The BC Court of Appeal has confirmed the jurisdiction for Canadian courts to make reverse vesting orders ("RVO") in receivership proceedings. British Columbia v. Peakhill Capital Inc., 2024 BCCA 246 ("Peakhill")marks the first time an appellate court considered the jurisdiction and appropriateness of RVOs in a receivership, and is poised to be a significant authority in the granting of RVOs pursuant to the Bankruptcy and Insolvency Act (Canada) ("BIA") in future insolvency proceedings.
Background
Peakhill concerned the granting of an RVO in a receivership proceeding pursuant to the BIA. Generally speaking, RVOs allow the shares of an insolvent company to be sold free and clear of claims and encumbrances by transferring unwanted assets and liabilities to a new company (frequently referred to as "ResidualCo"). In Peakhill, that resulted in the real estate that the purchaser wanted to acquire remaining with the insolvent company, with liabilities being transferred out. By concluding a share transaction, the transaction did not trigger property transfer tax ("PTT") payable under the BC Property Transfer Tax Act ("PTT Act"). This provided a benefit to creditors of approximately $3.5 million, since if the transaction were concluded by transferring the real property, the PTT would be payable in priority to creditors.
The BC Supreme Court approved the transaction, despite opposition from the Province of British Columbia (the "Province"). In its decision, the Court held that it had jurisdiction to grant an RVO under section 183(1)(c) of the BIA, which provides such Court with such "jurisdiction at law and in equity as will enable them to exercise original, auxiliary and ancillary jurisdiction in bankruptcy and in other proceedings authorized by [the BIA]". The Court also found that the RVO was appropriate to maximize recovery for creditors, and that the economic outcome was at least as favourable as any other viable alternatives, both factors under the oft-cited Harte Gold test for approvals of RVOs in insolvency proceedings generally. The Court rejected the Province's arguments that the RVO was an unlawful tax avoidable as even outside insolvency proceedings, such transactions are available to parties.
On appeal, the Province argued that the lower Court erred in finding jurisdiction, that the structure contravened the PTT Act (and accordingly section 72 of the BIA, which prevents the BIA from superseding provincial laws related to property and civil rights), and in exercising its discretion to approve the transaction.
The Decision
The Court of Appeal concluded that, in receivership proceedings, Canadian courts have "clear" jurisdiction to grant RVOs pursuant to the BIA. Rather than grounding such jurisdiction under section 183 as the lower Court had done, the Court of Appeal confirmed such jurisdiction in receivership proceedings flows from section 243(1)(c) of the BIA, which allows the court to make any order it considers advisable, provided the exercise of such power is incidental to a receiver's power to liquidate assets and maximize creditor recoveries. The Court of Appeal did however leave open the possibility in future proceedings under the BIA that jurisdiction could be found in the Court's more general jurisdiction under section 183.
The Court of Appeal also confirmed that structuring a transaction to avoid PTT is a legitimate commercial practice outside the insolvency context and, accordingly, there is no reason that should not be available in the insolvency context. There was therefore no contravention of section 72 of the BIA respecting the interplay between the BIA and provincial property and civil rights.
Finally, the Court of Appeal did not find any error in the lower Court's exercise of discretion in pronouncing the RVO, having noted the exceptional and extraordinary nature of the relief and weighing the interests of all persons engaged in the insolvency to determine that the RVO in this case best fulfilled the purpose and objects of the receivership; being, the maximization of recovery for creditors.
Implications and Key Takeaways
Peakhill provides clear and definitive confirmation that RVOs are available in receiverships and, in appropriate circumstances, can be used to maximize recovery for stakeholders. In doing so, the Court of Appeal confirmed that it is important for courts to weigh the various interests, with a view to considering whether the order best fulfills the purpose and object of the statutory scheme and with regard to RVOs remaining exceptional or extraordinary relief. Peakhill has however continued to leave the door open for jurisdictional challenges in other insolvency proceedings under the BIA, as the Court of Appeal refrained from providing guidance on whether such jurisdiction could be found in section 183 of the BIA.
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