RVO rejected over bid to vest out supply rights

Teal-Jones Group (Re), 2026 BCSC 1771 
Can an RVO wipe out a long-standing supply agreement that gives a counterparty a proprietary interest in the debtor’s land?

Summary: The British Columbia Supreme Court has refused to approve a proposed reverse vesting transaction for Teal-Jones Group that would have wiped out long-standing fibre supply agreements tied to Tree Farm Licence 46, finding that TimberWest and Domtar held proprietary interests that should not be extinguished. The Monitor argued that the sale of the Surrey Mill and TFL 46 to Gillfor Manufacturing was the best available transaction and that removing the agreements was necessary to preserve the business, but the Court found no sufficient evidence that the agreements were uneconomic or would prevent Gillfor from operating the assets. With the agreements priced at fair market value and their termination expected to cause significant prejudice to TimberWest and Domtar, the Court declined to approve the transaction unless they remained in place.

The various entities comprising the Teal‑Jones Group had substantial forest product operations in British Columbia and five US states. In the early 2020s, the Teal‑Jones Group began to experience serious financial hardship, primarily because of COVID‑19, new tariffs imposed by the US government, and high interest rates. On April 25, 2024, the Teal‑Jones Group entities were granted protection under the Companies’ Creditors Arrangement Act. Concurrent proceedings in the US Bankruptcy Court recognized the CCAA proceedings in Chapter 15 proceedings in that jurisdiction.

The petitioner’s assets in Canada and the US were divided into 11 parcels. During the course of these proceedings, the court approved and the Monitor carried out a sales and investment solicitation process (“SISP”) that resulted in the court‑approved sale of parcels 1, 2, 3, 4, 5, 9, 10, and 11. Among other things, parcel 7 comprised the petitioner’s Surrey Mill facility and related timber, shake and shingle operations and real estate. Parcel 8 comprised Tree Farm Licence 46 (“TFL 46”). The Surrey Mill is one of the largest diversified lumber product operations in BC, located on waterfront industrial real estate. TFL 46 is a forest tenure located on Southwestern Vancouver Island.

Sawmills and pulp mills are a fundamental component of the BC forest manufacturing sector. To remain economically viable, these mills require a consistent supply of logs and other fibre from forests. Prior to 1993, TFL 46 was held by Fletcher Challenge. In 1993, TFL 46 was sold by Fletcher Challenge to TimberWest Forest Group (“TimberWest”). The transaction was conditional on TimberWest entering into various fibre supply agreements which allowed Fletcher Challenge to maintain the supply of fibre from TFL 46 for its pulp mills. Sometime prior to 2004, Fletcher Challenge’s BC mills and other assets were acquired by Norske Skog Canada Limited.

On January 19, 2004, the Teal‑Jones Group acquired TFL 46 from TimberWest. Coincident with that transaction, the Teal‑Jones Group entered into certain supply agreements (“Supply Agreements”) with TimberWest and Norske Skog. Domtar Inc. (“Domtar”) is the successor to Norske Skog and a party to the Norske Skog/Teal‑Jones Supply Agreements. The Supply Agreements were imperative to Domtar’s coastal operations in BC, providing Domtar’s coastal pulp mills with the consistent fibre supply needed to operate and allowing TimberWest to fulfill its historical contractual chip Supply Agreements with Domtar. Without the Supply Agreements, Domtar would likely be forced to vastly reduce or terminate its BC operations, which in turn would trigger broad and sweeping negative consequences for the province’s forestry industry.

On July 17, 2026, the Monitor entered into agreements with Gillfor Manufacturing Inc. (the “Surrey Buyer”) pursuant to which the Surrey Buyer agreed to purchase parcels 7 and 8 by way of a share purchase agreement and reverse vesting order (together, the “Surrey Sale Transaction”). The terms of the Surrey Sale Transaction included a requirement that the Supply Agreements be vested off into a newly incorporated company, which would result in the Supply Agreements being unenforceable as against the Surrey Buyer and effectively rendered meaningless. The Surrey Sale Transaction was opposed by TimberWest and Domtar.

Courts have jurisdiction to authorize the implementation of a reverse vesting transaction in appropriate circumstances. Considerations include:

1. Whether the reverse vesting order (“RVO”) structure produces an economic result at least as favourable as any other viable alternative;

2. Whether any stakeholder will be worse off under the RVO structure than they would have been under any other viable alternative; and

3. Whether the consideration being paid for the debtor’s business reflects the importance and value of the licences and permits or other tangible assets being preserved under the RVO structure.

The court must be diligent in ensuring that the restructuring is fair and reasonable to all parties, having regard to the objectives and statutory constraints of the CCAA. Where the transaction would vest out an interest in land, the Ontario Court of Appeal set out the following three‑step analysis for determining whether the interest in land should be extinguished:

1. The nature of the interest.

2. Whether the party who holds the interest has consented to the vesting out of that interest, either in the insolvency process itself or in agreements reached prior to the insolvency.

3. If those two factors prove to be ambiguous or inconclusive, the court goes on to consider the equities to determine whether a vesting order is appropriate in the circumstances.

The Surrey Sale Transaction came about after extensive marketing efforts and negotiations with multiple interested parties. The Monitor and the petitioners were adamant that the Surrey Sale Transaction represented the best transaction available in the circumstances for the benefit of the Teal‑Jones Group and its stakeholders and was necessary and appropriate. The Monitor argued that the transaction would facilitate the continuation of the Surrey Mill’s business and maximize value for stakeholders, including by preserving employment and business relationships, and that it was “the one and only way to accomplish the goals of the CCAA”. The Monitor further submitted that the substantial benefit to the majority of the Teal‑Jones Group’s stakeholders far outweighed any potential disadvantages to TimberWest and Domtar. The Monitor contended that, although unfortunate, the court should nevertheless approve the RVO and the effective termination of the Supply Agreements in order to preserve the Surrey Mill’s business.

The clear intent of the parties in entering into the Supply Agreements was to create an interest in land in favour of TimberWest and Domtar in the nature of a profit à prendre. Both TimberWest and Domtar have a proprietary interest in TFL 46. Accordingly, the Supply Agreements were the type of interest that should not be extinguished. There was insufficient evidence to conclude that the Supply Agreements were uneconomical or would otherwise be an unreasonable constraint on the ability of the Surrey Buyer to operate the Surrey mill facility. No evidence of financial hardship to the Surrey Buyer was proffered. The assertion by the Surrey Buyer that it considered the Supply Agreements to be “so onerous that they would render uneconomic the transaction contemplated by the [RVO]” and that the purpose of the Surrey Sale Transaction would be rendered uneconomical by the Supply Agreements was merely a bare assertion. All transactions under the Supply Agreements were at fair market value. The Court held that the parties had not demonstrated that any loss of the potential opportunity to optimize the value of the products from TFL 46 outweighed the substantial prejudice that would be suffered by TimberWest and Domtar if the Supply Agreements were rendered unenforceable.

The prejudice to Domtar if the Supply Agreements were extinguished would be significant. The Court was not prepared to exercise its discretion to approve the Surrey Sale Transaction if the TimberWest and Domtar Supply Agreements were not retained by the Teal-Jones Group and were instead vested out as part of the RVO.

Judge: The Honourable Justice G.C. Weatherill

Professionals involved include:

• Bryan Gibbons, Baylee Hunt and Thomas Boyd of Lawson Lundell for Domtar Inc.

• Alexis Teasdale of Lawson Lundell for Mosaic Forest Management Corporation, as agent for TimberWest Forest Company and its managing partner, TimberWest Forest Corp.

• Arad Mojtahedi of DLA Piper for the Teal-Jones Group

• Joe Latham, Mark Dunn and Erik Axell of Goodmans, Mihai Tomos of MLT Aikins and S. Common for the Monitor, Ernst & Young Inc.

• Michael Shakra, Melanie Teetaert, David Rotchtin and Andrew Froh of Bennett Jones for the Interim Lenders, Wells Fargo Capital Financial Corp. and Export Development Canada

• Tim Louman-Gardner of Farris for the Purchaser, Gillfor Manufacturing Inc.

• Peter Bychawski of Blakes for Royal Bank of Canada

• Daniel Shouldice of McMillan for Bank of America