Canada: The Preservation Of Lien Rights In Insolvency Proceedings

This article originally appeared in the September 16th issue of The Lawyers Weekly

Most insolvency practitioners will likely agree that in the context of receivership or bankruptcy proceedings, the issue of priorities of the interests of various creditors and stakeholders is not one that is always easily resolved. In the context of a Court-appointed receivership, there are certain "standard" provisions that will likely be found in the order appointing the receiver. The receivership order will typically provide for a general stay of proceedings as against the property of the debtor and require third parties in the possession of property of the debtor to release such property to the Court-appointed receiver. These basic provisions found in orders appointing receivers can be problematic for creditors who may have various lien claims as against the property of the debtor. This is particularly the case, where a creditor is maintaining possessory lien claims that are recognized by common law, contract and/or statute, the latter of which may arise from providing warehousing or storage services and are expressly recognized in the Repair And Storage Liens Act and the Warehouse Receipts Act.

In the receivership proceedings of HIP Interactive Inc., HIP Interactive Corp., and certain related companies (collectively, "HIP"), Justice Cameron made an order on July 11, 2005, inter alia, appointing Ernst & Young Inc. ("E & Y") as interim receiver (the "Interim Receiver") of the assets, undertaking and properties of HIP. The receivership order provided for the customary stay of proceedings and further required the property of HIP in the possession of third parties to be turned over to the Interim Receiver.

Exel Global Logistics Inc., Exel Global Logistics (Canada) Inc. and Exel Transportation Services, Inc. (collectively, "Exel"), a creditor of HIP, had provided various freight forwarding, carriage, customs brokerage, storage and logistical services to HIP prior to the date of the receivership order. As of the date the receivership order was issued, Exel was in possession of substantial property belonging to HIP located at warehouses in Ontario and New York and in various containers located in Ontario, California, France and Hong Kong.

At the time the receivership order was made, Exel asserted various lien claims as against the HIP property, including common law lien rights for freight/carriage services, contractual lien rights and statutory lien rights under the Repair and Storage Liens Act and the Warehouse Receipts Act. The ability of Exel to retain and subsequently dispose of the HIP property on account of the HIP indebtedness to Exel, came into direct conflict with the provisions of the receivership order requiring the Court-appointed Interim Receiver to gather the property of the debtors.

On August 3, 2005, Exel brought a motion to the Ontario Superior Court of Justice (Commercial List) for an order preserving its various lien rights and interests in any property that would be released by Exel to the Interim Receiver. Central to the relief sought from the Court was a recognition by the Court that Exel would be deemed to remain in possession of the HIP property notwithstanding its release of such property to the Interim Receiver. The order sought also provided for maintaining any and all lien rights Exel may have against the property which was located in the United States and in other jurisdictions. This was particularly important on account of the fact that some of the HIP property was located in California, France and Hong Kong.

Justice Farley made an order granting the relief sought by Exel, which preserved the various lien rights of Exel, including all possessory lien rights to which Exel was entitled to maintain as against the HIP property, notwithstanding the release of such property to the Interim Receiver. The order further provided that the Interim Receiver would be required to segregate the proceeds derived from the sale of any property released by Exel to the Interim Receiver in a separate trust account and not to take any steps to distribute such funds pending a determination as to priority to such funds as between Exel, Congress Financial Corporation (Canada), or any other third party asserting a priority claim to the proceeds of sale of the released property. In order to address the Interim Receiver’s concerns that certain of the property released by Exel to the Interim Receiver may be subject to a sale(s) by the Interim Receiver for which vesting orders would not be sought, Justice Farley’s Order provided that the claim of Exel would attach to the proceeds of sale of the released HIP property, as opposed to the specific property released.

The approach taken by Justice Farley in granting the order preserving the various lien claims of Exel, pending a release of the HIP property to the Interim Receiver, represents a creative solution which facilitated the Interim Receiver’s need to gather the property while maintaining the status quo as far as Exel’s various lien rights. The order made by Justice Farley in the HIP receivership proceedings represents a flexible and common sense approach to the resolution of issues that are likely to arise in the context of insolvency proceedings.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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