To vest or not to vest: Interests in land and the powers of insolvency courts

On June 19, 2019, the Ontario Court of Appeal released its decision in Third Eye Capital Corporation v. Ressources Dianor Inc./Dianor Resources Inc.^[1], addressing the following issues:

1. Does the court in a receivership have the jurisdiction to grant an order vesting assets in a purchaser free and clear of encumbrances?
2. When should the court exercise its jurisdiction to extinguish an interest in land, in this case, a Gross Overriding Royalty ("GOR"), by way of a vesting order in an insolvency proceeding?
3. Can and should a receiver close a transaction within the ten-day appeal period after obtaining an approval and vesting order?

Summary

The Court of Appeal found that Ontario courts do have the power to vest out an interest in land. In determining whether to do so, a court must consider, in order: (1) whether the interest in land is more akin to a fixed monetary interest that is attached to land, or a fee simple interest in the ownership of a feature of the property itself; (2) whether the parties have consented to the vesting; and (3) the equities of the relief sought.

The Court of Appeal also determined that it was within the receiver's discretion to close the transaction within the ten-day appeal period. However, it stated that generally speaking deals should not be closed within the appeal period if a party is advised of a possible pending appeal.

Facts

The issues in this case arose in the context of a credit bid by Third Eye Capital Corporation ("TEC") to purchase the assets, including sub-surface rights in real property, of Dianor Resources Inc. ("Dianor") in a receivership. TEC's bid was conditional on the receiver obtaining an order vesting the property in TEC free and clear of certain GORs registered on title by 2350614 Ontario Inc. ("235").

The judge at first instance held that the GORs were not an interest in land, and accordingly there was no issue as to whether they could be vested out; however he ordered that 235 be paid the GORs' fair market value.

The motion judge released his reasons on October 5, 2016. The receiver then circulated a draft approval and vesting order on October 19, 2016 (the "Draft Order"). On October 26, 2016, 235 approved the Draft Order as to form and content and the receiver had the order issued and entered.

That same day (20 days after the release of the decision), 235 advised the receiver that it was considering appealing the motion judge's decision and asked that the receiver defer cancelling the GOR registrations. The receiver refused to do so and the transaction closed later that day.

235 ultimately appealed the motion judge's order. The Court of Appeal initially determined that the motion judge erred in finding that the GORs were not an interest in land, but requested further submissions and argument on whether the Superior Court has the power to extinguish a third party's interest in land (among other things).

Decision:

1. Does the court in a receivership have the jurisdiction to grant an order vesting assets in a purchaser?

The Court of Appeal considered the jurisdiction of the Court at first instance to grant a vesting order. The Court noted that the receivership provisions in the Bankruptcy and Insolvency Act ("BIA")^[2] and the concept of a receivership implicitly contemplate the power to sell assets, and that the power is commonly expressed in the receiver's appointment order. Accordingly, the Court concluded that s. 243 of the BIA confers jurisdiction on the court to approve a sale proposed by a receiver and courts have historically acted on that basis.

Based on the jurisdiction to approve a proposed sale, the Court further concluded that the power to vest assets in a sale approval order is necessary and consistent with the power to sell. For these reasons, the Court concluded that the power to vest is also within the jurisdiction granted to the court pursuant to s. 243 of the BIA.

2. When should the court exercise its jurisdiction to extinguish an interest in land, in this case, a GOR, by way of a vesting order in an insolvency proceeding?

The Court of Appeal held that a "rigorous cascade analysis" should be applied where a vesting order extinguishes rights. There are three stages to this analysis.

First, the Court must consider the "nature and strength" of the interest that the proposed vesting order will extinguish. The Court of Appeal appears to contemplate a continuum between a fee simple interest in land (which likely would never be vested out) and a security interest, stating:

… a key inquiry is whether the interest in land is more akin to a fixed monetary interest that is attached to real or personal property subject to the sale (such as a mortgage or a lien for municipal taxes), or whether the interest is more akin to a fee simple that is in substance an ownership interest in some ascertainable feature of the property itself. This latter type of interest is tied to the inherent characteristics of the property itself; it is not a fixed sum of money that is extinguished when the monetary obligation is fulfilled. Put differently, the reasonable expectation of the owner of such an interest is that its interest is of a continuing nature and, absent consent, cannot be involuntarily extinguished in the ordinary course through a payment in lieu.^[3]

Second, the Court should consider whether the party with the interest that is being vested out either consented to the order (at the time of the sale or earlier) or subordinated its interest to the enforcing creditor, either of which would weigh in favour of extinguishing the interest.

Finally, if the first two factors are not determinative, the court may consider the equities of the proposed relief including considering (a) the prejudice to the holder of the interest, (b) whether there will be adequate compensation for the interest, (c) whether there is equity in the property and (d) whether the parties acted in good faith.

3. Can and should a receiver close a transaction within the ten-day appeal period after obtaining an approval and vesting order?

The Court of Appeal held that due to the failure of the appellant in this case to inform the receiver that it was contemplating an appeal prior to the proposed closing date, despite the decision being released some twenty days earlier, it was permissible for the receiver to close the transaction.   

However, the court also held that "[a]bsent some emergency that has been highlighted in its receiver's report to the court that supports its request for a vesting order, a receiver should await the expiry of the 10 day appeal period before closing the sale transaction to which the vesting order relates."

The Court of Appeal's decision in this case raises important issues for lenders and royalty holders with respect to how their competing interests may be treated in an insolvency. It will be interesting to see how courts apply the test established by the Court of Appeal to other interests (for example, a leasehold interest in a quarry that includes a right to remove aggregate).

In addition, the Court's statement that a receiver should wait for the expiry of the appeal period to close transactions appears to take a step beyond the current commercial practice of closing immediately after approval unless a party states that (a) it intends to appeal and (b) will be seeking a stay of the vesting order in the meantime.