Forage Subordinated Debt LP v Enterra Feed Corporation
What is the test for approving an RVO in a receivership?

Overview: This case considers whether an RVO can be approved an a receivership, and the test to be applied in these circumstances.

FTI Consulting Canada Inc., as the court-appointed Receiver and Manager of Enterra Feed Corporation, sought an order, among other things, approving a reverse vesting order (“RVO”) contemplated in an Amended Subscription Agreement among Enterra, as issuer, Forage Subordinated Debt LP III as purchaser, and 2488172 Alberta Ltd. (“ResidualCo”), and transferring and vesting all of Enterra’s right, title and interest in and to the Excluded Assets and the Excluded Liabilities (as defined in the Amended Subscription Agreement) in the name of ResidualCo. At issue was whether this was one of the exceptional cases where an RVO may be appropriate, and whether an RVO can be approved in a receivership.

The Amended Subscription Agreement provided that Enterra would be cleansed of the majority of its liabilities through the mechanism of an RVO whereby ResidualCo would assume the Excluded Liabilities and taken an assignment of the Excluded Assets.

An RVO transaction is an extraordinary remedy that should only be granted in exceptional cases. The fact that this remedy is sought in a receivership does not preclude approval of the RVO structure. A court-appointed officer overseeing an RVO transaction should be prepared to answer the following questions:

1. Why is the RVO necessary in this case?

2. Does the RVO structure produce an economic result at least as favourable as any other viable alternative?

3. Is any stakeholder worse off under the RVO structure than they would have been under any other viable alternative?

4. 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?

In considering the appropriateness of an RVO transaction in the circumstances, the Court noted the following relevant factors:

1. Enterra’s business was unusual and would only be of value to a limited number of prospective purchasers;

2. a pre-receivership SISP was conducted and attracted only two offers, both of which were materially less than the secured debt;

3. a new SISP would be unlikely to attract new offers and, in any event, the Receiver had limited liquidity available;

4. Forage, as senior secured creditor, was materially under-secured and no other subordinate creditors would receive any returns or distributions under any alternative transaction; and

5. no stakeholder would be worse off under the RVO structure than it would have been under any other viable alternative.

Notwithstanding that this was not a proceeding under the CCAA, the statutory jurisdiction to approve the Amended Subscription Agreement and grant the RVO was found through the interplay of section 13(2) of the Judicature Act, section 192(1) of the Business Corporation Act (Alberta), and section 64 of the Personal Property Security Act. The Receiver was appointed pursuant to the provisions of these statutes.

Therefore, the Court found the RVO structure to be an appropriate structure in the exceptional circumstances of this insolvency, and granted the order.

Judge: Justice Romaine

Counsel: Ryan Zahara and Robert Law of MLT Aikins for the Receiver, FTI Consulting Canada Inc.; Raymond Lee, Rana El-Ehoury and George Brody of the Department of Justice Canada for the Crown; Walker MacLeod and Erinn Wilson of McCarthy Tetrault LLP for the Lender