Reverse vesting orders (“RVO”) are a relatively new phenomenon in Canadian insolvency proceedings. RVOs are a mechanism whereby an insolvent entity can be cleansed of its liabilities (some or all, as determined on a case-by-case basis) to a new company incorporated or brought into the insolvency proceedings for that purpose. The new company will sometimes assume certain unwanted assets as well. The debtor company then continues on its business free of the unwanted liabilities and assets. For a few years now the court has been approving RVOs in insolvency proceedings under the Bankruptcy and Insolvency Act as well as the Companies Creditors Arrangement Act, while generally specifying the reservation that RVOs are only to be used in exceptional cases so that creditors’ rights to vote on restructuring plans are not circumvented.
It wasn’t until 2023 that a written decision of the court was rendered approving a reverse vesting order in a receivership: Forage Subordinated Debt LP III v Enterra Feed Corporation et al. 2023 ABKB (unreported). In Forage, the receiver wasn’t appointed under the BIA but Justice Romain affirmed that by virtue of the interplay of 13(2) of the Judicature Act RSA 2000, c J-2, s. 192(1) of the Business Corporations Act (Alberta), RSA 2000, C B-9 and s. 64 of the Personal Property Security Act (Alberta), RSA 2000, c P-7, the court had the requisite jurisdiction to approve a RVO in a receivership. The RVO would allow tax credits of approximately $356K and SR&ED expenditures of approximately $6.3M to be carried forward indefinitely. Following on the test for an RVO set out in Harte Gold Corp (Re), 2022 ONSC 653, generally known as the Harte Gold factors, the court analyzed the application:
- Why is the RVO necessary in this case?
- Does the RVO structure produce an economic result at least as favourable as any other viable alternative?
- Is any stakeholder worse off under the RVO structure than they would have been under any other viable alternative?
- Does the consideration being paid for the debtor’s business reflect the importance and value of the licenses and permits (or other intangible assets) being preserved under the RVO structure?
Using the Harte Gold factors, the court held that the RVO was acceptable as it was critical to the viability of the transaction; sufficient efforts were made to get the best consideration available for the debtor’s assets; it would facilitate the transfer of the debtor’s IP; and the debtor would continue on business. The court held that the debtor’s shareholders did not have an economic interest in the assets as they had the lowest priority of the stakeholders and they would receive nothing in a liquidation. Therefore, the debtor’s shareholders could not be permitted any ability to block the reorganization by RVO, which the court held was commercially reasonable.