Looking Forward in Reverse: Recent Developments in Reverse Vesting Orders in Insolvency Proceedings
By Jared Enns and Forrest Finn, Cassels Brock & Blackwell LLP
I – INTRODUCTION
In recent years, reverse vesting orders (“RVOs”) have become an important feature in restructuring proceedings across Canada. Although not expressly contemplated in insolvency legislation, RVO-based transactions allow a purchaser to acquire the shares of an insolvent debtor (as opposed to its assets), free and clear of all encumbrances, and a “vesting out” from that debtor to a new company (often referred to as the “ResidualCo”) of any unwanted assets, obligations, and liabilities. Once the transaction closes, the “ResidualCo” becomes responsible for making distributions to the debtor company’s former creditors, subject to the oversight of the applicable court officer.1
In response to their increased use in a variety of insolvency proceedings, courts across Canada have consistently held that such orders should not be viewed as the “norm” and should not be employed as a mere matter of convenience.2 In doing so, courts have pointed out that: (i) insolvency legislation does not specifically contemplate the use of RVOs and (ii) RVOs ought not be used to circumvent processes in insolvency proceedings which would otherwise entitle creditors to vote on plans or proposals.3
II – REQUIREMENTS FOR APPROVING AN RVO
Despite taking a conservative approach to RVOs, Canadian courts have found jurisdiction to approve RVOs under both the Companies’ Creditors Arrangement Act (the “CCAA”) (sections 11 and 36)4 and the Bankruptcy and Insolvency Act (the “BIA”) (in both proposal proceedings5 and in receiverships, under subsection 243(1)).6 In exercising this jurisdiction, courts have articulated that an RVO must, in the circumstances:
- be necessary;
- produce an economic result at least as favourable as any viable alternative;
- not result in any stakeholder being worse off than under any viable alternative; and
- provide for the payment of consideration that reflects the importance and value of the licences and permits (or other intangible assets) being preserved under the RVO structure.7
To satisfy these RVO-specific considerations, applicants generally must demonstrate that there is a compelling and extraordinary need to facilitate the transaction through an RVO.8 In Just Energy Group Inc et al v Morgan Stanley Capital Group Inc et al, the Ontario Superior Court (“ONSC”) summarized the circumstances in which this extraordinary relief may be required:
- the debtor operates in a highly-regulated environment in which its existing permits, licences or other rights are difficult or impossible to reassign to a purchaser;
- the debtor is a party to certain key agreements that would be similarly difficult or impossible to assign to a purchaser; and
- where maintaining the existing legal entities would preserve certain tax attributes that would otherwise be lost in a traditional vesting order transaction.9
In this respect, it is perhaps unsurprising that RVOs have been utilized in a number of insolvency proceedings involving cannabis companies, as neither the Cannabis Act nor its regulations permit the transfer or assignment of any licences issued thereunder. Consequently, to preserve the otherwise non-transferrable licences, RVO-structured transactions have been used (and approved) to ensure that these licences remain with the licensed entity.
RVOs have also been used to facilitate transactions involving insolvent mining companies. For example, in Harte Gold Corp (Re) (“Harte Gold”), the ONSC held that, without an RVO, “the purchaser would have to apply to the various agencies and regulatory authorities for transfers of existing licences and permits or, if transfers are not possible, for new licences and permits.”10 The use of an RVO allowed the purchaser to acquire these non-transferrable assets without the risk, delay, and cost associated with an ordinary vesting order transaction.11 For that reason, the ONSC approved its use, but cautioned that RVOs ought to be “regarded as an unusual or extraordinary measure; not an approach appropriate in any case merely because it may be more convenient or beneficial for the purchaser”.12
III – JUDICIAL SCRUTINY AND RECENT DEVELOPMENTS
In Harte Gold, the ONSC clarified the “necessary” requirement, noting that even though the debtor’s assets may have been technically transferrable, the RVO structure enabled the transaction to be completed efficiently and expeditiously, without the corresponding risk, delay, and cost of an alternative form of transaction, which would have required the purchaser to obtain transfers of existing licenses and permits from various agencies and regulatory authorities.13 The Supreme Court of British Columbia (the “BCSC”) reached a similar conclusion in the CCAA proceedings for Pure Gold Mining Inc (“Pure Gold”). In that case, Pure Gold sought approval of an RVO and put forward evidence that “some” of Pure Gold’s mining tenures and permits “may” be difficult to transfer to a purchaser and, accordingly, may result in additional delay or costs in closing the transaction.14 The BCSC found this evidence sufficient and granted the RVO.15
In contrast, the BCSC declined to grant an RVO in PaySlate Inc (Re) (“PaySlate”) for the following reasons:
- the court was unable to conclude that the RVO was intended to preserve the company as a viable going concern;16
- insufficient evidence of value had been provided, without which the court was unable to determine: (i) the appropriateness of the consideration proposed to be paid under the RVO; (ii) whether there were other viable alternatives; and (iii) whether other stakeholders were no worse off;17 and
- the applicants had not “demonstrated that the waiver, bar, release provisions, as well as those restricting contractual rights of counterparties to Retained Contracts” were fair and reasonable.18
Importantly, in declining to approve the RVO, the court in PaySlate articulated and weighed the following additional considerations:
- creditors ought to have an opportunity to have a voice in the workout strategy of the debtor, which may be prejudiced by an RVO;
- as the purchaser obtains all of the forward-value of the debtor’s activities, RVOs remove the opportunity for negotiations among debtors and their creditors that may lead to compromise and greater value for a broader group of stakeholders;
- there should be an evidence-based rationale explaining why an RVO is at least equivalent to outcomes under the statutory mechanisms; and
- careful consideration should be given to proposed releases where creditors have not had an opportunity to vote.19
The BCSC subsequently approved an RVO in PaySlate Inc’s insolvency proceedings, holding that the subsequent application was supported by an “appropriate evidence-based rationale…with fulsome and most helpful information and analysis of value provided by the Proposal Trustee.”20
But contrast the judicial hesitancy expressed in the PaySlate decision with the decision in Peakhill Capital Inc v Southview Gardens Limited Partnership (“Peakhill”), released on August 25, 2023. In that case, the sole purpose for seeking an RVO was to avoid triggering an obligation to pay property transfer tax under the Property Transfer Tax Act (the “PTTA”) (which would arise on a transfer of legal title of certain lands, but not on the transfer of beneficial title). The BCSC rejected the “floodgates argument” advanced by the Province of British Columbia in opposition to the RVO, and went on to conclude that “although it may well be true that the granting of an RVO in this context will cause them to be sought more often, [the court had] been advised of no reason why this would be undesirable from a policy perspective or from the perspective of any stakeholder, other than the taxing authority, at least in the absence of prejudice to other stakeholders such as creditors”.21
In approving the RVO in Peakhill, the BCSC stated that it was in “somewhat uncharted territory”, as: (i) on the one hand, it did not appear that Canadian courts had pronounced RVOs in contested proceedings when tax savings were the only benefit; and (ii) on the other hand, in the circumstances of the case and subject to the Province of British Columbia’s arguments regarding the interplay between the BIA and the PTTA, there did not seem to be a specific reason not to employ an RVO to preserve value for creditors.22 The BCSC went on to approve the RVO, noting that:
- the effect of the RVO was that title was not transferred (and the tax was not triggered), which could “readily be done without attracting tax when property is owned by a solvent company”;23
- after considering the effect of the RVO-transaction on the debtors’ creditors, no creditors would have their rights compromised or their interests prejudiced since: (i) the RVO would increase the recovery of secured creditors; and (ii) unsecured creditors were already “out of the money”;24 and
- the RVO would preserve and maximize the value of the assets available for creditors and would increase the recovery for the secured creditors.25
Although RVOs are an important remedy in the insolvency toolbox, Canadian courts have consistently held that, because such transactions are not specifically contemplated in the BIA or the CCAA, they should only be approved in exceptional circumstances following close judicial scrutiny.26 Recent jurisprudence provides some much needed clarity and guidance on the circumstances in which courts may be willing to approve RVOs, as well as the RVO-specific criteria that they may consider and apply when asked to do so. While PaySlate demonstrates the pitfalls that applicants may face if they fail to satisfy these criteria on the evidence, Peakhill suggests that this remains a rapidly evolving area of insolvency law and that further developments are inevitable.
1 Typically, a ResidualCo will have no administrative infrastructure in place to deal with such distributions. Accordingly, in CCAA proceedings, courts will often also pronounce orders enhancing a monitor’s powers so that the monitor may also administer the affairs of the ResidualCo: Michelle Pickett and Linc Rogers, “The Business Side of Reverse Vesting Orders”, 2021 ANNREVINSOLV 14 at 8.
2 Peakhill Capital Inc v Southview Gardens Limited Partnership, 2023 BCSC 1476 at paras 40 – 44 [Peakhill].
3 See, for example, Harte Gold Corp (Re), 2022 ONSC 653 at para 38 [Harte Gold] in which the ONSC held that RVOs are an “unusual or extraordinary measure” and are not justified merely because they are more convenient for a prospective purchaser. See also Peakhill, ibid at para 45.
4 In general, courts have held that they are authorized to approve RVOs under both sections 11 and 36 of the CCAA: Arrangement relative à Nemaska Lithium inc, 2020 QCCA 1488 at para 19; Quest University Canada (Re), 2020 BCSC 1883 at para 11. Although the ONSC has recently questioned whether section 36 of the CCAA grants courts jurisdiction to approve RVOs, it ultimately declined to resolve the issue, holding that it clearly had authority to do so under section 11: see Harte Gold at para 37.
5 In PaySlate Inc (Re), 2023 BCSC 608 at para 84 [PaySlate], for example, the BCSC held that, although many of the authorities have considered RVOs under the CCAA, the remedy is also available in other insolvency proceedings including under the BIA and similar considerations/criteria will apply in the context of RVOs sought in the context of BIA proceedings: see para 84.
6 Vert Infrastructure Ltd (Re), (June 16, 2020), ONSC (Commercial List), Court File No CV-20-00642256-00CL (Order Appointing Receiver); 2056706 Ontario Inc, Kozo Holdings Inc, Cancor Det Agency Inc and Pure Global Cannabis Inc, PureSinse Inc et al (Re) (January 7 2021), ONSC (Commercial List), Court File No CV-20-00638503-00CL (Approval and Vesting Order) and (May 1, 2020) (Order Appointing Receiver).
7 Harte Gold, supra note 3 at para 38; PaySlate, supra note 5 at para 107; CannaPiece Group Inc (Re), 2023 ONSC 841 at para 58 [CannaPiece]; Peakhill, supra note 2 at para 76.
8 Harte Gold, ibid at para 38.
9 Just Energy Group Inc et al v Morgan Stanley Capital Group Inc et al, 2022 ONSC 6354 at paras 33, 34.
10 Harte Gold, supra note 3 at para 71.
11 Harte Gold, ibid.
12 Harte Gold, ibid at paras 38, 94.
13 Harte Gold, ibid at paras 71-73.
14 See, for example, Pure Gold Mining Inc (Re), (May 18, 2023), BCSC, Court File No S-228723 (Affidavit #2 of Jonathan Singh) at para 27.
15 Pure Gold Mining Inc (Re), (May 29, 2023), BCSC, Court File No S-228723 (Approval and Vesting Order).
16 PaySlate, supra note 5 at para 124.
17 PaySlate, ibid at para 142.
18 PaySlate, ibid at para 143.
19 PaySlate, ibid at paras 96 - 99.
20 PaySlate Inc. (Re), 2023 BCSC 977 at para 5.
21 Peakhill, supra note 2 at paras 52 - 55.
22 Peakhill, ibid, at para 56.
23 Peakhill, ibid at paras 62 - 66.
24 Pealhill, ibid at paras 49 - 51. This can be contrasted to the decision in CannaPiece, supra note 7, in which the ONSC refused to grant an RVO primarily on the basis that the relief sought would be prejudicial to (and was opposed by) the first ranking secured creditor: see paras 65 and 85.
25 Peakhill, ibid at paras 49 and 81.
26 Harte Gold, supra note 3 at para 38. See also Peakhill, ibid at paras 40 – 44.