Several significant judicial decisions occurred in 2024 that are relevant to commercial lenders and businesses as well as restructuring professionals. This bulletin summarizes the key developments of 2024 and highlights areas of significance to be aware of in 2025.
1. Reverse Vesting Orders
Reverse Vesting Orders (RVOs) continued to be widely used in insolvency proceedings in 2024, and Canadian courts provided additional guidance on the appropriate circumstances in which an RVO will be granted. An RVO transaction provides for the sale of shares of the debtor company, following the assignment of unwanted liabilities and assets to a “ResidualCo,” usually a special-purpose vehicle incorporated for this purpose. When certain criteria are met, courts have recognized that an RVO can be granted, particularly where valuable attributes such as government permits and licenses cannot be transferred via an asset sale.
In Xplore Inc. (Re), the Superior Court of Justice (Ontario) (ONSC), for the first time, granted an RVO in the context of an arrangement under section 192 of the Canada Business Corporations Act (CBCA). Xplore is a telecom company operating in a highly regulated industry. Xplore was also party to various grants from the Canadian government with strict change of control requirements in relation to the development of wireless internet services in rural regions across Canada. Xplore experienced significant liquidity challenges in early 2024, necessitating the commencement of proceedings under the CBCA to address its debt burden.
As part of its CBCA plan, which provided for the recapitalization of Xplore and a significant reduction of its secured debt obligations, Xplore sought an RVO from the court vesting certain satellite obligations in a “ResidualCo.” The ONSC found that subsection 192(4) of the CBCA, which provides the court with the authority to “make any interim or final order it thinks fit” provides the court with the same broad and flexible authority to grant an RVO as section 11 of the Companies’ Creditors Arrangement Act (CCAA) provides to a court within the context of a CCAA proceeding. The requested RVO was assessed by the ONSC in light of the now well-established relevant factors laid out in Harte Gold Corp. Re. The Court was satisfied that this was an appropriate case in which to grant an RVO. In doing so, the Court emphasized that its conclusion that the RVO was appropriate in this case was fact-specific, including because the transaction was unopposed, and that its decision was not intended to create a “broad precedent for the expansion of the use of RVOs in other circumstances.”
In MCAP Financial Corporation v. QRD (Willoughby) Holdings Inc., the Supreme Court of British Columbia (BCSC) emphasized the importance of providing evidence of the market value of the assets being acquired pursuant to the RVO to assist the Court in discerning whether the consideration to be received for the assets is reasonable and fair, consistent with the final factor set out in Harte Gold. The receiver’s application for an RVO was initially adjourned to provide the receiver with an opportunity to adduce evidence of value of the assets that would be available in an RVO, but not in an asset sale (including tax losses). The RVO was only granted after such evidence was provided.
In 2024, the Province of British Columbia (the Province) opposed the granting of RVOs in certain transactions that impacted the Province’s rights. The Province opposed two RVOs, one of which is anticipated to be considered by the Supreme Court of Canada (SCC) in 2025.
In Aquilini Development Limited Partnership v. Garibaldi at Squamish Limited Partnership (Aquilini Development), the receiver of Aquilini Development sought the issuance of an RVO that would preserve certain development rights held by the debtor pursuant to an environmental assessment certificate issued by the Province. Pursuant to these development rights, the debtor was actively engaged in a development project at the time that it became subject to receivership proceedings. In the context of an asset sale, a “transfer application” to the Province would have been necessary in order for a purchaser to gain the benefit of the development rights. Such application was not required in the context of a share sale.
The Province opposed an RVO in the context of a receiver appointed pursuant to the Bankruptcy and Insolvency Act (BIA) on the basis that (1) there is no jurisdiction under the BIA to grant an RVO based on its more rules-based approach to insolvency (relative to the CCAA), and (2) if there is, the RVO is inappropriate in this case because it abrogated the Province’s statutory decision-making powers, contrary to section 72 of the BIA which prevents a court from abrogating any other law or statute governing property and civil rights and was unnecessary.
The BCSC rejected the Province’s jurisdictional argument on the basis that Canadian courts have routinely affirmed the expansive interpretation and flexibility of the BIA. With respect to the Province’s statutory decision-making powers, the BCSC found that paramountcy concerns were not engaged since the RVO did not circumvent provincial legislation and statutory decision-making powers, as suggested by the Province. The relevant provincial legislation did not require a transfer application in the context of a change of control and, accordingly, the BCSC found that there was no breach of any right that the Province would ordinarily have in the context of a share sale.
Despite its opposition to the RVO, the Province had a stated desire for the development project to be completed. The RVO was the only alternative that would see the development project completed and provide an economic benefit to all stakeholders, including the Province. The BCSC found that no stakeholder would be worse off if the RVO were approved and that the Harte Gold factors were satisfied.
In British Columbia v. Peakhill Capital Inc., (Peakhill) the Court of Appeal for British Columbia (BCCA) considered whether a court in a BIA receivership proceeding has the jurisdiction to grant an RVO structured to avoid provincial property transfer taxes. Peakhill represents the first time that a court has granted an RVO in a contested proceeding where tax savings is the only benefit.
Under the proposed RVO, the beneficial interest in certain valuable real property was to be transferred to the purchaser without transferring title to the underlying real property asset. By avoiding the transfer of title, the debtor would avoid incurring transfer taxes, thereby enhancing the value of the estate for distribution to creditors by approximately C$3.5-million. The BCSC granted the RVO and its decision was appealed by the Province on the same basis as in Aquilini Development.
The BCCA, like the BCSC in Aquilini Development, affirmed the jurisdiction of a court supervising a receivership proceeding to grant an RVO, finding that section 243(1)(c) provides the court with the broad jurisdiction to “take any other action that the court considers advisable.”
The BCCA also found that the BCSC did not err in granting the RVO for the sole purpose of avoiding the payment of transfer taxes. Structuring a transaction to minimize tax obligations is a legitimate commercial practice both within and outside of the insolvency context. The BCCA concluded that the motions judge gave careful consideration to third-party rights in granting the RVO and carefully weighed the rights of all stakeholders to decide whether the RVO best fulfilled the purposes and objects of the statutory scheme. The BCCA saw no reason to interfere with the BCSC’s decision.
The Province filed for leave to appeal the decision of the BCCA to the SCC on October 1, 2024, and the leave application is still pending.
2. Corporate Attribution
In our bulletin Canadian Insolvency Law: Case Law, Trends and Shifts in 2023, we described the Ernst & Young Inc. v. Aquino and Golden Oaks Enterprises v. Scott decisions of the Ontario Court of Appeal, both of which contemplate the application of the corporate attribution doctrine in the insolvency context. The corporate attribution doctrine is a mechanism by which the intent or actions of a directing mind of a corporation can be attributed to the corporation itself.
On October 11, 2024, the Supreme Court of Canada (SCC) released its long-awaited decisions in Aquino v. Bondfield Construction Co. (Aquino) and Scott v. Golden Oaks Enterprises Inc. (Golden Oaks). The appeals were heard jointly on December 5, 2023.
In Aquino, the court-appointed monitor of Bondfield Construction Company (Bondfield) and trustee in bankruptcy of its affiliate sought to recover funds pursuant to section 96 of the BIA and 36.1 of the CCAA concerning transfers at undervalue which were a result of a fraudulent invoicing scheme. Given the timing of the fraudulent scheme, the transfers in question could only be impugned where (1) the transferee was not dealing at arm’s length with the debtor, and (2) the debtor had the intent to defraud, defeat or delay a creditor. At the SCC, the Bondfield Principals, among other things, submitted that while Mr. Aquino intended to defraud both companies, the companies did not benefit from his fraud, and the corporate contribution doctrine should thus not be applied. The Bondfield Principals argued that SCC jurisprudence imposed minimal criteria for corporate attribution that must be met in every case, regardless of the context, and that the courts below erred by reframing the corporate attribution doctrine to allow for attribution where the controlling mind acted fraudulently and those minimal criteria were not met.
The SCC dismissed the appeal of the Bondfield Principals. In doing so, the SCC recast the test for corporate attribution, setting out four guiding principles:
(i) As a general rule, a person’s fraudulent acts may be attributed to a corporation if two conditions are met: (1) the wrongdoer was the directing mind of the corporation at the relevant times, and (2) the wrongful actions of the directing mind were performed within the sector of corporate responsibility assigned to them
(ii) Attribution will generally be inappropriate when: (1) the directing mind acted totally in fraud of the corporation, or (2) the directing mind’s actions were not by design or result partly for the benefit of the corporation
(iii) In addition to the fraud and no benefit exceptions, courts have the discretion to refrain from applying the corporate attribution doctrine when this would be in the public interest
(iv) In all cases, courts must apply the common law corporate attribution doctrine purposively, contextually and pragmatically
The fourth principle is best understood as interpretive guidance for the application of the other three principles, which emphasizes that these governing principles are not to be applied in a vacuum. Context not only matters but, in many circumstances, may be determinative.
Consistent with principle four, the SCC concluded that the fraud exception and the no-benefit exception were not applicable in the context of determining liability under section 96 of the BIA. The SCC also held that attributing the directing mind’s fraudulent intent to the Bondfield Companies would advance the public policy goals of section 96 by allowing creditors to recover fraudulently transferred assets that unlawfully reduced the value of the estate available for distribution to creditors.
In Golden Oaks, the SCC considered the application of the corporate attribution doctrine to a trustee in bankruptcy’s attempt to recover funds lost in a Ponzi scheme carried out by the sole directing mind of the corporation. The trustee commenced several actions in the name of the bankrupt company against individuals and companies (the Defendants) who received fraudulent payments from the company in connection with the Ponzi scheme.
Generally, in Ontario, the Limitations Act, 2002 provides that a claimant has two years to commence a legal proceeding from the day they discovered the claim. The Defendants argued that the knowledge of the single directing mind of the Ponzi scheme should be attributed to the corporation. As two years had passed in between the impugned conduct and the trustee’s action, the trustee’s actions would be time-barred.
Relying on the principles established in Aquino, in Golden Oaks, the SCC found that there is no principled basis to apply different guiding principles for corporate attribution to one-person corporations. The guiding principles set out in Aquino provide sufficient flexibility to deal with one-person corporations and most other situations of corporate attribution. Additionally, automatically attributing the knowledge of a sole directing mind to its corporation would effectively disregard corporate separateness.
The SCC’s decisions in Aquino and Golden Oaks reaffirm the doctrine of corporate attribution as a flexible, purposive tool. Courts must weigh the specific context and purpose of the law under which corporate attribution is sought rather than adhering rigidly to predetermined rules.
An in depth consideration of the SCC’s decisions in Aquino and Golden Oaks can be found in our bulletin, The Broader Context: Key Takeaways From the SCC Rulings in Aquino and Golden Oaks.
3. Creditor-Driven CCAAs and Super Monitors
In most cases, CCAA proceedings are commenced by a debtor company seeking protection from its creditors. The CCAA, however, also permits a creditor to bring an application for relief under the CCAA in respect of a debtor company. Likewise, the CCAA permits creditors to propose a plan of arrangement for a debtor company.
In creditor-driven CCAAs, the debtor company remains in possession of its assets and in control of its business. Additional restrictions and controls are typically put in place, however, such as the appointment of a chief restructuring officer (CRO) or expansion of the supervisory role of the court-appointed monitor to include management powers (commonly referred to as a “super” monitor”).
There are various considerations that may lead to a creditor-driven CCAA. Most often, a creditor commences a CCAA proceeding where the CCAA is determined to be the optimal realization vehicle and there is potential going-concern value for the business, but a lack of faith in management to conduct a suitable CCAA process.
In 2024, there were a number of uncontested creditor-driven CCAA applications. In each case, the Monitor was granted expanded powers, or a CRO was put in place to manage the business of the debtor during the restructuring:
In certain circumstances, however, a court will have to assess the merits of two competing CCAA applications, one by a creditor and the other by the debtor. In 2024, the Supreme Court of Nova Scotia (NSSC) contended with competing CCAA applications between a debtor and its senior secured creditors in Fiera Private Debt Fund v. SaltWire Network Inc and applied the factors set forth in the 2022 decision of the Quebec Superior Court in Groupe Sélection. Following GroupeSélection, the NSSC observed that, among other things, (1) the creditor’s proposed monitor had the most familiarity with SaltWire’s business, economic circumstances and issues affecting the business by virtue of its involvement over the five months leading to the CCAA applications; (2) while prior agreement is not determinative, SaltWire had previously consented to the appointment of the creditor’s proposed monitor and the same financial advisory firm had started assisting with an informal restructuring effort; and (3) the creditor’s proposed monitor had a more realistic approach to the need for interim financing than the alternative proposed by the debtor. The NSSC granted an Initial Order appointing the monitor proposed by the creditors, including expanded supervisory and management powers.
4. Stalking Horse Bids
In 2024, Canadian courts addressed the appropriate mechanism, timing and grounds to oppose the selection of a stalking horse bid.
In Peakhill Capital Inc. v. 100093910 Ontario Inc., (1000 Ontario), the Ontario Court of Appeal (ONCA) found that, in certain circumstances, the right to appeal a sale process (SISP) order may be automatic. In 1000 Ontario, the receiver appointed by the ONSC pursuant to the applicable provisions of the BIA, entered into a stalking horse agreement with a prospective purchaser. The same purchaser was party to an agreement of purchase and sale with the debtor pre-filing that provided for a purchase price that was approximately C$7-million higher than the stalking horse bid. On December 20, 2023, the motion judge granted the receiver’s SISP order, approving the sale process and stalking horse agreement.
The BIA grants an interested party the automatic right to appeal a lower court decision under a prescribed list of narrowly construed circumstances. The debtor relied on section 193(c) of the BIA, which states that, unless otherwise expressly provided, an appeal lies to the Court of Appeal if the property involved in the appeal exceeds the value of C$10,000.
The ONCA recognized that SISP orders are typically viewed as procedural in nature. However, the ONCA also found that, in this case, the SISP order had the substantive effect of potentially jeopardizing the value of the debtor’s property by setting a floor price almost C$7-million less than the original agreement of purchase and sale entered into with the same purchaser. The ONCA concluded that, in the circumstances, pursuant to section 193(c) of the BIA the debtor was not required to seek leave to appeal. The ONCA issued a decision dismissing the debtor’s appeal on April 9, 2024.
In Tool Shed Brewing Company Inc. (Re) (Tool Shed), the Court of King’s Bench of Alberta (ABKB) reiterated the importance of objecting to the identity of a stalking horse bidder at first instance when approval of the SISP order is sought. In Tool Shed, the proposed purchaser under the stalking horse agreement was a related party to the CEO of the debtor company. Approval was sought and obtained without objection for the related party to act as stalking horse bidder under the proposed SISP.
The proposal trustee ultimately concluded that it did not receive any superior bids to the stalking horse bid and sought approval of the stalking horse transaction. This relief was opposed by an unsuccessful bidder that raised a number of concerns with the transaction. The concerns stemmed primarily from the non-arm’s length relationship between the debtor company and the stalking horse purchaser and allegations that this relationship resulted in an unfair SISP process.
The ABKB approved the transaction notwithstanding this objection. The ABKB emphasized that the concerns raised by the objecting party were process considerations that should have been raised prior to approval of the SISP and not issues regarding the substance of the successful bid, which are properly considered at the sale approval hearing. The identity of the stalking horse bidder was considered at the SISP approval hearing and not open for reconsideration on sale approval.
5. Cross-Border Restructurings
In 2024, there was a substantial uptick in the number of both Canadian and U.S. businesses that commenced cross-border restructurings, both in terms of recognition proceedings by U.S.-based businesses under Part IV of the CCAA and recognition proceedings by Canadian-based businesses under Chapter 15 of the U.S. Bankruptcy Code. It is expected that this trend will continue in 2025, highlighting the importance of case law clarifying the principles applicable to cross-border restructurings.
For In the Matter of Curo Canada Corp. and Lenddirect Corp., the ONSC considered the meaning of “Centre of Main Interest” or “COMI” and the appropriate circumstances in which a debtor with its head office in Canada will, nevertheless, be found to have its COMI in a different jurisdiction. A proceeding will only be considered a “foreign main proceeding,” such that certain relief available under Part IV of the CCAA is mandatory (principally a stay of proceedings) where the foreign proceedings have been commenced in the debtor’s COMI. Under subsection 45(2) of the CCAA, a debtor’s COMI is presumed to be its registered head office.
This presumption is, however, rebuttable. Where it is necessary to go beyond the presumption under subsection 45(2), courts have also found COMI to be (1) the location readily ascertainable to creditors, (2) the location of a debtor’s principal assets or operations, (3) the location of management, employee administration, marketing, banking and other key functions, (4) the level of integration of the international operations and (5) whether the enterprise is managed on a consolidated basis.
Notwithstanding the location of the debtors’ registered head office in Canada, all executive and management-level decision-making and back-office functions for the company were conducted out of the U.S. Accordingly, the debtors’ COMI was the U.S. and recognition of the debtors’ Chapter 11 proceeding was granted under Part IV of the CCAA as a “foreign main proceeding.”
Issues were also raised in Elevation Gold Mining Corporation (Re) (Elevation Gold) in relation to a business with substantial operations in both Canada and the U.S. In Elevation Gold, the BCSC considered whether the Canadian court in a plenary CCAA proceeding owes deference to the U.S. court supervising a Chapter 15 recognition proceeding in respect of the sale of assets belonging to the debtor company in the territorial jurisdiction of the U.S.
Elevation Gold is a British Columbia corporation that is the sole owner of a U.S.-based operating company, Golden Vertex Corp. (GVC). GVC, in turn, owned and operated a mine in Arizona, which was the primary asset in the CCAA proceeding. Elevation Gold commenced proceedings under the CCAA and sought and obtained recognition of such proceedings under Chapter 15 of the U.S. Bankruptcy Code.
Elevation Gold conducted a court-approved sale process within its CCAA proceeding, which gave rise to an offer to purchase the shares of GVC through an RVO. Two parties objected to the sale on the basis that the Canadian Court is required to defer the matter of approval of the sale transaction to the U.S. Bankruptcy Court, given the location of GVC’s mine. The basis of this argument was the requirement under Chapter 15 that the U.S. Court apply the sale requirements under section 363 of the U.S. Bankruptcy Code to sales for which recognition is sought in Chapter 15 proceedings where the property subject to the sale is located in the territorial jurisdiction of the U.S.
The BCSC rejected this argument, finding that the asset being transferred was shares owned by a Canadian company and physically located in Canada. The Court made no comment on whether the U.S. Court may undertake a section 363 analysis in respect of the sale on a recognition motion, noting that the decision to undertake such an analysis rested with the U.S. Court. The fact that such an analysis may be undertaken, however, did not mean that the Canadian court owed “deference” to the U.S. Court when considering approval of the sale. As the plenary proceeding, the sale was properly considered in the Canadian proceeding first. The Canadian court therefore granted the RVO. The U.S. Court recognized the RVO on December 30, 2024, over the objections of the same parties.
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