BCCA: Reverse Vesting Orders can be Granted under the BIA

British Columbia v. Peakhill Capital Inc., 2024 BCCA 246

In a decision likely to be welcomed by insolvency lawyers across Canada, the BCCA became the first appellate court in Canada to explicitly hold that courts have the jurisdiction to make reverse vesting orders ("RVOs") under the Bankruptcy and Insolvency Act.

RVOs are used when a debtor corporation has some valuable assets, but also lots of debt (or other, undesirable assets). The RVO strips the debt and bad assets into a new shell corporation, and then the shares of the 'original' corporation are sold to a buyer for the benefit of the creditors. RVO's allow the buyer a fresh start: they get the benefit of any licenses, permits, contracts (like leases, or franchise agreements), or intangibles like consumer good will, without having to take on any debt or unprofitable contracts. 

There are also losers. Notably, where the debtor corporation owns real estate, RVOs are sometimes used to remove everything but the real estate. If the real estate was sold, it would attract land transfer tax. If an RVO is used, and transaction instead involves 100% of the shares of a company that owns nothing but the real estate, the transfer tax doesn't apply.

In this case, the transfer tax would have amounted to $3.5m. British Columbia appeal the RVO, arguing that the BIA doesn't authorize RVOs.

The province's argument was doomed to failure. Section 243 of the BIA gives a court extremely broad jurisdiction to order a receiver to take "any other action" in relation to a debtor's property that the court deems advisable. 

While no appellate court may have previously considered whether that extended to reverse vesting orders, appellate courts have explicitly held that s.243 authorizes  "standard" vesting orders. While there may be significant commercial difference between a vesting order (which vests title to assets in the purchaser), and an RVO (which vests title to assets in a shell corporation), as a matter of statutory interpretation, they're the same. In each case, the court is issuing an order saying that a different party now owns property that was previously owned by the debtor. If s.243 authorizes one kind of vesting order, it also authorizes the other.

British Columbia also argued that even if RVOs were generally authorized, this particular RVO was still invalid because it amounted to court-approval of a tax avoidance transaction. BC argued that, but for the RVO, a provincial tax statute allowed the province to reassess the share sale, and levy the the land transfer tax. While the doctrine of paramountcy generally means that where there is a conflict between provincial and federal law the federal controls,  BC argued that s.72(1) of the BIA says that the Act can't be used to "abrogate or supersede the substantive provisions of any other law or statute relating to property and civil rights that are not in conflict with this Act."

The BCCA rejected this argument on the basis that the underlying transaction was not done for the "primary purpose" of avoiding the tax, and therefore couldn't be reassessed under the provincial law.

That's an unsatisfying rationale. The province's argument was that the provincial statute authorized a particular official to determine whether or not any transaction as an instance of tax avoidance, and that this official's determination was "exclusive." Whether or not the BCCA thought this particular RVO was a tax avoidance transaction is irrelevant to the question raised by the province. What matters is whether the RVO interfered with a provincial statute.

In GMAC, the Supreme Court considered a similar question.  A union applied to the Ontario Labour Relations Board (OLRB) for a declaration that the court-appointed receiver was a "successor employer" bound by the union's collective agreement with the employer. Under provincial law, the OLRB has exclusive jurisdiction to determine if the receiver was a "successor employer." However, under s.215 of the BIA, no party can bring any kind of claim or proceeding against a receiver acting in their official capacity without leave of the bankruptcy court. The Union hadn't sought leave. When it did, the bankruptcy court purported to make its own determination of whether or not the receiver was a successor employer, and denied leave on that basis. The Ontario Court of Appeal  held that where a bankruptcy court denied leave, s.215 would conflict with the provincial law allowing the proceeding, and as such s.72(1) would not apply, and the provincial law would have no effect. However, both the ONCA and the SCC  also held that the BIA didn't authorize the bankruptcy court to make its own determination as to whether the not the receiver was a "successor employer," and that the bankruptcy court erred by purporting to answer that question in the context of the motion for leave under s.215. 

Applying GMAC to Peakhill (which didn't cite it), the question of whether or not the RVO authorized an "avoidance transaction" should never have been addressed by the court. Instead, the BC official authorized by statute should have made that determination, and then sought leave under s.215 if necessary. On that motion, the bankruptcy court would not have been entitled to to make the determination itself. 




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