Appellate guidance on RVOs in receiverships

Can an RVO be used in a receivership to avoid tax liabilities?

British Columbia v. Peakhill Capital Inc., 2024 BCCA 246
Can an RVO be used in a receivership to avoid tax liabilities?

Overview: In this case, the British Columbia Court of Appeal considered whether an RVO can be used in a receivership to avoid tax liabilities. A sale of the debtor’s real estate assets had been structured as an RVO, allowing property transfer tax of $3.5 million to be avoided. On appeal by the Province, the British Columbia Court of Appeal upheld the the RVO, finding that avoiding property transfer tax was simply a means by which to maximize recovery for creditors, a bona fide purpose intended to further the objectives of the BIA.

The Court supervising the Debtor’s receivership proceedings granted a reverse vesting order (“RVO”) approving a transaction whereby the shares of the Debtor were sold to a purchaser. As part of the transaction, the unwanted assets and liabilities of the Debtor were stripped out of the company and transferred to another corporate entity, leaving only the valuable real property as an asset of the company. The transaction was structured so as to transfer the beneficial interest in the property to the purchaser of the company without transferring title to the underlying real estate asset.

By avoiding the transfer of title, the transaction did not attract property transfer tax (“PTT”) under BC’s Property Transfer Tax Act, thereby enhancing the value of the estate for distribution to creditors. If PTT were payable, the amount available for distribution to the creditors would have been reduced by the amount of PTT owing, which totalled approximately $3.5 million.

The motion judge recognized that RVOs are “exceptional” or “extraordinary” and should be sanctioned only when they further the remedial objects of the legislation under which authorization is sought. The motion judge held that the jurisdiction to grant the RVO was found in the courts’ general jurisdiction under s. 183(1)(c) of the Bankruptcy and Insolvency Act. Consequently, the court did not go on to decide whether s. 243 of the BIA also provided the necessary jurisdiction.

The motion judge reiterated that courts have granted RVOs which have conferred tax benefits on the parties in an insolvency proceeding, blessing the objective of avoiding a tax liability, albeit in circumstances where that was not the only objective. In authorizing the RVO, his Honour considered that the RVO provided approximately $3.5 million more to the secured creditors than an approval and vesting order (“AVO”); the three secured creditors were owed more than the recovery available under either an RVO or an AVO; the unsecured creditors or residual claimants were “out of the money”; and the only party to whom any prejudice would be allegedly occasioned was the taxing authority.

The motion judge also noted that outside of the insolvency context, share transactions premised on PTT avoidance are not captured by the PTTA. The judge did not accept the Province’s argument that statutory jurisdiction to grant an RVO is negated by mechanisms in the PTTA by which the Administrator can assess PTT and penalties when a transaction is designed to avoid the tax. He accepted that the Province already had the authority to impose PTT on the transfer of property through the purchase of the shares of a nominee company.

On appeal, the Province argued that neither s. 183 nor s. 243 of the BIA confer authority on a court to grant an RVO in a liquidating receivership. According to the Province, s. 183 of the BIA provides a more limited jurisdiction to approve an RVO than s. 11 of the CCAA. While the broad scope of authority conferred by s. 11 of the CCAA is consistent with the purposes and objects of the CCAA to attempt to continue insolvent companies as going concerns, the receivership provisions in the BIA—which are concerned with the liquidation of assets in accordance with the priorities of creditors and interested third parties—do not engage a broad discretionary grant of authority outside of what is necessary to sell assets as part of an orderly liquidation. Accordingly, the Province contended that if the jurisdiction to authorize an RVO in a receivership exists at all, it must be found in s. 243 of the BIA, which gives a court power to appoint a receiver to take possession and control of the insolvent company’s assets. However, s. 243 should not be read broadly to confer the jurisdiction required to authorize an RVO because an RVO goes beyond anything that can properly be seen as incidental or ancillary to a sale.

The Court of Appeal rejected these arguments and confirmed that vesting orders are incidental and ancillary to a receiver’s power to sell, which is itself grounded in a superior court’s “general jurisdiction” found in ss. 243(1)(c) of the BIA to authorize a receiver to “take any other action that the court considers advisable.” The shares of the debtor were assets within the receivership, over which the receiver had assumed possession and control. They were capable of being sold or liquidated in a manner intended to maximize their fair market value. Accordingly, arrangements could be made to enhance the value of the shares by transferring the liabilities that served to depress the value of those shares to another entity.

In assessing whether the motion judge erred in granting an RVO for the alleged sole purpose of avoiding the payment of PTT that would be incurred under the PTTA if title to the real estate asset were transferred, the Court of Appeal held that avoiding PTT was simply the means by which to maximize recovery for creditors. The Court confirmed that maximizing recovery for creditors is a bona fide purpose intended to further the objectives of the BIA. The Province did not suggest that the transaction as structured attracted PTT. It also accepted that the form of the transaction approved by the RVO is one commonly used outside the insolvency context to ensure that PTT is not payable. In other words, PTT is a tax liability which is readily avoided in a non-insolvency context. Accordingly, the Court found no reason why that which is legitimate and proper outside the insolvency context should be viewed differently within it.

The Court dismissed the appeal.

Judges: Justice Harris, Justice Voith and Justice Winteringham

Counsel: Jordan Schultz and Emma Newbery of Dentons for Cenyard Pacific Developments Inc.; William Roberts, Sarah Hannigan and Baylee Hunt of Lawson Lundell for Cenyard Southview Gardens Ltd.; and Owen James, Ray Power and B.A. Gulka‑Tiechko for the Province