In the recent unreported decision of Alberta Treasury Branches v. Northpine Energy Ltd., the Court of Queen’s Bench of Alberta authorized a disposition of a debtor’s assets by a receiver immediately upon appointment and without being forced to conduct a marketing process within the receivership proceedings. This decision is authority for the proposition that, where a pre-receivership sales process has been consistent with the principles set forth in Royal Bank of Canada v. Soundair Corp, a secured creditor may apply to authorize a receiver to enter into and close a sale transaction, distribute proceeds and be discharged on an initial appointment under section 244 of the Bankruptcy and Insolvency Act (Canada).
There is precedent for pre-packaged sale transactions in receivership proceedings. In Montrose Mortgage Corporation v. Kingsway Arms Ottawa, the court authorized the immediate completion of a credit bid transaction in respect of a retirement residence and in Elleway Acquisitions Limited v. 4358376 Canada Inc, a sale transaction of an online travel business that had been negotiated prior to appointment of the receiver was approved. In authorizing the transactions the courts generally recognized that the pre-receivership marketing processes had been comprehensive, that the senior secured lender held the sole economic interest in the assets and that a failure to proceed with the proposed sale would jeopardize the available recovery. Both decisions applied and held that the Soundair test had been satisfied.
The Northpine decision contains facts commonly known to insolvency professionals who work with production and exploration companies in Alberta. The borrower was a junior oil and gas company that faced significant liquidity challenges and had been actively marketing itself to interested parties for several months. The offers presented in that process demonstrated that there was no realistic possibility of a new or extended marketing process achieving a bid that exceeded the value of the secured debt. As with the Ontario decisions, Madam Justice Romaine applied the Soundair principles and approved the sale transaction. In addition, the relief granted extended to distribution and discharge of the receiver on completion of the transaction on the strength of a standard security opinion that had been prepared by counsel for the proposed receiver.
The downturn in the energy industry has resulted in an increase in credit covenant defaults and it is common for a lender to require the borrower to initiate a sales process in forbearance arrangements. All too often that process serves to confirm what was already widely suspected, namely that the value of borrower’s assets are insufficient to generate a deal that will repay the creditor in full. A pre-packaged sale transaction is a unique and cost-effective method for a senior lender to achieve the completion of a disposition that it supports, particularly where it has a borrower who has engaged in fulsome marketing efforts that confirms the lender’s status as fulcrum creditor and a willing purchaser who wishes to take the assets free and clear in an enforcement process.