Written by Nick Noonan, JD, LLM
An interesting case in Manitoba with the COVID-19 pandemic at its center is White Oak Commercial Finance, LLC v. Nygård Holdings, 2020 MBQB 58. The case involves the Nygård Group, a conglomerate of companies facing financial difficulties, and the applicant, White Oak Commercial Finance, LLC, a lender to the Nygård Group. The central issue was the appointment of a receiver for the Nygård Group, and the proceedings were heavily influenced by the COVID-19 pandemic.
The Nygård Group was in the process of selling properties, to pay the applicant and make a proposal to its remaining creditors. The respondents sought an extension of time for the Nygård Group to make a proposal in bankruptcy and sought administrative charges to pay the proposal trustee and counsel. The appellant wanted the appointment of the receiver to better protect its interests. The COVID-19 pandemic played a significant role in the case. The Nygård Group’s unilateral closure of (i) retail stores; (ii) distribution centers; and (iii) its website was attributed to the pandemic. However, these actions were taken without consulting the lenders and the proposal trustee, leading to serious concerns that directly affected the ability of the Nygård Group to continue to operate.
The issue in the case was whether to appoint a receiver pursuant to s. 243 of the Bankruptcy and Insolvency Act (the “BIA”), considering factors such as irreparable harm, risk to lenders, nature of the property, and balance of convenience. The closures referred to above were a serious concern in this regard, especially given the lack of consultation. It was important that the lenders, including the applicant. had advanced further funds to the Nygård Group to meet payroll, but that money had not been given to employees, but rather transferred out to another corporation controlled by the Nygård Group, but one that was not subject to the credit arrangements with the lenders.
In its analysis, the court examined whether the Nygård Group acted in good faith and with due diligence, especially in light of its failure to comply with previous court orders and the credit agreement, with certain creditors, including the applicant. In one of its reports, the Proposal Trustee (appointed as part of the process for making a proposal to creditors) says that it the Proposal Trustee cannot say that the Nygård Group was acting in good faith. The court agreed, finding that there was a lack of good faith by the Nygård Group. The court found it just and convenient to appoint a receiver, considering the various factors and the evidence presented. Richter was appointed as the receiver effective March 18, 2020.
Ultimately, the court granted a stay of the proposal proceedings commenced by the Notices of Intention (“NOIs”), effective ending the proposal process unless there were a further court order. The court appointed Richter as the receiver, subject to the oversight and jurisdiction of the court. The court decided to lift the stay of proceedings granted under s. 69(1) of the BIA, finding that the lenders would suffer material prejudice if the receivership was not granted. While the closure of operations may have been necessitated by the COVID-19 pandemic, the court found that the Nygård Group’s actions were prejudicial and lacked transparency. A notice that was sent to employees and customers during the pandemic was deemed inappropriate, causing greater uncertainty, making it more difficult for other parties (the receiver and others) to work with and protect stakeholders, including employees. The Nygård Group’s actions, including the unilateral closure of its retail stores, distribution centers, and website, were seen as a breach of the Credit Agreement and court orders. While the court acknowledged that the shutdown might have been a necessary response to the COVID-19 pandemic, it criticized the manner in which the Nygård Group handled the situation. The lack of consultation with stakeholders, inappropriate communication with employees and customers, and failure to act in good faith and with due diligence were central to the court’s decision.
This case illustrates the intricate interplay between financial distress, legal obligations, and the unprecedented challenges posed by the COVID-19 pandemic. It underscores the importance of good faith, due diligence, and adherence to legal agreements and court orders, even in the face of extraordinary circumstances. The decision also highlights the court’s willingness to adapt and respond to rapidly changing conditions, balancing the interests of various stakeholders in a complex and evolving legal landscape. A lack of good faith and candour on the part of the debtor in possession of collateral in the process will be a factor in the decision of the court.
The views and opinions expressed in the blogs and case reporter are the views of their authors, and do not represent the views of the Desautels Centre for Private Enterprise and the Law, the Faculty of Law, or the University of Manitoba. Academic Members of the University of Manitoba are entitled to academic freedom in the context of a respectful working and learning environment.