a useful review of the general legal principles applicable to the allocation of receivers’ costs.