Anonymised, illustrative composite. A specialty distributor acquired as an add-on lost a key customer four months after closing, breached its covenant, and the sponsor had ten statutory days to refinance before the lender could apply for a receiver.
At a glance
A sponsor’s portfolio company acquired a specialty distributor as an add-on for $6,800,000, valuing the target at roughly 6.5 times the $1,050,000 of trailing EBITDA used to underwrite the deal. The acquisition was financed with $4,200,000 of senior secured term debt against the combined entity, sized on the EBITDA run-rate the diligence process had verified. Four months after closing, the target’s largest customer — a relationship the confidential information memorandum had flagged as a concentration risk but not a going-concern one — moved its volume to a competitor mid-contract.
Trailing-twelve-month EBITDA fell from $1,050,000 at close to $690,000 by month four. The senior facility carried a fixed-charge coverage covenant, and the drop tripped it. Under the loan agreement the lender was entitled to accelerate, and it moved to enforce: a notice under Bankruptcy and Insolvency Act section 244(1), which requires a secured creditor intending to enforce against “all or substantially all” of an insolvent debtor’s inventory, receivables or other property to send notice of that intention. Section 244(2), marginal note Period of notice, then bars the creditor from enforcing “until the expiry of ten days after sending that notice, unless the insolvent person consents to an earlier enforcement of the security” — and section 244(2.1) closes the obvious loophole by providing that such consent “may not be obtained…prior to the sending of the notice.” Two further exceptions sit in section 244(3) and (4): the section does not apply to a creditor whose realisation rights are protected under subsection 69.1(5) or (6) or who has had a stay lifted, and it “does not apply where there is a receiver in respect of the insolvent person.” None of those applied here, so the ten-day window — not the covenant default itself — was the sponsor’s actual deadline.
The restriction is on the appointment, not on the application. Nothing stopped the lender from filing at once; what BIA section 243(1.1), marginal note Restriction on appointment of receiver, does is bar the court from appointing a receiver “before the expiry of 10 days after the day on which the secured creditor sends the notice” unless the debtor consents or “the court considers it appropriate to appoint a receiver before then.” So the ten days was a floor with a judicial escape hatch, not a guarantee — and section 243(4), marginal note Trustee to be appointed, provides that “only a trustee may be appointed,” which meant the sponsor was also racing the clock against losing operational control of the company to a court-appointed insolvency professional it had no say in choosing. The replacement facility, an asset-based line sized off $1,450,000 of eligible receivables at an 85% advance rate and $980,000 of eligible inventory at 50%, produced a borrowing base of $1,722,500 — short of the $4,200,000 balance being refinanced. The sponsor bridged the $2,477,500 gap with an equity top-up from the fund, closing the new facility on day eight.
Two BIA provisions, read together, are what made day eight survivable rather than day eleven fatal. Section 244’s ten-day notice period is not a courtesy — subject to its own consent and receiver exceptions it is the one stretch in which a secured creditor is barred by statute from enforcing, which converts an open-ended threat into a dated one a sponsor can plan against. Section 243(1) then sets what happens once the window closes: on a secured creditor’s application the court “may appoint a receiver…if it considers it to be just or convenient to do so,” and under section 243(4) only a trustee may be appointed — a licensed insolvency professional, not anyone the sponsor would choose. Closing the refinancing inside the window meant the section 243 application was never made, and the decision stayed inside the deal team rather than passing to a court-appointed party.
The replacement asset-based facility closed on day eight, two days inside the section 244(2) floor. The prior senior lender was repaid in full from the new facility plus the sponsor’s equity top-up, and the section 244 notice lapsed without a receivership application ever being filed. The company operated under the new lender’s covenant package, reset to the post-loss EBITDA level, through the remainder of the hold. See what actually happens once a receiver is appointed for the counterfactual this sponsor avoided, and how an asset-based facility is sized for the mechanics behind the replacement borrowing base.
Missing the ten-day window does not simply mean more negotiating time — it means the decision stops being the sponsor’s to make. Once a trustee is appointed receiver under section 243, the receiver controls the sale process, and the fund’s equity in the portfolio company sits behind every secured and priority claim ahead of it. The $2,477,500 equity top-up the fund actually wrote is the cost of staying in control of the outcome; the counterfactual is not a larger cheque, it is no cheque the fund gets to write at all, because by day eleven the decision belongs to someone else.
The covenant package was written around a single customer’s volume without a cure period wide enough to arrange replacement financing after a loss of that size — the deal team could see the concentration risk in the CIM but had not pre-cleared a backup lender before it mattered. A sponsor holding any covenant-lite or single-customer-concentrated add-on should have a replacement facility at least discussed with an asset-based lender before a covenant is ever tripped, not after a section 244 notice starts the clock.
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