A fundamental term in the "standard" receivership order is the provision granting the receiver a super priority for its fees and disbursements over the interests of secured creditors of the debtor.
When an appointment of a receiver is sought under section 243 of the Bankruptcy and Insolvency Act (the "BIA"), the court has the power, under subsection 243(6) of the BIA, the power to grant a charge over the property of the entity in receivership "ranking ahead of any or all of the secured creditors". The only restriction is that "the court may not make the order unless it is satisfied that the secured creditors who would be materially affected by the order were given reasonable notice and an opportunity to make representations."
Prior to the enactment of the amendments to section 243 of the BIA, the general rule was that secured creditors would not be subject to the charges and expenses of a receivership. The exceptions to the general rule, where the receiver would have priority, were where:
the secured creditor sought the appointment or the appointment was with the consent or approval of the other secured creditors;
the receiver had been appointed to preserve and realize on the assets for the benefit of all interested parties, including secured creditors; or,
the receiver expended money for the necessary preservation or improvement of the property.
These principles are proper considerations for the court in determining whether to grant a receivership order with a super priority for the receiver's fees and disbursements.
In Edmonton (City) v. Alverez & Marsal Canada Inc., 2019 ABCA 109, the Alberta Court of Appeal heard the appeal by the receiver of the Reid-Built group of companies of the order of Mr. Justice Graesser, who had previously ruled that the receiver's priority did not apply over the City of Edmonton's property tax claim.
The BIA defines "secured creditor" in part to include "a person holding a mortgage, hypothec, pledge, charge or lien on or against the property of the debtor or any part of that property as security for a debt due or accruing due to the person from the debtor". The City's tax lien on the debtor's property clearly made the City a secured creditor for the purposes of section 243(6) of the BIA.
The City argued that since its lien was in first position and fully secured, it would not gain any benefit from the receivership, so it should not bear any of the costs of the receivership and thus should not be subordinate to the receiver. This is, of course, the situation with any secured creditor in first priority who has not sought the appointment of the receiver. Accordingly, that fact alone could not be determinative of whether the receiver should have a super priority.
Mr. Justice Graesser also considered in the same judgment, the applications by a first mortgagee and a builder's lien claimant on other properties who made the similar argument that the receiver should not have priority over the mortgage and lien claim. He ruled, however, with respect to those secured creditors that the receiver would have the super priority.
Mr. Justice Graesser stated with respect to the policy considerations that: "I do not see that claimants with a proprietary claim are entitled to a free ride in a receivership, such that they should be responsible for payment of the costs of the receivership as they relate to the claimants' claims and the cost of monetizing the claim." He further noted that: "for creditors who may benefit from the Receivership, the super priority is generally appropriate for the Receiver's fees and disbursements, on the expectation that these fees and disbursements will ultimately be fairly apportioned."
One would have thought that those same policy considerations should have also applied to the City. However, Mr. Justice Graesser found that the City tax lien should be treated differently. The Court of Appeal did not agree and concluded that there was "no principled reason for drawing this distinction between [the City's] position and that of the mortgage and lien holders." Accordingly, the Court of Appeal allowed the appeal and granted the receiver priority for its fees and disbursements over the City's tax lien.
Ultimately, as the Court of Appeal noted, "The super priority is necessary to protect receivers; without security for their fees and disbursements they would be understandably concerned about taking on receiverships." Equally, a single secured creditor may be reluctant to seek the appointment of a receiver if it will bear the burden of costs of the process while other secured creditors, including governmental entities, can sit back and benefit from the receiver's work without sharing in the costs.
While the court must complete the analysis required by section 243(6) of the BIA before granting a receiver super priority for its fees and disbursements, it will perhaps be the rare situation where secured creditors as a group will not be subordinated to the super priority of the receiver on the granting of the "standard" receivership order. Nevertheless, secured creditors should be mindful that the granting of super priority to the receiver is still at the discretion of the court so may, in an appropriate situation, be able to convince the court to not grant such priority in respect of a specific secured creditor's security.