Canada: Keeping An Eye On The Ball: Ontario Court Scrutinizes Related Party Transactions

On May 14, 2012, in 9-Ball Interests Inc. v. Traditional Life Sciences Inc.1, the Ontario Superior Court of Justice (the "Court") rendered another decision that demonstrates the importance of full disclosure and transparency in applications made to the Court.

The Court rejected an application made for the appointment of a receiver and the approval of the sale of the assets of the debtor, Traditional Life Sciences Inc. ("TLS"), in a case in which where the secured creditor making the application to the Court, the debtor, and the proposed purchaser were all related.  The Court refused to grant the requested relief because the applicant failed to submit sufficient evidence to enable the court to understand the implications for all parties and adequately assess the appropriateness of appointing the receiver and the fairness of the proposed sale.

In applying the criteria for granting the orders sought under the Bankruptcy and Insolvency Act (the "BIA") and Courts of Justice Act ("CJA"), the Court frames quite precisely for insolvency professionals the importance of justifying their recommendations and supporting their conclusions with sufficient evidence of the facts, documents and underlying activities.


The insolvent company, TLS, was owned by the applicant, 9-Ball Interests Inc. ("9-Ball"), and operated an on-line health supplement store.  Because of the virtual nature of its business, TLS had few tangible assets and no employees.  Its operations were essentially conducted by consultants (some of whom were related to TLS), who provided management and consulting services. On February 21, 2012, shortly before the filing of the application to the Court, TLS granted security on all of its assets to 9-Ball to secure all future advances 9-Ball would make to TLS.

Less than a month after the grant of security, and before 9-Ball had made its first advance to TLS, 9-Ball retained the services of a financial advisory firm and licensed trustee (the "Consultant") to market the assets of TLS. The marketing process resulted in a single offer from a related third company (the "Purchaser") owned by the sole shareholder of 9-Ball.

9-Ball applied to the Court for the appointment of the Consultant as receiver of TLS' assets under section 243 of the BIA and section 101 of the CJA and for the approval of an immediate sale to the Purchaser. The Consultant reported that the proposed sale of the assets, whose value resided mainly in the intellectual property and inventory of TLS, was, in all likelihood, the best offer the Consultant would be able to obtain. It was submitted by 9-Ball and confirmed by the Consultant that most unsecured creditors of TLS were aware of the proposed transaction and did not oppose same.


Notwithstanding the recommendations of the Consultant, the Court was not persuaded by the evidence that the appointment of the receiver and the sale of the assets were in the interest of all parties.

Request for appointment of a receiver

The Court held that the appointment of a receiver is "just or convenient" where a privately appointed receiver would be likely to face difficulties in the accomplishment of its task.  According to the Court, the appointment of a receiver by the Court would be justified where there is strong opposition to the taking of possession of the debtor's property, where many creditors are exercising their recourses at once, or in the face of competing priority claims.  The Court concluded that the standard for the appointment of a receiver under the BIA and CJA had not been met and the Court expressed the view that the appointment of the receiver had been sought mainly to circumvent the requirements for the sale of the assets that would have applied in a private receivership.

Request for approval of asset sale

The Court recognized that the proposed sale was of the nature of a "quick flip" transaction and subject to the same principles as any other sale to a related party.  The Court emphasized the importance of submitting sufficient evidence to the Court to allow for a thorough analysis of the fairness of a proposed sale to all interested parties.

The Court found the evidence lacking in the following ways:

  • Insufficient evidence had been provided to the Court to confirm that the proposed sale process had indeed generated the best offer for the assets and would not be improvident.
  • No independent valuation of the assets or analysis of the reasonableness of the proposed sale had been submitted.

The Court mentioned that the timing of the Consultant's involvement relative to the granting of security and advances made it even more important for the Consultant to adequately support its conclusions and recommendations.

The Court noted that the Consultant reported that it had retained the services of independent counsel from which it had obtained a conclusive opinion with regards to the validity of 9-Ball's security. However, the Court pointed out that the opinion was not provided to the Court and that there was no evidence of any analysis of the facts underlying the secured loan, including confirmation that any funds had actually been advanced to TLS.  The Court was of the view that in light of the fact that the proceeds of sale were to be paid to a secured creditor that was related to the purchaser, evidence demonstrating that close scrutiny of the lender's security had been given by the proposed receiver should have been placed before the Court.


This is another recent case in which the Court brought scrutiny to bare when asked to approve proposed credit bids and transactions between related parties. In Hypnotic Clubs2 and Canrock3, the Court also refused to approve proposed

transactions, one which was to an arm's length purchaser and the other not. In both cases, the application was rejected because there had been insufficient evidence that the proposed sales were in the interest of all parties and that a satisfactory sale process had been conducted.

It is clear from this case, Hypnotic Clubs and Canrock that it is incumbent upon applicants, insolvency practitioners and their counsel to present sufficient evidence to satisfy the Court that a meaningful sale process has been undertaken and that the proposed transaction is in the best interest of the creditors and other interested parties - even more so when the proposed purchaser is not at arm's length with the debtor.


1 9-Ball Interests Inc. v. Traditional Life Sciences Inc. 2012 ONSC 2788

2 Re Hypnotic Clubs Inc. 2010 ONSC 2987

3 Canrock Ventures LLC c. Ambercore Software Inc. 2011 ONSC 1138

The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.

© Copyright 2012 McMillan LLP

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