Canada: Court Confirms Receiver's Authority To Assign A Contract

Prior to December 23, 2020, it had been unclear whether a court had the jurisdiction to grant an order assigning a contract without counterparty consent, on application by a court-appointed receiver (a "Receiver"). In a helpful decision - Urbancorp, 2020 ONSC 7920 ("Urbancorp"), Chief Justice Morawetz continued the trend in Canadian jurisprudence of interpreting the Canadian insolvency regimes harmoniously using a purposive approach to statutory interpretation, he found that a Receiver, just like a bankruptcy trustee or a debtor in proceedings under the Companies' Creditors Arrangement Act ("CCAA"), has the power to apply for an order assigning contracts of the debtor and the court has jurisdiction to grant the order.

Background

The ability to obtain court approval to assign a contract in an insolvency proceeding without the counterparty's consent is a powerful tool that has been used in numerous bankruptcy and other insolvency proceedings in Canada. Using this tool, bankruptcy trustees and CCAA debtor companies can obtain value for a contract without the need to obtain consent from contractual counterparties to the assignment (even if such consent is required by the terms of the contract).  These orders are commonly obtained in conjunction with a sale of assets by a bankruptcy trustee or CCAA debtor to obtain enhanced value on realization.

The Bankruptcy and Insolvency Act ("BIA") (at section 84.1) and CCAA (at section 11.3) each contain a provision explicitly authorizing the court, on an application by a bankruptcy trustee or CCAA debtor (respectively), to make an order assigning the rights and obligations of the bankrupt or debtor company (respectively) under a contract.  The statutory provisions also set out the factors to be considered by the court when determining whether to grant such an order, as well as certain exceptions.

However, there is no express statutory provision (similar to section 84.1 of the BIA or 11.3 of the CCAA) that authorizes the court to grant such an order upon an application by a Receiver in receivership proceedings.  This led to uncertainty as to whether a Receiver is able to obtain value from the debtor's contracts through a court-ordered assignment - even though it may have the same mandate to realize upon the debtor's assets and maximize recoveries for creditors.

In Urbancorp, Chief Justice Morawetz held that section 243 of the BIA, together with section 100 of the Courts of Justice Act ("CJA"), are broad enough to provide the basis for a Receiver to seek, and the jurisdiction for the court to grant, an order assigning the debtor's contracts.  Alternatively, he found it would be appropriate to resort to the inherent jurisdiction of the court as the basis for such authority.

Urbancorp

In the Urbancorp case, a number of related entities were granted insolvency protection under the CCAA and another related entity ("URPI") was subject to a receivership proceeding. After conducting a court-approved sales process, both the receiver and monitor (together, the "Court Officers") sought approval of a transaction (the "Transaction") to sell certain geothermal assets, which provided heating and air conditioning to three condominiums in downtown Toronto (the "Geothermal Assets"). Integral to the Geothermal Assets were 82 geothermal borehole wells located on a neighbouring property belonging to King Towns North Inc. (the "Landlord"). URPI (which managed the Geothermal Assets) and another entity (together, the "Tenants") used the boreholes pursuant to a long-term lease with the Landlord (the "Lease"). The purchaser required the Lease be assigned to it as a condition of the Transaction.

At the time of entering into the Lease, the Landlord and Tenants were part of the same corporate group owned or controlled by the Saskin family. Reflecting that relationship, the Lease was for a 50-year term (with 40 years remaining) and had a nominal annual rent of $100. The Lease also contained an assignment clause providing that the Landlord's consent to any assignment or transfer of the Lease was required and that such consent could be unreasonably withheld.

The Court Officers brought a motion to approve the Transaction and, among other things, assign the Lease to the purchaser without the Landlord's consent (the "Assignment Order"). The Landlord argued that the Court Officers had not sought its consent to the assignment of the Lease and objected to the Assignment Order.

Among other arguments, the Landlord argued that there was no statutory authority for the Receiver to seek the Assignment Order. In its submission, the Landlord referred to section 84.1 of the BIA and section 11.3 of the CCAA, which provide a court with statutory jurisdiction to make an order assigning a debtor company's rights and obligations under an agreement. The Landlord argued that since there was no corresponding provision in Part XI of the BIA dealing with Secured Creditors and Receivers, the court lacked the jurisdiction to grant the Assignment Order.

In response, the Receiver pointed to the Supreme Court of Canada statement in Century Services¹ directing that the BIA and CCAA are to be interpreted harmoniously. While acknowledging that the BIA is silent as to when a Receiver may apply for an Assignment Order, the Receiver argued that "the only purposive interpretation which harmonizes the Canadian insolvency regimes and prevents the loss of value from the estate of the debtor is the application of section 84.1 of the BIA to receivers."²

In its analysis, the court highlighted recent case law supporting the use of a purposive analysis to establish the scope of a Receiver's powers and noted that the Supreme Court of Canada in 9354-9186 Quebec Inc. v Callidus Capital Corp had recently confirmed that the remedial objectives of Canadian insolvency include: providing timely, efficient, and impartial resolution of a debtor's insolvency, preserving and maximizing the value of the debtor's assets, ensuring fair and equitable treatment of claims against a debtor, protecting the public interest, and balancing the costs and benefits of restructuring or liquidating a debtor company.³

In considering those objectives, the court noted 1) the significant purchase price in the Transaction and the harm to creditors if the Transaction could not be completed because the Lease could not be assigned; and 2) that the Receiver would be able to assign the Lease if it effected a bankruptcy and then assigned the Lease as bankruptcy trustee; however, doing so would cause delay and add cost to the process.

Taking these points into consideration and applying a purposive analysis, the court found that there is sufficient jurisdiction in section 243(1) of the BIA in conjunction with section 100 of the CJA for the Receiver to seek the Assignment Order, and for the court to make such an order.  Those sections provide as follows:

According to the Chief Justice, if those sections were not broad enough to form the basis of the Receiver's request for the Assignment Order "the ability of a receiver to discharge its functions would be severely restricted to the point where the objectives of Canadian insolvency laws would be frustrated in the receivership context."⁴  

The court also went on to summarize the scope of the court's inherent jurisdiction and conclude that in this case, where there is no statutory provision prohibiting the Assignment Order, it would also be appropriate to resort to inherent jurisdiction to grant the Assignment Order if section 243(1)(c) of the BIA and section 100 of the CJA are insufficient.

Assignment was appropriate in the circumstances

Finally, the court considered whether the assignment of the Lease was appropriate in the circumstances and, in doing so, referenced the factors set out in section 84.1 of the BIA and section 11.3 of the CCAA, specifically:

1. whether the monitor approved the proposed assignment (only relevant to CCAA proceedings);
    
2. whether the person to whom the rights and obligations are to be assigned would be able to perform the obligations; and
    
3. whether it would be appropriate to assign the rights and obligations to that person.⁵

Only (c) was in dispute and, in finding that the assignment was appropriate, the court dismissed the Landlord's arguments including that it would not be treated fairly and equitably without modifying the Lease to increase what it viewed to be commercially unreasonable rent. The court found that the Landlord's objections had been addressed by the Receiver, which argued:

• the sale process was approved by the court;
   
• the assignment of the Lease does not preclude the Landlord from asserting a claim as to an allocation of a portion of the sale proceeds based on the value inherent in the Lease;
   
• there is no prejudice to the Landlord from the assignment since no amendments are being sought; and
   
• the Lease (given the 82 boreholes located on the leased land) are an integral part of the purchased assets.

In the circumstances, the court held that the Transaction should be approved and that the Assignment Order should be granted. 

Conclusion

Accordingly, notwithstanding the prior uncertainty on this point, this case provides clarity in Ontario that Receivers have the power to request a court-ordered assignment of contracts of the debtor without consent of the counterparty, and the court has the jurisdiction to grant such an order.

In granting this decision, the court continued the trend of using a purposive approach to interpret Canadian insolvency regimes harmoniously to accomplish their objectives.

Footnotes

1. Century Services Inc. v. Canada (Attorney General), 2010 SCC 60 at para 44. 

2. Urbancorp, 2020 ONSC 792 at para 23 [Urbancorp].

3. Ibid at paras 24-25; citing 9354-9186 Quebec Inc. v Callidus Capital Corp, 2020 SCC 10 at para 40 and Yukon (Government of) v Yukon Zinc Corporation, 2020 YKSC 16 at para 46.

4. Ibid at para 31.

5. Ibid at para 35.

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