Maximizing value for creditors is one of the paramount objectives of the Canadian insolvency system. Where the value is in a business varies in each situation. Depending on the nature of the business, a debtor company may have crucial licenses or contracts that are not transferrable but are necessary in order to operate. In another example, an entity may have significant tax losses that may be a driver of value, but the path to a successful plan of arrangement is uncertain or the debtor has insufficient resources to pursue a plan of arrangement in Canada. There is a new tool in Canadian insolvency law that helps address some of these concerns in the right circumstances: the “reverse” vesting order (RVO).
This article provides a high-level primer on the traditional vesting order and its significance in the Canadian insolvency space, then describes the relatively new concept of RVOs, and provides recent examples where RVOs have been creatively used in the insolvency context. Finally, the article concludes with a brief discussion on how the RVO has earned its stripe as a legal tool available to insolvency practitioners, and its potential for use beyond Canadian borders.
Vesting Orders: The Basics
At its core, a traditional vesting order is a court order that permits the transfer of assets by “vesting in” title to property to a third-party purchaser free and clear of encumbrances, similar to a § 363 sale under the US Bankruptcy Code. In a typical scenario, a debtor company files for creditor protection under Canada’s Companies’ Creditors Arrangement Act (CCAA) and commences a sale process to identify a going-concern purchaser. At the conclusion of the sale process, if a successful transaction is identified, the debtor company will apply to the CCAA court for approval of the successful transaction. In doing so, the CCAA court typically grants an “Approval and Vesting Order,” which has the effect of approving the transaction and, on closing, “vesting” the purchased assets in the purchaser free and clear of all encumbrances (other than permitted encumbrances). The approval and vesting order typically includes provisions providing that the sale proceeds stand in the place and stead of the purchased assets, and creditor claims attach to the sale proceeds in the same order of priority as they were against the purchased assets.
Reverse Vesting Orders
In contrast with the traditional vesting order, the mechanism created by the RVO shifts the focus to “vesting out” the liabilities and encumbrances of the property through court order. In recent cases in Canada, RVOs have been achieved through a unique three-step transaction:
- A new corporation is created (NewCo) for the purpose of the transaction;
- The liabilities of the debtor company, as well as any excluded assets and the purchase price, are transferred into NewCo pursuant to the RVO; and
- The shares of the debtor company are acquired by the purchaser.
The result of this transaction is that all unassumed liabilities and excluded assets are “vested out” of the debtor company and into NewCo. The shares of the debtor company are then acquired by the purchaser free and clear of creditor claims. NewCo, burdened with the purchase price, the excluded assets and all unassumed liabilities, replaces the original debtor company as the debtor within the insolvency proceeding, and the proceeds, together with proceeds realized from the monetization of the excluded assets, are distributed to creditors according to legal priority. The debtor company is removed from the insolvency proceeding with ownership of the purchased assets and a clean balance sheet.
One overarching consideration in an insolvency proceeding is to preserve and maximize the value of a debtor’s business for the benefit of its creditors and other stakeholders. As a going concern, a debtor company will almost always be more valuable than in a liquidation of its assets.
Some of the most notable uses of the RVO have been in highly regulated industries such as the cannabis space, including in Beleave Inc. et al. (Re)  and Green Relief Inc. (Re).  In Beleave, the debtor company switched from a plan of arrangement to an RVO transaction in order to, among other things, allow the purchaser of the debtor’s assets to maintain operations (including the continued use of the cannabis licenses), and to address liquidity challenges that made it unfeasible to implement a plan. In Green Relief, the RVO also permitted the debtor company to, among other things, maintain the cannabis licenses, reduce its use of interim financing and minimize professional fees that would be incurred under a plan of arrangement. 
In another case, Quest University,  the debtor company was a post-secondary academic institution that was empowered by statute to grant degrees. Through the RVO structure described above, the debtor company was able to transfer certain assets (including unwanted lease contracts, claims and liabilities) to a subsidiary of the university, and the debtor was released from all obligations connected to those assets. The debtor company maintained all assets that were required for the ongoing operations of the university (including the debtor company’s ability to grant degrees). Importantly, the court acknowledged that the RVO and the proposed transaction provided certainty for the go-forward operations of the debtor company, and created security for the university’s students, faculty and staff.
Most RVOs in Canada have been granted without opposition. However, Arrangement relatif a Nemaska Lithium inc.  was the first instance where the Quebec Superior Court approved a contested RVO. In that case, the debtor company operated in the highly regulated mining industry and was party to important agreements with indigenous groups near the mine. One stakeholder (a shareholder of the insolvent company) objected to the RVO transaction on the basis that the Quebec court did not have the jurisdiction to grant an RVO. In particular, it was argued that the court only has authority to grant a vesting order for the purpose of a sale or disposition of assets, and that the RVO was impermissible, as it allows the debtor company to emerge from CCAA protection outside of a plan of arrangement. The court in this case made it clear that the CCAA did not limit the court’s authority in this way, and that the RVO could be used to effectively discharge the encumbrances attached to the debtor’s assets. Leave to appeal this decision was recently denied by the Supreme Court of Canada, paving the way for RVOs to be another arrow in a Canadian insolvency practitioner’s quiver.
One of the most telling decisions on RVOs was recently released by the Ontario Superior Court of Justice (Commercial List) in Harte Golde Corp. (Re).  In this recent decision, the debtor company, which operated a gold mine-operating business, entered into an RVO purchase and sale transaction with a buyer for all of its business. The debtor’s business involved numerous permits, licenses and mineral claims that were necessary for the company’s continued operations. In deciding whether to grant the RVO, the court provided a four-part analytical framework to determine whether an RVO transaction is appropriate in the circumstances. In seeking approval of an RVO transaction, the court held that the purchaser in the transaction, the court-appointed monitor, and the debtor must be prepared to answer the following questions for the court:
- Why is the RVO necessary in this case?
- Does the RVO structure produce an economic result at least as favorable 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 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?
The RVO transaction in the Harte Golde case was ultimately approved upon the application of the new framework.
Advantages of RVOs, and Practical Implications for Practitioners
The chief advantage of an RVO is the ability of the insolvent debtor company to preserve a debtor company’s existing corporate structure. So far, the RVO has been utilized to (1) allow going-concern sales of companies in heavily regulated industries by avoiding issues surrounding nontransferrable government-issued licences or permits; (2) maintain the employment of all employees of the insolvent company, and avoid the transfer of employment contracts, pension plans, payroll service providers and other successor employer issues; (3) permit important contracts to remain in place, and avoid the challenges related to seeking consents for any required assignments; and (4) preserve any beneficial tax attributes of the insolvent company.
The RVO is not a statutory remedy, and any debtor or purchaser looking to the court for approval of an RVO transaction must satisfy the court that the application of the four-part test in Harte Golde favors the approval of the RVO transaction. The court in Harte Golde made clear that the RVO structure will be subject to close scrutiny, and the fact that an RVO structure is merely convenient or beneficial to a debtor or purchaser is insufficient to warrant the RVO’s approval. Accordingly, there may be instances where the court may decline to grant an RVO. However, the RVO remains a tool that practitioners should be aware of when considering value-maximizing strategies for a Canadian subsidiary in a larger U.S. insolvency, or when representing a prospective purchaser in a Canadian insolvency proceeding.
 Beleave Inc. et al (Re), Toronto CV-20-00642097-00CL (Ont Sup Ct [Commercial List]).
 Green Relief Inc. (Re), Toronto CV-20-00639217-00CL (Ont Sup Ct [Commercial List]).
 Miller Thomson LLP acted as counsel to the debtor company in Beleave Inc. et al (Re), and to the purchaser in Green Relief Inc. (Re).
 Southern Star Developments Ltd. V. Quest University Canada, 2020 QCCS 3218.
 Arrangement relatif à Nemaska Lithium inc., 2020 QCCA 1488.
 Harte Gold Corp. (re), 2022 ONSC 653.