NORTH OF THE BORDER UPDATE
This article has been contributed to the blog by Mary Paterson and Dave Rosenblat. Mary Paterson is an associate in the litigation group of Osler, Hoskin & Harcourt LLP and Dave Rosenblat is an associate in the insolvency and restructuring group of Osler, Hoskin & Harcourt LLP.
In Montrose Mortgage Corp. v. Kingsway Arms Ottawa Inc., 2013 ONSC 6905, the Ontario Superior Court of Justice reviewed the basis for approving a “quick flip” transaction in which the appointment of a receiver is immediately followed by approval of a “pre-packaged” sale. This guidance is welcome as pre-pack transactions become more common in the Ontario distress marketplace, often representing the best commercial alternative to liquidation.
Montrose Mortgage Corporation (“Montrose”) applied for an order appointing Grant Thornton Ltd. (“GTL”) as receiver and manager of the assets, undertakings and properties of four debtors (the “Debtors”) who operated retirement residences. Montrose also applied for an order approving a purchase and sale agreement between GTL and 2391766 Ontario Inc. (the “Purchaser”). The proposed sale involved an indirect credit bid by Montrose, the Debtors’ main secured creditor, which was acting on loans to the Debtors as agent for GMF Nominee Inc. (“GMF”).
The Debtors owed Montrose close to $36 million. The Debtors were unable to repay or service this debt and were in default of the terms of the corresponding loans. In March and December of 2012, Montrose had demanded payment and given notice of intention to enforce a security under section 244 of the Bankruptcy and Insolvency Act. Montrose had also delivered notices of sale pursuant to the Personal Property Security Act and the Mortgages Act.
In February 2012, Montrose appointed GTL to review and report on the financial and operational condition of the Debtors. In March 2012, with Montrose’s support, one of the Debtors retained a listing agent to market each of the retirement residences. Few offers resulted from the listing agent’s efforts and most of those offers would have resulted in a significant shortfall on the debt.
Montrose therefore applied for the appointment of GTL as receiver to effect a credit bid sale for the properties amidst the inability to elicit a satisfactory offer. The Purchaser, which had been incorporated by GMF, proposed to acquire each of the assets that were charged by Montrose’s security for an amount equivalent to the indebtedness owed to Montrose. This proposed purchase provided that the Purchaser would assume a prior ranking charge on one of the residences.
DECISION AND ANALYSIS
The Court held that it was just and convenient to appoint GTL as receiver of the debtors and to approve the proposed sale. In reaching this decision the Court articulated two considerations that must be made before approving a “quick flip” or “pre-pack” transaction:
- The Court must assess the need for a receiver; and
- The Court must assess the reasonableness of the proposed sale.
The Court stated that the adequacy and fairness of the sales and marketing process in a “quick flip” transaction must be scrutinized with special care. Per Tool-Plas Systems Inc., Re (2008), 48 C.B.R. (5th) 91 (S.C.J.), “the Court should consider the impact on various parties and assess whether their respective positions and the proposed treatment that they will receive in the quick flip transaction would realistically be any different if an extended sales process were followed”.
The Court also noted that there is a heightened need for a “robust and transparent record” when it is considering a proposed purchase that involves a credit bid, given that the practical effect of such a transaction would be to foreclose on subordinate creditors.
In the result, the Court was satisfied that the appointment of a receiver was necessary. The appointment would provide for the preservation of the retirement residence operations as going concerns, thereby ensuring that residents and employees would stay at the residences.
The Court also accepted that the proposed sale was reasonable. In reaching this decision the Court emphasized that there had been a professional and prolonged effort to elicit interest in the properties and that there had not been any interest received that could have matched the level of the secured indebtedness. Additionally, independent professional appraisals of the properties revealed that the proposed sale price was reasonable. Finally, the proposed sale provided for the proper treatment of claims that were in priority to Montrose.
“Quick flip” transactions may be the best alternative to a liquidation. However, these transactions will be subject to careful scrutiny to ensure that the proposed sale is reasonable. This case shows that reasonableness may be established when it is clear that there are no other viable alternatives, as may be evidenced by the low offers elicited through a sales and marketing process. Appraisals in support of the proposed sale price will also help to establish the reasonableness of the proposed sale. In short, “quick flips” should be preceded by a careful and fair sales and/or appraisal process to show the Court that such a transaction is reasonable in the circumstances.