Reverse Vesting Orders ' When Is This "Extraordinary Measure" Appropriate?

• Published date: 18 February 2022
• Subject Matter: Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Financial Restructuring, Corporate and Company Law, Directors and Officers, Insolvency/Bankruptcy
• Law Firm: McMillan LLP
• Author: Mr Daniel Shouldice

Reverse vesting orders (or "RVOs") have become an increasingly popular and useful tool for maximizing recovery in complex insolvencies in Canada, particularly in circumstances where traditional alternatives of asset sales or restructuring plans are not effective or practical. RVOs are very attractive to purchasers of distressed businesses because they can efficiently preserve the value of permits, tax losses and other assets which cannot be easily transferred to a purchaser through an asset transaction. Unlike a plan, court approval of a RVO does not require a creditor vote.

In our May 2021 bulletin, we reviewed two decisions, Nemaska Lithium¹ and Quest University², where Quebec and British Columbia appellate courts upheld the approval of RVOs in the face of stakeholder opposition.

However, the recent decision of the Ontario Superior Court of Justice (Commercial List) in Harte Gold³, the Court issued a reminder that RVOs are an "unusual or extraordinary measure", not the new normal and are not justified merely because they are more convenient for the purchaser. The Court also identified the key factors that should be considered when seeking approval of a RVO.

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 Harte Gold found that RVOs "should continue to be regarded as an unusual or extraordinary measure, not an approach appropriate in any case merely because it ay be more convenient or beneficial to the purchaser."⁴ Similarly, in Quest University the Court held RVOs should...