Canada and the Development of Reverse Vesting Orders

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In Canadian proceedings, it had previously been common for assets of the debtor to be conveyed to a purchaser through the granting of a vesting order. Normally, the court supervising the relevant insolvency proceeding in approving the transaction would issue an order that title to the purchased assets would vest in the purchaser “free and clear” of the claims of the vendors’ creditors. Instead, the purchase price proceeds would stand in place of the purchased assets. Creditors’ claims against the purchase proceeds would rank in the same order of priority as they had against the assets that had been sold. Such orders were routinely granted if the sale occurred from a receiver or a debtor that was operating under some form of court protection.[1]

Recently, Canadian courts have approved transactions involving a reverse vesting order (RVO). In such a case, instead of a purchaser acquiring assets from the insolvent debtor, the purchaser acquires the shares of the debtor. However, as part of the transaction, the assets and liabilities that the purchaser does not want are moved to a new entity, and what remains are only the assets and liabilities that the purchaser desires to assume. Creditors’ claims are, in effect, transferred to the new company that has acquired the unwanted assets and liabilities.

The advantage to an RVO is that licenses and tax attributes are preserved. This can be particularly attractive in a situation where the secured creditors are likely underwater and there is a desire to preserve the operation as a going concern. The Quebec Court of Appeal in Cantore v. Nemaska Lithium[2] had to consider the validity of this approach in the case of an application for leave to appeal a decision of the motion judge who had approved such an order.

The case involved Nemaska Lithium’s intent to develop a lithium mining project in Quebec. Nemaska Lithium and related companies filed for CCAA protection in December 2019. About a month later, an unopposed sale and investment solicitation process (SISP) was approved. At the end of the SISP, the successful offer included a condition that the court grant a reverse vesting order. The purchasers wanted the RVO due to the highly regulated environment in which the companies operate so as to maintain their existing permits, authorizations, essential contracts and fiscal attributes.

Two parties opposed the RVO. One, Victor Cantore, was a shareholder and a creditor. He had sold certain mining titles to the debtor companies back in 2009.[3] Cantore argued that there was no jurisdiction to grant an RVO (and various other objections). The second opposition came from Brian Shenker, a shareholder. Shenker objected to the RVO and the related release of claims as being against the debtors’ directors and officers (Cantore also objected to this release).

After a nine-day hearing,[4] Justice Gouin approved the transaction and issued the RVO. He noted that the request for the RVO stemmed from the SISP and that the Court should not decide what terms the parties asked to be included in the RVO. In Justice Gouin’s view, the evidence showed that sufficient efforts had been made to market the assets, the SISP had been followed, it was in the overall interests of the stakeholders to let the transaction proceed, and there was no unfairness in the process. As such, the decision was made to approve the transaction.

In his reasons, Justice Gouin focused on the devastating impact that would result if the companies failed. He also drew an adverse inference from Cantore’s attorney’s concession that his opposition to the RVO wouldn’t have been pursued if his rights had been accepted and incorporated into the RVO. In terms of the jurisdictional challenge, Justice Gouin found that the CCAA should be broadly interpreted and that the wide discretionary powers granted to the motion judge included the ability to implement innovative solutions, such as the RVO.

Both Cantore and Shenker applied to the Quebec Court of Appeal for leave to appeal the decision.[5] They both raised the same arguments that had been made at first instance. In dismissing the application for leave to appeal, Marcotte J.A. found that although there were genuine issues related to the extent of RVOs and the proposed releases that might merit appellate consideration in an appropriate case, this was not such a case. In reaching this conclusion, Marcotte J.A. found that the prejudice to the overwhelming majority of creditors if an appeal went forward outweighed the interests of these two individuals. In addition, Marcotte J.A. noted, as did Gouin J. at first instance, that the motive of Cantore can’t be ignored here, that it affected the “legitimacy” of his arguments and was more a “bargaining tool.” She dismissed the application for leave to appeal.[6]

One other very recent decision where the RVO was used is in the CCAA proceedings of JMX Contracting Inc. and related companies (JMX Group).[7] In this case, the RVO was requested in order to minimize land-transfer taxes that might otherwise have to have been paid if the real property assets were transferred. Further, an RVO would allow the JMX Group to continue to benefit from certain government-related COVID-19 benefit programs (which are only available to companies that existed at the onset of the pandemic). The RVO would also obviate the necessity to assign contracts or a motion to compel contract assignments over the objections of contract counterparties. At the same time, the RVO would not have any impact on creditor claims. While no reasons for judgment have been given (at least, not yet), the Court was satisfied and granted the RVO.

In summary, the RVO appears to be gaining favor. Certainly in the context of regulated industries, it would seem to provide many benefits rather than requiring a purchaser to obtain new licenses and the associated cost and timing uncertainty. So long as creditors’ rights are not negatively impacted, the RVO appears to becoming another tool to be used in appropriate cases.

[1] In Canada, this would normally either be under the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36 (CCAA), or the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (BIA).

[2] 2020 QCCA 1488.

[3] Cantore also asserted certain rights related to the mining titles of the debtors. These rights were not argued at that time and were expressly carved out of the RVO.

[4] The decision was released on October 15, 2020. Quebec Superior Court (Commercial No. 500-11-057716-199. Justice Gouin’s judgment is in French. It is summarized in English in the Court of Appeal decision, supra, n. 2.

[5] There is no right to appeal a decision under the CCAA. Leave (i.e., permission) of the Court of Appeal is required. The test to get leave is extremely restrictive.

[6] Both Cantore and Shenker have filed applications for leave to appeal Marcotte J.A.’s dismissal to the Supreme Court of Canada. (In American terms, this is functionally equivalent to a certiorari application to the U.S. Supreme Court.) A decision on the application will likely come at some point in spring 2021.

[7] Ontario Superior Court of Justice (Commercial List) - Court File No.: CV-20-00648528-00CL. Order made Feb. 2, 2021.