Alberta court reins in use of reverse vesting orders

Cleo Energy Corp (Re), 2025 ABKB 621
Can an RVO be approved when no evidence is presented as to why a CCAA plan isn't feasible?

Summary: The Alberta Court of King’s Bench has refused to approve a reverse vesting order in the receivership proceedings of Cleo Energy, holding that the receiver failed to justify why the transaction couldn’t proceed through a traditional plan process. The Court found that the receiver’s assertions about the costs, risks, and delays associated with transferring oil and gas licences were unsupported by evidence, emphasizing that assertions by the purchaser that the transaction must be an RVO are not enough to establish that it is necessary. The Court criticized the use of RVOs as a shortcut to avoid the creditor protections built into the CCAA and BIA, warning that such orders must be backed by concrete analysis—not convenience or purchaser preference—before they can displace creditor democracy.

In December 2024, Cleo Energy Corp. (“Cleo”), a private oil and gas company that owned and operated assets in East Central Alberta, filed a Notice of Intention to Make a Proposal (“NOI”) pursuant to section 50.4(1) of the Bankruptcy and Insolvency Act (“BIA”). During the NOI proceedings, only some of Cleo’s assets were sold through a sales and investment solicitation process. To avoid a deemed bankruptcy pursuant to s. 50.4(8) of the BIA, the interim financier was granted a receivership order on June 2, 2025, appointing Alvarez & Marsal Canada Inc. as receiver (the “Receiver”).

The Receiver conducted a remarketing process to sell the unsold Cleo assets. The process generated eight non-binding bids and the Receiver selected 2698902 Alberta Corporation (the “Purchaser”) as the successful bidder. The Receiver proposed that the transaction be effected by way of a reverse vesting order.  The proposed RVO contemplated the creation of ResidualCo, which would take on assets, liabilities, and contracts that the Purchaser did not want.  Cleo, which would be acquired by the Purchaser, would retain, among other things, Crown mineral leases with the liabilities for unpaid royalties and rent being transferred to ResidualCo.

The Receiver explained that “[b]y using an RVO, the Purchaser can avoid seeking approval from Alberta Energy Regulator for multiple licence transfers, a process that could be lengthy and introduce additional risk and cost to the Transaction and deplete the remaining cash on hand for distribution to creditors.” The Receiver gave no estimate of the time it would take to complete AER licence transfers or any explanation of what “attributes” of Cleo would be preserved or why such attributes might have value sufficient to justify proceeding by way of an RVO. The Receiver asserted that alternatives to the proposed RVO would in all likelihood result in material environmental liabilities and abandonment and reclamation obligations being transferred to the Orphan Well Association (“OWA”). No evidence or analysis was offered to substantiate this claim other than to point out that other bids contemplated environmental liabilities being assumed by the OWA.

The traditional way for non-asset attributes to be conveyed in insolvency proceedings is via a plan under the Companies’ Creditors Arrangement Act (“CCAA”) or a proposal pursuant to the BIA.  Both CCAA plans and BIA proposals provide creditors the right to vote and a claims process. An RVO delivers the benefits of a CCAA plan or BIA proposal without the messiness and expense associated with creditor democracy.

Here, the Receiver asserted that the transfer of licences would take time and cost money which, in turn, would create more risk and reduce the return to Cleo creditors. The Receiver also stated that the Purchaser made proceeding by RVO a condition of its offer. The Court noted that where it is claimed that there is an obstacle to proceeding via alternative structures, such as the cost, risk, and delay of licence transfers, the party seeking the RVO must substantiate same. The proposed transaction could be completed by way of a CCAA plan. Proceeding by way of a CCAA plan would allow Cleo to avoid the licence transfer problem that it has identified. But proceeding by way of a CCAA plan would mean that Cleo would have to deal with the inconvenience and expense of affording creditors their statutory rights under the CCAA when there will be no recovery for most creditors.

The cost, delay, and risk associated with the transfer of licences has been found to justify the use of an RVO structure. The problem here was that delays, risks, and costs associated with the transfer of AER licences were asserted but not proved. Oil and gas licence transfers are an everyday part of business in the oilpatch.  Part of the AER’s job is to process licence transfers. The Receiver was required to substantiate claims that the burdens associated with licence transfers necessitated that this transaction use an RVO structure.

The Court noted that the Receiver’s report should show that the Receiver has done the work to determine what the delays, risks, and costs associated with licence transfers are likely to be. For example, instead of asserting that there will be delays, costs, and risks associated with the licence transfers, the Receiver should specify what delays, costs, and risks are apprehended and why the Receiver believes those concerns to be genuine and material. The Receiver must provide backup to justify its conclusion regarding the materiality of the risks, delays, and costs associated with the required licence transfers. It was possible that the cost of AER licence transfers could be material to the proposed transaction given that much of the deal consideration was comprised of assumed liabilities that would otherwise be transferred to the OWA. However, the Receiver ought to have provided an estimate of the costs associated with the AER licence transfers and a reasoned explanation why the estimated amount was material to the proposed transaction.

The fact that the Purchaser required that the proposed transaction proceed by way of an RVO did not move the Court.  Purchasers always demand what is most favourable from their perspective.  The Court must assume that the Purchaser will behave rationally.  Under the circumstances, the Court posited that if an RVO is not available as a deal structure, the economically rational thing for the Purchaser to do was not to walk away but to negotiate a reduction of the purchase price by the amount that it estimated it would have to pay to effect the licence transfers. Assertions that the transaction must be an RVO are not enough to establish that it is necessary.

The Court concluded that the Receiver did not establish that an RVO was necessary. The Receiver’s application was dismissed without prejudice to its ability to apply again for approval of the proposed transaction with additional supporting material and/or for a restructured transaction.

Judge: The Honourable Justice Colin C.J. Feasby

Professionals involved:

• Sam Gabor and Tom Cumming of Gowling WLG for Cleo Energy Corp.

• James Reid and Pavin Takhar of Miller Thomson for the Receiver, Alvarez & Marsal

• Melissa Burkett of Alberta Justice for Alberta Energy

• Daniel Segal of Department of Justice Canada for Employment and Social Development Canada

• George Wong for the Alberta Energy Regulator

• Ryan Zahara of MLT Aikins for the Orphan Well Association

• Aaron Dow and Alexiss Teasdale of Lawson Lundell for the Interim Financer, uCapital – uLoan Solutions Inc.