The case of Canrock Ventures LLC v. Ambercore Software Inc. et al is a cautionary tale for a Receiver and its counsel alike. In this case, the Ontario Superior Court of Justice rejected a Receiver's application for the approval of an asset purchase agreement because of a failure to take the requisite steps when conducting a sale process and, in the Court's view, failing to remain a neutral officer of the Court.
Ambercore Software Inc. ("Ambercore") was a software development company with assets that included intellectual property (the "Ambercore IP"), supply contracts and shares of its wholly owned subsidiary, Terrapoint USA Inc. ("Terrapoint"). Canrock Ventures LLC ("Canrock") had taken an assignment of the debt and security over all of Ambercore's assets from Ambercore's prior operating lender.
In addition to Canrock, Quorum Oil and Gas Technology Fund Limited ("Quorum") was an indirect and direct secured creditor of Ambercore. It had advanced funds to an Alberta numbered corporation which had then advanced that amount and more to Ambercore under debenture security. Quorum advanced further funds directly to Ambercore and held a third secured position for that amount against Ambercore and Terrapoint.
After the Receiver's appointment on November 18, 2010, it sent a memorandum to the service list on November 30, 2010. That memorandum proposed a quick sale of Terrapoint's contracts to maximize their value, but acknowledged that the sale of Ambercore's assets was not urgent. However, on December 6, 2010, the Receiver went ahead and notified 40 potential purchasers of the sale of the assets of both Ambercore and Terrapoint. The sale was also advertised in the Globe and Mail on December 8, 2010, and offers were accepted until December 17, 2010.
While the Receiver received several expressions of interest for specific assets, Canrock, together with GeoDigital International Inc. ("GeoDigital"), submitted the only offer for all of the assets of Ambercore and Terrapoint, which was signed on January 14, 2011. The purchase price was to be paid by the partial forgiveness of the debt owed to Canrock, but no funds would be available for any other secured creditors. When the Receiver made a motion for the approval of the agreement, Quorum opposed, and the Court declined the sale's approval, citing a number of concerns with the sale process.
First, there had effectively been no valuation of most of the assets sold, including the shares of Terrapoint and the Ambercore IP, which consisted of sophisticated software. Without this information, the Court expressed concern that what was proposed to take place was essentially a foreclosure with the prospect that any upside would only benefit Canrock/GeoDigital.
Second, the Court was concerned that the time period for marketing and accepting offers was too short and the Receiver had provided no justification for the quick sale of Ambercore's assets. Further, the Receiver failed to sufficiently inform potential purchasers of the nature of the assets being sold, having placed only one advertisement with the general description of "Intellectual Property."
Third, the Court questioned an "unusual" provision which required the resale of the Ambercore IP by Canrock, subject to terms granting Canrock/GeoDigital a royaltyfree, perpetual licence, or by the Receiver, subject to terms granting Canrock/GeoDigital full access to the Ambercore IP source code. The first $450,000 of the proceeds from the sale of the Ambercore IP was to be used to repay the portion of the Canrock debt that had not been tendered as part of the purchase price under the asset purchase agreement, with the remaining balance, if any, to go to the Receiver for distribution to other secured creditors. The Court noted that buyers may not be as motivated to make an offer for the Ambercore IP, which would have remained subject to Canrock/GeoDigital's continued interest.
Finally, the Court had concerns about the Receiver's neutrality as an officer of the court. The Receiver's counsel was the same counsel that acted for Canrock in the Receiver's appointment. At the very least, this created the appearance of a conflict. The course of action adopted by the Receiver, including the provision for the resale of the Ambercore IP, appeared to favour Canrock. The Court found that the Receiver's reports sought to justify such action, rather than present the facts as a disinterested observer. The Court found that the Receiver was, therefore, not acting as a neutral observer as required.
As a result, the Court held that the proposed sale did not meet the principles set out in Royal Bank of Canada v. Soundair Corp. (1991), 4 O.R. (3d) 1 (C.A.), being:
- whether the Receiver made a sufficient effort to get the best price and has not acted improvidently;
- whether the Receiver considered the interests of all parties;
- whether the Receiver considered the efficacy and integrity of the process by which offers were obtained; and
- whether there has been unfairness in the working out of the process.
This decision serves as a helpful reminder of what a Receiver should do when selling assets. At a minimum, the value of all critical assets should be properly determined and an appropriate time frame and sufficient disclosure should be provided. Further, the interests of all parties must be considered, as the appearance of impropriety may undermine an agreement's approval.
Nathaniel Erskine-Smith* is an articling student at Aird & Berlis LLP.
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