Ontario Court of Appeal Provides Guidance on Vesting Orders in Receivership – and Beyond

Vesting orders have become one of the most powerful tools in an insolvency professional’s toolkit, providing a purchaser with the comfort that the encumbrances contributing to the debtor’s financial difficulties cannot follow to the new owner. In light of their importance, Canadian insolvency and banking professionals were understandably anxious when the Ontario Court of Appeal (the “OCA” or the “Court”) recently asked for submissions on whether receivership vesting orders can extinguish third party interests in land in the nature of a Gross Overriding Royalty (a “GOR”).¹

The highly-anticipated decision in Third Eye Capital Corporation v. Ressources Dianor Inc./Dianor Resources Inc.² was released in June 2019. The Court held that, while receivership courts have the jurisdiction to grant vesting orders, whether such order should be granted must be determined through a rigorous analysis. The Court developed and applied what it terms a three-part “cascade” analysis and determined that due to the nature of the GOR in this case, it could not be vested out.³ Although the Court ultimately upheld the vesting order due to a procedural technicality relating to the appeal period, the newly-established framework is expected to limit the availability of such orders in the future.

The Court’s confirmation that receivership courts generally have the jurisdiction to issue vesting orders over assets in a receivership affirmed Canadian insolvency professionals’ common understanding. However, the Court surprised a number of observers who took the stance that nothing was sacred in a vesting order, and who expected the Court to affirm the receivership court’s expansive jurisdiction to effectively vest any interest. Going forward, receivers and debtors will have to spend more time negotiating with holders of non-monetary real property interests, who now hold more power than they did before. In contrast, a number of banking professionals and lenders are likely sleeping more soundly knowing that the security provided by a GOR is not as easily disposed of as simple monetary interests.

These issues and future considerations for stakeholders in a receivership are detailed below.