Alberta Court of King’s Bench denies appointment of interim receiver to conduct investigation

In National Bank of Canada v. Precision Livestock Diagnostics Ltd., the Court of King's Bench of Alberta addressed the application by the National Bank of Canada (“NBC”) for the appointment of an interim receiver under section 47 of the Bankruptcy and Insolvency Act (the “BIA”). NBC sought this appointment due to concerns over possible cheque kiting by some of the defendant corporations, including Precision Livestock Diagnostics Ltd. and various entities within the Sunterra Group. The Court ultimately concluded that the appointment of an interim receiver was not warranted, highlighting the stringent requirements for appointing an interim receiver for the primary purpose of conducting investigations.

Background and legislative framework

NBC demanded payment of the $17 million loan provided to the defendant corporations and issued a notice of intention to enforce security under section 244 of the BIA, following the identification of irregular chequing activities among the defendants. NBC took immediate steps to control further drawdowns from the defendants’ accounts and recover an apparent overdraft of approximately $43 million. NBC sought an interim receiver to preserve and control, among other things, the defendants' bank accounts, receivables, cheques and books and records, and to investigate the irregular chequing activities, referred to as "Impugned Transactions."

Section 47 of the BIA allows the court to appoint an interim receiver if necessary for (i) the protection of the debtor's estate or (ii) the interests of the creditor who sent the notice. The court may direct the interim receiver to take possession of the debtor's property, exercise control over the property and business, take conservatory measures, and dispose of perishable property.

Court's analysis and decision

The Court examined NBC's arguments for appointing an interim receiver, focusing on several key points.

• Potential exposure and risk: NBC argued that it faced potential exposure and risk due to the Impugned Transactions. However, the Court found that NBC had already mitigated the overdraft, demanded on the loan and implemented strict internal monitoring, eliminating the risk of further drawdowns.

   

• Effects on third parties: NBC's concern about the impact on other creditors, such as Compeer Financial ACA (an American bank), was not deemed a sufficient reason for appointing an interim receiver, as section 47 focuses on the interests of the creditor applying for the appointment of the interim receiver

   

• Need to investigate chequing activities: the Court found that NBC did not explain why an interim receivership was necessary for investigating the chequing activities, when litigation processes such as document production and review and questioning could achieve the same objective.

   

• Dissipation of assets: in the absence of evidence of a material risk of asset dissipation or continuation of irregular chequing activities, given the protective measures already in place, the Court could not conclude there was a need to appoint an interim receiver to protect the debtors’ estate.

   

• Loss of confidence in management: while NBC had lost confidence in the defendants' management, the Court was unable to conclude how, if an interim receiver was not appointed, management’s decisions would or could make NBC’s circumstances worse.

   

• Limited powers of interim receiver: the Court emphasized that the powers of an interim receiver under section 47 of the BIA are limited to preserving the status quo and do not extend to conducting investigations where it was unclear how the outcome of such investigations could affect NBC’s position.

The Court concluded that NBC had not demonstrated the necessity for an interim receiver under section 47 of the BIA. Additionally, the Court noted that no receiver could be appointed for four of the defendants due to a stay period under the Farm Debt Mediation Act.

Implications for future interim receivership applications

This ruling highlights the stringent requirements for appointing an interim receiver for the primary purpose of conducting investigations under section 47 of the BIA. Creditors must provide clear evidence of a material risk to their interests or the debtor's estate and demonstrate that an interim receivership is necessary to protect those interests. The decision also underscores the importance of considering alternative mechanisms, such as litigation, for investigating financial irregularities.

For further information or assistance with similar matters, please contact the authors.