Use of RVOs in restructuring proceedings has grown in popularity in recent years
The British Columbia Court of Appeal recently delivered a landmark decision endorsing the use of a reverse vesting order in an insolvency proceeding which allowed the debtor company to avoid $3.5 million in property tax.
Reverse vesting orders (RVOs) are an increasingly popular tool for restructuring insolvent companies under the Bankruptcy and Insolvency Act (BIA) and the Companies’ Creditors Arrangement Act (CCAA). In an RVO, a purchaser buys the shares of the insolvent debtor company, while its unwanted assets and liabilities are transferred to a residual company. The residual company goes bankrupt, and with a court order, the purchaser can carry on the debtor company’s business. RVOs allow for the perseveration of the regulatory permits, licenses, agreements, and tax attributes that were held by the insolvent company.
Karen Fellowes, the Western Canadian leader of Stikeman Elliott’s national restructuring and insolvency group, says RVOs have commonly been used in cannabis sector insolvencies to transfer licenses and permits, which tend to be among companies’ most valuable assets in that sector.
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“Insolvency professionals have started to use these reverse vesting orders in new and interesting ways,” she says. “One of the advantages which has recently come to light is if there is not a transfer of an asset, but instead a transfer of a share, that transfer is not subject to property transfer tax.”
In British Columbia v. Peakhill Capital Inc., 2024 BCCA 246, the RVO approved a transaction in which a company was stripped of liabilities and assets and left with valuable real property as its sole asset. The share sale transferred a beneficial interest in the property but did not transfer title to the underlying real estate.
Justice David Harris, who wrote the reasons for the Court of Appeal’s panel, said that Peakhill Capital was the first opportunity for an appellate court to consider whether a court in a receivership proceeding has jurisdiction to authorize an RVO rather than an approval and vesting order. If the jurisdiction exists, the parties asked the court to “identify the criteria governing the exercise of discretion to make such an order,” he said.
BC argued that the court supervising a receivership involving the liquidation of an insolvent debtor’s assets for its creditors’ benefit lacks the jurisdiction to approve an RVO. The province also argued that the sole purpose of the RVO was to evade the property transfer tax, which was counter to s. 72(1) of the BIA. Section 72(1) states that the act’s provisions “shall not be deemed to abrogate or supersede the substantive provisions of any other law or statute relating to property and civil rights that are not in conflict with this Act.”
Harris found that a court has jurisdiction under s. 243 of the BIA to grant an RVO in a receivership. Harris also rejected the claim that the sole purpose of the RVO was tax avoidance.
“The purpose of the transaction was to maximize recovery for the creditors and it did so by avoiding PTT [Property Transfer Tax],” said Harris. “The goal of maximizing recovery for creditors is a bona fide purpose intended to further the objectives of the BIA. Avoiding PTT was simply the means by which that benefit was conferred.”
“Everyone is talking about this case,” says Fellowes. While BC has not filed to appeal to the Supreme Court of Canada, if it does it will be the first time the court has weighed in on RVOs.
“We currently have no case law from the Supreme Court of Canada on the use of reverse vesting orders, and they are becoming more and more popular across Canada,” she says. “Even though the judges have stated that they should be used sparingly, the truth of the matter is insolvency professionals really like them.”
Fellowes says Peakhill Capital will “entrench the use of RVOs” in CCAA and BIA proceedings and receiverships. The decision may also create more of an incentive for banks and lenders to use receiverships as the preferred method of realizing upon a defaulted loan on a real estate asset, considering the potential tax advantage, she says.
“We may see the appointment of a lot more receivers on real estate assets to take advantage of the RVO structure. Receivers are feeling positive that this may result in more work across the country.”
