Commencement, Administration, and Supervision of the Receivership

• Author: Roderick J. Wood
• Pages: 519-542

519

CH AP TER 18

COMMENCEMENT,

ADMINISTR ATION,

AND SUPERVISION OF

THE RECEIVER SHIP

There are two different methods of commencing receivership proceed-

ings. The f‌irst is through the appointment of a privately appointed

receiver. This form of receivership is not possible unless the part ies

have contractually agreed to t he exercise of this power by the secured

creditor. The second is through the appointment of a court-appointed

receiver. A secured creditor may also convert a private receivership into

a court-appointed receivership through a court application made after

a receiver is privately appointed. The rules and principles that govern

the commencement, administration, and supervision of receivership

proceedings differ dependi ng upon whether a privately appointed re-

ceiver or a court-appointed receiver is involved. In addition, there are

certain prelim inary steps that must be satisf‌ied before either type of

receivership proceeding can be invoked.

A. PRELIMINARY REQUIREMENTS

1) The Requirement of a Valid Security Interest

The validity and priority of the secured creditor’s security interest is of

critical import ance to receivership proceedings. There are two reasons

why this is the ca se. First, the ability of the receiver to give clear title to

a buyer depends upon the priority of the secured creditor. If the secured

creditor does not have priority to the as set, the enforcement sale will

BANKR UPTCY AND INSOLVENC Y LAW520

not give the buyer clear title. An enforcement sale by a secured creditor

cuts off only security i nterests of subordinate secured cred itors.1 The

buyer will therefore take the propert y subject to the interest of those

parties th at are entitled to priority over the secured creditor. Although

a court can make a vesti ng order that conveys the property to a pur-

chaser free and clea r of any encumbrances against the propert y, the

prior and subsequent encumbrancers must be given notice.2 A court

will not grant the vest ing order unless the claims of higher-ranking

claimants a re fully protected.

Second, the receiver’s ability to manage the busi ness and to enforce

the security intere st will be seriously compromised if t hird parties are

able to claim priority to some or all of the assets. Because a receiver’s

possession and control of the debtor’s assets c an be displaced by the

superior right of a higher-ranking secured creditor, the appointment of

a receiver by a junior-ranking creditor is generally a r isky undertaking.3

Receivership proceedings wil l not generally be feasible where the

security interest covers only some of the business assets. The receiver

will lack the en forcement remedies available to secured creditors in

respect of the asset s that are not given as collateral under the security

interest. For this reason, courts have refused to make an order appoint-

ing a receiver unless the secured creditor’s security interest covers all

the busine ss asset s.4

2) The Requirement of Notice

a) The Reasonable Notice Doctrine

Prior to 1992, a secured creditor’s right to appoint a receiver to take

possession and control of the debtor’s assets upon default under a se-

curity agreement was not rest ricted by legislation. Secured creditors

would demand payment and withi n a matter of hours appoint a receiver

to take over control of the business. Can adian courts began to develop

the reasonable notice doctrine in order to curtail potential abuses of

this power. The security interest given to the secured creditor often

secured a demand loan. The courts held that a secured creditor was

not entitled to make a demand for payment and then immediately ap-

point a receiver. The secured creditor was required to give the debtor

1 See, for example, Persona l Property Security Act, RSA 2 000, c P-7, s 60(12) [Alta

PPSA].

2 Roynat Ltd v Can awa Holdings Ltd (1978), 28 CBR (NS) 285 (Sask CA).

3 See R Cuming, C Walsh, & R Wood, Persona l Property Security Law, 2d ed (To -

ronto: Irwin L aw, 2012) at 675–76.

4 First Investors Corp v 237208 Alberta Ltd (1982), 20 Sask R 335 (QB).