A. Preliminary Requirements

AuthorRoderick J. Wood
ProfessionFaculty of Law. University of Alberta
Pages473-477

Page 473

There are two different methods of commencing receivership proceedings. The first is through the appointment of a privately appointed receiver. This form of receivership is not possible unless the parties have contractually agreed to the 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 depending upon whether a privately appointed receiver 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.

1) The Requirement of a Valid Security Interest

The validity and priority of the secured creditor’s security interest is of critical importance to receivership proceedings. There are two reasons why this is the case. 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 asset, the enforcement

Page 474

sale will not give the buyer clear title. An enforcement sale by a secured creditor cuts off only security interests of subordinate secured creditors.1The buyer will therefore take the property subject to the 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 the property, the prior and subsequent encumbrancers must be given notice.2A court will not grant the vesting order unless the claims of higher-ranking claimants are fully protected.

Second, the receiver’s ability to manage the business and to enforce the security interest will be seriously compromised if third 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 can 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 risky undertaking.3Receivership proceedings will not generally be feasible where the security interest covers only some of the business assets. The receiver will lack the enforcement remedies available to secured creditors in respect of the assets that are not given as collateral under the security interest. For this reason, courts have refused to make an order appointing 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 assets upon default under a security agreement was not restricted by legislation. Secured creditors would demand payment and within a matter of hours appoint a receiver to take over control of the business. Canadian 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...

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