Reverse vesting orders (or "RVOs") have become an increasingly popular and useful tool for maximizing recovery in complex insolvencies in
In our
However, the recent decision of the
Reverse Vesting Orders - An Unusual or Extraordinary Measure
In a traditional vesting order, the assets of the insolvent company are transferred to the purchaser, leaving behind any unwanted assets and liabilities. RVOs involve the transfer of the undesirable assets and liabilities from the insolvent company to another company, typically incorporated for this special purpose. The insolvent company is left with only those assets and liabilities sought by the purchaser. This allows the shares of the insolvent company to be sold, preserving valuable permits, contracts or tax losses while also, as discussed below, reducing the risk, delay and cost of more traditional insolvency transactions.
Despite the attractive benefits of RVOs, they are not specifically provided for in either the Companies' Creditors Arrangement Act (CCAA) or the Bankruptcy and Insolvency Act. The limited decisions approving RVOs have generally not provided substantial guidance on the positive and negative implications of RVOs. In light of this context, the Court in
Courts should be expected to closely scrutinize proposed RVO transactions and court-appointed monitors must diligently ensure the restructuring is fair and reasonable to all stakeholders, particularly where there is no significant party opposing the RVO transaction.6
The principal objective and benefit of the RVO transaction in
The proposed RVO transaction in
Statutory Authority and Factors to Consider for RVOs
Previous decisions approving RVOs have relied on both the Court's specific authority to approve a sale of the debtor company's assets under section 36(1) of the CCAA and the broad jurisdiction conferred on the Court under section 11 of the CCAA to make any order appropriate in the circumstances.9
While questioning whether section 36(1) of the CCAA grants jurisdiction to approve RVOs, the Court in
When seeking approval of a RVO, the Court in
(a) Why is the RVO necessary in this case?
(b) Does the RVO structure produce an economic result at least as favourable as any other viable alternative?
(c) Is any stakeholder worse off under the RVO structure than they would have been under any other viable alternative?
(d) Does the consideration being paid for the debtor's business reflect the importance and value of the licences and permits (or other intangible assets) being preserved under the RVO structure?12
The Court also considered the section 36(3) factors in the context of a RVO, including:
(a) Whether the process leading to the proposed RVO transaction was reasonable in the circumstances;
(b) Whether the RVO transaction resulted in better recovery for stakeholders than a bankruptcy proceeding;
(c) The degree of creditor consultation;
(d) The effect of the proposed RVO transaction on creditors and other stakeholders;
(e) The fairness of the consideration to be received for the assets; and
(f) Whether the monitor supported the RVO transaction.13
In particular, the Court noted that a bankruptcy proceeding would almost certainly result in lower recovery for stakeholders than the proposed RVO because of the risk, delay and cost involved in a traditional insolvency transaction.14 The seven months of extensive solicitation efforts culminating competing credit bids made for a reasonable sale process.15 The only stakeholders who did not stand to benefit were
The broad third-party releases sought as part of the RVO transaction were also found to be reasonable and appropriate in the circumstances when considering the factors outlined in
Conclusion
RVOs can be a powerful tool for maximizing recovery for stakeholders in appropriate circumstances, but they are not routine or normal transactions under the CCAA. When considering a RVO transaction, interested parties should consider whether they can answer the questions posed by the Court in
Footnotes
1 Arrangement relatif ŕ
2 Southern Star Developments v. Quest University Canada, 2020 BCCA 364 ("
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5 Quest University Canada (Re), 2020 BCSC 1883, at para. 171.
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The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.
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