Regulation of Receiverships
by Roderick J. Wood, Faculty of Law, University of AlbertaAbstract
A) Introduction
Receivership law is different from bankruptcy law and commercial restructuring law in that it is not a creature of statute. Whereas the bankruptcy and restructuring regimes are legislatively created, receivership law emerged out of English common law. Canada, Australia, New Zealand and the United Kingdom have chosen to pass statutes that regulate certain features of receivership law. However, these approaches are markedly different. A comparative survey of these legislative approaches together with a review of the theoretical literature will be used to evaluate if the Canadian approach to regulation is the best means of realizing the underlying goals and objectives of receivership law.
B) Historical Development of Receivership Law in Canada
Canadian receivership law is scattered across a variety of different sources. There is a fundamental bifurcation in the common law sources. The rules and principles that govern privately appointed receivers are substantially different from those that apply to court-appointed receivers. This common law base of substantive principle is modified by several layers of legislation. Statutory provisions in federal and provincial business corporations’ statutes and in provincial personal property security legislation regulate different aspects of receivership law. Since 1992, regulatory provisions have been added in the Bankruptcy and Insolvency Act, and these underwent significant amendment in 2009. Two points should be kept in mind concerning this state of affairs. First, the piecemeal approach to regulation has produced a patchwork quilt that contributes to the complexity and legal uncertainty in this area of law. Second, the reforms may well lead to expanded use of receiverships as receivers are now insulated from liability under successor employer statutes.
C) Regulation of Receiverships in Canada, Australia, New Zealand and the United Kingdom
The comparative survey reveals that although the regulatory approaches to the regulation of receiverships in Canada, Australia and New Zealand differ in their details, they share a common set of objectives. All are designed to ensure that insolvency professionals are properly accountable to creditors and to promote going-concern sales that maximize recoveries by creditors. The regulatory regime in each jurisdiction deals with seven issues, namely (1) qualifications of receivers; (2) powers of receivers; (3) duties of receivers; (4) liabilities of receivers; (5) court supervision of receiverships; (6) disclosure of information; and (7) interaction among insolvency regimes.
The survey reveals that there are three areas where the Canadian approach to regulation may be lacking. First, there is considerable uncertainty as to the scope of the duty of a privately appointed receiver and the identity of the persons whose interests the receiver is bound to protect. Under common law, a privately appointed receiver was only required to consider the interests of the secured creditor who was responsible for the appointment of the receiver. Canadian insolvency legislation should make it clear that a receiver owes an obligation to all creditors and cannot give sole regard to the interest of the secured creditor who made the appointment. Second, a privately appointed receiver should be held liable for post-receivership contracts that are negotiated by the receiver. This rule has been adopted by every other jurisdiction and is needed to prevent unfair prejudice to third parties. Third, insolvency legislation should ensure that the powers of a privately appointed receiver are not lost upon a bankruptcy of the debtor.
The approach to the regulation of receiverships taken in the United Kingdom is more radical. The regulation has resulted in the de facto abolition of receiverships in all but exceptional cases. A major concern was that a receiver acted in the interests of only the secured creditor and this operated to the detriment of other creditors and stakeholders. Although receiverships were abolished, many of the functions carried out by a receiver are now carried out under an insolvency regime referred to as administration. It is unlikely that the approach could be successfully transplanted into Canada as it would require a complete overhaul of commercial restructuring law.
D) Theoretical and Economic Literature
Three important ideas are found in the theoretical literature. The first idea is that the usefulness of security interest is not limited to the enhanced priority that is given to the secured creditor. If the secured creditor is given a right to appoint a receiver, the secured creditor will have a right of control over the insolvency proceedings. The second idea is that the ability to appoint a receiver gives the secured creditor the ability to remove inefficient managers and operates as a kind of "privatized" insolvency regime. By permitting the receiver to operate the business, it allows a going-concern sale of the business that will produce a greater recovery than a piecemeal liquidation sale. The third idea is that control over the insolvency process exercised by secured creditors can result in a destruction of value that would otherwise be available to subordinate creditors and may result in the unnecessary closing down of viable businesses. This is most likely to occur where the secured creditor is fully secured as the secured creditor will be primarily interested in obtaining repayment of its loans as quickly as possible.
The theoretical literature therefore lends support to the view that although receiverships play a useful role in Canadian insolvency law, their use should be regulated to inhibit value-reducing conduct. In particular, it supports the view that a privately appointed receiver should owe a duty to all creditors and not simply to the secured creditor who caused the receiver to be appointed.
E) Availability of Empirical Data in Canada
An empirical question that is highly significant in this area concerns the extent to which the claims of secured creditors are fully satisfied following the appointment of a privately appointed receiver. The risk of value-reducing enforcement sales is greatly lessened if the secured creditor is undersecured as any loss from such conduct is primarily borne by the secured creditor. The secured creditor has a strong incentive to maximize recovery on enforcement by maximizing the proceeds of sales and minimizing the costs of enforcement as the secured creditor will be the sole beneficiary of these efforts. It appears that the necessary data concerning distributions to creditors are available. It would therefore be possible to undertake an empirical exploration of this issue in the future.
F) Framework for the Regulation of Receiverships in Canada
The three problems in the Canadian regulatory approach identified above could be modified through a relatively modest amendment to the insolvency statutes. A more ambitious and longer term objective is to reduce the duplication and complexity inherent in the ad hoc and piecemeal approach to regulation that currently prevails. The ideal would be to produce a single statute that contains a complete and comprehensive statement of the legal rules and principles that govern receiverships and that would codify the rules for both privately appointed and court-appointed receivers. The substantive rules should be such that there would not be differences in the rules that affect the contracts and property rights of third parties unless there is some overriding reason that justifies special treatment as such differences promote regime shopping in order to procure special advantages.
