Commencement, Administration, and Supervision of the Receivership

• Author: Roderick J. Wood
• Profession: Faculty of Law University of Alberta
• Pages: 473-493

473

CHAPTER 18

COMMENCEMENT,

ADMINISTRATION,

AND SUPERVISION OF

THE RECEIVERSHIP

There are two different method s of commencing receivership proceed-

ings. The f‌i rst is through t he appointment of a privately appointed

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

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

creditor. The second i s 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 t hat govern

the commencement, administration, and supervi sion of receivership

proceedings differ depending upon whether a privately appointed re-

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

certain preliminary steps that must be satisf‌ied before either type of

receivership proceeding can be invoked.

A. PRELIMINA RY REQUIREMENTS

1) The Requirement of a Valid Security Interest

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

critical import ance to receivership proceedings. There are two reasons

why this is t he case. First, t he ability of the receiver to give clear t itle

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

secured creditor does not have priority to the asset, the enforcement

BANKR UPTCY A ND INSOLVENCY L AW474

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

creditor cuts off only security interests of subordinate secured credit-

ors.1 The buyer w ill therefore take the property subject to t he interest

of those parties that are entitled to priority over the secured creditor.

Although a court can make a vesting order that conveys the property to

a purchaser free and clear of any encumbrances against t he property,

the prior and subsequent encumbrancers must be given notice.2 A co urt

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 business and to enforce

the security interest will be seriously compromised if thi rd parties are

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

possession and control of the debtor’s assets can be displaced by the su-

perior right of a higher-rank ing secured cred itor, the appointment of a

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

Receivership proceed ings will not general ly be feasible where t he

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

will lack t he enforcement remedies available to secured creditors in

respect of the assets that are not given a s collateral under the secur-

ity interest. For this reason, court s have refused to make an order ap-

pointing a receiver unless the secured creditor’s security interest covers

all the business assets.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 asset s upon default under a se-

curity agreement was not rest ricted by legislation. Secured creditors

would demand payment and within a matter of hours appoint a receiver

to take over control of the business. Ca nadian court s 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 dem and for payment and then i mmediately ap-

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

1 See, for example, Persona l Property Security Act, R.S. A. 2000, c. P-7, s. 60(12)

[Alta. PPSA].

2 Roynat Ltd. v. Canawa Holdings Lt d. (1978), 28 C.B.R. (N.S.) 285 (Sask. C.A.).

3 See R. Cuming,C. Walsh, & R . Wood, Personal Prope rty Security Law (Toronto:

Irwin L aw, 2005) at 569–71.

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