Reverse Vesting Orders: Will They Replace CCAA Plans?

• Published date: 27 July 2021
• Subject Matter: Insolvency/Bankruptcy/Re-structuring, Financial Restructuring, Insolvency/Bankruptcy
• Law Firm: Stikeman Elliott LLP
• Author: Nicholas Avis

In the past two years, reverse vesting orders ("RVOs") have gone from obscurity to being the tool of choice in many complex restructurings under the Companies' Creditors Arrangement Act (the "CCAA"). As restructuring practitioners increasingly employ RVOs, it begs the question: Will RVOs replace traditional CCAA plans?

• RVOs transfer unwanted assets and liabilities out of a debtor company, leaving behind only the assets and liabilities that a purchaser wants to acquire.
• RVOs can achieve a similar outcome to a plan of compromise or arrangement, but with less cost, time, and fewer steps.
• Two lower court decisions (leave to appeal dismissed) have addressed contested reverse vesting transactions and confirmed that RVOs are permissible under the CCAA, but the extent to which RVOs may be used is still unclear.

Reverse Vesting Orders as a Third Restructuring Tool

In a traditional corporate restructuring under the CCAA, debtor companies typically follow one of two paths:

1. Plan of compromise or arrangement, which allow debtors to emerge as "new and improved" restructured companies while retaining possession of their assets, agreements employees, permits, licences, tax attributes, etc. Plans can be complex and time-consuming to implement: they require a claims process, a creditors' meeting, "double majority" approval by eligible creditors, and court approval, amongst other requirements.
2. Liquidation, which involves the sale of debtor companies as going concerns (as opposed to outright liquidations) or the sale of some or all of the assets of debtor companies to one or more purchasers. Sale transactions are typically structured as asset purchase agreements. Purchasers can individually select which assets and liabilities they want to acquire/assume, while excluding unwanted assets and liabilities. Purchased assets and liabilities are transferred to and vested in the purchaser free and clear of pre-existing liabilities (other than assumed liabilities) by means of a court-issued approval and vesting order ("AVO") AVOs do not require a plan or creditor approval.

RVOs have emerged as a new third option for debtor companies. RVOs combine the benefits of both a plan and an AVO, but without imposing the same costs, time considerations and requirements of a plan or the limitations of an AVO.

What is an RVO?

An RVO is a court order that transfers unwanted assets and liabilities out of a debtor company ("ExistingCo") to an affiliated (often, newly incorporated) company...