Lienholders in a proposal proceeding

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On filing a notice of intention to file a proposal under the Bankruptcy and Insolvency Act, RSC 1985, c B-3, an insolvent debtor benefits from a stay of proceedings that, among other things, provides that no creditor has a remedy against the debtor or the debtor’s property. One exception to this stay of proceedings applies to a secured creditor who took possession of property for the purpose of realization before a notice of intention to file a proposal was filed.

In 1635623 Alberta Ltd (Adrenaline Diesel and Bonnie’s Equipment Services Ltd.) (Re), 2022 ABQB 361, a debtor sought to recover property in the possession of two lienholders after the debtor had filed a notice of intention to file a proposal. The debtor argued that the possession of the property by the lienholders was a “remedy” and that the lienholders, as secured creditors, were not able to rely on the exception to the stay of proceedings because the lienholders did not possess the property for the purpose of realization.

The Court noted that the stay of proceedings aims at maintaining the status quo and preserving a debtor’s assets during a reorganization process by preventing proceedings that would give a creditor an advantage over other creditors. The stay does not, however, prevent a creditor from preserving a position it already enjoys. The exception for secured creditors in possession of property for the purpose of realization provides a limited exception for those secured creditors who have sufficiently advanced their realization efforts before a notice of intention is filed.

As the lienholders were not looking to enforce their claims, such as by arranging to sell the liened property, mere possession of the property did not constitute the exercise of a remedy and was not prohibited by the stay of proceedings. As the stay did not prevent the lienholders from retaining possession, the lienholders did not have to rely on the exception that applies to secured creditors in the process of realization. The lienholders were permitted to retain possession of the debtor’s property, and maintain their “secured-via-possession” position.

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