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Bankruptcy & Insolvency, Commercial Litigation, Corporate

Receiver responsible for evaluating secured creditor claims

A recent decision shows courts will take a pragmatic approach to insolvencies where there are limited assets at stake, says Toronto corporate and commercial lawyer Marlin Horst.

In the Superior Court case, the judge decided a court-appointed receiver should have responsibility for evaluating the claims of secured creditors, even though the debtor had subsequently made an assignment in bankruptcy with a different trustee.

Under normal circumstances, explains Horst, a partner with the Toronto office of Shibley Righton LLP, court-appointed receivers are often made trustees when the company enters bankruptcy. However, that didn’t happen in this case because the company made its assignment voluntarily, and without leave of the court.   

“Because the receiver was court-appointed, they needed court approval to enter bankruptcy,” Horst tells AdvocateDaily.com. “If there was more money at stake, I think the bankruptcy would have been overturned, but the court doesn’t give approval for that because that would result in even more legal fees.

"You can argue whether technically it is legally correct, but the judge takes a pragmatic approach to the problem. I suspect he was trying to come to a conclusion that would not cost the estate any more than it needed to,” adds Horst, who was not involved in the case and comments generally.

The competing cases for evaluation of claims ended up before the court following a sale of the insolvent company’s assets conducted by the receiver, which was swiftly followed by the company’s voluntary assignment in bankruptcy.

One of the secured creditors filed a claim for $500,000 but was rejected by the trustee. As a result, the creditor moved to stay the bankruptcy proceedings until after the receiver completed its evaluation

Writing that there appeared to be “no benefit in annulling the bankruptcy,” the judge said it would be “unfortunate if the receiver and trustee either have to duplicate work or if they work at cross purposes.

“Because the receivership was put in place first and because the bankruptcy was initiated without approval by the court, I am of the view that the receiver should be authorized to complete its work. The trustee will have the right to be informed of steps taken by the receiver and to take a position when the report is submitted to the court for approval,” he concluded. “In the event the receiver and the trustee reach different conclusions on the status and quantum of the secured claims, a hearing will be required in the receivership.”

Horst says it's was also notable that the Canada Revenue Agency did not argue for the bankruptcy to be overturned since that would restore its priority over other creditors.

"They probably realized there would be no money for them anyway," he says.

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