Guidance on RVOs in receiverships

Can the court grant an RVO in a receivership?

Royal Bank of Canada v Canwest Aerospace Inc., 2024 BCSC 585
Can the court grant an RVO in a receivership?

Overview: In this case, the Supreme Court of British Columbia considered whether an RVO can be granted in a receivership proceeding in light of the outstanding appeal in Peakhill. The Government opposed the RVO on the basis that, contrary to the lower Court’s findings in Peakhill, the Court has no power to order an RVO in a receivership proceeding. The Court disagreed, ruling that it was bound to follow the lower Court’s decision in Peakhill absent appellate authority calling the decision into question. It also found that the RVO was appropriate in this case, since no stakeholder would be worse off under the RVO structure than under any viable alternative, and the RVO structure was necessary to preserve aviation certificates and contracts with foreign counterparties which could not be conveyed efficiently, or in some cases at all, in an asset sale. The consideration paid for Canwest’s business reflected the importance and value of the licences and permits being preserved under the RVO structure.

Until 2023, Canwest Aerospace Inc. and Can West Global Airparts Inc. (collectively, "Canwest") operated a business that provided specialized aircraft and helicopter maintenance, repair, and overhaul services, often to international customers.  Its business was heavily regulated, requiring certifications issued by Canadian, U.S., and European authorities. In early 2023, faced with an application by its principal secured creditor, Royal Bank of Canada (“RBC”), for the appointment of a receiver, Canwest sought and obtained an initial order under the Companies’ Creditors Arrangement Act. Following a failed transaction for the purchase and sale of its business, Canwest abandoned its claim for relief under the CCAA, and the court appointed a receiver on RBC’s application in August 2023.

RBC was owed in excess of $4 million. His Majesty in right of Canada (“Canada”) was a modest creditor, both in respect of statutory deemed trust claims totalling approximately $70,000, and in respect of unsecured claims for payroll source deductions and taxes totalling approximately $107,000.

Canwest sought an application for a reverse vesting order (“RVO”) in a receivership proceeding, to give effect to a transaction under which a purchaser would acquire its business for US$670,000. The purchaser was only willing to pay US$670,000 if the purchase was effected through an RVO. An RVO would enable the purchaser to acquire ownership of the two Canwest corporations, free and clear of their liabilities. The liabilities and the purchase price would be vested in another company, termed Residual Co., which would replace Canwest as the defendant in this proceeding. The advantage for the purchaser was that it would obtain, through Canwest, regulatory certifications and certain contracts that could not be transferred to the purchaser directly.

The RVO was supported by RBC on the basis that it will minimize RBC’s expected losses. It was opposed on legal grounds by Canada. Canada’s principled objection was that the court has no power to order an RVO in a receivership proceeding. The converse was decided in Peakhill Capital Inc. v. Southview Gardens Limited Partnership, 2023 BCSC 1476, which is currently under appeal. Alternatively, Canada submitted that an RVO was inappropriate.

Canada acknowledged that the order sought did not adversely affect its pecuniary interest as a creditor.  Insofar as it was a secured creditor, it could only benefit from the sale to be implemented by RVO, because there was no better sale in view.  Insofar as it was an unsecured creditor, its interest was unaffected because the unsecured creditors were all indisputably out of the money. However, Canada argued that its interest in voting on a proposal was adversely affected, because the RVO avoids a proposal. It is in this sense that the RVO would be made at Canada’s expense.

Peakhill involved an application for an RVO in an action in which, like this one, the court had appointed a receiver pursuant to s. 243 of the Bankruptcy and Insolvency Act and s. 39 of the Law and Equity Act. The RVO was sought to permit a sale of the debtor’s undertaking in a manner that would avoid liability for $3.5 million of property transfer tax that would be payable on an asset sale. The Province of British Columbia, as the potential recipient of the tax, opposed the RVO on the grounds that, among other things, the court lacked jurisdiction to order an RVO. The Court in Peakhill held that the jurisdiction to grant an RVO is found in s. 183(1)(c) of the BIA. In this case, Canada’s jurisdictional argument was really an argument that Peakhill was wrongly decided. The Court noted that that is an argument for the Court of Appeal, and was satisfied that Peakhill was not distinguishable and that it was bound by it—according to the principle of horizontal stare decisis—to hold that the Court had jurisdiction to grant an RVO in the circumstances of this case.

As to the merits of the application, the Court noted that on an application for an RVO, the first question is whether the proposed sale, whatever its form, should be approved. It’s addressed by reference to the considerations enunciated in Royal Bank v. Soundair Corp. The second question is whether the sale should be approved for implementation by an RVO. The second question is necessary because the authorities warn and the receiver accepts that an RVO is an unusual or extraordinary measure, not justified merely on the ground of convenience or benefit to the purchaser. The second question addresses the exceptional feature of a sale implemented by an RVO. RVOs require close scrutiny and must be justified by compelling and exceptional circumstances because of the risk to creditors and other stakeholders not before the court.

The Court found that the proposed sale was appropriate, fair and reasonable. There were extensive efforts to market Canwest’s undertaking since the initial CCAA order in March 2023. The marketing of the assets was made difficult by the intangible nature of most of the assets, regulatory constraints, complexities introduced by Canwest’s international customer base, and the specialized nature of its work—all serving to limit the universe of potential buyers. Nevertheless, the Court was satisfied that the receiver had conducted the marketing in good faith as an officer of the court.

The Court also found that the interests of all parties were served by the proposed sale. RBC, as the fulcrum creditor with the most to lose, supported the sale. There was no reasonable prospect of a better transaction. No stakeholder would be worse off under the RVO structure than they would have been under any other viable alternative. While Canada was correct that no value was provided to unsecured creditors, there was no realistic scenario under which there could be value for unsecured creditors. The RVO was necessary because the aviation certificates and contracts with foreign counterparties could not be conveyed efficiently, or in some cases, at all, in an asset sale. The consideration paid for Canwest’s business reflected the importance and value of the licences and permits being preserved under the RVO structure. A piecemeal liquidation of the assets would, undoubtedly, result in a markedly inferior result.

Accordingly, the Court approved the RVO.

Judge: Justice Gomery

Counsel: Lisa Hiebert of Fasken for Deloitte as receiver; Jordan Schultz of Dentons for RBC; Martin Sennott and Lauren Morris of Boughton Law for 0854271 B.C. Ltd. and 2155537 Ontario Inc.; J. Ko and R. Leung for the Attorney General of Canada