Neil Jacobs, QC, Joe Thorne and Meaghan McCaw

The Newfoundland and Labrador Court of Appeal recently confirmed that accounting/auditing firms may take on several mandates in respect of companies that may or do become insolvent in Wabush Hotel Limited v Business Development Bank of Canada, 2017 NLCA 35 (“Wabush Hotel”), which was released on May 25, 2017.

This case provides additional comfort to such firms that previous consulting or review engagement work will not prohibit them from acting in a receivership role in later insolvency proceedings.

Background

In this case, three debtor companies (Wabush Hotel Limited, L.H. Service Center Limited, and D.P.B. Holdings Limited) appealed the appointment of PricewaterhouseCoopers Inc. (“PWC”) as receiver.

In April 2016, the Business Development Bank of Canada (“BDC”) applied to the Court pursuant to s. 243 of the Bankruptcy and Insolvency Act for an order installing PWC as court-appointed receiver to manage the assets, undertakings, and property of the debtors.

Prior to the court proceedings, BDC as primary lender requested that PWC perform a review engagement of the debtors’ assets and liabilities. The debtors consented to the review, with clear conditions in the agreement that BDC would play an active role and that PWC would be permitted to take on other mandates regarding the debtors.

Ultimately, the debtors defaulted on their obligations to BDC. At the time of the court application, BDC claimed that it was owed an aggregate amount of $7.2 million by the debtors.

After negotiations, the debtors consented to PWC’s court appointment. The receivership order was granted in June 2016.

However, the debtors then had a change of heart, and sought to appeal the consent receivership.

Court of Appeal Denies the Debtors’ Appeal

The debtors raised two issues on appeal:

1. was PWC in a disqualifying conflict of interest as court-appointed receiver because of its previous review of the debtors’ finances; and,
2. should the consent receivership order have included a claims disposition plan.

The Court of Appeal dismissed the appeal, upholding the applications judge’s decision on both issues.

1. Conflict of Interest

The debtors argued that PWC was in a conflict of interest that arose from its previous review engagement relationship with the debtors at the direction of and on behalf of BDC.

The purpose of the review engagement was to determine the viability of the debtors and to assist BDC in making decisions regarding its lending and security.

The Court of Appeal reviewed the terms of PWC’s engagement letter, which provided, in part, that:

• PWC, at the request of BDC, agreed to “review restructuring and cost reduction activities” and to assist in formulating a business plan;¹
• PWC would have no management responsibility or control over the debtors operations during the term of the engagement; and, most importantly,
• the debtors acknowledged that PWC “is not precluded from accepting any other mandate in respect of the [debtor companies], including but not limited to appointments under statute or by court order”.²

Notably, the debtors did not challenge the validity of the engagement letter. Rather, the debtors argued that:

• the debtors’ principal, a businessman of over 30 years, did not fully understand the terms of the engagement,
• The debtors argued strongly that their principal, whose second    language was English, did not realize that the engagement permitted PWC to take on future mandates that might not align    with the debtors’ corporate interests; and
• the previous review relationship effectively meant that PWC was precluded from taking on the court-appointed receiver role.

The Court of Appeal rejected these arguments and held that “it is clear from the terms of the engagement letter, signed on behalf of the debtors, that PWC could not be found to be in a conflict of interest position given the mandate set forth in the engagement letter”.³ Moreover, the Court of Appeal noted that the evidence all pointed to the fact that the receivership was inevitable and PWC in no way contributed to the debtors’ default.

2. Failure to Include Realization Plan and Claims Plan

The debtors also argued that the applications judge erred in failing to include a realization or claims plan in the receivership order as they alleged that BDC and Bank of Montreal were not the sole creditors.

In support of their argument, the debtors pointed to a prior decision of the Trial Decision [Hickman Equipment (1985) Ltd. (Receivership), Re., 2004 NLSCTD 164] where a claims plan was developed by the receiver in connection with the bankruptcy proceeding.

BDC argued that the situation at hand was different than that faced by the court in Hickman Equipment as that matter involved a large and complex bankruptcy proceeding. Further, BDC argued that the debtors were precluded from raising this point on appeal as it was not a matter in dispute before the applications judge.

The Court of Appeal agreed with BDC and declined to revisit the receivership management plan agreed to by the parties and approved by the applications judge. The Court of Appeal noted that a detailed claims plan akin to that set out in Hickman Equipment was unnecessary in the present circumstances since the debtors’ assets were all located Western Labrador and the financing was provided in large by two companies, BDC and Bank of Montreal.

What this means for clients

While this decision tracks with cases in other jurisdictions, it is a useful appeal court determination that an accounting firm has broad latitude to take on multiple roles regarding companies that may become insolvent.

Notwithstanding this decision, we stress that best practices for accounting firms should be:

• to set out the nature of its role, particularly in pre-insolvency review or consulting agreements, and in particular the limitations on the relationship; and
• to encourage companies to seek independent legal advice regarding the nature of review engagements in scenarios where restructuring or insolvency may arise.