Hitting Reverse: B.C. Court Refuses To Grant A Reverse Vesting Order

• Jurisdiction: Canada
• Law Firm: Torys LLP
• Subject Matter: Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, M&A/Private Equity, Insolvency/Bankruptcy
• Author: Mr David Bish, Scott Bomhof, Jeremy Opolsky and Mike Noel
• Published date: 05 May 2023

With the recent flurry of reverse vesting orders (RVOs) in Canadian insolvency proceedings in the last two years, courts have warned against over-use of this distressed M&A structure. In PaySlate Inc. (Re), 2023 BCSC 608, the Supreme Court of British Columbia hit reverse. The Court, in reinforcing the judicial view of RVOs as an extraordinary remedy rather than a new norm, refused to grant an RVO and its related releases and claims bar, and provided further guidance as to the circumstances when a court should, and should not, grant an RVO.

What you need to know

• The Supreme Court of British Columbia refused to grant an RVO because, among other reasons, the debtor: (i) did not provide adequate notice to creditors whose claims would be impaired by the transaction; (ii) failed to establish that the RVO was sought for a proper purpose; and (iii) did not support the transaction with fulsome valuation evidence to demonstrate that it was necessary and appropriate in the circumstances.
• The Court did not take issue with, or dispute the conclusions set out in, any of the recent cases on RVOs across the country'rather, it applied those cases and principles to the facts at hand.
• In evaluating whether to grant an RVO, the Court enumerated additional factors to weigh in addition to those established in recent cases and confirmed that the same considerations that have been previously applied in the context of the Companies' Creditors Arrangement Act (CCAA) also apply in other insolvency contexts, including under the Bankruptcy and Insolvency Act (BIA).
• The Court emphasized not only the role of the debtor but also the court officer in satisfying the court as to the appropriateness of the RVO.
• The Court's decision follows the judicial trend of treating RVOs with a heightened degree of scrutiny and granting them only in appropriate, extraordinary circumstances.

The details

Background

This case illustrates circumstances in which a court will refuse to grant an RVO.

PaySlate Inc. is a technology company that provides online property rental payment processing services, primarily to owners and managers of real property. Its assets are comprised almost entirely of "soft" assets'customer service agreements, intellectual property, its workforce and certain tax attributes consisting of tax credits and scientific research and experimental development tax credits. Due to financial distress, PaySlate filed a notice of intention to make a proposal to its creditors under the BIA in...