This article was originally published in Journal of Corporate Renewal (JCR), the official publication of the Turnaround Management Association (TMA), October 2018 edition.
There are many similarities between the sale of assets through a bankruptcy sale in the United States under Section 363 of the U.S. Bankruptcy Code and the sale of assets under Canada’s Companies’ Creditors Arrangement Act or Bankruptcy and Insolvency Act. Although the two countries’ legislation is different, many of the underlying principles are the same, and the desired result of a bankruptcy sale in both jurisdictions is for clean, unencumbered assets to be transferred to a new purchaser.
Because of the similarities, people on both sides of the border often think that the scope of their orders and the factors underlying them can be completely harmonized with one another. To a certain degree, this is true. However, there are also some peculiarities to both jurisdictions, and it is wise to remember that, at times, there are important differences as well.
The decision of the Court of Appeal for Ontario in Third Eye Capital Corporation v. Ressources Dianor Inc./Dianor Resources Inc.1 is a recent examination of both the limitations on the scope of interests that may be cleansed in a bankruptcy sale and the impact of appeals on the closing of a transaction.
Scope of Vesting Orders
Similar to a sale order under Section 363 of the Bankruptcy Code, a vesting order is used to convey assets when sales are completed in the context of an insolvency proceeding in Canada. The advantage of a vesting order is that it “vests out,” or eliminates, financial interests attaching to the assets that are being sold so that the purchaser obtains clean title. The scope of what types of interests may be vested out is largely settled but with a few lingering exceptions. The issue in Dianor is a good example of one of those exceptions.
In Dianor, the issue was whether a sale by the receiver of the debtor company’s assets, mining claims, could be free and clear of a royalty claim by a creditor. At first instance, the trial judge ruled that those rights were vested out in the sale because, he concluded, they were not interests in land.
Upon appeal, however, the Court of Appeal reversed that aspect of the decision. In doing so, it followed an analysis of whether gross overriding royalties were, or could be, interests in land within the meaning of a 2002 decision of the Supreme Court of Canada.2 In short, the Court of Appeal came to a different legal conclusion on the same facts.
Appeal Periods
The possibility of an appeal in a transaction based on a court order is a common issue. This is reflected by the fact that in most sale agreements, one of the conditions of closing is that the sale order must have become “final,” and all appeal periods must have expired. This condition is often waived by both the purchaser and the seller, and closing usually occurs long before the appeal period expires. The general wisdom behind this approach is that reversing a vesting order on appeal after a deal is closed is difficult to do, so the chances of success of any objecting party are generally slim.
However, Dianor shows that in some circumstances, it may be more prudent to wait. Having decided that the royalty claims were interests in land, the Court of Appeal had to face two further issues in deciding whether the appeal should affect the transaction that had already closed.
The first issue about disposition of the appeal arose from the purchaser’s argument that the appeal was moot and should be denied on that basis alone. In what may be the most important takeaway from this case, the Court of Appeal held that the closing of a transaction after approval by the trial court does not necessarily mean that the transaction cannot be affected or undone on appeal but did not finally rule on the point.
The Court of Appeal noted two reasons why that could be the case. First, the existing case law3 had noted that the statute enabling the land titles system allows for applications to change title based on errors or rectification. The Court of Appeal therefore held that this could conceivably allow for an attack on a vesting order, just like any other title instrument.
Second, the court noted that the receiver and purchaser in Dianor had known before closing that the holder of the royalties, who had objected on the motion at first instance, might appeal. Even though no notice of appeal had been filed and no motion for stay of the order approving the sale had been served (much less a stay granted), the Court of Appeal still questioned whether the sale should have proceeded in those circumstances.
The second issue about disposition of the appeal arose because, having decided that the royalty rights were an interest in land, the Court of Appeal then had to consider whether the courts had jurisdiction to vest out such rights in an insolvency sale. The court questioned the basis for this, noting that the statutory provision providing for vesting orders was procedural and did not create substantive rights, but also did not finally rule on the point. 4
The court did note that further transactions in Dianor with innocent third parties could affect whether the appeal was moot and called for further submissions on that point in particular.
The result of all this is to call into question the prevailing wisdom in insolvency sales that one should close as soon as possible after approval has been granted by the court. Now, if there is objection at first instance, a transaction could be affected later, even if there is not an appeal or stay in place when the transaction closes.
Conclusion
The Court of Appeal has asked for further argument in Dianor, so more definitive reasons may come on the interplay between appeal periods and closings, and also on the scope of vesting orders. Until that happens, professionals dealing with the purchase of assets in Canada should take note that closing an insolvency transaction while an appeal period is still running, presumably (but not necessarily exclusively, given the Court of Appeal’s approach) if there was objection at first instance, could lead to a transaction being undone. Additionally, orders should be reviewed to consider the legal basis for vesting out the affected interests.
- 2018 ONCA 253.
- Bank of Montreal v. Dynex Petroleum Ltd., 2002 SCC 7.
- Regal Constellation Hotel Ltd., Re, (2004), 71 O.R. (3d) 355 (C.A.).
- For better or worse, at least the parties to the case have proceeded to engage on those issues and will present further argument to the Court of Appeal in September, which may result in a clearer decision.