Receiverships

• Author: Stephanie Ben-Ishai; Thomas G. W. Telfer
• Pages: 735-765

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CHAPTER 17

Receiverships

I. INTRODUC TION

Secured creditors who have been granted an all-encompassing security interest in the debt-

or’s assets will usually also be given the power to appoint a receiver-manager in the event

of a default under the security agreement. If this power is exercised, the receiver-manager

will take possession and control of the business from the debtor. The receiver-manager will

operate the business in the hope of selling it to a buyer as a going concern.

The law relating to receiverships is complicated by the fact that there are two dierent

sources of receivership law. A receiver-manager may be appointed pursuant to the contrac-

tual power contained in the security agreement. Alternatively, a court exercising its equitable

jurisdiction may appoint a receiver-manager. The rules and principles governing these two

types of receiverships dier in many important respects, although these dierences have

been reduced somewhat by legislation. The law relating to receiverships is also complicated

by the fact that there are several dierent federal and provincial statutes that regulate receiv-

erships, and there is considerable overlap in their provisions.

II. THE POSITION AT COMMON LAW

For several centuries, equity has employed the remedial device of a court-appointed receiver

and manager to administer assets while a dispute is being resolved or to assist in the

enforcement of a judgment where the legal enforcement mechanisms were inadequate.

The privately appointed receivership has a much shorter history and traces its genesis to,

approximately, the middle of the nineteenth century. Historically, in the case of realty mort-

gages, mortgagees were reluctant to take possession of the land because the courts held the

mortgagees strictly to account for maladministration. Mortgagees were reluctant to apply

for court-appointed receivers because the device is expensive and can require many court

hearings. Ingenious counsel thereupon hit on the device of a contractual clause allowing the

secured creditor, on the debtor’s default, to appoint a private receiver-manager to take pos-

session of the collateral and manage the business until it was disposed of. To make sure that

the secured creditor could not be held responsible for the receiver’s actions, and that the

receiver would have plenary powers to manage the business, the clause also provided (and

continues to provide) that the receiver shall be deemed to be the debtor’s agent.

Strictly speaking, a distinction is drawn between a person who is appointed to collect

income and rent from a property and a person who also has the power to manage the busi-

ness of the debtor. The former is referred to as a receiver, while the latter is referred to as a

receiver and manager (or receiver-manager). The appointee is virtually always given a power

 BANKRUPTCY AND INSOLVENCY LAW IN CANADA: CASES, MATERIALS, AND PROBLEMS

of management over the business, and it has therefore become usual to refer to the latter

simply as a receiver. This usage will be adopted here, but it should be kept in mind that the

receiver must be given a power of management either by the security agreement (in the

case of a privately appointed receiver) or by the court order (in the case of a court-appointed

receiver).

The powers of a court-appointed receiver were derived from the order appointing the

receiver. The powers of a privately appointed receiver were derived from the terms of the

security agreement. A secured creditor who had the power to appoint a privately appointed

receiver pursuant to its security agreement was not compelled to do so and could instead

seek to have a receiver appointed by a court. A secured creditor could also seek to have a pri-

vately appointed receiver converted into a court-appointed receiver. The next case discusses

the dierence between these two kinds of receiverships.

Ostrander v Niagara Helicopters Ltd (1973), 1 OR (2d) 281 (Ont H Ct J)

STARKJ:

In spite of the lengthy evidence that was taken in these proceedings continuing over many

days, I am satised that the real questions involved have become quite narrowed and con-

ned. This result was mainly achieved by the very careful and thorough arguments of all

counsel and by their careful review of the evidence. Summarily stated the facts are briey

these. The company known as Niagara Helicopters Limited (hereinafter referred to for con-

venience as “Niagara”), was founded by the plainti Paul S. Ostrander who was the owner

of % of the stock of the company. This company operated out of the City of Niagara Falls

providing charter commercial air services, a ight school, tourist operations and various

other services using helicopters. While Ostrander was an experienced helicopter pilot he

proved to be an inept nancial manager and when the company experienced serious nan-

cial diculties the defendant Roynat was approached for a substantial loan by way of bond

mortgage. A debenture dated October , , (ex.) was entered into between Niagara

Helicopters Limited and the Canada Trust Company as trustee, as a result of which Roynat

became the single debenture holder. An initial advance of , was made on Novem-

ber , . Two or three months later Niagara defaulted on the loan and the insurance on

its aircraft was cancelled. On January , , the defendant, C.R.Bawden, was appointed

as receiver-manager by virtue of the default provisions contained in the deed of trust. It was

admitted by counsel for the plainti and was placed on the record that all powers of the

trustee were properly delegated to Roynat pursuant to s.. of the debenture and, in eect,

Bawden was appointed receiver and manager as the agent of Roynat for the purpose of

protecting and enforcing its security. The defendant Bawden was considered by Roynat to

be an experienced receiver-manager, having acted in that capacity on many previous occa-

sions. Bawden took immediate steps to reinstate the insurance, came to the conclusion

that the company was a viable operation, although it lacked working capital, and a further

, was advanced under the debenture. Bawden’s duties as receiver-manager were

then terminated but Roynat insisted that the company retain a nancial adviser; and with

the consent of Ostrander, indeed it appears with the urging of Ostrander, Bawden acted

in this capacity. However, during this period the nancial position of Niagara deteriorated

mainly because of Ostrander’s inability to operate the company eciently and due also to

his frequent absences from the company for various reasons and Roynat became increas-

ingly concerned as to the safety of its security. Thus, ex. indicated that during the year

ending December , , a loss of , had been incurred as opposed to a net loss