Province challenges RVO in receivership

On what grounds can an RVO in a receivership be challenged?

Overview: In this case, the Court considered the Province of British Columbia’s opposition to an RVO. The Province argued that there is no jurisdiction under the BIA to grant an RVO and, if there is, one shouldn’t be granted in this case since the RVO circumvented provincial legislation, abrogated its statutory decision-making powers, and was unnecessary. The Court disagreed, finding that it does have jurisdiction to approve an RVO under the BIA, and that exceptional circumstances existed in this case to warrant approval of an RVO.

The petitioners were secured creditors of Garibaldi at Squamish Inc. (“GAS”) and Garibaldi at Squamish Limited Partnership (“Partnership” and collectively, the “Garibaldi Entities”). GAS is a federally incorporated company founded in 2001 to develop a ski resort near Squamish, British Columbia (“Project”). GAS is the managing partner of the Partnership. The petitioners sought to acquire ownership of the Garibaldi Entities through an internal reorganization of GAS’ share structure and the Partnership.

The Garibaldi Entities’ ability and GAS’ right to develop the Project arose from an environmental assessment certificate (“EA Certificate”) issued by the Province of British Columbia (“Province”) to GAS on January 26, 2016, pursuant to the Environmental Assessment Act. In order for construction to begin, GAS was required to, amongst other things, satisfy numerous (approximately 40) construction pre-conditions set out in the EA Certificate by no later than January 26, 2026 and obtain approval of a master plan (“Master Plan”) from the Province. Construction has yet to get underway since the pre-conditions called for in the EA Certificate have yet to be satisfied.

The Garibaldi Entities are now insolvent. They owed the petitioners over $80 million, and thus GAS lacked the financial means to satisfy the construction pre-conditions set out in the EA Certificate. The Garibaldi Entities did not own any physical assets and did not generate revenue. They had been dependent on third party funding since inception to support GAS’ obligations to develop a draft Master Plan and to satisfy the construction pre-conditions in the EA Certificate. Their assets were primarily the EA Certificate and some (unidentified) tax attributes (losses).

A receivership order was issued on December 4, 2023, appointing Ernst & Young (“EY”) as the receiver of the Garibaldi Entities. EY undertook without delay and with court approval what all parties agreed was a robust sale and investment solicitation process (“SISP”). As part of that process, EY obtained court approval for the petitioners’ stalking horse bid (“Stalking Horse Bid”) to purchase the Garibaldi Entities for a price of approximately $80.41 million, comprised of, inter alia, a transaction to obtain the rights under the EA Certificate by either a traditional asset vesting order or a reverse vesting order (“RVO”). No other qualified bids were received. Accordingly, EY sought court approval of a purchase agreement in line with the Stalking Horse Bid by means of an RVO. The transaction called for an RVO, with excluded assets and liabilities to be vested into a separate entity referred to as “Excluded Co”. On closing, Excluded Co would be assigned into bankruptcy.

RVOs are a relatively recent method used in insolvency cases to avoid the purchaser assuming an insolvent debtor’s unwanted assets and liabilities. Typically, an RVO contemplates the sale of the debtor through a transaction structured such that “unwanted” assets and liabilities are removed and vended to a residual company while the desired or “good assets” remain with the debtor acquired by the purchaser. RVOs have typically been granted where the debtor operates in a highly regulated environment where it is difficult to impossible to transfer licenses, permits, intellectual property, non-transferrable tax attributes, or other intangibles under a typical asset purchase agreement.

The only party opposing the Transaction was the Province. In particular, the Province queried whether jurisdiction exists under the BIA to approve RVOs, and if it does, whether it was appropriate to do so in this case since, as the Province contended, the RVO circumvented provincial legislation, abrogated its statutory decision-making powers, and was unnecessary. The Province’s overarching position that no jurisdiction existed under the BIA to grant RVOs relied on case authorities and commentary discussing the difference between the rules-based nature of the BIA as opposed to the elastic provisions of the CCAA.

The Province argued that EY had not satisfied its onus to establish the Harte Gold factor of necessity since it had not applied for approval from the chief executive assessment officer to transfer the EA Certificate to the petitioners. The Court found that that application was not required. The change of control mechanism contemplated by the transaction was specifically excluded from the application process. Nonetheless, EY was still required to establish necessity on the evidence, which the Court found it had.

The RVO was essential to allow GAS to meet the timelines imposed by the Province in the EA Certificate and thereby preserve the going concern value of the Project for all stakeholders, the anticipated economic benefits for all stakeholders, the goodwill established with and rights of the Squamish Nation, and tax attributes. The Province, knowing of the existing relationship between the petitioners and existing shareholders of GAS and the Partnership, and the urgent timeframe in which to complete the construction pre-conditions, had not advised, let alone indicated, whether it would approve a transaction contemplated by a traditional AVO or that it would extend the deadlines in the EA Certificate. In the circumstances, the Transaction represented the highest and best recovery for all of the Garibaldi Entities’ stakeholders.

By contrast, a traditional AVO requires not only the reapproval from the Province, but also the preparation of a new application package, drafting and negotiation of a new purchase agreement, and filing of a new application to obtain the relevant order of the Court—all of which would result in additional delay and costs. Pursuing a transaction through the CCAA process would similarly result in additional delay. The Province’s insistence on an unnecessary formal transfer application being made as part of an AVO transaction in these circumstances underscored the necessity of the RVO.

EY also established that no stakeholder, including the Province, would be worse off if the RVO were approved. Nothing in the transaction avoided consultation obligations with the Squamish Nation. To the contrary, the EA Certificate retained by GAS provided for ongoing, broad oversight and consultation with the Squamish Nation throughout the Project to ensure its construction and the operation of the resort are carried out in a satisfactory manner. The petitioners were aware of those obligations contained in the EA Certificate and committed to satisfying them. The Province was the only stakeholder objecting to the transaction despite its stated desire for the Project to complete. None of its statutory powers were adversely affected. There was no other viable alternative at this juncture to preserve the economic benefits to all stakeholders.

In conclusion, jurisdiction existed under the BIA to approve the RVO. EY met its onus to satisfy the Harte Gold factors. EY demonstrated an evidence-based rationale to approve the RVO. Exceptional circumstances existed to warrant approval of the RVO. They arose from the urgency to complete the construction pre-conditions (in order to preserve value to the Garibaldi Entities and their stakeholders, including the Province) coupled with the lack of any meaningful response from the Province that would allow for an expeditious AVO transaction. The transaction proposed by EY was also commercially reasonable.

Accordingly, EY’s application was allowed and the transaction under the RVO was approved.

Judge: Mr. Justice Walker

Counsel: Vicki Tickle and Forrest Finn for Aquilini (the petitioners); John Sandrelli of Dentons for the Garibaldi Entities; William Skelly and Jess Reid for EY as receiver; Owen James, Ray Power, Aaron Welch and A. Glen for the Province; Lance Williams of McCarthys for the Squamish Nation