Transferring Assets in a Receivership in Canada? Is it Vested or Not?

By Steve Weisz, Caitlin Fell and Alex Don of Brauti Thorning Zibarras LLP

Introduction

In insolvency proceedings, when a debtor company becomes insolvent, its creditors will often look to sell the debtor company’s assets and use the proceeds of the sale to satisfy the outstanding debt.  To do this, a receiver may be appointed by the secured creditors or the court to take possession of and sell or liquidate the assets of the debtor company to repay the outstanding debt. In a sale of the debtor’s assets, a purchaser will want to ensure that it will take title to the assets free and clear of all encumbrances and claims. To achieve this result, a receiver will obtain a vesting order in order to insulate purchasers from claims made by third parties against the debtor and its assets.

In Canada however, recent caselaw has brought to the forefront questions as to the certainty that purchasers of distressed assets typically enjoy in a receivership with respect to the conveyance of assets free and clear of all claims and encumbrances. Specifically, this has been the case in circumstances where third party proprietary rights are involved. In the recent case of Third Eye Capital Corporation v. Dianor Resources Inc. (“Third Eye Capital”),[1] the Ontario Court of Appeal has invited additional submissions on the question of a motion court’s jurisdiction to vest out third party proprietary interests. More specifically, the question to be addressed was:

Whether and under what circumstances and limitations a Superior Court Judge has jurisdiction to extinguish a third party’s interest in land using a vesting order under s. 100 of the Courts of Justice Act (“CJA”) and s. 243 of the Bankruptcy and Insolvency Act (“BIA”)?

This decision has important implications on the Canadian restructuring regime and represents an opportunity for the Court of Appeal to establish a principled approach to determining the jurisdiction of a motions judge to vest out certain rights and proprietary interests, to assist parties in insolvency proceedings to understand the limits and boundaries of the court’s jurisdiction and their respective rights and entitlements relative to other stakeholders and purchasers of assets in insolvency proceedings.

Several Canadian cases have held that the inherent jurisdiction of a motion court does not confer on it the power to take real property from third parties simply because the court considers it equitable to other stakeholders. Rather, the position of the courts has been that the enabling statutes only grant the courts authority to affect a transfer of title to a party who is otherwise or independently entitled to it.

Facts

At issue in Third Eye Capital were certain Ontario mining claims held by Dianor Resources Inc. (“Dianor Resources”)., which were subject to Gross Overriding Royalties (“GOR”) in favour of the appellant, 2350614 Ontario Inc. (“235 Co.”). Notices of the agreement granting these GORs were registered on title to the relevant surface rights and mining rights of Dianor Resources.

As a result, the financial insolvency of Dianor Resources Inc., Third Eye Capital Corporation sought and obtained the appointment of a receiver under s. 243 of the BIA and s. 101 of the CJA over Dianor’s assets, property and undertakings. The receiver ran a sale process for Dianor’s assets and received two bids for the mining claims, both of which included a condition that the GORs be terminated or significantly reduced. Third Eye Capital Corporation, as the secured lender, submitted a bid and was chosen as the successful bidder. In approving the sale of the assets to Third Eye Capital, the motion judge granted a vesting order which extinguished 235 Co.’s gross royalties. 235 Co., although not opposing the transfer, asked that the mining claims be transferred subject to the royalties. The motion judge rejected 235 Co.’s argument that the royalties constituted an interest in land and held that the court had jurisdiction under the CJA to transfer the mining claims to Third Eye Corporation free and clear of the royalties.

On appeal, 235 Co. sought to set aside the order of the motion judge and to obtain an order stating that its royalties by way of the GORs constituted an interest in land. The Court of Appeal agreed with 235 Co. that its GORs constitute an interest in land; however, it requested additional submissions on whether a motion judge had jurisdiction to vest out 235 Co.’s GORs in the sale of Dianor’s mining rights to Third Eye Capital.

The Nature of Vesting Orders Generally

Historically, the court’s power to grant vesting orders derived from the law of equity. The Court of Chancery used to grant in personam orders that directed parties to deal with property in accordance with the court’s judgment, which were then enforced in proceedings for contempt, followed by imprisonment or sequestration. Subsequently, the courts were granted statutory power to grant vesting orders and supplemented the contempt power by allowing the Court to affect the change of title directly.

The power of a motion court to grant vesting orders in Canada is now found under s. 100 of the CJA, which provides that a “court may by order vest in any person an interest in real or personal property that the court has authority to order be disposed of, encumbered or conveyed.” The change in the source of the court’s jurisdiction to grant vesting orders did not change its application. Rather, s.100 of the CJA has been recognized to only provide for a “mechanism to give the applicant the ownership or possession of property to which he or she is otherwise entitled.”[2]

Finally, the most unique feature of the vesting order is its dual nature. The Court of Appeal of Ontario in Regal Constellation Hotel Ltd., Re[3] opined that a vesting order is a court order on the one hand and a conveyance of title on the other. The court held that “once the vesting order is registered on title, its attributes as a conveyance prevail and its attributes as a court order are spent”, at which point the change of title is affected and any appeal from it is moot. This important ramification on a party’s ability to appeal was addressed in Third Eye Capital, where the court found the appeal not to be moot mainly due to the fact that the issue the motion court’s jurisdiction to issue the vesting order was and still is unresolved.

The Court’s Jurisdiction to Vest Third Party Proprietary Rights

A motion court’s jurisdiction to vest out third party proprietary rights was addressed by the initial reasons of the Court of Appeal in Third Eye Capital. The court recognized that in certain circumstances, where a motion court vests property to an entitled party, certain third-party proprietary interests may be extinguished. However, this jurisdiction to vest out real property interests only arises where the party in whom the property is to be vested, has at equity or common law “a valid and independent entitlement to possession or ownership”.

Canadian courts have exercised this discretion, albeit in exceptionally narrow circumstances. As the scope and the limitations of this discretion are unclear, the Court of Appeal in Third Eye Capital considered several situations where courts exercised its discretion to vest and invited additional arguments to confirm, reject or clarify those circumstances.

The answer to the question as to the scope and discretion of the Court to vest out real property interests appears to be in the case law. Canadian courts have indeed relied on the equitable nature of vesting orders to extinguish third party proprietary rights. The justification for this discretion is that it grants the courts with the necessary flexibility to achieve a just result on a case-by-case basis and to prevent undesirable outcomes. In deciding whether vesting out is appropriate and just under the circumstances, the courts have been weighing the equities of the parties on a principled basis while at the same time considering the prejudice to the third party whose property rights are being transformed or vested out.

Conclusion

The Third Eye Capital appeal is highly anticipated in the insolvency and restructuring circles.  Brauti Thorning Zibarras LLP was retained to intervene in the appeal on behalf of the Insolvency Institute of Canada.  The decision will significantly impact all parties to restructuring proceedings, including for purchasers of distressed assets going forward.  This appeal presents the Court of Appeal with an opportunity to establish a principled approach to determining the jurisdiction of a motion judge to vest out certain rights and proprietary interests. A cornerstone objective of the Canadian insolvency regime is to promote transparency and predictability of result in proceedings. The regime must provide guidance to parties in the sale of debtor’s assets, whereby a trustee or a receiver is able to provide certainty to a purchaser that it will take title to the assets free and clear of all encumbrances and claims in a manner that is approved by the court.

[1] 2018 ONCA 253.

[2] Trick v. Trick, [2006] O.J. No. 2737, at paras. 19-20.

[3] 2004 CarswellOnt 2653.

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