BC Take Five Newsletter, OnPoint Legal Research
This case addressed a long-standing tension between receivers and creditors who are unwilling participants in a receivership.
A receiver’s role is to enforce security by taking control and possession of all of a debtors’ property and ultimately selling the property for the benefit of the body of creditors. As in this case, the receiver is usually appointed at the request of a general creditor, such as a bank or credit union which holds general security over all of the debtor’s assets. Sometimes the receiver is given the authority to carry on the business of the debtor so as to maximize the creditors’ recovery—perhaps to allow for the conclusion of some of the debtor’s sales commitments, or to facilitate the sale of the debtor’s business as a going concern. The receiver is usually given a priority charge over the property under its control to secure its fees, disbursements and borrowings. These powers are set out in the form of a model order.
However, equipment lessors are often unhappy about being included in receiverships, especially where the receiver isn’t going to keep the business operating, since the lessors typically have PMSI priority over other creditors to the equipment they have leased, and expertise in re-marketing their leased equipment. From their perspective, they don’t need the receiver to take control over their equipment and sell it. In particular, they don’t wish to have their equipment subject to the receiver’s charges for fees, disbursements and borrowings relating to services they didn’t request or require.
In this case, two equipment lessors made it known to the receiver early in the receivership that they wished no part of the receivership. They wanted their equipment released by the receiver. The receiver undertook a typical analysis of their leases and decided that their leases were “security leases” rather than “true leases”—i.e. they were really financing agreements rather than merely agreements to use the equipment. On that basis the receiver kept their equipment in the receivership, which made it subject to the receiver’s priority charges.
The Court of Appeal noted that this “security lease/true lease” analysis was not useful. It also recognized that the receiver’s assumption of control over the leased equipment amounted to an unjustified change in priority positions, since the equipment lessors’ PMSI priority became attenuated. Since there were insufficient assets in the receivership to satisfy the claims of the various secured creditors, the equipment lessors would have had some portion of the sale proceeds of their equipment involuntarily contributed to the cost of the receivership created at the behest of the Credit Union. The court held that would unjustifiably alter the PMSI priority claims to which they were entitled.
Receivers, and the banks that typically request their appointments and indemnify their costs, will need to act with more caution as a result of this case. When they review the property available to secure the cost of the receivership process, they will need to consider whether any of that property is the subject of equipment leases, assess the priorities and determine the willingness of the lessor to participate in the receivership. Where receivers previously conducted their own “security lease/true lease” analysis in determining whether the leased equipment should be kept or released to the lessors, receivers will now need to consider the interests of the lessors and the priority consequences of including their equipment in the property under their control, and subject to their charges.
More broadly, any creditor unwillingly part of a receivership may find in this case a basis to be excluded from the process– and especially its costs.