For insolvency practitioners, developing case law is changing the availability of tools and strategies for insolvency proceedings. Lexpert talks to three lawyers about some of the most noteworthy updates.
More guardrails around reverse vesting orders
In recent years, one tool that has long been available only in exceptional circumstances has shown up with growing frequency in insolvency proceedings: reverse vesting orders. Insolvency practitioners say as RVOs become more common, a growing body of case law – and even potential legislation – could put more guardrails around how and when they’re used.
RVOs have several features that make them attractive for debtors and potential purchasers. In contrast to a traditional vesting order, where a purchaser acquires the assets of an insolvent company and leaves behind any unwanted assets and liabilities with the debtor, RVOs involve the debtor transferring most or all its liabilities to a specially-created “residual corporation.” Cleansed of its liabilities, the debtor can move through insolvency proceedings more easily.
Because RVOs don’t involve the transfer of intangible assets like licenses, regulatory permits, or key contracts, debtors and purchasers don’t need permission from regulators or other contract parties to reassign those licenses, permits, or contracts to the purchaser. A creditor vote is not required for court approval of an RVO, which adds to the tool’s relative speed and efficiency.
However, not everyone is convinced that the growing use of RVOs is a positive development.
“There are people in the community who take the view that RVOs do an end run around plans of arrangement where creditors get to vote, or that they do away with other procedural and substantive protections because they’re simply granted by a court, as opposed to using the other mechanisms in the insolvency legislation,” says Peter Rubin, a partner at Blakes who specializes in insolvency law.
“There’s a concern by some that RVOs and the use of RVOs [have] become too prevalent, and that there are not enough protections in place.”
Rubin points to a recent paper by Maziar Peihani, an associate professor at the University of British Columbia’s Peter A. Allard School of Law, on the normalization of RVOs. Peihani argues that RVOs “undermine the core tenets of Canadian insolvency law” – including practices or concepts like creditor democracy, class-based voting, and collective negotiation – by allowing purchasers to acquire a debtor’s shares “free of liabilities outside the statutory plan or proposal process.”
While Rubin is not convinced that RVOs are inappropriate, he says he wouldn’t be surprised if Parliament introduced legislation to “further restrict or define when it is appropriate to use an RVO and to limit the breadth of circumstances in which it has been used.” No such proposed legislation exists, but the issue is one “that’s actively being discussed on both sides of the ledger,” Rubin adds.
For now, limits on when and how RVOs can be used can be found in case law. In Ontario, one of the most significant cases on the appropriate use of RVOs is Harte Gold Corp. (Re), which involves the insolvency proceedings for an Ontario-focused gold producer. A 2022 decision in the case issued by the Ontario Superior Court of Justice’s Commercial List outlined the key questions a court should address before issuing an RVO.
These include why the RVO is necessary; whether the RVO structure creates an economic result at least as favourable as any other viable alternative; whether any stakeholder is worse off under the RVO structure versus another viable alternative; and whether the consideration being paid for the debtor’s business reflects the value of intangible assets – such as licenses and permits – being preserved under the RVO structure.
Joseph Pasquariello, a partner at Goodmans LLP who represented the court-appointed monitor in the case, believes the court did a good job of enunciating “the various considerations in terms of granting or not granting an RVO, and part of it is the balancing of interests and determining the equities in a particular situation.”
But some questions continue to linger, particularly around applicability. “Is it meant to only deal with situations where there are, for example, government-issued licenses or permits in the company, and therefore that should be the rationale for the reverse vesting order?” Pasquariello asked.
Over the last few years, rejections of RVO requests by courts following applications of the Harte Gold test have further honed the framework around when RVOs are appropriate. Lance Williams, a partner in McCarthy Tétrault LLP’s bankruptcy and restructuring group, describes the RVO as “very much a case law-created or developed remedy.”
And for now, they’re here to stay. Williams points to the Supreme Court of Canada’s decision in May to reject an appeal bid in British Columbia v. Peakhill Capital Inc. In 2024, a BC Court of Appeal decision affirmed the appropriateness of a transaction structured as an RVO, setting a precedent for using RVOs in receivership contexts.
Williams says the high court’s decision not to review this ruling is “good, solid authority that these reverse vesting orders are available” for receiverships.
That move seems to be “part of a growing trend within the courts to ensure that the insolvency statutes are all extremely flexible,” Williams says. “That’s kind of Canada’s advantage as a restructuring jurisdiction, is that our statutes are so flexible they allow the courts to really customize for the situation.”
Cross-border companies seeking certain third-party releases in Canada
In 2024, the US Supreme Court ruled in a split decision that Chapter 11 of the US Bankruptcy Code did not give bankruptcy courts the authority to approve a restructuring plan that included nonconsensual third-party releases. In the case in question, which involved OxyContin manufacturer Purdue Pharma, the proposed releases would have given members of the Sackler family broad immunity from potential claims by individuals impacted by the opioid crisis.
The ruling left open the question of the validity of similar releases in other scenarios. In the year since, multiple US bankruptcy courts – including those in Delaware and New York – have confirmed that such nonconsensual third-party releases are available under Chapter 15 of the US Bankruptcy Code, which allows for the recognition of foreign bankruptcy proceedings in the US.
This effectively opened the door for cross-border companies to restructure in foreign jurisdictions like Canada, secure releases, and later have the proceedings recognized in the US.
“The trend we’re watching for is if more cross-border entities between Canada and the US will actually seek to do their main restructuring in Canada under the [Companies’ Creditors Arrangement Act] and then seek to have it recognized in the US so they can get the benefit of these nonconsensual third-party releases,” Williams says.
Being able to secure these types of releases that are not available in Chapter 11 proceedings is “of huge value if you have US operations and are looking for that kind of a release,” Williams adds.
Pasquariello agrees that companies are likely “thinking about whether or not Canada would be a better jurisdiction to try to get those types of releases and then go to the US and try to get recognition of it, as opposed to the other way around.”
However, he’s uncertain whether a trend will take off.
“There’s [definitely] a possibility, but it’s not as if our judges are going to just rubber-stamp broad releases,” Pasquariello says. “It’s a question of what makes sense in the circumstances, and I think we just have some more judicial discretion around those types of issues on a case-by-case basis.”
Still, releases are only one factor to consider when companies evaluate forums for insolvency proceedings. “The lawyers in question will be looking at what it is you’re trying to resolve or what are the main issues that we anticipate being in the restructuring,” he says. “Then we look at the law and the jurisdictions to say, okay, it might be better to do it in Canada. It might be better to do it in the US.”