Canada: The Ontario Court Of Appeal Determines When It Is Appropriate To Vest Out A Royalty Interest As Part Of An Insolvency Proceeding

Last Updated: July 23 2019
Article by Mining Prospects, James D. Gage, Junior Sirivar, Sean Collins, Andrew Kalamut and Walker L. MacLeod

Most Read Contributor in Canada, August 2019

The Ontario Court of Appeal determines when it is appropriate to vest out a royalty interest as part of an insolvency proceeding

The Importance of the Decision

Ontario's highest court has 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.  This has given resource extraction industries and insolvency practitioners some much needed clarity on how to navigate situations when assets subject to encumbrances and other interests are being sold, especially when land subject to a royalty interest is involved.

The Ontario Court of Appeal held in its decision in Third Eye Capital Corporation v. Dianor Resources, 2019 ONCA 508 that third-party interests in land may be extinguished by a vesting order in an insolvency proceeding.  While the case confirms that such jurisdiction exists, the principles outlined by the Court of Appeal make it clear that the jurisdiction is unlikely to be exercised in cases where a true ownership or comparable interest, such a royalty interest that is an interest land, is at issue and the holder has not consented to the extinguishment. 

In doing so, the court has also confirmed that a vesting order may be granted in a receivership where, unlike a Companies' Creditors Arrangement Act or Bankruptcy and Insolvency Act restructuring case, there is no express statutory provision that authorizes a sale.  This result is particularly noteworthy for holders of royalty interests in mining and energy assets, as it clarifies how their rights may be affected in the event that their counterparty becomes distressed.  

Background and Context for the Decision

Royalty arrangements are a useful financing tool for companies involved in the exploration and production of mineral interests, where there is often substantive investment risk at the outset of development and a corresponding high cost of preliminary capital. To overcome this the party who has the right to exploit the minerals in situ will often grant a fractional interest in the future gross production of its working interest to obtain project investment.  The grantor receives its required capital or credit, the grantee receives a return on its investment if and when production occurs and both parties are aligned in seeking a successful project outcome.  While the royalty can be an advantageous investment structure, it can also be a burden on the assets if the working interest holder becomes insolvent because potential purchasers will factor the reduced production into their valuation of the minerals. One potential response of the now insolvent grantee or its creditors is to attempt to extinguish or vest the royalty interest in the bankruptcy proceedings, thereby increasing the value of the debtor estate at the expense of the royalty holder. 

In the landmark decision of Bank of Montreal v. Dynex Petroleum Ltd, the Supreme Court of Canada held that a gross overriding royalty was capable of constituting an interest in land if the parties evidenced such an intention.  While decisions such as Walter Energy and Manitok Energy addressed whether a specific royalty was an interest in land through application of the Dynex Petroleum decision, Dianor provides guidance on the ability of the court to affect a royalty that had previously (through an earlier decision) been determined to constitute an interest in land.   

This specific case arose in the context of Dianor's insolvency proceedings.  Dianor's main assets were a group of mining claims.  These mining claims were subject to a gross overriding royalty (the "Royalty"), which was held by 2350614 Ontario Inc. ("235").  Dianor then became insolvent and a receiver was appointed in respect of its assets.

As part of the insolvency proceedings, the receiver obtained offers to purchase the mining claims.  Each of the offers it received was conditional upon the lands being unencumbered.  The receiver sought approval of the sale of the lands to one of the bidders from the supervising judge, requesting that 235's Royalty be vested out. 

The supervising judge approved the sale and vesting order, and the transaction was completed.  235's Royalty interest was vested out, and it received $250,000 in compensation. 

In reaching its decision, the supervising judge determined that royalty interests are not interests in land.  He also determined that the court had  jurisdiction to vest out the royalty interest.  235 appealed the decision, but only after the Royalty was struck from the land titles registry and the sale transaction by the receiver to the third party had closed. 

The Court of Appeal heard 235's appeal in two parts.  The first part considered whether is the Royalty was an interest in land.  In that appeal, analyzed here, the Court of Appeal relied on the Supreme Court of Canada decision in Bank of Montreal v. Dynex Petroleum Ltd.. finding that the Royalty constituted an interest in land.  The Court of Appeal restated that the court's role, as it is in all matters of contractual interpretation, is to determine what the intention of the parties was at the time that the agreement was struck.  If it is clear and ambiguous that a royalty interest grants an interest in land, the manner of the calculation of the royalty will not displace that intention.

In part two, the Court considered whether the Court has jurisdiction to vest out an interest in land and, if that jurisdiction exists, what the remedy would be in this specific case.

The Court Develops a Framework for Determining when to Vest Out Interests in Land

The Ontario Court of Appeal began its analysis by recognizing that a "...paradigm shift has occurred in Canadian corporate insolvency practice" over the past decade.  While a company may still elect to reorganize through a plan of arrangement approved by each creditor class, going concern sale transactions involving all or substantially all of a debtor's assets are now frequently the restructuring transaction of choice.  The vesting order is the fundamental basis by which such sales are completed, as they provide purchasers with certainty that they are acquiring the assets on a "free and clear" basis and with the benefit of court oversight of the process. 

There are numerous examples of sale and vesting orders being granted in insolvency proceedings under the CCAA, and section 36 of the CCAA confirms the ability of the court to provide such relief.  Receivership orders are usually focused on liquidation and typically granted under section 100 of the Courts of Justice Act (or comparative legislation in other provinces), section 243 of the BIA or a combination thereof, and this legislation does not provide the same express statutory authority for sales as is found in the CCAA.  Justice Peppall, writing for the unanimous Court, offered a lengthy, compelling and detailed rationale as to why section 243(1)(c) of the BIA permits the court to grant a sale order vesting property in a purchaser on application by a receiver.  The jurisdiction arises through the broad language of the provision and the expansive and remedial interpretation to be given it, and is not an exercise of "inherent jurisdiction" to fill a legislative gap.  Although not specifically decided, the court was careful not to foreclose the possibility of provincial legislation also providing similar authority for cases where the receiver is not operating under an order issued pursuant to section 243 of the BIA. 

Having determined that the jurisdiction to grant the vesting order exists under the BIA, the court turns to the appropriate scope of the order itself.  This issue is more complicated because of the "...very inconsistent treatment of vesting orders" in the existing jurisprudence.  Refreshingly, the court goes to some length to address this through what it describes as a "...rigorous cascade analysis" in deciding whether to grant a vesting order that extinguishes rights.  The cascade analysis operates as follows:

  • first, the nature and strength of the interest that is proposed to be extinguished is considered;
  • second, whether the interest holder has consented to the vesting out of their interest is considered;
  • third, and only to the extent that the above-factors prove to be ambiguous or inconclusive, the equities are considered to determine if a vesting is appropriate.

The Framework Applied to Royalty Interests

The application of the newly formulated legal test is of obvious importance to royalty holders.  The critical point for the court was that the royalty at issue was a true ownership interest and not akin to a fixed monetary interest, such as a mortgage or other type of charge.  The reasonable expectation of the holder, like any true owner, was that its interest should continue absent its consent to an alternative arrangement.  Given that there was no such consent, the court held that it was not appropriate for the lower court to extinguish the Royalty by way of a vesting order.  This conclusion was accepted even though the value of the assets was significantly impaired by the Royalty; the receiver's position was that there would have been no market for the assets without the vesting of the royalty interest: 

The Receiver submits that the realities of commerce and business efficacy in this case are that the mining claims were unsaleable without impairment of the GORs. That may be, but the imperatives of the mining claim owner should not necessarily trump the interest of the owner of the GORs.  Given the nature of [the royalty holders] interest and the absence of any agreement that allows for any competing priority, there is no need to resort to a consideration of the equities.

Accordingly, the Court of Appeal found that the motion judge erred in granting an order extinguishing the royalty interest.

Procedural Considerations Regarding the Timing of an Appeal

Despite the Court of Appeal determining that the Royalty interest should not be vested out, it was not necessary for it to consider how to remedy the fact that the lands had been sold unencumbered to a third party. 

The royalty holder, 235, had ten days to appeal the motion judge's decision vesting out the Royalty interest.  While 235 gave notice to the receiver within the timeframe that it was "considering" an appeal, the receiver waited the requisite ten days to close the transaction.  235 appealed 29 days after the decision.  The Court found that the receiver's conduct was appropriate in the circumstances of the case (i.e., to pursue the efficient administration proceedings).

The Court refused to extend the appeal period nunc pro tunc.  There was no evidence that 235 intended to appeal within the ten day appeal period, or evidence to explain its failure to appeal.  The royalty holder sat on its rights knowing that the receiver was relying on the motion judge's decision and did not seek a stay or commence an appeal within the appropriate period.

A Welcome Decision for Resource Extraction Industries

The Court of Appeal's decision is welcome clarity for all parties that are investors in in the resource sector, and will almost certainly affect the way that future royalty interests are negotiated and drafted.  For royalty holders, clear drafting that establishes an interest in land (and not a mere contractual entitlement) remains important, as does structuring that ensures that the royalty cannot be classified as a security interest.  Attention should also be directed at proposed priority and subordination covenants so as to ensure that consent to extinguishment cannot be imposed or implied through their operation.  These safeguards will provide as much protection as possible against any effort to extinguish the royalty in an insolvency proceeding.

To view the original article click here

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions