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Tipping the Scales Ontario Court of Appeal Confirms the Primacy of Creditors

The Sikh Lehar International Organization ("SLIO") purchased property in order to establish a Gurdwara, a Sikh temple. To finance the purchase of the property, SLIO took out several mortgages. Eventually, SLIO became insolvent, and Reciprocal Opportunities Incorporated ("ROI"), the holder of the first mortgage over the property, asked the Court to appoint a receiver, a remedy that the Court granted with regard to all of SLIO's assets, undertakings and property.

SLIO informed the receiver that SLIO had a firm commitment from a lender to take assignment of ROI's mortgage. While the receiver indicated that it would apply to the Court to approve the assignment and discharge the receiver if the outstanding mortgage amount and fees were paid, the receiver also informed SLIO that it was continuing with the steps necessary to sell the property.

Eventually, the receiver found a buyer for the property. The receiver brought a motion for the Court to approve the sale; however, SLIO opposed the receiver's motion, and brought its own motion seeking an order requiring ROI to assign its mortgage upon payment of the mortgage amount and fees, and an order discharging the receiver.

The motion judge found that the Court's duties when reviewing a receiver's sale of property were articulated in Royal Bank of Canada v. Soundair Corp.:

  1. The court should consider whether the receiver has made a sufficient effort to get the best price and has not acted improvidently.
  2. The court should consider the interests of all parties.
  3. The court should consider the efficacy and integrity of the process by which the offers are obtained.
  4. The court should consider whether there has been unfairness in the working out of the process.

The motion judge found that the process the receiver undertook, including indicating acceptance of the assignment of ROI's mortgage to a third party, but selling the property instead resulted in unfairness to SLIO as well as the prospective assignee of the first mortgage, and accordingly declined to approve the sale of the property.  

The prospective purchaser of the property appealed the order. The issue before the Court therefore was whether or not the motion judge erred by not considering or not giving sufficient weight to the interests of all parties as part of the second Soundair factor, including the interests of  SLIO's creditors and the prospective purchaser of the property.

The Court of Appeal found that the motion judge had erred in their consideration of the Soundair factors.

The Court of Appeal found that the primary (though not the only or overriding) interest at stake was that of the creditors. Whereas the sale of the property would allow the creditors to be repaid, the assignment of ROI's mortgage to a third party would be trading one creditor for another, and SLIO would actually be less capable of paying off its creditors, as SLIO would assume additional debt in order to pay the brokerage fees for arranging the assignment.

Furthermore, the Court found that the motion judge did not engage in any analysis regarding the potential prejudice that the prospective purchaser would face if the sale did not go through.

Accordingly, since the considerations set out in Soundair for the sale of a property in a receivership directs the Court to review all of the interests at stake, and the creditors' interests have primacy, the Court of Appeal found that the motion judge erred in their application of the test, and ordered that the motion judge's order be set aside and a new hearing take place.