This paper was a finalist for The Michael MacNaughton Student Writing Award for Insolvency Law.
Introduction
In the past two years, reverse vesting orders (“RVOs”) have become a popular option in many complex restructurings under the Companies’ Creditors Arrangement Act[1] (“CCAA”). An RVO transfers the insolvent firm's undesirable assets and liabilities to another firm. As a result, the debtor company is left with only the assets and liabilities that the purchaser desires.[2] Despite their recent popularity, RVOs have received little judicial scrutiny or substantive guidance.[3] Harte Gold Corp (Re),[4] is the first case to provide a cautionary note and held that greater scrutiny should be exercised when deciding to grant an RVO. The Court’s view is that RVOs should be considered an extraordinary measure.[5] The impact of this case is that parties seeking approval for their RVO structure will be required to meet a higher evidentiary threshold, allowing a court to determine that their RVO structure is necessary, economical, and a viable alternative, that causes the least amount of harm to all stakeholders in comparison to alternate options.
Background
On December 7, 2021, Harte Gold Corp. (“Harte Gold”), a public company that operates a gold mining operation in northern Ontario, filed for creditor protection under the CCAA. Harte Gold required certain material permits and licenses to sustain and continue its operational activities. Harte Gold began a review of its options in May 2021, which could generate the needed liquidity and fund the acquisition of additional capital to assist it with its solvency difficulties. This method entailed addressing a large number of possible purchasers, some of whom signed confidentiality agreements and even fewer of whom completed due diligence using Harte Gold's virtual data room. In the end, Harte Gold received four non-binding expressions of interest, but no binding proposals had been received by the bid deadline.
As a result, Harte Gold signed a subscription agreement with its senior secured creditor, which was intended to be utilized as the stalking horse bid in a court supervised SISP. The subscription agreement provided for a reverse vesting structure, under which the purchaser would obtain Harte Gold’s business and activities while omitting certain assets, contracts, and liabilities that would be assigned to a newly formed company. The parties chose a reverse vesting structure over a more standard asset sale approach involving an approval and vesting order (“AVO”), to retain Harte Gold's numerous permits, licenses, and mineral claims.
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