It’s All Peakhill From Here: Appellate Confirmation of Courts’ Jurisdiction to Grant Reverse Vesting Orders in Receivership Proceedings

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The motion judge recognized that RVOs are “exceptional” or “extraordinary” and should be sanctioned only when they further the remedial objects of the legislation under which authorization is sought. In authorizing the RVO, his Honour considered that the RVO provided approximately $3.5 million more to the secured creditors than an approval and vesting order (“AVO”); the three secured creditors were owed more than the recovery available under either an RVO or an AVO; the unsecured creditors or residual claimants were “out of the money”; and the only party to whom any prejudice would be allegedly occasioned was the taxing authority.

His Majesty the King in Right of the Province of British Columbia (the “Province”) appealed from the lower court’s decision on the basis that, inter alia, a court supervising a receivership intended to liquidate an insolvent debtor’s assets for the benefit of its creditors lacks the jurisdiction to approve an RVO. In dismissing the Province’s appeal, the Court of Appeal affirmed the jurisdiction of courts in receivership proceedings to grant RVOs and provided important guidance on the exercise of such discretion.

1. Section 243 of the BIA Confers the Jurisdiction to Grant an RVO in a Receivership

The lower court held that the jurisdiction to grant the RVO was found in the courts’ general jurisdiction under s. 183(1)(c) of the BIA. Consequently, that court did not go on to decide whether s. 243 of the BIA also provided the necessary jurisdiction.

On appeal, the Province argued that neither s. 183 nor s. 243 of the BIA confer authority on a court to grant an RVO in a liquidating receivership. According to the Province, s. 183 of the BIA provides a more limited jurisdiction to approve an RVO than is found in s. 11 of the CCAA. While the broad scope of authority conferred by s. 11 of the CCAA is consistent with the purposes and objects of the CCAA to attempt to continue insolvent companies as going concerns, the receivership provisions in the BIA—which are concerned with the liquidation of assets in accordance with the priorities of creditors and interested third parties—do not engage a broad discretionary grant of authority outside of what is necessary to sell assets as part of an orderly liquidation. Accordingly, the Province contended that if the jurisdiction to authorize an RVO in a receivership exists at all, it must be found in s. 243 of the BIA, which gives a court power to appoint a receiver to take possession and control of the insolvent company’s assets. However, s. 243 should not be read broadly to confer the jurisdiction required to authorize an RVO because an RVO goes beyond anything that can properly be seen as incidental or ancillary to a sale.

The Court of Appeal rejected these arguments and confirmed that vesting orders are incidental and ancillary to a receiver’s power to sell, which is itself grounded in a superior court’s “general jurisdiction” found in ss. 243(1)(c) of the BIA to authorize a receiver to “take any other action that the court considers advisable.”^[1] The shares of the debtor were assets within the receivership, over which the receiver had assumed possession and control. They were capable of being sold or liquidated in a manner intended to maximize their fair market value. Accordingly, arrangements could be made to enhance the value of the shares by transferring the liabilities that served to depress the value of those shares to another entity.

Having found the “jurisdiction” to grant an RVO in s. 243 of the BIA, the Court of Appeal declined to opine on whether it could also be found in s. 183 of the BIA.^[2]

2. Maximizing Recovery for Creditors Through Tax Avoidance Is Consistent With Objectives of BIA

In assessing whether the motion judge erred in granting an RVO for the alleged sole purpose of avoiding the payment of PTT that would be incurred under the PTTA if title to the real estate asset were transferred, the Court of Appeal held that avoiding PTT was simply the means by which to maximize recovery for creditors. The Court confirmed that maximizing recovery for creditors is a bona fide purpose intended to further the objectives of the BIA.

Structuring a transaction to avoid the transfer of title and, therefore, PTT is a legitimate commercial practice outside the insolvency context, as parties are permitted to carry out the transfer of property by means of the transfer of shares of the nominee company. The Court found no reason why that which is legitimate and proper outside the insolvency context should be viewed differently within it.

3. Rights of All Stakeholders Must Be Carefully Weighed

The Court of Appeal confirmed that in any given situation, the rights of all persons engaged in an insolvency must be carefully weighed to decide whether an RVO best fulfils the purposes and objects of the statutory scheme. The Court found that the motion judge gave careful consideration to third-party rights when concluding that the RVO should be granted, and the Court saw no basis to interfere with his Honour’s decision.

The lower court in Peakhill acknowledged that the issues in this case were “somewhat uncharted territory,” given that this was the first case in which a Canadian court ordered an RVO in a contested proceeding when tax savings were the only benefit. In upholding the lower court’s decision and confirming the courts’ jurisdiction under the BIA to grant RVOs in receiverships (including liquidating receiverships), the Court of Appeal has, therefore, “broken new ground” and provided binding appellate authority for courts across the country. While RVOs remain extraordinary orders, there is no longer any doubt that they are available in receivership proceedings.

If you require legal counsel regarding reverse vesting orders or insolvency proceedings, please contact the authors or a member of our Financial Services Group.