The use of Reverse Vesting Orders (“RVOs”) has become a common occurrence in Canadian insolvency proceedings in recent years. However, in PaySlate Inc. (Re)[i] the Supreme Court of British Columbia initially declined to grant an RVO and instead offered guidance on when this extraordinary remedy is appropriate.
- RVOs are not the “norm;” they cannot be granted merely for convenience or some abstract benefit.
- The parties seeking to have an RVO approved should provide thorough and detailed analysis to the court that accounts for the test and factors enumerated in Harte Gold.[ii] The RVO should be compared to concrete alternatives.
- The RVO’s impact on creditors must be outlined and explained. Creditor impact should be rationally connected to the reason that the RVO is sought.
- RVOs are exposed to heightened judicial scrutiny.
As a result of financial difficulties, PaySlate Inc. (“PaySlate”), a technology company that provides online payment processing services, filed a notice of intention to make a proposal to its creditors pursuant to s.50.4 of the Bankruptcy and Insolvency Act (the “BIA”). In March 2023, PaySlate filed an application in the Supreme Court of British Columbia seeking approval of a bid by its debtor-in-possession lender (the “DIP Lender”) to purchase its shares through an RVO. The proposal trustee (the “Proposal Trustee”), Grant Thornton, supported the transaction.
What is a Reverse Vesting Order?
As the name suggests, an RVO is the opposite of a traditional vesting order. In a traditional vesting order, an insolvent company’s assets are transferred to a purchaser free and clear of all encumbrances. The insolvent company retains its unwanted assets and liabilities.
In an RVO, an insolvent company’s unwanted assets and liabilities are transferred to another company, generally incorporated specifically to absorb such assets and liabilities. The insolvent company retains its desirable assets and a prospective purchaser obtains the shares of the insolvent company. As a result, the purchaser takes these shares and obtains ownership of the insolvent company and all of its desirable assets.
A significant benefit of RVOs is that they allow for a purchaser to obtain assets of the insolvent company that are normally non-transferrable, such as licences and tax attributes (non-capital tax losses were relevant for PaySlate). Additionally, unlike other asset purchases, RVOs do not require a creditor vote to obtain court approval.
While RVOs may be an attractive option for insolvent companies, the court has reiterated that they are only available in “extraordinary circumstances.”
The test for whether an RVO will be approved comes from Harte Gold, which involved an insolvent mining company. Those seeking approval of an RVO (i.e., debtor, court-appointed monitor and purchaser) must be able to answer the following questions:
- Why is the RVO necessary in this case?
- Does the RVO structure produce an economic result at least as favourable as any other viable alternative?
- Is any stakeholder worse off under the RVO structure than they would have been under any other viable alternative?
- Does the consideration being paid for the debtor’s business reflect the importance and value of the licences and permits (or other intangible assets) being preserved under the RVO structure?[iii]
The court also accepted that the factors outlined in 36(3) of the Companies’ Creditors Arrangement Act were relevant in the consideration of an RVO under the BIA. These factors are:
- whether the process leading to the proposed sale or disposition was reasonable in the circumstances;
- whether the monitor approved the process leading to the proposed sale or disposition;
- whether the monitor filed with the court a report stating that in their opinion the sale or disposition would be more beneficial to the creditors than a sale or disposition under a bankruptcy;
- the extent to which the creditors were consulted;
- the effects of the proposed sale or disposition on the creditors and other interested parties; and
- whether the consideration to be received for the assets is reasonable and fair, taking into account their market value.[iv]
Reasons the Court Denied the RVO in PaySlate
The original proposed RVO in PaySlate was opposed by Paysafe Merchant Services Inc. (“Paysafe”), an unsecured trade creditor, who argued that the RVO was a pretense for the DIP Lender to obtain PaySlate’s tax losses at a discounted rate while circumventing the creditor consent provisions in the BIA. While Justice Walker did not endorse that position, he did note that he could not accept PaySlate’s contention that the RVO “[was] intended to preserve the company as a viable going concern.”[v]
PaySlate failed to convince the court that the RVO was necessary and effected a proper purpose. Additionally, due to evidentiary issues, the court was unable to determine the economic advantages of the RVO, whether other stakeholders were worse off under the RVO and whether consideration was adequate.
Subsequent RVO Approval
In subsequent reasons[vi] (the “Approval Decision”) Justice Walker approved a revised RVO (the “Revised RVO”) in PaySlate.
At paragraph 23 of the Approval Decision, Justice Walker considered the evidence and analysis presented in the Proposal Trustee’s reports and a supporting affidavit (collectively, the “Supporting Documents”). Consistent with Harte, the Supporting Documents thoroughly assessed the economics of the Revised RVO and, in particular, noted the following:
- no other parties could be expected to come forward with proposals due to a thorough and fair Sale and Investment Solicitation Process (the “SISP”);
- the Proposal Trustee provided a recommendation for a concrete viable alternative to the Revised RVO via direct comparisons of proposed transactions;
- an acknowledgment that Paysafe did not oppose the Revised RVO;
- a final assessment that the Revised RVO provides the best possible outcome for PaySlate stakeholders because:
- it is necessary for PaySlate to remain a going-concern;
- no stakeholder is worse-off under the Revised RVO than the viable alternative;
- the Revised RVO’s proposed consideration accurately reflects the value of PaySlate’s non-transferrable intangible assets; and
- the impact on creditors is rationally connected to the Revised RVO’s goals.
- a description of the Revised RVO’s implementation via the creation of a Creditor Trust and post-RVO steps including PaySlate’s continued operation; and
- an honestly held belief that the Revised RVO transaction is the best option for PaySlate’s creditors.
Justice Walker approved the Revised RVO and made the following findings pursuant to s.65.13(4) and (5) of the BIA:
- sustained good faith, comprehensive and robust efforts have been made to solicit offers from non-related parties;
- the Revised RVO offers a far better outcome than bankruptcy; and
- no other viable alternative providing the same value to stakeholders exists.[vii]
[i] 2023 BCSC 608.
[ii] 2022 ONSC 653
[iii] Harte Gold at para 38
[iv] Harte Gold at para 20.
[v] 2023 BCSC 608 at para 124.
[vi] 2023 BCSC 977.
[vii] 2023 BCSC 977 at para 19
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