Ontario Court Relies On The Duty Of Good Faith And Awards Full Indemnity Costs

• Published date: 09 June 2021
• Subject Matter: Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy
• Law Firm: Cassels
• Author: Mr Shane Kukulowicz, Monique Sassi, Ted Frankel and Kieran May

OVERVIEW

On May 13, 2021, Justice Koehnen of the Ontario Superior Court of Justice (Commercial List) (the Court) released a decision¹ in the receivership proceeding of Mill Street & Co, Inc. (Mill Street) holding that the former officers and directors of Mill Street had not acted in good faith in respect of the receivership proceedings. The Court found the conduct was contrary to section 4.2 of the Bankruptcy and Insolvency Act, R.S.C., 1985, c. B-3 (the BIA) and awarded full indemnity costs of over $150,000 in favour of the receiver.

BACKGROUND

In May 2020, A. Farber & Partners Inc. was appointed receiver (the Receiver) over the assets of Mill Street being primarily of shares in various portfolio companies operated by members of a single family (the Former D&Os). The Former D&Os had continuously taken steps to impede the receivership proceeding, raising 'one obstacle after another'² forcing the Receiver to bring multiple motions to the Court for relief. The most recent motion was brought by the Receiver to facilitate the closing of a sale transaction of Mill Street's shares in a portfolio company- Lumbermens Credit Group Ltd. (Lumbermens).

The Receiver had conducted a sales process for the Lumbermens' shares and an entity related to the Former D&Os had been selected as the winning bidder, however that purchaser failed to close the transaction contrary to the terms of the sale agreement. The Receiver entered into an alternative sale agreement with another buyer, but the Former D&Os obstructed and delayed the closing of the alternative transaction by: (i) arguing that another entity owned the intellectual property required to operate the Lumbermens business (a questionable license agreement to support this position was produced); (ii) establishing a competing business and contacting current Lumbermens' clients and contract counter-parties to solicit business; and (iii) acquiring secured debt owing by Lumbermens and seeking to appoint a receiver over the assets of Lumbermens based on that newly acquired secured debt.

THE DECISION

The Court granted the relief sought by the Receiver to allow the sale to close. The order (i) precluded the Former D&Os from enforcing their newly acquired security until further order of the Court; (ii) declared that the intellectual property is owned by Lumbermens and not the alternate entity; and (iii) prohibited the Former D&Os from operating a competing business for two years.

Justice...