Approving an RVO without evidence of value?

Overview: In this case, the Court considered whether it should approve an RVO transaction in a receivership absent evidence of market value of the specific intangible assets and non-transferrable tax attributes that would remain with the purchaser. The Court refused to approve the RVO transaction without this evidence, which it permitted the receiver to provide by way of a supplemental report. The RVO transaction was then approved.

On July 9, 2024, the Court granted an Order approving a transaction contemplated by an Asset Purchase Agreement between MNP Ltd., in its capacity as court-appointed receiver, and the purchaser, Redekop Ferrario Properties (DD) Corp. (“Redekop”). The Court issued an asset vesting order (“AVO”), which approved the purchase price of $35.31 million and granting the Receiver liberty to subsequently seek approval of a further amended agreement of purchase and sale to be implemented by a reverse vesting order (“RVO”). An appeal of the July 9 Order was brought by the owners and the developer of the lands to be sold, who asserted that the Receiver’s efforts to market the property were insufficient, and was subsequently dismissed by the Court of Appeal on August 16, 2024.

The Receiver and Redekop subsequently negotiated a further amended purchase agreement on the same commercial terms as the previous one, structured as an RVO share sale as opposed to an asset sale (“RVO Transaction”). Pursuant to this amended agreement, Redekop would retain certain assets (including intangible assets) it considered worthwhile, and all of the debtors’ unwanted assets and liabilities would be transferred to an entity known as “Residual Co.” Accordingly, the Receiver applied, on an unopposed basis, for approval of the RVO Transaction in order to proceed with the amended transaction.

The RVO Transaction called for, inter alia, an increase in the purchase price of $842,000. The increased amount, less professional fees for implementation (estimated at $100,000) and the cost to defend the appeal ($100,000) would be paid to the next secured creditor in priority, Canadian Mortgage Servicing Corporation, who was owed approximately $7.55 million when the receivership order was issued on November 8, 2023. The RVO Transaction also included broad form release language in favour of Redekop, its nominee and the nominee’s retained assets, and the current and former directors, officers, employees, legal counsel and advisors of Residual Co. The Receiver argued that if the RVO Transaction were not approved, it and Redekop would fall back on the Asset Purchase Agreement approved in the AVO.

Typically, an RVO is structured so that “unwanted” assets and liabilities are removed and vended to a residual company while the desired or “good assets” remain with the debtor whose shares are acquired by the purchaser. An RVO is not to be granted merely because it may be more convenient or beneficial for the purchaser. RVOs may be granted where the applicant can demonstrate extraordinary circumstances exist, typically, e.g., where intangible assets such as licenses, permits, intellectual property, and tax attributes are difficult or impossible to transfer to the purchaser through an asset vesting order. Close scrutiny of the proposed RVO is required to ensure that the restructuring is fair and reasonable having regard to the objectives and constraints of the statutory scheme in issue. There must be an evidence-based rationale for value in the proposed RVO transaction.

In addition to establishing extraordinary circumstances exist, the applicant seeking approval of the RVO must satisfy the Harte Gold factors:

• a. whether the process leading to the proposed sale or disposition was reasonable in the circumstances;

• b. whether the monitor approved the process leading to the proposed sale or disposition;

• c. 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;

• d. the extent to which the creditors were consulted;

• e. the effects of the proposed sale or disposition on the creditors and other interested parties; and

• f. whether the consideration to be received for the assets is reasonable and fair, taking into account their market value.

While the Receiver had clearly established the first five Harte Gold factors ((a) to (e)), in terms of the reasonableness and fairness of the additional consideration to be paid (Harte Gold factor (f)), no evidence of market value was provided. The Receiver did not explain the rationale for an increased purchase price that is approximately $838,000 less than the estimated Property Transfer Tax payable for the RVO Transaction. As well, the Receiver did not provide any information and evidence concerning the value of the specific intangible assets that would remain with Redekop under the RVO Transaction. Nor was there any evidence regarding the potential value of non-transferrable tax attributes that may be available to Redekop.

The Court adjourned the application to permit the Receiver to obtain evidence to satisfy the final Harte Gold factor (f). Following the adjournment, the Receiver provided further advice in a supplemental report concerning the intangible assets, tax attributes, and valuation. The primary benefit to Redekop in the RVO Transaction was the savings of close to half of the property transfer tax (“PTT”) obligation arising under the AVO, and, to a lesser extent, the likelihood that the existing Development and Building Permits would be transferred to Redekop (avoiding additional costs and delay in construction) and potential tax losses unavailable in an asset sale would be retained. The increased purchase price also resulted in some recovery to CMSC. The increased purchase price, which fell below the overall savings amount of the PTT, was the result of arm’s-length negotiations between commercial parties concerning the manner in which the PTT savings should be split between Redekop and CMSC. Moreover, the increase in purchase price exceeded that offered by another bidder.

In the circumstances, and in the absence of any objection from any party that may be affected by the RVO Transaction, the Court found that the Receiver established the reasonableness of the consideration arising from the increased purchase price and satisfied the remaining Harte Gold factor, (f). As such, the Court was satisfied that the RVO Transaction should be approved.

Judge: Justice Walker

Counsel: William Roberts, Baylee Hunt, Eloise Hirst and Alexis Teasdale of Lawson Lundell for MNP as Receiver; Colin Brousson and Joel Robertson-Taylor (Articling Student) of DLA Piper for MCAP Financial Corporation; Shawn Poisson of Koffman Kalef for the Canadian Mortgage Servicing Corporation; Jonathan Van Netten and Jonathan Ross of Gowling WLG for Redekop