A short history of reverse vesting orders in Canadian insolvency law

As reverse vesting orders rise in prominence, a Canadian appellate court has yet to rule on their merits. That will change if the Supreme Court of Canada grants leave in Arrangement relatif à Blackrock Metals Inc.

BlackRock Metals placed itself under the protection of the Companies’ Creditors Arrangement Act (CCAA) in 2021, and eventually made a deal to sell its assets using a reverse vesting order (RVO). Certain shareholders contested the RVO, but Justice Marie-Anne Paquette (who is now Chief Justice of the Quebec Superior Court) granted it. After being denied leave to appeal to the Quebec Court of Appeal, the shareholders have sought leave to the Supreme Court of Canada and are awaiting the ruling.

When an insolvent company places itself under CCAA protection, the company looks for ways to restructure its operations and preserve “the going concern” of the company and protect jobs, says Jean-Yves Simard, a commercial litigator at DS Avocats in Montreal. This restructuring process may consist of shedding old debts and refinancing operations, but the company can also try to sell its assets to the highest bidder. The asset-sale is done within the Sale for Investment Solicitations Process (SISP), where, under court supervision, the company and an appointed monitor will put out a public call for tenders to find financing, a new strategic partner, or purchaser of the company’s assets.

After the SISP, the purchaser and the company apply to the court for an order giving the purchaser the assets, free-and-clear of charges, liens, and hypotheticals.

“You can imagine that for a purchaser that is very, very advantageous because it gets a clean bill of health on the assets that its purchasing,” says Simard. “Especially if they’re purchasing this in a scenario where all of the creditors are chasing the debtor company.”

The vesting order’s development throughout the years began when the CCAA, “as a statute, was very lean,” he says. Lawyers relied on “the famous” s. 11, which states: “Despite anything in the Bankruptcy and Insolvency Act or the Winding-up and Restructuring Act, if an application is made under this Act in respect of a debtor company, the court, on the application of any person interested in the matter, may, subject to the restrictions set out in this Act, on notice to any other person or without notice as it may see fit, make any order that it considers appropriate in the circumstances.”

Vesting orders were later codified with s. 36.

A vesting order is a sale of assets; the good assets are taken out of the debtor company while the bad remain. A reverse vesting order is a purchase of shares in the debtor company. In a reverse vesting order, the bad assets – including liabilities and creditor claims – are removed, and the good assets stay in the company.

Another feature of the RVO, is that the company retains its tax attributes, permits, licenses, and environmental authorizations, says Simard, which makes the procedure advantageous for a purchaser whose target is in a highly regulated industry.  

In BlackRock, the mining company had yet to begin operations, but had done exploration work, obtained tax credits, mining claims, mining and environmental permits, and had also made deals with First Nations.

RVOs have emerged in the last three years, he says, and BlackRock was among the first cases where shareholders contested. The very first was Arrangement of Nemaska Lithium Inc., which followed the same trajectory as BlackRock but was denied leave at the SCC.

In February, Harte Gold Corp. (Re), 2022 ONSC 653 provided guidance on the use of RVOs. While the order was approved, Harte Gold may mean greater scrutiny on RVOs in the future, and parties will need to justify why they are more appropriate than alternatives in a case’s specific circumstances.

Harte Gold’s review of the standards of RVOs includes a statement that they “should remain the exception and not the rule,” says Simard. There is a dispute over where the CCAA draws its jurisdiction to approve an RVO, because the legislation deals with creditors, not shareholders, and s. 36 expressly concerns the sale of assets, not shares.

Harte Gold suggests a two-step test, which involves evaluating whether the sale should be approved while considering the applicable statutory criteria and evaluating whether using an RVO for the sale is appropriate given the specific facts of the case.

In BlackRock, the shareholders argued that the company could not simply take their shares without consideration, says Simard. “The other side argued that once a company is insolvent, the shareholders no longer have a stake. The company doesn't have enough money to pay the creditors, let alone to pay the shareholders. The shares have zero value because there is zero equity. So, the shareholders should not even have standing in the proceedings. They should not be heard.”

That argument resonated strongly with Justice Paquette, he says. “She agreed with the company and those who were seeking approval of the RVO that the shareholders had no leg to stand on.”

In CCAA cases, there are four criteria according to which appellate courts will grant leave to appeal, and they apply throughout Canada. First is whether the appeal is significant to the insolvency practice, in general. “Obviously, issues of RVO are novel, and whether they stem from s. 11 or s. 36, it’s obvious that the issue of RVOs is significant to the practice,” says Simard.

Both judges determining leave in BlackRock and Nemaska Lithium agreed that RVOs are a significant issue for the insolvency practice. The problem is that another criterion is whether the appeal would unduly restrain the process of the restructuring, he says.

“It’s a built-in failsafe that this thing will never be appealed. Because you will meet the test for significance to the practice, but you will not meet the test that it will not unduly slowdown the restructuring. And the four criteria on the application are cumulative, so you have to hit all four, otherwise you can’t go through.”

Simard quotes Justice Patrick Healy, who ruled on the BlackRock leave application, and said “I say nothing of the merits of the proposed appeal, because the questions posed will undoubtedly return in a case that will address them as required.”

The shareholders in BlackRock filed leave to appeal to the SCC in early October.

“As we speak today, no Canadian appellate court has ruled on the merits of RVOs,” says Simard. “It is still today an open question.”

As it stands, RVOs are “an adequate addition to the restructuring toolbox of insolvency professionals. RVOs are here to stay, for sure.”