The secured lender, which had loaned over $1.3 million against real estate and equipment to a dental practice in Ontario, was concerned about its security position when the business owner, who was also the dentist in charge of the business and with whom the patient base identified, stopped making his monthly payments.
The secured lender had issued Notices of Intention to Enforce Security and had the ability to appoint a Receiver. There was concern that if patients discovered that the business was in trouble they might go elsewhere for their dental services.
As the business owner had previously filed for personal bankruptcy, the lender’s security was limited to the business assets. A liquidation of the assets by a Receiver would result in a significant loss to the secured lender.
The secured lender had also lost faith in the owner’s management of the practice. However, replacing the owner was a concern because customers might be inclined to follow the dentist if he set up a new practice after being removed. While the secured lender had a non-competition agreement in place with the dentist as part of their lending agreement, the protected area was not a prohibitive distance to deter patients from following him.
The decision was made to apply to Court for the appointment of a Receiver and to continue operating the dental practice while a buyer was found. Farber was appointed as the Receiver and Manager of the business, taking possession of the assets and ensuring that the creditor’s interests were protected.
Upon appointment as Receiver, Farber immediately retained the services of an unrelated dentist to provide advice, dental services, and supervision to the practice. Farber also retained the services of several ex-employees of the practice (hygienists, dental assistants, and receptionists) in order to provide customers with some comfort and familiarity with staff.
Immediately prior to the appointment of Farber as Receiver, the former owner-practitioner contacted patients and cancelled upcoming patient appointments in what appeared to be an attempt to thwart the Receiver and transfer patients to another practice in the region.
The owner also removed a significant amount of the supplies required to operate the dental practice and some expensive equipment. Farber applied to Court for an order compelling the owner to return the supplies and patient records. Farber had the equipment repaired. Farber obtained a log of the cancelled appointments from the dental administration system and began calling patients.
Farber operated the dental practice while in Receivership. As the Receiver was now in control of the business and finances, the lender was comfortable providing financing to the Receiver to fund the operations.
Within two weeks of being appointed, Farber had patients back “in the chair.” There was minimal patient attrition and Farber was able to operate the dental practice on a profitable basis for five months while it conducted a sales process to find a buyer for the building and the practice.
Continued operations of the practice resulted in the sale of the business as a going concern which maximized realizations. Continued operations also allowed a smooth transition for patients to the new dentist and preserved jobs in the community.
Also, the secured lender was able to achieve a significantly better recovery on its loan from the sale of the business than it would have had the business been simply liquidated.
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Peter Crawley is a Managing Director with the Restructuring practice of Farber. His practice focuses on corporate insolvency and restructuring, distressed financial advisory services, and corporate consultative advisory services. Peter can be reached at 416.496.3507 or firstname.lastname@example.org.