In recent years, courts have granted reverse vesting orders in insolvency proceedings as an alternative to transferring a debtor’s assets to a purchaser. In a reverse vesting order, unwanted assets and liabilities are transferred from the debtor to another entity, and the debtor’s shares are transferred to a purchaser without any transfer of the wanted assets.
Courts have been careful in granting reverse vesting orders, particularly as the orders can circumvent votes on proposals or plans of arrangement. Recently, in Harte Gold Corp. (Re), 2022 ONSC 653, the court described reverse vesting orders as an “unusual or extraordinary measure.”
In Peakhill Capital Inc. v. Southview Gardens Limited Partnership, 2023 BCSC 1476, the court considered whether a reverse vesting order could be granted solely for the purpose of achieving a tax benefit. A secured creditor and the purchaser sought the approval of a reverse vesting order rather than a transfer of real property so that a property transfer tax of around $3.5 million would not be payable. The Province opposed the reverse vesting order.
The court referred to previous cases in which tax benefits were considered as one of the reasons for granting reverse vesting orders. The court also noted that the only party who would allegedly suffer prejudice was the Province, and a transaction in which property transfer tax was not payable would maximize the recovery for creditors. Moreover, granting a reverse vesting order to avoid paying property transfer tax is consistent with share purchase agreements outside of the insolvency context that have the same purpose. As the Province had not deemed share sales by a company holding real property to be a taxable transaction by regulation under the Property Transfer Tax Act, a reverse vesting order was not unlawful or subject to anti-avoidance rules.
The court granted the reverse vesting order. As the Province has appealed the order, the Court of Appeal will consider whether a reverse vesting order can be granted in such circumstances.