Reverse vesting orders (“RVOs”) have garnered a great deal of attention in recent months, including in the Nemaska, Beleave and Quest University matters, each of which was a debtor-in-possession proceeding commenced under the Companies’ Creditors Arrangement Act. RVOs provide an efficient mechanism for a distressed business to shed liabilities and live another day.
An Order issued by the Ontario Superior Court of Justice on June 8, 2021, in the matter of Vert Infrastructure Ltd. (“Vert”), has now opened the door to the use of RVOs in receiverships.
Vesting and Reverse Vesting Orders
Vesting Orders have been the historical norm to convey title to assets free and clear of liabilities, with the sale proceeds standing in place of the conveyed assets. Provided the Court being asked to issue the Order is satisfied that the consideration offered is fair and reasonable, the purchaser of those assets obtains clean title.
RVOs took that concept and flipped it, allowing a purchaser to acquire the debtor legal entity, while unwanted assets and/or liabilities are vested out to a newco (sometimes referred to as a “garbageco”). This is a particularly useful tool where permits, licenses and contracts are not easily transferable, such as in the cannabis or mining sectors which operate in regulatory environments. An RVO also allows for the preservation of tax losses, and, as seen in the Vert case discussed below, the ability for a buyer to acquire public listings without having to deal with corporate law issues and shareholder voting.
Vert was incorporated under the Business Corporations Act (British Columbia) (the “BCBCA”). It was in the business of raising capital which it was supposed to use to incorporate subsidiaries in the United States for the purpose of developing and operating licenced cannabis and hemp businesses. Vert’s common shares were listed on the Canadian Securities Exchange under the symbol “VVV” until it became subject to a cease trade order and later delisted.
Vert’s senior secured creditors, based in Toronto, brought an application in June 2020 before the Ontario Superior Court of Justice (Commercial List) (the “Ontario Court”) for the appointment of KSV Restructuring Inc. as receiver, which was granted. As is the norm, the Receiver took steps to identify and monetize Vert’s assets.
The Public Listing
The Receiver’s efforts to realize on Vert’s assets included monetizing Vert’s public listing. The way to monetize such an asset historically was through a complex series of steps, including the filing of a proposal under the Bankruptcy and Insolvency Act combined with a corporate restructuring where creditors vote on the structure, and the debtor’s existing share capital is effectively cancelled. New shares are issued to the sponsor/purchaser. The process is long, costly, and risky such that it is not commonly used.
This path was not followed in the Vert matter. Instead, the Receiver and its counsel borrowed from the RVO concept, to structure an agreement (the “Agreement”) between the Receiver and an interested party (the “Purchaser”), where, through a series of steps:
- Vert’s assets would be transferred without recourse and subject to all existing encumbrances and liabilities to a trust (the “Trust”);
- all claims against Vert would be extinguished and transferred to the Trust;
- the Receiver would be appointed as the Trustee of the Trust with the same duties and obligations as set out in the Receivership Order;
- the liabilities that are transferred to the Trust would retain the priority they had against Vert;
- upon implementation, the Receiver would be discharged and the receivership proceedings terminated with respect to Vert; and
- the Purchaser would restructure Vert’s share capital to take advantage of its public listing (the “Transaction”).
Thus, Vert, the public entity, would be left intact without any assets or liabilities, other than those that Purchaser is prepared to assume.
Steps (a) through (d) only come into effect upon the delivery of a Receiver’s Certificate confirming two things: (i) receipt of the “purchase price” and (ii) the issuance of a subsequent order in a follow-on corporate Plan of Arrangement whereby the Purchaser would arrange a private placement conditional on a share consolidation and its directors replacing the existing directors. In this fashion, the Purchaser would have control of the governance of Vert on closing with the private placement affording it the means of becoming the majority shareholder.
Another feature of the Agreement was that the Purchaser funded the professional costs associated with the Transaction. The Agreement was subject to the approval of the Court in Ontario and obtaining a follow-on order in BC (where the corporate Plan of Arrangement proceedings needed to be as a result of Vert’s jurisdiction of incorporation).
The Receiver’s Recommendation to the Court
The Receiver brought a motion seeking approval of the Agreement on the basis that, amongst other things:
- the Transaction, if successful, would provide additional recoveries to Vert’s creditors, at no cost to its stakeholders;
- the structure contemplated by the Transaction is a practical and cost-effective mechanism to convey the public company listing, while providing an economic benefit to Vert’s stakeholders;
- the public listing had no value absent the Transaction;
- the secured lenders, the only parties with an economic interest, supported the Transaction; and
- the transfer of all Vert’s property would see the receivership continued under the Trust, without any prejudice to its stakeholders.
Decision of the Court
Justice Conway of the Ontario Court considered the matter and concluded that:
“The transaction has been designed in a practical manner that uses judicial tools available to this court – a vesting order, channeling claims, and creation of a common law trust. I am satisfied that I can grant the order. Ultimately, KSV, who is the Receiver of Vert, will be holding these assets in trust for the very same creditors of Vert – it mirrors the structure and rights/obligations that are in place under the receivership. It is all for the benefit of those creditors. There is no reason to have a formal trust agreement in place here since KSV would be signing it both as Receiver and Trustee.”
Accordingly, the Ontario Court approved the Agreement.
The Receiver then applied to the Supreme Court of British Columbia (the “BC Court”) for an Order under the BCBCA to affect the restructuring of Vert as contemplated in the Agreement.
On June 24, 2021, the BC Court accepted the Receiver’s recommendation and followed the Ontario Court’s lead. The Transaction is expected to be completed shortly.
A process using an RVO should be considered in any restructuring where permits, licenses, tax losses, unique contracts, public listings, and similar assets are tied to the corporate entity. Industries where these are commonly found include cannabis (licenses, permits), mining and natural resources (land rights and royalties), military (government contracts), pharmaceuticals and biotech (licenses, approvals), and many more. With the Vert precedent, there is no longer a requirement for a debtor-initiated process to unlock the value of these assets. A traditional receivership enforcement route can be utilized in the appropriate situation.