COURTS OF JUSTICE ACT: COURT OF APPEAL FOR ONTARIO CREATES NEW RULE?

Introduction

On June 19, 2019, the Court of Appeal for Ontario, released its decision in the matter of Third Eye Capital Corporation v. Ressources Dianor Inc./Dianor Resources Inc., 2019 ONCA 508 (the Dianor decision). This case was heard in September 2018. It has to do with a Court-appointed Receiver, appointed under both the Courts of Justice Act, R.S.O. 1990, c. C.43 (CJA) and the Bankruptcy and Insolvency Act (R.S.C., 1985, c. B-3) (BIA).

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What the decision stands for

Dianor Resources Inc. (Dianor) was a financially troubled exploration company focused on the acquisition and exploitation of mining sites in Canada. The appointment was made under s. 243 of the BIA and s. 101 of the CJA. Dianor’s secured lender Third Eye Capital Corporation (Third Eye) made the application for the appointment of the Receiver.

Dianor’s primary asset was a collection of mining claims located in Ontario and Quebec. The mining claims were also subject to Gross Overriding Royalty agreements (GOR) in favour of two different corporations. All agreements were registered on title.

There were 2 issues that needed to be decided; one relating to the sale of real property by a Court-appointed Receiver by way of vesting order. The second question was procedural.

The questions to be answered were:

1. Can a 3rd party interest in land in the nature of a GOR be extinguished by a vesting order approved in a receivership case?
2. Does the appeal period in the BIA or the Courts of Justice Act, regulate the appeal period from the order of the motion judge in this situation?

I am going to tell you how the Court of Appeal for Ontario answered these questions, but I am not going to describe it in detail. Why do you ask? Because that is not the point of this Brandon’s Blog.

Some lawyers have already written summaries on the detailed thinking of the Appeal Court and I am sure there will be more. The decision is very well thought out one and is described in detail in the Court’s Reasons. I provided a link to the decision above, and if you wish to read it but don’t wish to scroll up, here it is again.

Vesting orders

I have written before on the matter of vesting orders. Simply stated, a vesting order is the means by which the transfer of acquired assets can be transferred to a buyer on a free and clear basis. It maintains the priority of competing interests against the debtor with respect to the money generated by the sale transaction and paid to the Receiver.

The Court of Appeal for Ontario decided that depending on the facts of a specific case, vesting orders approved in a receivership case can extinguish a 3rd party interest registered against the title. However, based on the facts of the Dianor case, the Appellate Court ruled that:

1. The lower Court Judge had jurisdiction under s. 243( 1) of the BIA to provide a sale approval and vesting order.

1. Based on the nature of the GORs the motion Judge erred in concluding that it was appropriate to extinguish them from the title.

But that is not the end of the matter.

The appeal period

Under r. 31 of the BIA Rules, a notice of appeal must be filed within 10 days after the day of the order or decision appealed from, or within such time as a judge of the court of appeal stipulates.

Under the CJA, r. 61.04(1) provides for a 30 day period from which to appeal a final Order to the Court of Appeal. On top of that, the appellant would have had to have actually applied for a stay of proceedings of the completion of the sale under the vesting order.

After its lengthy analysis, the Court of Appeal decided that the appeal period is governed by the BIA rules and not the CJA Rules of Civil Procedure. As the appellant filed its notice of appeal after the 10 day period, the appeal was unsuccessful. This is notwithstanding that the Court of Appeal agreed with the appellant that in this case, the GORs could not be extinguished. The appellate court also stated that there were not factors involved for the Court to invoke its inherent jurisdiction to provide relief to the appellant to extend the timeline so that its appeal would be valid.

I discussed this appeal period issue previously in my Brandon’s Blog – MOVE FAST TO OBJECT TO AN ONTARIO RECEIVERSHIP COURT ORDER.

But this aspect of the decision is also not my main point of this Brandon’s Blog.

So what is my point you ask?

As a licensed insolvency trustee (formerly called a bankruptcy trustee) (LIT), what really caught my eye in the Court of Appeal’s decision was something that I doubt any lawyer is going to write about when analyzing this case. What I am talking about is two sentences near the end of the decision under the heading “The Receiver’s Conduct”.

I feel these two sentences are so important that in certain cases, it will create a new rule for Receivers. By extension, it will also affect all stakeholders in the receivership and give all legal counsel something serious to think about. The two sentences are so important, I will show them to you here:

“(2) The Receiver’s Conduct

[132] The Receiver argues that it was appropriate for it to close the transaction in the face of a threatened appeal because the appeal period had expired when the appellant advised the Receiver that it was contemplating an appeal (without having filed a notice of appeal or a request for leave) and the Receiver was bound by the provisions of the purchase and sale agreement and the order of the motion judge, which was not stayed, to close the transaction.

[133] Generally speaking, as a matter of professional courtesy, a potentially preclusive step ought not to be taken when a party is advised of a possible pending appeal. However, here the Receiver’s conduct in closing the transaction must be placed in context.”

The Court of Appeal held that the Receiver’s conduct in completing the sale prior to the expiry of the appeal period was proper.

Why is this so important?

Now I am at the point of this Brandon’s Blog. The reason I am writing this. The real heart of the matter. To understand the importance of these two sentences, I must provide you with some additional background information.

In June 2004, the Ontario Court of Appeal released its decision in Regal Constellation Hotel Ltd., Re, 2004 CanLII 206 (ON CA) (the Regal Constellation case). The main points decided in that case were:

1. There is no automatic stay of a vesting Order under appeal under the Courts of Justice Act or any other provincial statue. There must be an application to stay it while the appeal is outstanding.
2. Once a vesting order is registered on the title under the Land Titles Act, R.S.O. 1990, c. L.5, its features as a conveyance prevail and its features are spent.
3. A registered vesting order cannot be attacked except by ways that apply to any type of order transferring outright title and registered under the Land Titles system.
4. Appeal from a registered vesting order is moot.

The Court of Appeal for Ontario stated in the Regal Constellation case that a vesting order has a double personality. It is, on the one hand, a court order and also a conveyancing tool vesting an interest in real or personal property as stated in the order. As soon as a vesting order has been registered on title, its features and characteristics as an order are spent. Any appeal at that stage is therefore moot.

So why is it so important? As a result of the Regal Constellation case, Receivers and their legal counsel always ask the purchaser’s legal counsel do they wish to close the transaction immediately or wait for the appeal period to expire? I have been involved in many real estate receiverships where the closing is scheduled to begin as soon as the vesting order is issued and entered. Everyone leaves the courthouse and goes straight to the closing. Registering the vesting order against the lands is part of the closing process.

Some buyers will certainly reject the option to complete the transaction before the period to appeal the vesting order has actually run out. Others are prepared to close immediately due to the fact that the chance of overturning the sale approval and setting the transaction aside is incredibly remote. This is especially so if the closing has actually taken place.

Nowhere in the Regal Constellation case is the conduct of the Receiver scrutinized.

The new rule for Court-appointed Receivers

So the new rule for Court-appointed Receivers is that the Receiver and its legal counsel will carefully have to consider in each situation, is the immediate closing of the transaction a reasonable thing to do. I can think of 8 issues to consider because of those two sentences in the Dianor decision:

1. Has an actual appeal been filed in time?
2. Has any party threatened an appeal prior to the 10 day appeal period expiring?
3. Say the situation is that the vendor Receiver and the purchaser has the option of completing the transaction prior to the 10 day appeal period expiring and there is no threatened appeal. Does the Receiver now have a duty, or at least cover off the point, to put all stakeholders on notice that the closing, including the registration of the vesting order, will take place prior to the expiry of the appeal period?
4. Should a discussion be held with a potential purchaser who has submitted an Agreement of Purchase and Sale that the Receiver believes it can work with regarding whether the Agreement should stipulate whether or not the closing must take place prior to the expiry of the appeal period?
5. Should the Court-appointed Receiver’s Terms and Conditions of Sale to be approved by the Court now state that any bidder must stipulate that the bidder must declare whether or not it wishes to have the option to complete a Court approved transaction prior to the expiry of the appeal period?
6. Similarly, must the Court-appointed Receiver’s standard Agreement of Purchase and Sale to be approved by the Court contain a right for the bidder to be able to elect in writing whether it wishes to complete the transaction prior to the expiry of the appeal period, if its bid is recommended by the Receiver and approved by the Court?
7. Must such an election be made prior to the Court approving the proposed transaction, so that all stakeholders are aware at the time Court approval is sought that such a possibility may exist?
8. Is the bidder having such an option to elect prior to obtaining Court approval sufficient, or to better protect the vendor Receiver and the purchaser, must the election be made so that such election can also be approved by the Court?

As I said before, this is not the focus of the Dianor decision. I doubt many or any writers analyzing this case will focus on those two sentences. However, as the LIT who will be the Court-appointed Receiver, in my humble opinion, I think those two sentences in the Dianor decision, now give Receivers things to think about that was not the case based on the Regal Constellation decision.

Courts of Justice Act summary

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