In the recent case of Integris Credit Union v. Mercedes-Benz Financial Services Canada Corporation, 2016 BCCA 231, the B.C. Court of Appeal rendered a decision which provides certain equipment financiers with the ability to avoid sharing in the costs of certain receiverships. The decision, while helpful to equipment financiers, does not apply universally to all receiverships and certain circumstances need to exist, and certain steps need be undertaken, in order to obtain such relief.
In particular, it appears that an equipment financier must, at a minimum, (i) have either a purchase money security interest (PMSI), lease or conditional sales contract and (ii) make it known early in the receivership that it wishes to seize its assets and resell the assets outside of the scope of the receivership. Further, the receivership must be a "liquidation" style of receivership and not one where all of the assets are being sold as a going concern.
If these criteria are met, then the proceeds from the equipment financier may not be utilized to pay the costs of the receivership. As will be described in greater detail below, this benefit may not accrue to lenders against specific assets if they do not have a PMSI but merely a first ranking security interest. Further, it is questionable whether this relief would assist a sale leaseback structure.
Background
Oversimplified, Integris Credit Union, a lender, sought and obtained a receivership order in respect of the debtor, All-Wood Fibre Ltd. The receiver subsequently took steps to liquidate the assets of the debtor and eventually applied to court for an order approving the sale of the Debtor's property by way of auction. Shortly after the debtor was placed into receivership, Mercedes-Benz Financial Services Canada Corporation (MBFS) and BHL Capital, both of whom leased equipment to the debtor, made it known to the receiver that they desired to take back their assets to market and sell them through their own processes. The receiver did not comply, and so MBFS and BHL applied to court for an order requiring the receiver to deliver the equipment to them. The lower court ultimately approved the auction sale but excluded the equipment from the sale and permitted MFBS and BHL to sell the assets on the condition that any proceeds would be held in trust pending disposition of the matter.
The lower court later determined that the equipment was subject to the costs of the receivership. In making this determination, the lower court reviewed the leases and determined them to be "financing leases" as opposed to "true leases," with the result that the secured creditors/lessors were responsible for a portion of the receiver's costs.
The Court of Appeal reversed this decision. In reaching its determination, the Court of Appeal focused on the relationship between the secured creditors and the debtor. The Court of Appeal distinguished between a mere secured creditor and a PMSI holder, noting that making a PMSI holder responsible for the costs of a receivership would effectively circumvent the priority rules and reverse priority. While the Court of Appeal did not expressly define the circumstances in which a secured creditor will be permitted to avoid sharing in the costs of a receivership, the Court's reasoning suggests that a secured creditor's status as a PMSI holder will often be a central consideration. What remains uncertain is whether a secured creditor must also retain an ownership interest in the subject property.
In order to assess the likelihood of a similar result in future cases, consideration should be given to the following factors, among others:
- Whether the terms of the receivership order permit the relief sought;
- Whether the receivership is a liquidation receivership;
- The nature of the relationship between the secured creditor and the debtor, and, in particular, whether the secured creditor holds a PMSI in connection with a conditional sales contract or leasing relationship;
- Whether the secured creditor has made it known to the receiver forthwith that it wishes to retain the asset and administer the realization of the assets itself;
- Whether the secured creditor has consented to the appointment of the receiver; and
- Whether the receiver has expended funds for the necessary preservation or improvement of the asset.
If the right circumstances exist, then this decision can help equipment financers reduce their costs in the event of an insolvency. Consideration should also be given to the fact that a leasing or conditional sales arrangement may be preferable to a specific security agreement arrangement as the existence of a leasing or conditional sales arrangement may increase the likelihood of success at avoiding liability for the costs of a receivership.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
