B.C. Court of Appeal issues groundbreaking ruling on reverse vesting orders in receiverships

Law360 Canada (July 17, 2024, 12:34 PM EDT) --

Jordan Schultz

The Court of Appeal for British Columbia recently issued a landmark decision that is set to reshape insolvency proceedings.

In the case of British Columbia v. Peakhill Capital Inc., 2024 BCCA 246, the appellate court, for the first time, addressed the jurisdiction and appropriateness of reverse vesting orders (RVOs) in receivership contexts. This ruling offers valuable insights into the court's rationale and its broader impact on both legal practitioners and other stakeholders.

Background and core issue

The case revolves around an order under the Bankruptcy and Insolvency Act (BIA) that approved a transaction structured as an RVO.

In essence, an RVO allows the shares of an insolvent debtor to be sold, stripping out unwanted assets and liabilities and transferring them to another entity, thus preserving the valuable assets within the original company. In this case, the RVO structure allowed the transaction to be completed without triggering an obligation to pay provincial property transfer tax (PTT), enhancing the estate’s value for creditors’ benefit.

The appellant, the Province of British Columbia, challenged this order, arguing that the judge erred in grounding jurisdiction in the BIA, contravening the Property Transfer Tax Act (PTTA) and exercising discretion improperly.

The court’s reasoning

The Court of Appeal dismissed the appeal, providing several key points in its reasoning:

1. Jurisdiction under the BIA: The court confirmed that s. 243 of the BIA does confer jurisdiction to grant an RVO in a receivership. The ruling aligned with previous decisions that recognized the broad powers vested in courts to maximize returns for creditors within insolvency proceedings.
   


2. Compliance with PTTA: The court rejected the appellant's argument that the RVO contravened s. 72(1) of the BIA, which prevents the BIA from superseding provincial laws related to property and civil rights. The judge noted that the primary purpose of the RVO was to maximize creditor recovery, a core objective of the BIA and not merely to avoid tax.
   


3. Exercise of discretion: In evaluating whether the judge properly exercised discretion, the court emphasized that the RVO provided a more favourable economic outcome for the creditors compared to a traditional asset sale. The RVO preserved approximately $3.5 million in value, which would otherwise be lost to PTT. Additionally, the court noted that there was no significant prejudice to any stakeholders except the taxing authority, which the judge found justifiable under the circumstances.
   
   

Key takeaways

This ruling is particularly noteworthy for several reasons:

• Precedent-setting: This decision establishes a precedent for the use of RVOs in receiverships, providing clarity on the jurisdictional authority of courts under the BIA. It highlights the courts’ flexibility in structuring insolvency transactions to maximize creditor returns.


• Balancing interests: The court’s analysis underscores the balance between adhering to statutory provisions and achieving practical, beneficial outcomes for creditors. The ruling illustrates the courts’ willingness to endorse innovative solutions that align with the fundamental objectives of insolvency law.


• Implications for insolvency practice: For insolvency professionals, this decision offers a valuable tool in the form of RVOs, which can be strategically employed to enhance the value of insolvent estates. While practitioners must be cognizant of judicial commentary (which was recognized by both courts in Peakhill) holding that RVOs are an “exceptional” remedy, this case may assist as a guide for structuring transactions in a manner that addresses this limitation by achieving economic efficiency.

The decision in British Columbia v. Peakhill Capital Inc. sets a significant precedent for insolvency law. By affirming the jurisdiction to approve RVOs under the Bankruptcy and Insolvency Act and dismissing challenges under the Property Transfer Tax Act, the ruling supports innovative approaches to maximize creditor recovery in receiverships. This landmark ruling clarifies legal pathways for practitioners and stakeholders navigating intricate insolvency landscapes.

Jordan Schultz is a partner and co-leader of Dentons Vancouver’s Restructuring, Insolvency and Bankruptcy group. His practice focuses on a range of commercial restructuring and insolvency matters, and he has extensive litigation and advisory experience.

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