End of controversy over section 243 of the Bankruptcy and Insolvency Act

For a number of years now, there has been a controversy in case law concerning the application of Section 243 of the Bankruptcy and Insolvency Act ("BIA") in Quebec, especially concerning the conditions under which such an application to the Court for the appointment of a receiver by a secured creditor may be granted.

On the one hand, some Superior Court judges were of the opinion that even in the presence of an insolvent debtor and an application for the appointment of a receiver in good and due form, a secured creditor must comply with the provisions applicable to hypothecary recourses (transmitting a prior Notice of Exercise and waiting for the expiry of the legal time limits contained therein) and therefore in the absence of compliance with these rules set out in the Civil Code of Québec, Section 243 of the BIA cannot be applied.

On the other hand, there was the thesis that the BIA somehow allows all requirements and rules of procedure applicable in Quebec law (security law) to be set aside, so that a secured creditor can use the vehicle provided for under Section 243 of the BIA without beginning the exercise of his or her hypothecary recourses as expressly provided by law.

The Court of Appeal was seized of an appeal filed by the Laurentian Bank of Canada ("LBC") following a judgment rendered by the Honourable Gaétan Dumas, S.C.J., which dismissed an application for the appointment of a receiver, first under Section 243 of the BIA and then under Section 47 of the BIA, of the property of the debtors Media5 Corporation and Essagal Acquisitions Inc. The purpose of the application at first instance is to allow the secured creditor, LBC, to be authorized to sell the debtors' businesses, through the appointed receiver, PricewaterhouseCoopers Inc. ("PWC"), as a going concern.

Here is how the Court of Appeal expressed itself in its unanimous decision of July 20:

« [97] To summarize, a hypothecary creditor may obtain the appointment of a trustee in bankruptcy as receiver under s. 243(1) of the BIA to sell the debtor's business if the following preconditions are met:

(1) the debtor is insolvent;

(2) the hypothecary security is for all or almost all of the inventory, accounts receivable or other property acquired or used by the insolvent debtor;

(3) such property is used in connection with the insolvent debtor’s affairs business;

(4) the notice required under Section 244 has been given and the time limit set out in Section 243(1.1) of the BIA has been met;

(5) the substantive and procedural requirements prior to the exercise of a hypothecary recourse set out in the Civil Code of Québec have been complied with, namely (i) the publication of a prior Notice of Exercise of a Hypothecary Right in accordance with the formalities set out in Articles 2757 and 2758 para. 1 C.C.Q., and (ii) compliance with the time limits set out in Art. 2758 para. 2 C.C.Q., subject to Art. 2767 C.C.Q. if the circumstances are appropriate.

[98] If these prerequisites are met, the court may then proceed with the appointment of the receiver if it is of the opinion that the appointment is fair and opportune, taking into account all the circumstances, including those identified in paragraphs [93] to [96] above, namely :

(6) the hypothecary creditor requesting the appointment of the receiver has acted in good faith and without being misappropriated;

(7) the appointment of the receiver and the powers conferred on the receiver will not prejudice the rights of the other creditors in such a way that their claims would be more in danger than in the event of the debtor's bankruptcy;

(8) the appointment of the receiver and the powers conferred on the receiver are not likely to prevent the implementation of a proposal under the BIA or an arrangement under the CCAA, to the extent that it is reasonable to believe that such a proposal or arrangement could receive the required approvals; and if

(9) these steps are justified in the particular circumstances of the case, taking into account the broader objectives of the BIA and insolvency law, including that they will contribute usefully to avoiding, to the extent possible, social and economic losses resulting from the liquidation of an insolvent business corporation while promoting the fair and orderly resolution of the debts of the target corporation. »

What must be retained from this decision and from the teachings of the Court of Appeal is first and foremost that the possibility for a secured creditor to appoint a receiver to put in place a bidding process for the sale of assets and then be authorized to sell to the highest bidder is not an option or a way to circumvent the applicable rules set out in the Civil Code of Québec, namely those of hypothecary recourses, in order to proceed more quickly. The Court of Appeal confirmed that the possibility of obtaining the appointment of a receiver under the BIA is in addition to hypothecary recourses when the debtor is insolvent and clearly established that the BIA, a federal law, may provide for other recourses for secured creditors than those already provided for in the Civil Code of Quebec. However, the BIA specifies that the two regimes must be able to operate in tandem.

It is now clear that an application made by a secured creditor under Section 243 of the BIA must necessarily comply with the rules and procedures set out in the Civil Code of Québec for exercising a hypothecary recourse, namely, it must be preceded by the service and registration of a Notice of Exercise pursuant to Article 2757 of the Civil Code of Québec and the time allowed for the debtor to remedy the defaults alleged under the notice must have elapsed. Once the prerequisites have been met, the other more specific criteria for the appointment of a receiver, which were reiterated by the Court of Appeal, may be analyzed by the Court, which will exercise its discretion as to whether or not to appoint a receiver.

Finally, it is important to note that if the circumstances are appropriate and the criteria of Article 2767 of the Civil Code of Québec are met, the Court of Appeal reiterates in paragraph 47 of its decision that "a creditor may immediately exercise his hypothecary rights when the court authorizes him to do so because it is feared that, without this measure, the recovery of its debt would be jeopardized, or when the property is likely to deteriorate or depreciate rapidly".