The British Columbia Supreme Court (the “Court”) continues to assert that it has the jurisdiction to grant a reverse vesting order (“RVO”) in a receivership proceeding authorized under the Bankruptcy and Insolvency Act (“BIA”).
On May 3, 2024, the Court rendered its decision in Aquilini Development Limited Partnership v. Garibaldi at Squamish Limited Partnership, 2024 BCSC 764. It is one of several recent cases put before the Court where the receiver, being Ernst & Young Inc. (“EY” or the “Receiver”) in this case, sought an RVO in a receivership proceeding but where the RVO was contested by the Province of British Columbia (the “Province”) on the basis that the Court does not have jurisdiction to grant such order generally or where an RVO interacts with provincial legislation.
The Province has appealed the decisions in Peakhill Capital Inc. v. Southview Gardens Limited Partnership, 2023 BCSC 1476 and 1351486 B.C. Ltd. v Living Beachside Development Limited Partnership, et al (October 27, 2023), both cases where the receiver sought and were granted an RVO in a receivership proceeding under the BIA. Justice Walker provided a detailed decision in the Garibaldi at Squamish case, wherein he granted the RVO in an effort to put the Province’s jurisdiction argument to bed, subject only to a different finding by the B.C. Court of Appeal in the coming months. The Province immediately filed an appeal in respect of the Garibaldi at Squamish decision.
There is no question that RVOs are exceptional orders and should only be granted where necessary. RVOs are a creature of insolvency proceedings and allow a purchaser to obtain control of an insolvent company free and clear of any unwanted liabilities and assets, which are transferred to a separate corporate entity to be bankrupted. RVOs are granted sparingly and only in appropriate situations as a reverse vesting transaction can have the effect of circumventing processes established by the BIA, the Companies’ Creditors Arrangement Act (“CCAA”), and other legislation which are designed to protect creditors and stakeholders.
Background
Garibaldi at Squamish Inc. and Garibaldi at Squamish Limited Partnership (together, “Garibaldi”) were formed for the purpose of developing a ski resort on Brohm Ridge, near Squamish, B.C. (the “Project”). The only assets held by Garibaldi are an environmental assessment certificate, which was issued by the Province (“EA Certificate”), and an interim agreement, which was entered into with the Province (the “Interim Agreement” and together with the EA Certificate, the “Licenses”), both of which grant Garibaldi a license to occupy the land for the purposes of developing the Project.
Before construction of the Project can begin, Garibaldi must complete a number of conditions under the EA Certificate including extensive consultation and conservation analyses. The costs of completing such conditions are expected to exceed $5.5 million. The deadline for completion of the conditions is January 26, 2026 (the “Construction Deadline”) with no ability to seek an further extensions.
EY was appointed as Receiver and Manager of Garibaldi on December 4, 2023 due to Garibaldi having no physical assets, having no liquidity as it relied solely on third party financing, and Garibaldi owing approximately $80 million to its secured creditors. Shortly after the appointment of the Receiver, the Court approved a sale process for the business and property of Garibaldi which included a stalking horse credit bid by the secured creditors (the “Purchasers”). At the end of the first phase of the sale process, no other party had submitted a bid and the Receiver determined that it would proceed with the stalking horse bid.
Given the highly regulated nature of the Project, the uncertainty in whether the transfer of the Licenses to the Purchasers would be approved by the Province, the unknown amount of time for the Province to grant approval of the transfer of the Licenses, the looming Construction Deadline, and the loss of tax attributes in a traditional vesting transaction, the Receiver and the Purchasers agreed that a reverse vesting transaction was the only option to close a sale transaction given the circumstances of this case.
Jurisdiction generally
It has been the Province’s position to object to Courts granting RVOs in the receivership context whenever the opportunity arises as the Province maintains the position that the Court does not have jurisdiction to grant an RVO under either s. 183(1) or 234(1) of the BIA. The Province also takes the position that horizontal stare decisis does not apply in this case as (1) all other decisions by Justices of this Court where an RVO was granted in a receivership proceeding have been wrongly decided and (2) are not binding on Justice Walker as an exception discussed in Hansard Spruce Mills was engaged. The Province unsuccessfully raised this same argument before Justice Masuhara in Living Beachside.
Justice Walker considered the Province’s interpretation of the language in s. 183(1) and s. 243(1) of the BIA to be narrow and at odds with the efforts to harmonize the BIA and CCAA regimes. Additionally, the Province’s narrow interpretation is at odds with recent case law, including Peace River Hydro Partners v. Petrowest Corp., 2022 SCC 41, where the Supreme Court of Canada stated that s. 243 of the BIA has expansive wording to give judges the “broadest possible mandate in insolvency proceedings to enable them to react to any circumstances that may arise” and which “permits a court to do not only ‘what justice dictates’ but also what ‘practicality demands’”.
Justice Walker reviewed the decisions of the other Justices of the Court to determine if any of the Hansard Spruce Mills exemptions applied.
The Province’s argued that the earlier decisions of Justice Loo in Peakhill, Justice Masuhara in Living Beachside, and Justice Gomery in Royal Bank of Canada v. Canwest Aerospace Inc., 2024 BCSC 585 had not fully considered Yukon (Government of) v. Yukon Zinc Corporation, 2021 YKCA 2, a case from the Yukon Court of Appeal which Justice Tysoe of the British Columbia Court of Appeal wrote for. It is worth noting that the Yukon Zinc decision was available and could have been raised in Peakhill and Living Beachside but the Province decided not to do so for unknown reasons (the Province was not a party to Canwest). Justice Walker found that, notwithstanding the Court not having been presented with Yukon Zinc in the earlier decisions, the principles and cases cited by Yukon Zinc had all been put before Justice Loo and Justice Masuhara by the Province and the final determination in Yukon Zinc was consistent with that of the cases cited by the Province in Peakhill.
Justice Walker ultimately determined jurisdiction exists under the BIA to approve an RVO and that no exception to horizontal stare decisis applied. It was determined that the Province’s actual argument was that Peakhill, Port Capital and Canwest were wrongfully decided – an issue best left for the Court of Appeal to decide.
The RVO does not conflict with provincial legislation
In addition to the Province’s broad objection to jurisdiction, the Province argued that the RVO in this case is in conflict with provincial legislation. Section 33 of the Environmental Management Act (B.C.) provides the Province the exclusive authority to consent to transactions involving the transfer of the Licenses to third parties and section 99(2) of the Land Act (B.C.) provides the Province the exclusive authority to consent to transactions where there is a disposition or dealing involving Crown land. The Province stated that an RVO permitted the Receiver and the Purchasers to circumvent the Province’s transfer process and its statutory decision-making power, contrary to section 72 of the BIA.
The Receiver argued that the Environmental Management Act (B.C.) and the Land Act (B.C.) are silent where a transaction involved a change of control of the entity holding Licenses (“Certificate Holder”). Further, the Receiver noted that the Province’s current ‘Transfer Policy and Procedures of the Chief Executive Assessment Officer’ specifically contemplates that a transaction effecting a change of control of the Certificate Holder, as the RVO was structured, was one of the specifically exempted transactions where a Certificate Holder was not required to engage the Province’s transfer process.
Justice Walker agreed with the Receiver’s interpretation of the legislation and determined that the Receiver was not attempting to abrogate third party contractual rights, or circumvent the provincial legislation, legislative intent or the Province’s statutory decision-making powers. The RVO was not in conflict with section 72 of the BIA.
The RVO is reasonable in the circumstances
In assessing the Harte Gold factors, the Court was asked to focus on the necessity of proceeding by way of an RVO. Justice Walker found that the RVO was essential in this case as it would allow Garibaldi to meet the Construction Deadline in order to preserve, inter alia:
- the going concern value of the Project for the stakeholders;
- the economic benefits for all stakeholders, including thousands of jobs;
- the goodwill established with and the rights of the Squamish Nation; and
- the tax attributes associated with the Project.
The Court found that the Province’s knowledge of the RVO transaction from March 15, 2024, the urgency of the Construction Deadline, that no further extensions to the Licenses would be given, the knowledge of the relationship between the purchasers and the Garibaldi entities, and the Province’s refusal to provide any indication that the transfer of the Licenses to the Purchasers would be approved and on what timeline, all contributed to the RVO being essential. At the time of the hearing of the RVO application, a regular vesting order would have further delayed the purchasers’ ability to begin work on the Project as a License transfer application would need to be submitted through the Province, the purchase agreement would need to be renegotiated between the Purchasers and the Receiver, and a new application would need to be prepared, including the drafting of new court documents. Alternatively, forcing the receivership proceedings to be converted to a CCAA proceeding would also incur further delays and costs, all of which would be born exclusively by the Purchasers.
The Receiver also established that no other stakeholders, not even the Province, would be worse off if an RVO was approved. There were no other objecting creditors or stakeholders and the Squamish Nation’s consultation rights were not negatively impacted in any way by the transaction. The Province even agreed that it supported the completion of the Project, notwithstanding its objections.
The Court held that there were no other viable alternatives to preserve the economic benefits to all stakeholders.
It is unfortunate that the Province is taking such an aggressive position against RVOs in receivership proceedings as it is having serious consequences for receivers and the insolvent companies under their care. While RVOs should only be granted in the appropriate circumstances, the analysis of what is appropriate should be determined based on the Harte Gold factors, and not through a blanket objection to the Court’s jurisdiction to grant such orders. On a practical note, where a receiver or proposal trustee must engage with the Province as a creditor or stakeholder, they should be prepared for an objection by the Province that could cause material delays and costs to the closing of a purchase agreement involving an RVO.
Vancouver lawyers William E. J. Skelly and Jess R. Reid were pleased to act as counsel to Ernst & Young Inc., the Receiver in this case. MLT Aikins insolvency & restructuring group is comprised of 24 lawyers practicing in six offices across all four western Canadian provinces. Our insolvency and restructuring experience helps our clients preserve value, capture business opportunities and resolve disputes across various sectors of the western Canadian economy.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.