Court Rules Against Transaction Fee in Receivership
In insolvency proceedings, a sales process may not always result in the closing of a transaction. The Ontario Superior Court recently provided clarity as to whether a transaction fee may still be payable in these circumstances.
This case involved a company that operated a land lease community, which had sought protection under the Companies’ Creditors Arrangement Act (“CCAA”). Within the CCAA proceedings, the court approved a sale and investment solicitation process (“SISP”) which contemplated the engagement of a sales agent. Ultimately, the sales process did not result in the completion of a successful transaction, and the SISP was terminated. The debtor’s senior secured creditor also sought the appointment of a receiver.
The receiver completed a sale of the debtor’s assets, which contemplated a credit bid by the purchaser. The sales agent subsequently sought payment of its transaction fee, arguing that the sale occurred “at the conclusion of the SISP” and qualified as a credit bid pursuant to its original engagement letter. The purchaser and the senior secured creditor (the “Lender Parties”) disagreed, asserting that the transaction did not meet the necessary conditions for the fee to be payable. The receiver held an amount equal to the transaction fee in escrow, pending the outcome of this dispute.
The court ruled in favour of the Lender Parties, finding that the transaction was not sufficiently linked to the conclusion of the SISP, as set out in the engagement letter. In particular, the court found that the transaction had been entered into by the receiver (who did not exist at the conclusion of the SISP) and was completed over four months after the SISP had concluded.
Further, the court agreed with the Lender Parties that the sale transaction did not meet the definition of a “credit bid” per the terms of the engagement letter. The court found that under the terms of the SISP, the senior secured creditor was only entitled to submit a credit bid for the amount of its debt. The ultimate transaction did not provide for a credit bid of the full amount of the senior secured creditor’s debt. The purchase price offered had been reduced, following the senior secured creditor’s discoveries over the state of disrepair of the debtor’s water and sewage treatment plants.
As a result, the court concluded that the transaction fee was not payable to the sales agent, and the funds held in escrow were to be released to the Lender Parties.
Aird & Berlis represented Fuller Landau Group Inc. as court-appointed receiver, with a team led by Sanjeev Mitra and Adrienne Ho (Financial Services).
