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Decisions on secured lenders’ rights and remedies in 2022

As Canada prepares to emerge from the COVID-19 pandemic, factors such as the elimination of government pandemic support and rising interest rates may significantly affect lenders’ decisions in 2022. Many expect that withdrawal of government funding will create a wave of insolvency filings in Canada. Although there remains significant uncertainty, secured lenders may be comforted by recent court decisions across Canada that have affirmed lenders’ rights and remedies in cases of default. This article summarizes these recent decisions and offers implications for lenders going forward.

To begin, the Ontario Court of Appeal in Devi Financial Inc. v. Everwood Place Ltd upheld a mortgagee’s right to enforce repayment against a personal guarantor. In this case, two corporate mortgagors were in default under their respective mortgages for failing to make payments when due. The mortgagee issued demand for repayment to the mortgagors and guarantor, and delivered notices of intention to enforce security pursuant to section 244 of the Bankruptcy and Insolvency Act,  RSC 1985 c B-3 (BIA). The guarantor, who was the principal of two corporate mortgagors, refused to pay the outstanding obligations on the basis that, at the time of signing the contract, he believed he was signing as an agent for his corporation, and not personally. The Court of Appeal upheld the motion judge’s decision to award summary judgment in favour of the mortgagee on the basis that an objective reading of the guarantee clearly bound the guarantor in his personal capacity and not as an agent for the corporate mortgagors, and that the guarantor’s personal, subjective understanding of the terms of the guarantee were irrelevant. Interestingly, the Court of Appeal also ruled that, given the terms of the guarantee, the mortgagee was entitled to an enhanced costs award, which suggests that the Court had little patience for sophisticated parties that advance obviously meritless defences. 

In Ward Western Holdings Corp. v. Brosseuk, the British Columbia Court of Appeal upheld a motion judge’s decision to appoint a receiver over a company that operated a gold mine (Westrike) despite conflicting evidence as to whether certain defaults under a General Security Agreement had occurred. Here, the seller sold all of the shares of Westrike to the purchaser. The transaction was financed by way of a vendor takeback financing, and the amount owing under the financing arrangement was secured by a GSA. The transaction contemplated that the principals of the seller would continue to operate the mine until a substantial portion of the indebtedness was paid off; however, almost immediately after the transaction closed, the relationship between the purchaser and seller deteriorated, culminating in the purchaser unilaterally taking over operations at the mine and restricting the seller’s access to the mine. Each party claimed that the other had breached terms of the share purchase agreement. The seller therefore applied to the Court for the appointment of a receiver, and the purchaser applied to enjoin the seller from interfering with the mine’s operation. 

The trial court dismissed the purchaser’s injunction application and granted the seller’s application to appoint a receiver. The British Colombia Court of Appeal upheld these decisions and stated that the trial court properly considered all relevant factors when determining whether a receiver should be appointed. Specifically, the Court of Appeal cited the risk to the seller’s security as providing reasonable grounds for appointing a receiver, noting that the purchaser/debtor’s contractual breaches and general lack of transparency in operating the mine seriously jeopardized the safeguard and protection of the seller/lender’s security. Although certain facts were in dispute, other facts were undisputed and clearly identified breaches to the share purchase agreement and GSA that individually and in combination supported real concern for protecting the seller’s security. In particular, the purchaser had failed to insure certain equipment at the mine, failed to pay advisory fees, and sold produced gold in contravention of other agreements that Westrike had signed. As a result, the Court of Appeal upheld the trial judge’s ruling that the appointment of a receiver was just and convenient.

In Pandion Mine Finance Fund LP v. Otso Gold Corp. the BC Supreme Court granted the secured creditor’s application to appoint a receiver despite failing to give ten days’ notice to the debtors, as is typically required by section 243(1.1) of the BIA. This notice period may be abridged either with the consent of the debtor, or more unusually, if the court determines it is appropriate in the circumstances. Here, the BC court agreed that it was appropriate to appoint the receiver without the lender delivering a 244 notice because the affected parties had received sufficient practical notice and, on the facts of this case, a 244 notice would be “just a formality”, serving no practical purpose.  The Court also emphasized that the asset in question, a mine, was a wasting asset, and that the debtors did not have the funds to maintain the mine. The secured creditor was not acting in bad faith, and only way to finance the required funds was through the secured lender, pursuant to a receivership.

Finally, in Can*Sport Incorporated v. HarbourEdge Mortgage Investment Corporation the Nova Scotia Court of Appeal considered an application for leave to appeal a receivership order. In this case, the motion judge gave oral reasons for granting the secured creditor’s application to appoint a receiver over the debtor. On application for leave to appeal under section 193 of the BIA, the judge noted that a motion judge’s decision as to whether to appoint a receiver is discretionary, and that absent a clear error of law or a substantial injustice, a discretionary decision will not be overturned.  The debtor claimed that the motion judge misapprehended certain evidence and failed to provide sufficient reasons to permit appellate review. The leave application judge refused leave to appeal, noting that the facts found by the motion judge were supported by the evidence. Further, the leave application judge provided that a motion judge’s reasons are not required to provide a “watch me think” approach wherein the judge performs an exacting analysis of each factor upon which she relied. Rather, a judge’s reasons, read in context of the evidence and submissions before her, are only required to adequately explain why she made the determination she did. This ruling emphasizes the deference given to motions judges who must decide urgent commercial matters.

Viewed together, these recent decisions, including several appellate decisions, reaffirm important enforcement rights and remedies of secured creditors. They show that Courts will generally uphold contractual obligations between debtors, guarantors and creditors, negotiated between sophisticated arm’s length parties, and will intervene to preserve or safeguard a creditor’s security. These cases also reiterate judicial trends from 2021 that insolvency judges at first instance have a wide discretion, which will ordinarily be shown deference by appellate courts.

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