COVID-19 alone not enough to delay receivership sale: Insight from the Choice Properties decision
As the global COVID-19 pandemic becomes a long-term event, Canadian courts and tribunals will increasingly consider the pandemic’s impact on business. Fillmore Riley’s Pandemic Resource Centre will report on these developments as key decisions are made.
What constitutes a fair and reasonable sales process during the COVID-19 pandemic was considered in the recent case of Choice Properties Limited Partnership v. Penady (Barrie) Ltd., 2020 ONSC 3517.
At issue in Choice was a receivership sale of a commercial shopping centre in Barrie, Ontario. The receiver sought an order approving its proposed sale procedure.
The court considered whether the sale procedure was fair and reasonable, applying criteria defined in Royal Bank of Canada v. Soundair Corp, 1991 CarswellOnt 7706 (Ont. Gen. Div). These criteria are:
- Whether the receiver has made a sufficient effort to get the best price and has not acted improvidently;
- Whether the interests of all parties have been considered;
- The efficacy and integrity of the process by which offers are obtained;
- Whether there has been unfairness in the working out of the process.
In considering the Soundair principles, a court is also looking to assess factors from CCM Master Qualified Fund Ltd. v. blutip Power Technologies Ltd., 2012 ONSC 1750. including:
- The fairness, transparency and integrity of the proposed process;
- The commercial efficacy of the proposed process in light of the specified circumstances facing the receiver; and
- Whether the sale process will optimize the chances, in the particular circumstances, of securing the best possible price for the assets offered for sale.
The sale of the shopping centre is occurring in the context of the COVID-19 pandemic, during which 22 of the centre’s 27 tenants had either temporarily suspended operations or limited services offered. The pandemic contributed to, but was not the sole cause of, the debtor’s financial difficulties, which predated the pandemic. The debtor had been attempting to sell or refinance the property for some months prior.
The debtor took issue with the receiver’s proposed sale procedure:
- The first complaint of the debtor was that the credit bid was significantly below appraisals for the property (i.e. that the bid was a “low-ball” offer.) The court did not accept this argument, as the receiver had based their price on a comprehensive estimate from a reputable commercial real estate company which factored in difficulties associated with the pandemic. This was preferred over the debtor’s estimate, which did not take into account pandemic implications for the collection of rental income. That the debtor had tried and failed to sell the property for an extended period of time prior to the pandemic, without success, was further evidence that the debtor’s price was too high.
- A second complaint of the debtor was that, in the credit bid, the receiver had included a $400,000 expense reimbursement payable to them if the bid was unsuccessful. The court found that this was reasonable (0.8% of purchase price) and within the range ordinarily accepted by the court.
The debtor’s third complaint pertained to Sale Procedure.
- First, they complained that the receiver was prepared to undertake the sale procedure without obtaining a valid environmental report, building condition assessment report, or tenant estoppel certificates. Despite the receiver’s arguments of the property’s recent construction and the difficulty in obtaining tenant estoppel certificates, the court found that the receiver should obtain all of these things, especially given the relatively quick and affordable nature of doing so.
- Second, they complained that a sale should not be undertaken at this time given the COVID-19 pandemic. Despite expressing its sympathy, the court disagreed. The insolvency in this case was not a result of the pandemic, but rather stemmed from longer-term financial difficulties. The court determined it could not simply take a “wait-and-see” approach on bankruptcy or restructuring sales during a pandemic, even for the few months suggested by the debtor here, as there is not sufficient certainty as to if or when the economic outlook will improve.
In sum, the court decided that the proposed sale in this case complied with the principles from Soundair and CCM Master, as it strikes a necessary balance between expediency and addressing the declining value of the business, while also setting out a realistic timetable for the process.
Insight for Businesses: The pandemic will likely not be over before an increase in insolvencies requires the attention of Canadian courts. This case suggests that courts will not choose delay as a means of addressing the particular challenges the pandemic poses. While the court will take into consideration the pandemic when assessing if an insolvency process has complied with Soundair, these circumstances do not supersede the overarching importance of having efficient and effective insolvency procedures. COVID-19 alone is insufficient to persuade a court to pause an asset sale, even for only a few months, as the timeframe for the abatement of this economic crisis is uncertain.
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Resource posted August 18, 2020, with a report from Nick Noonan.