Reverse vesting orders (RVO) are a structure uniquely available in Canada and have grown increasingly popular in Canadian insolvency proceedings since 2020. An RVO allows for the transfer of liabilities and unwanted assets from the debtor company to a newly formed entity rather than a traditional vesting order that transfers the purchased assets out of the debtor company to the purchaser. As a result, the purchaser is able to acquire the existing corporate structure without any unwanted assets and liabilities, allowing the debtor company to emerge from the restructuring proceeding and continue as a going concern.
Courts have allowed the use of RVOs in restructuring proceedings for a number of reasons, among others: RVOs further the remedial objectives of the insolvency statutes, the transactions are pursued in good faith and there is no other viable option that would allow for the successful restructuring of the debtor company.
Although RVOs have increased in popularity over the years, courts continue to caution that RVOs should be sanctioned only when such transaction furthers the remedial objective of the insolvency legislation. In other words, these transactions should not be regarded as the norm to circumvent processes in insolvency proceedings that may otherwise prejudice creditors.
RVOs have been used to restructure the affairs of companies under the Companies’ Creditors Arrangement Act, R.S.C., 1985, c. C-36 (CCAA) or via the proposal provisions under the Bankruptcy and Insolvency Act, R.S.C., 1985, c. B-3 (BIA). The British Columbia Court of Appeal has recently confirmed the expansion of the use of RVOs in the decision of British Columbia v. Peakhill Capital Inc., 2024 BCCA 246 (Peakhill), to receivership proceedings, which are generally driven by and for the benefit of secured lenders and are not debtor-in-possession proceedings.
In February 2023, pursuant to an application made by Peakhill Capital Inc., the British Columbia Supreme Court appointed a receiver over all of the assets, undertakings and business of various companies related to a property located in Vancouver, British Columbia, and the buildings thereon (the Real Property). Approximately one month later, the Court made an order approving a sale process in respect of the Real Property.
The highest offer that resulted from the sale process proposed to complete part of the transaction by way of an RVO. The Province of British Columbia (the Province) opposed the transaction as completion in this manner would avoid paying CAD$3.5 million in property transfer tax. The Province raised two arguments to support its opposition:
The judge, at first instance, rejected the Province’s arguments and held that the court had jurisdiction to approve RVO transaction.
On appeal, the Court of Appeal also rejected the Province’s arguments, finding that the general jurisdiction granted in section 243 of the BIA encompasses the jurisdiction to authorize the sale of a debtor’s assets by way of a vesting order in receivership proceedings, relying on Third Eye Capital Corporation v. Ressources Dianor Inc./Dianor Resources Inc., 2019 ONCA 508 (at para. 87) and Yukon (Government of) v. Yukon Zinc Corporation, 2021 YKCA 2.
In reaching this conclusion, the court noted that the question is simply whether an RVO furthers the purposes and objects of the applicable statute which, in the case of receiverships, is whether a receiver is liquidating assets to allow for the maximum recovery to creditors. This was confirmed to be a bona fide objective of the BIA regardless of whether the means to achieve such objective is by avoiding property transfer tax. By avoiding this tax, it allowed for greater recovery to the companies’ creditors thereby achieving the stated purpose.
The Province’s argument related to the transfer tax avoidance was also rejected by the court as the proposed RVO contemplated a transaction that is routine outside the insolvency context (i.e., the sale of shares of a company), in so far as it structured a transaction to avoid the transfer of title and thereby the associated tax consequences. As the structure was a legitimate commercial practice and perfectly proper outside the insolvency regime, the court found that the transaction should not be viewed differently because it was to occur within the receivership proceeding.
Accordingly, the appeal was dismissed.
The decision in Peakhill raises the question of whether the test for RVOs continues to be one of necessity rather than convenience. Although the appellate court confirmed that RVOs are only to be utilized in extraordinary circumstances, it is arguable whether a receivership meets this test. In this case, the judge expressly found that the RVO was not necessary to avoid foreclosure or bankruptcy, but rather that it was necessary to preserve CAD$3.5 million in value for the creditors. This finding suggests that creditors will be able to utilize RVOs in receivership proceedings as long as the transaction substantially increases the return to creditors.
As a practical matter, if secured creditors expect a substantial shortfall in the sale of real property, it may be beneficial to commence a receivership proceeding rather than avail itself of its lawful and just remedies under the applicable enforcement legislation. The main consideration will be whether the tax savings (or similar liabilities that may be avoided by an RVO) outweigh the costs of the receivership.
It remains to be seen how courts will interpret and apply Peakhill in practice. However, this decision appears to expand the use of RVOs as an acceptable method to achieve the objectives of insolvency legislation and confirms that the main focus in receivership proceedings is to maximize recoveries for creditors. Although a receivership may not be appropriate or available in all circumstances, it will be interesting to see whether secured creditors will shift the focus to receiverships rather than conventional enforcement proceedings. If there is an increase in receivership proceedings, it raises the question of whether courts will interpret Peakhill narrowly to rein in the “necessity” requirement in the future. Time will tell. Stay tuned.
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