Ontario Court offers further guidance on Reverse Vesting Order Transactions
In a recent decision in the CCAA proceedings involving the Cannapiece Group, Mr. Justice Osborne of the Ontario Superior Court of Justice rejected an application for a reverse vesting order brought by the debtor companies and supported by the monitor. An amended reverse vesting transaction consented to by all parties was subsequently approved in a decision by the Court on a later application. The basis for the rejection in the first decision is significant in that it applied the Dianor Resources factors in refusing to transfer a security interest to a residual company and accounted for the value of assumed liabilities in comparing bids.
Dianor Resources created a framework for determining when it is appropriate for courts to approve sales and vest out interests in assets in the context of insolvency proceedings. While this issue arises more commonly in relation to the vesting of interests in land, in this instance it was applied to a security interest in personal property. The Court rejected the submission that the interest was being transferred (as opposed to vested) as the practical reality was an extinguishment of rights due to the lack of value in the residual entity. In a relatively straightforward application of Dianor Resources, the vesting of the interest was not appropriate because the affected secured creditor had the senior position on the subject collateral and it had not consented to the proposed vesting.
The case is also unique in that the bid that was sought to be approved did not provide for the assumption of the same liabilities as proposed by the initial stalking horse bidder. The opposing senior creditor, whose claims were not being assumed, successfully argued that it was materially better off under the stalking horse bid. The bid subject to the approval application could not be supported on a ”risk of bankruptcy” analysis as the stalking horse bid was available to avoid this exact outcome. Ultimately, there did not appear to be any legitimate basis for concluding that the bid the debtor companies proceeded with, although deemed superior under the SISP, had a higher value than the stalking horse bid.
The subsequent approval of a revised bid by way of reverse vesting order suggests that this decision is not a challenge to the increasing use of reverse vesting orders in insolvency proceedings. It does illustrate the need for applicants to be alert to CCAA section 36 and Dianor Resources considerations in seeking transaction approval, whether occurring by way of reverse or regular vesting order, and particularly where the interests of the senior secured creditor are being affected.
CCAA Reverse Vesting Orders Ontario Superior Court of Justice