There’s Something About (Hail) Mary: Appeals of Sale Processes and Pre-Receivership Sale Agreements
Court approval of a sale process in receivership or Bankruptcy and Insolvency Act (“BIA”) proposal proceedings is generally a procedural order and objectors do not have an appeal as of right; they must seek leave and meet a high test in order obtain it. However, in Peakhill Capital Inc. v. 1000093910 Ontario Inc., 2024 ONCA 59 (“Peakhill”), the Ontario Court of Appeal recently held that an objecting debtor had an appeal as of right with respect to a sale process order that included a stalking horse bid and effectively prevented the debtor from completing a sale agreement that it had entered into on the eve of the receivership.
Receivers and secured creditors should bear this decision in mind, and the potential delays that may result from an appeal, when seeking a sale process order in circumstances where the debtor still holds out hope that a pre-receivership agreement can be completed.
The following is a brief chronology of the steps that led to the decision on appeal:
- On August 31, 2023, Peakhill Capital Inc. delivered its record seeking the appointment of a receiver over the assets of 1000093910 Ontario Inc. (the “Debtor”).
- On September 7, 2023, with notice of the receivership application, the Debtor entered into an agreement of purchase and sale (the “original APS”) to sell its primary asset, an industrial building in Vaughan (the “Property”) to 2557904 Ontario Inc. (“255”) for $31 million. The closing date under the original APS was December 21, 2023.
- On September 13, 2023, KSV Restructuring Inc was appointed as the Receiver on consent. In accordance with the terms of the consent, the receivership order became effective on October 2, 2023 after the Debtor failed to pay the amounts specified.
- 255 indicated that it would refuse to close the original APS and would not amend the original APS to include terms the Receiver considered necessary to implement a receivership sale, including substituting the Receiver as the vendor and allowing for a vesting order of the Property to complete the transaction.
- On November 13, 2023, the Receiver entered into a stalking horse agreement with 255 (the “Stalking Horse APS”) which provided a minimum sale price of $24,255,000 (over $6 million less than the original APS), a break fee of $200,000 and expense reimbursement of up to $50,000.
- A hearing to approve the Stalking Horse APS and bidding procedures was scheduled for December 20, 2023.
- On December 6, 2023, the Debtor indicated that it would seek to discharge the Receiver or vary the receivership order to allow the Debtor to complete the original APS.
- On December 13, 2023, the Receiver filed its report recommending the approval of the Stalking Horse APS and bidding procedures.
- On December 19, 2023 around 4:00 p.m. – the night before the hearing – the Debtor served a cross-motion requesting amendments to the receivership order to approve the original APS and directing the Receiver to complete it.
- On December 20, 2023, the Court approved the Stalking Horse APA and bidding procedures and declined to hear the Debtor’s late-served cross-motion which the Court stated had little chance of success.
Sale Process Orders Generally Not Appealable as of Right
The Debtor appealed and sought directions concerning whether it had an appeal as of right or required leave to appeal. The Debtor asserted that it had an appeal as of right under section 193(c) of the BIA as the appeal involved property with a value in excess of $10,000.
The Ontario Court of Appeal recognized that section 193(c) has been interpreted narrowly and does not apply to orders that are: procedural, do not involve the value of the debtor’s property, and do not result in a loss of more than $10,000.
The Court of Appeal also recognized the well-established law that sale process orders in BIA receivership or proposal proceedings are generally not appealable as of right as they are procedural in nature; they merely establish a process and do not affect substantive rights because a sale at the conclusion of that process would still require the approval of the court. This is generally the case in sale process orders granted pursuant to other statutes as well:
- Leave to appeal is required to appeal sale process orders issued pursuant to the Companies’ Creditors Arrangement Act, like all other orders issued under that Act.
- Leave to appeal is also required to appeal sale process orders issued in other proceedings such as winding-ups ordered pursuant to corporate and partnership statutes, as they are interlocutory in nature and do not affect substantive rights.
Ontario Court of Appeal Finds Exception Due to Original APS
The Court of Appeal held that the sale process order and related decision to decline to hear the Debtor’s late-filed cross-motion did involve property with a value in excess of $10,000 as it effectively prevented the Debtor from completing the original APS at a sale price of $31 million. The Stalking Horse APA had a floor price that was over $6 million less and guaranteed the payment of up to $250,000 to 255 in the event of a superior bid:
 On its face, the original APS was an unconditional agreement of purchase and sale with a purchase price of $31,000,000. No basis has been advanced to support 255’s claim on December 20,2023 that the original APS was null and void. The Receiver had not terminated the original APS. Nor did the motion judge accede to the Receiver’s request that she do so. The Order does not address the original APS. As I see it, by declining to hear the Debtor’s cross-motion, the refusal decision deprived the Debtor of any ability to complete or enforce the original APS, a prospect the Receiver appears to have acknowledged could occur.
 Instead, the Order sanctioned a sale process which approved the Stalking Horse APS of $24,455,000 from the purchaser under the original APS and required payments of up to $250,000 to that purchaser if a superior bid was obtained. In my view, the refusal decision clearly put in play, and jeopardized, the value of property by an amount exceeding $10,000. Although no loss was crystallized by the refusal decision or the Order, given the circumstances of a receivership sale and the terms of the Stalking Horse APS, which established a floor price of $24,455,000 and required payment of up to $250,00 to 255 if a superior bid was obtained, the likelihood of loss in excess of $10,000, as compared to completion or enforcement of the unconditional original APS at a sale price of $31,000,00 appears inevitable.
 The refusal decision deprived the Debtor of any right it may have had to enforce the unconditional original APS at a price of $31,000,000 and instead required that the Property be sold, subject to the uncertainties of the market, based on a floor price of almost $7,000,000 less and a guarantee to the stalking horse purchaser of a payment of up to $250,000 in the event of a superior bid. The Debtor asserts that, because the original APS has not been terminated, either it or the Receiver can still enforce it. Whether that is so remains to be seen. In the circumstances, I conclude that the property involved on the appeal exceeds10,000 as required under s. 193(c) of the BIA.
Recognizing that the appeal and automatic stay of the sale process order would hinder the progress of the receivership, the Court directed that the appeal be expedited.
In the lead-up to a receivership application, it is not uncommon for debtors to enter into agreements or obtain commitments for financing or sale transactions that would purportedly be sufficient to pay out their secured creditors in an attempt to avoid the appointment of a receiver. These commitments/agreements are often “Hail Marys”: highly conditional and/or with concerns about the financial wherewithal of the counterparty.
Receivers and secured creditors should be mindful that if they seek approval of a sale process that effectively prevents a debtor from completing a pre-receivership agreement that may have resulted in greater proceeds (even if the receiver thinks that the agreement cannot be completed), the debtor may have an appeal as of right that would result in the sale process being stayed while the appeal plays out. This can be particularly detrimental in circumstances, like Peakhill, where there is only a short period to market an asset.
It remains to be seen whether Peakhill will be confined to the particular facts of the case – specifically that the pre-receivership agreement was unconditional and the receiver entered into an agreement with the same counterparty at a lower price without terminating the pre-receivership agreement – or applied more broadly.
Bankruptcy and Insolvency Act Ontario Court of Appeal Sale Process Orders