The recent decision of Peakhill Capital Inc. v. Southview Gardens Limited Partnership et al., 2023 BCSC 1476 (“Peakhill Capital”) marks the first time, in a contested matter, that a Canadian court has considered the court’s ability to grant a Reverse Vesting Order (“RVO”) solely to realize a tax benefit.
Notwithstanding the fact that the receiver in this case had decided not to recommend the RVO in the course of receivership, the Court determined it had the ability to grant an RVO in the circumstances. In doing so, the Court considered, among other things, the interplay between the RVO and the Property Transfer Tax Act, R.S.B.C. c. 378 (the “PTTA”), and considered and applied the factors set out in Harte Gold Corp (Re), 2022 ONSC 653.[1]
Overview
In Peakhill Capital, Cenyard Pacific Developments Ltd. (the “Debtor”) was in receivership. As part of that receivership, a sale of certain real estate assets was contemplated to the senior secured creditor, Cenyard Southview Gardens Ltd. (the “Purchaser”).
The Purchaser was one of three secured creditors collectively owed more than $83 million. The unsecured creditors were owed approximately $124,000 and were considered “out of the money”.[2]
The sale to the Purchaser was proposed to be carried out by way of a standard Approval and Vesting Order (“AVO”) as part of the receivership, which would have resulted in a transfer of legal title of the real property to the Purchaser, triggering the payment of property transfer tax (“PTT”) pursuant to the PPTA, estimated in this case to be about $3.5 million.
Another option considered by the Debtor and Purchaser for the sale of the Property was an RVO. An RVO permits the transfer of a debtor company’s shares to the creditor after unwanted assets and liabilities have been removed,[3] which would have allowed the parties to avoid the PTT in this case.
After the receiver did not recommend an RVO, the Debtor and the Purchaser (together, the “Applicants”) applied to the Court to have the sale carried out by way of RVO in place of an AVO. transferred to a shell company.
The proposed transaction provided that if the PTT is payable, the purchase price will be reduced by the amount of the PTT. Accordingly, the Applicants argued that if the PTT is payable, the Purchaser, a secured creditor, will suffer a shortfall.
The Province of British Columbia (the “Province”) opposed the relief sought.[4]
The court identified two issues to be determined on this application:
(a) does the Court have jurisdiction to grant an RVO; and
(b) if so, is it appropriate for the Court to grant an RVO in the circumstances?
The receivership order in this case was sought pursuant to s. 243 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (“BIA”)[5] and s. 39 of the Law and Equity Act, R.S.B.C. 1996, c 253 (“LEA”).[6]
The Province raised two arguments regarding jurisdiction:
- Section 183 of the BIA (or s. 243, which deals with receiverships) is insufficient to ground jurisdiction to grant an RVO; and
- Even if s. 183 of the BIA applies generally to grant an RVO, it does not do so in the context of the case, because the BIA must be interpreted together with provisions of the PTTA;
On the Province’s first argument, the Court agreed with and adopted the decision of Justice Walker in PaySlate Inc. (Re), 2023 BCSC 608 (“PaySlate #1”), which held a court may grant an RVO in BIA proceedings.[7]
On the Province’s second argument, the Court held that the Province’s submission regarding the interplay of the PTTA and BIA did not relate to jurisdiction of the Court to order an RVO, but rather it related to the question of whether such an order was appropriate.[8]
In turning to the issue of appropriateness, the court highlighted the unique nature of the application. In a contested proceeding, no Canadian court had addressed whether an RVO may be granted solely to achieve a tax benefit. To determine the issue of appropriateness, the court turned to a detailed review of the principles regarding granting RVOs.
Analysis of the Authorities Regarding RVOs
On several occasions, courts have cited tax benefits as reasons for granting an RVO. The courts have cited the following reasons:
- to avoid substantial payment of property transfer tax;[9]
- to implement an agreement that effectively transferred current tax losses and intellectual property to a purchaser;[10]
- to preserve tax attributes of the debtor, which the purchaser viewed as critical for the success of the future business;[11] and
- to preserve certain tax attributes that would otherwise be lost in a traditional vesting order transaction.[12]
The Province argued that each of these cases represented a going concern enterprise that was preserved by the proposed RVO, and was not for the sole purpose of preserving tax attributes or for tax savings.[13]
The Court did not find the Province’s argument persuasive. While noting that careful consideration is on part of the Court is required when an RVO is sought, the Court considered the reluctance of the courts generally to grant RVOs to be attributable to efforts of creditors to circumvent insolvency processes and prejudice other creditors.[14]
Ultimately, the Court found no evidence that granting an RVO would compromise the other creditors’ rights or otherwise prejudice their interests.[15] It determined the only party who may suffer prejudice was the taxing authority.
The Interplay between the Granting of an RVO and the PTTA
The final argument advanced by the Province was that granting an RVO would be contrary to the PTTA.[16] Once again, the Court did not find the Province’s argument to be persuasive, citing the following reasons:
- there are several instances where courts have granted an RVO that has conferred a tax benefit on parties to an insolvency proceeding – in each case, the taxing authority became entitled to less tax because tax credits or losses were preserved or because taxes payable were avoided;[17] and
- it is clear, at least outside of the insolvency context, that the sale of company shares, which leads to the acquisition of property, does not constitute unlawful tax avoidance.[18]
To further support the Court’s second reason, it referred to the Applicants’ argument that the Province may impose PTT on the transfer of property through the purchase of the shares of a nominee company through regulation, but has not done so.[19]
In addition, the Court found that a receiver declining to recommend the approval of a transaction did not preclude the court from granting an RVO.[20]
Finally, the Court considered the Harte Gold Factors[21] and determined that it was appropriate to grant an RVO for the following reasons:
- While an RVO is not necessary to avoid foreclosure or bankruptcy, it was necessary to allow the parties to structure their affairs so as to preserve $3.5 million in value for the creditors and to maximize the return for creditors;
- The RVO structure produced an economic result at least as favourable as any other viable alternative. It clearly created more value for the creditors and to the extent that the Province is a stakeholder in the analysis, the overall economic result is at least as favourable overall, in the sense that the Province “loses” exactly the amount that the creditors gain;
- As to whether any stakeholder was worse off under the RVO structure, the Province was undoubtedly worse off. However, for the reasons set out above, it is was the Court’s view that the Province’s argument that it is entitled to the PTT because would be unlawful for the creditors to avoid the tax in these circumstances, is belied by the regime currently in place in the non-insolvency context; and
- Finally, the question of whether the consideration paid for the assets reflect the importance and value of the assets being preserved under the RVO structure may be answered in the affirmative. In the event that an RVO is granted, the saved funds go to the creditors.[22]
Take Away
Peakhill Capital permits the court to grant an RVO when the circumstances are deemed appropriate. In its assessment of appropriateness, the court may grant an RVO when the RVO serves the dominant purpose of maximizing the return for creditors. However, the court must proceed with some degree of caution and should not grant an RVO when it is being used to circumvent processes in insolvency proceedings. The court must carefully consider whether the rights of creditors will be compromised or their interests will be prejudiced if an RVO is granted.
If you have any questions relating to this article or need assistance in an insolvency matter, please reach out to John Fiddick, Joseph Romanoski or Patrick Kurek.
[1] Harte Gold Corp (Re), 2022 ONSC 653 at para. 38.
[2] Supra note 1 at paras 49 – 50.
[3] Peakhill Capital Inc. v Southview Gardens Limited Partnership, 2023 BCSC 1476 at paras. 3 – 4.
[4] Ibid at paras. 6 – 10.
[5] Bankruptcy and Insolvency Act, R.S.C 1985, c. B-3 (“BIA”).
[6] Law and Equity Act, R.S.B.C. 1996, c 253 (“LEA”).
[7] Supra note 1 at paras. 20 – 22 citing Playstate Inc. (Re), 2023 BCSC 608 at paras. 84 – 86.
[8] Supra note 1 at paras. 26 – 27.
[9] Port Capital Development (EV) Inc. (Re), 2022 BCSC 1464 [Port Capital] at para. 58.
[10] Quest University Canada (Re), 2020 BCSC 1883 [Quest], leave to appeal ref’d at 2020 BCCA 364 at para. 31 citing Plasco Energy (July 17, 2015), Toronto CV-15-10869-00C (Ont. S.C.J. [Comm. List]).
[11] Quest University Canada (Re), 2020 BCSC 1883 [Quest], leave to appeal ref’d at 2020 BCCA 364 at para. 31 citing Comark Holdings Inc. (July 13, 2020), Toronto CV-20-00642013-00CL (Ont. S.C.J. [Comm. List]); and Playslate Inc. (Re), 2023 BCSC (“Playslate #2”) at para. 11.
[12] Just Energy Group Inc. v. Morgan Stanley Capital Group Inc., 2022 ONSC 6354 at para. 34 [Just Energy],
[13] Supra note 1 at para. 36.
[14] Supra note 1 at paras. 40 – 45.
[15] Supra note 1 at para. 51
[16] Supra note 1 at para. 58
[17] Supra note 1 at para. 61.
[18] Supra note 1 at paras. 62 – 66.
[19] Supra note 1 at para. 67.
[20] Supra note 1 at para. 75.
[21] Harte Gold Corp (Re), 2022 ONSC 653 at para. 38.
[22] Supra note 1 at para. 77.