Appellate Guidance on Appealing Receivership Orders

Introduction

The recent British Columbia Court of Appeal (the “BCCA”) decision in Creative Wealth Media Lending LP 2016 v. Access Road Capital, LLC et al., 2023 BCCA 208 (“Creative Wealth”)¹ clarifies how courts determine the merits of applications for leave to appeal receivership orders and applications to stay the execution of such orders. In Creative Wealth, a Vancouver film studio that financed the Hollywood blockbuster hit Joker, owed tens of millions of dollars to various secured and unsecured creditors. When the British Columbia Supreme Court (the “BCSC”) granted an application by an unsecured creditor to order a receivership in the event that the film studio was unable to repay its debt by a specific deadline, a certain secured creditor successfully convinced the BCCA to block the receivership until the appellate hearing.

This decision raises an interesting analysis about how courts should weigh the needs of secured creditors over other stakeholders, even where such creditors participate in an industry where high levels of risk are par for the course. Creative Wealth is likely to influence future decisions where courts attempt to negotiate balancing beams between different stakeholders and their desired influence on insolvency proceedings.

Factual Background

In summary, Creative Wealth Media Lending LP 2016 (the “Appellant”) was a secured creditor to Bron Media Corp. (“Bron”), a film studio. Access Road Capital, LLC (the “Respondent”) was another of Bron’s creditors, albeit not sharing the same secured status as the Appellant. The Respondent loaned US$20 million to subsidiaries of Bron in 2020, who subsequently defaulted in 2021. The Respondent obtained a consent judgment against Bron (who had guaranteed the loan) for roughly half of the outstanding loan balance, but Bron had only paid the Respondent $151,000 under the judgment.

The Respondent successfully applied to the BCSC² for an order appointing an equitable receiver over all of Bron’s assets, undertakings and property pursuant to Rule 10-2 of the British Columbia Supreme Court Civil Rules (“SC Rules”) and s. 39 of the British Columbia Law and Equity Act (“LEA”).

At the time of the receivership application, Bron owed the Appellant US$30 million. The Appellant, believing that the receivership application was premature, applied for leave to appeal the receivership order and to stay its execution under ss. 31 and 33 of the British Columbia Court of Appeal Act (“CAA”) and Rules 13 and 20 of the British Columbia Court of Appeal Rules (“CA Rules”). Marchand JA of the BCCA granted the Appellant leave to appeal the receivership order and stayed the order until the hearing of the appeal.

Legal Analysis

In Creative Wealth, Marchand JA initially siloed the legal analysis used to rule on the question of granting leave to appeal a receivership order. In short, courts ordinarily grant leave to appeal when doing so is in the interest of justice, having regard to:³

1. whether the point on appeal is of significance to the practice (of civil litigation);
2. whether the point raised is of significance to the action itself;
3. whether the appeal is prima facie meritorious or, on the other hand, whether it is frivolous; and
4. whether the appeal will unduly hinder the progress of the action.

In answering the first question in the affirmative, Marchand JA found that while the BCSC judge’s approach in answering this question was supported by the relevant jurisprudence,⁴ there is unfortunately still much ambiguity and uncertainty in this area of law when dealing with facts similar to those found in Creative Wealth, as unlike the precedent relied upon by the lower court judge, this case involves the appointment of a receiver in favour of an unsecured creditor over the objection of secured ones. What precedent to rely upon when dealing with such facts remains undetermined.

After holding that the Appellant had established point No. 2 of the above,⁵ Marchand JA held that in answering the third question, the BCSC judge’s receivership order was discretionary, meaning that it is entitled to deference on appeal. As a result, any successful appeal requires the Appellant to identify an error in principle in the judge’s exercise of discretion.⁶ Marchand JA accordingly determined that the Appellant had an arguable case that the lower court judge erred in principle by prioritizing the “just and convenient” analysis (under s. 39 of the LEA) over the SC Rules and their interpretation in the relevant jurisprudence in granting the appointment of a receiver.⁷ A lack of evidence that Bron held enough assets to satisfy all of its secured creditors was also referred to by the BCCA; the BCCA concluded that while an appeal would delay the receivership proceeding, such a delay would not be undue, because any additional interest expenses would pale in comparison to the total amounts owed to creditors, as downside risks could later be minimized by ordering an expedited appeal process.⁸

To answer the latter question of obtaining a stay of execution of a receivership order, the court then turned to the three-part test established in RJR-MacDonald (Attorney General) (“RJR”),⁹ which asks:¹⁰

1. Is there a serious question to be tried?
2. Will the applicant suffer irreparable harm if the stay is refused?
3. Does the balance of convenience favour granting the stay?

It must be noted that the overarching consideration in this test is also whether granting the stay is in the interest of justice.¹¹

While the first part of this test was confirmed, in turning to the question of irreparable harm, which was defined as harm that “either cannot be quantified in monetary terms or cannot be cured, usually because one party cannot collect damages from the other,”¹² Marchand JA disagreed with the Respondent’s claim that the Appellant would not face irreparable harm if the stay was not granted. In this case, a granted appeal would become moot if the separate stay application was not granted, as “the receiver’s appointment would become effective on the release of these reasons.”¹³ Since an appointed receiver in this case would have the authority to liquidate Bron, the purpose of the appeal (to maintain Bron as a going concern) could be lost.

Creative Wealth also reminds us of the importance of respecting the order of priority among creditors and by adequately weighing the interests of various creditors in determining whether receivership applications should be granted in the first place. By improperly relying on jurisprudence to answer some of the questions in the tests outlined above, the major objectives of bankruptcy and insolvency law may be threatened.