Reverse Gear: Supreme Court Of British Columbia Provides Guidance On Reverse Vesting Orders In Insolvency Proceedings

• Published date: 31 July 2023
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Insolvency/Bankruptcy/Re-structuring, Corporate and Company Law, Insolvency/Bankruptcy, Contracts and Commercial Law, Trials & Appeals & Compensation
• Law Firm: Lawson Lundell LLP
• Author: Mr Noor Mann and Jacqueline Ovsenek

The use of Reverse Vesting Orders ("RVOs") has become a common occurrence in Canadian insolvency proceedings in recent years. However, in PaySlate Inc. (Re)1the Supreme Court of British Columbia initially declined to grant an RVO and instead offered guidance on when this extraordinary remedy is appropriate.

Key Takeaways

• RVOs are not the "norm;" they cannot be granted merely for convenience or some abstract benefit.
• The parties seeking to have an RVO approved should provide thorough and detailed analysis to the court that accounts for the test and factors enumerated in Harte Gold.² The RVO should be compared to concrete alternatives.
• The RVO's impact on creditors must be outlined and explained. Creditor impact should be rationally connected to the reason that the RVO is sought.
• RVOs are exposed to heightened judicial scrutiny.

Background

As a result of financial difficulties, PaySlate Inc. ("PaySlate"), a technology company that provides online payment processing services, filed a notice of intention to make a proposal to its creditors pursuant to s.50.4 of the Bankruptcy and Insolvency Act (the "BIA"). In March 2023, PaySlate filed an application in the Supreme Court of British Columbia seeking approval of a bid by its debtor-in-possession lender (the "DIP Lender") to purchase its shares through an RVO. The proposal trustee (the "Proposal Trustee"), Grant Thornton, supported the transaction.

What is a Reverse Vesting Order?

As the name suggests, an RVO is the opposite of a traditional vesting order. In a traditional vesting order, an insolvent company's assets are transferred to a purchaser free and clear of all encumbrances. The insolvent company retains its unwanted assets and liabilities.

In an RVO, an insolvent company's unwanted assets and liabilities are transferred to another company, generally incorporated specifically to absorb such assets and liabilities. The insolvent company retains its desirable assets and a prospective purchaser obtains the shares of the insolvent company. As a result, the purchaser takes these shares and obtains ownership of the insolvent company and all of its desirable assets.

A significant benefit of RVOs is that they allow for a purchaser to obtain assets of the insolvent company that are normally non-transferrable, such as licences and tax attributes (non-capital tax losses were relevant for PaySlate). Additionally, unlike other asset purchases, RVOs do not require a creditor vote to obtain court approval.

While...