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Frivolous Actions in Receivership – The HRH Hotels Ltd. Case

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Insolvency and Restructuring Bulletin

As the Courts have often stated, in bankruptcy and insolvency law, time is of the essence. Bankruptcy and insolvency legislation allows the Court to craft orders with the specific aim of shielding a Receiver against frivolous actions, such that the Receiver may complete his task of managing property while enforcing the rights of a secured creditor in a timely fashion. The HRH Hotels Ltd. case is one such example where the Court ruled that a plaintiff's claim against the Receiver was frivolous and constituted a collateral attack on the Receivership process.

The Case

On April 14, 2016, the Superior Court of Québec handed down its decision on an action in passing of title (PDF - available in French only) filed by 9108-9284 Québec Inc. ("9108", and the "9108 Motion") against the Receiver Deloitte Restructuring Inc. ("Deloitte" or the "Receiver"). Through the 9108 Motion, 9108 sought to acquire certain assets (the "Assets") of the Debtor HRH Hotels Ltd. (the "Debtor").

The 9108 Motion was contested by way of Deloitte's filing of a Motion to dismiss the 9108 Motion (the "Motion to dismiss"), alleging namely that 9108 had not complied with the Receivership Order which provided that any action instituted against the Receiver required prior leave pursuant to s. 215 of the Bankruptcy and Insolvency Act ("BIA").

The Honorable Michel A. Pinsonneault, S.C.J., allowed the Motion to dismiss and dismissed the 9108 Motion. In its analysis, the Court held that by sending a standard form document entitled "Offer to purchase" (the "Standard Offer") to 9108 and to other potential bidders, the Receiver never made an offer to purchase; rather, the Receiver was soliciting offers so that they could be considered in the Receiver's eventual decision on sale of the Assets. The Court concluded that by continuing to formulate offers to the Receiver through various legal intermediaries, 9108's numerous offers and the 9108 Motion constituted a collateral attack on the Receiver's endeavours to sell the Assets as quickly as possible, and for the benefit of the creditors.

In its reasons, the Court adopted the view that failure to obtain leave pursuant to s. 215 BIA prior to instituting proceedings against the Receiver rendered the 9108 Motion null ab initio, and that this nullity could not be rectified in the course of proceedings.

Moreover, the Court was not satisfied with 9108's demonstration of its capacity to pay the full purchase price for the Assets. Indeed, 9108's initial deposit was of a lesser amount than the deposit required pursuant to the Standard Offer.

As well, the Court considered that 9108's conduct in the proceedings was tantamount to vexatious and abusive behaviour, and used its discretionary power under s. 197 BIA to condemn 9108 to pay Deloitte its fees and costs in connection with the 9108 Motion on a solicitor-client basis.

This is an important decision in insolvency law as it attempts to resolve the two separate lines of case law pertaining to whether or not failure to obtain leave pursuant to s. 215 BIA constitutes an absolute or relative nullity of the contemplated proceedings. However, this is also an important decision in the general law of sale contracts as it addresses the criteria required to institute a valid action in passing of title, namely that the plaintiff-purchaser must demonstrate a clear financial capacity to pay the purchase price.

Fasken Martineau counseled Deloitte Restructuring Inc. with a team consisting of Luc Morin and Nicolas Mancini.

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