Despite the seemingly meteoric rise in popularity that reverse vesting orders (RVOs) have experienced in the past 12 months in Canadian insolvency proceedings, they have received little judicial scrutiny or substantive guidance. In the recent decision of Harte Gold Corp. (Re), 2022 ONSC 653, the Ontario Superior Court of Justice (Commercial List) (the Court) may have tapped the brakes on this trend. The Court signaled a more cautious judicial attitude in the use of RVOs—one in which they face greater scrutiny as a narrow and exceptional remedy, rather than a new norm for insolvency proceedings commenced under the Companies' Creditors Arrangement Act (Canada) (CCAA).
What you need to know
- Harte Gold Corp. (Harte Gold) operates a gold mine located in northern Ontario. It commenced CCAA proceedings in December 2021 and subsequently entered into an RVO purchase and sale transaction with a strategic buyer for substantially all of its mining business following a court-ordered sale and investment solicitation process.
- The parties chose an RVO structure, as opposed to the more traditional asset sale model with an approval and vesting order (AVO), ostensibly to preserve the numerous permits, licenses and mineral claims that were necessary for Harte Gold's continued operations, and to otherwise capitalize on the benefits of a share acquisition. The RVO also contained broad third-party releases in favour of Harte Gold's directors and officers, the Monitor and its counsel and the purchaser and its directors and officers.
- The Court approved the proposed RVO transaction following Harte Gold's unopposed motion for same, citing, among other things, that: 1) no creditor was placed in a worse position because of the use of the RVO structure; 2) without an RVO structure, Harte Gold would have been exposed to material risks, delays and costs associated with the transfer of its permits, licences, etc. (or in acquiring replacements); and 3) the RVO structure provided for a timely, efficient and impartial resolution of Harte Gold's insolvency proceedings.
- The Court also found that the releases contained in the proposed RVO transaction were reasonable and appropriate in the circumstances, and that each of the factors from Lydian International Limited (Re), 2020 ONSC 4006 for the granting of such releases had been satisfied.
- However, although the Court reaffirmed that the CCAA provides courts with the jurisdiction to grant RVOs, it cautioned that such orders should be regarded as an "unusual or extraordinary measure" and should not be considered the new norm in these sorts of cases and circumstances. The Court held that the proposed use of an RVO structure should be subject to close scrutiny. That an RVO structure is merely convenient or beneficial to a debtor or purchaser is insufficient to warrant the RVO's approval: something more is required.
- The Court further noted that both the Monitor and the courts must be diligent in ensuring that the proposed restructuring transaction is fair and reasonable to all parties having regard to the objectives and statutory constraints of the CCAA, particularly where no party with a significant stake in the outcome is opposing the RVO structure. Lack of opposition to a proposed RVO does not ensure its approval.
- Accordingly, in determining whether an RVO transaction is
appropriate in the circumstances, the Court held that the debtor,
the purchaser and the Monitor must be prepared to answer for the
court questions such as:
- Why is the RVO necessary in this case?
- Does the RVO structure produce an economic result at least as favourable as any other viable alternative?
- Is any stakeholder worse off under the RVO structure than they would have been under any other viable alternative?
- Does the consideration paid for the debtor's business reflect the importance and value of the licences and permits (or other intangible assets) being preserved under the RVO structure?
- The Court noted that these considerations must be applied in addition to, and not in substitution of, the non-exhaustive list of factors found in section 36(3) of the CCAA and the principles articulated in Royal Bank of Canada v Soundair Corp.,  4 OR (3d) 1 for considering a traditional asset sale transaction, each of which the Court confirmed continue to apply to RVO transactions (with necessary modifications).
The Court's guidance in the Harte Gold decision—if adopted by other courts—will ultimately result in more carefully structured and better supported RVO transactions. In determining whether to employ an RVO structure (as opposed to a traditional AVO structure), buyers and sellers of insolvent companies should consider whether their proposed transaction would satisfy the considerations above. Given the Court's view that RVOs should be considered an extraordinary measure, parties seeking approval of their RVO structure (and any third-party releases contained therein) should be vigilant in establishing a proper evidentiary record that permits a court to find that the RVO structure is necessary, economically favourable and, as compared to a viable alternative (i.e., a traditional AVO), not significantly prejudicial to any stakeholders.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.