Executive Summary: Key Legal and Evidentiary Issues

• SSLA defaulted on over $10 million in secured debt owed to BNS, despite extensions and forbearance agreements.

• Unauthorized collateral mortgages were registered against the Property without BNS’s consent, violating loan terms.

• Although SSLA agreed to a consent receivership in April 2024, it later failed to honor the agreement or finalize amendments.

• The Property’s restrictive zoning and licensing requirements supported BNS’s claim that a receivership was more appropriate than a judicial sale.

• Rent from a February 2024 lease was received by SSLA but not remitted to BNS, and its use remains unexplained.

• The Court concluded a receivership was just and convenient, citing SSLA’s conduct, consent to the receivership, and lack of viable alternatives.

Background and loan relationship

Bank of Nova Scotia (BNS) applied for a receivership order over the assets and property of Smiling Simba Learning Academy Inc. (SSLA). SSLA, through directors Uma Pujari and Prince Chahal (the Guarantors), opposed the application. The parties had entered into a Commitment Letter on April 28, 2022, for the re-financing of a commercial property at 13209 Evanspark Blvd NW in Calgary, zoned “Special Purpose – Community Service (S-CS)”. Additional agreements included an Acceptance Agreement dated May 24, 2022, and an interest rate swap agreement dated May 31, 2022. The Guarantors guaranteed the loan to a maximum of $8.2 million.

From the beginning, BNS understood that SSLA would lease the entire Property to arms-length tenants operating childcare facilities. However, BNS later learned that Chahal was involved in the childcare operations, which had not been licensed. This came to BNS’s attention in March 2023.

Defaults and enforcement

SSLA defaulted, and by May 2023, the swap agreement was converted into a demand loan. As of March 31, 2024, over $9 million was outstanding. BNS’s security was comprised of a general security agreement, a collateral mortgage, assignments of rents and leases, and an assignment of insurance, all properly registered. On March 27, 2023, BNS issued a demand and a notice under section 244 of the Bankruptcy and Insolvency Act (BIA).

Subsequently, SSLA allowed other creditors—1967262 Alberta Ltd. (May 5, 2023) and Mortgagequote Canada Corp. (August 22, 2023)—to register collateral mortgages of approximately $900,000 and $200,000 respectively, without BNS’s consent.

A tenant began paying monthly rent of $28,200 under a 10-year lease that commenced in February 2024, but SSLA provided no explanation or evidence of what it did with the rent. On January 4, 2024, BNS issued a second demand and notice of intention to enforce security.

Forbearance and receivership agreements

On April 16, 2024, BNS, SSLA, and the Guarantors signed a Forbearance Agreement. It acknowledged the indebtedness as $9,160,339.79 and included a provision for a consent receivership order. When SSLA failed to repay the debt, the parties amended the agreement on July 22, 2024, extending the deadline to September 20, 2024. SSLA again defaulted.

On September 24, 2024, the parties agreed by email to the terms of a second amendment that reaffirmed the consent receivership, but SSLA and the Guarantors never signed it. BNS notified SSLA on December 6, 2024, of its intent to seek a receivership order, filing the application on January 2, 2025.

Receivership application and court findings

The application was heard on January 6, 2025, and reconvened on January 9, 2025. The Court reviewed the legal test under section 243(1) of the BIA and section 13(2) of the Judicature Act, considering whether receivership was just and convenient. It adopted factors from Bennett on Receiverships, including the risk to the secured creditor, nature of the property, debtor conduct, and the existence of a consent order.

SSLA argued a judicial sale was sufficient and less costly. Initially supported by Mortgagequote, this position was later withdrawn after reviewing Chahal’s affidavit. The Court emphasized that BNS had a contractual right to seek a receiver and was not required to show irreparable harm.

Policy and contractual considerations

The Court highlighted that SSLA and the Guarantors had knowingly consented to a receivership while represented by counsel. The consent was valid, untainted, and not conditional. SSLA had acknowledged its defaults and agreed that receivership was the appropriate remedy if obligations remained unpaid.

The Property’s unique zoning and licensing complexities for childcare uses were not determinative alone but added context to the appropriateness of court-supervised sale under receivership.

Outcome

Justice M.A. Marion granted the receivership order on January 10, 2025. SSLA’s conduct—including granting unauthorized mortgages, failing to pay forbearance fees, and withholding rent from BNS—supported the conclusion that a supervised receivership was necessary. The Court declined to restrict the receiver’s duties, citing the need for full oversight given the circumstances.