Nine of the 13 times RVOs were used since 2000 came occurred last year
The emergence of reverse vesting orders as a tool to facilitate restructurings under the Companies’ Creditors Arrangement Act was a significant feature of insolvency-related court proceedings in 2020, says a new report from Davies Ward Phillips & Vineberg LLP.
Davies partner Natasha MacParland says RVOs where undesired liabilities of a company are hived off into a separate corporation were first used in 2000 to restructure retailer T. Eaton Co. It is a tool that has been employed sparingly over the years, only two times until 2019. However, since then, RVOs have been used 11 times, with nine times in 2020 alone.
Significant restructurings using an RVO in 2020 include New Age circus Cirque du Soleil and miner Nemaska Lithium. There were also four restructurings under CCCA in the cannabis sector — – Beleave Inc., Wayland Group Corp., Tidal Health Solutions Ltd., and Green Relief Inc.
MacParland says that, typically, restructurings have seen the insolvent company’s desired parts split off into a new corporation, which then becomes the firm emerging from CCAA. However, the RVO structure involves a new corporation created and added as a debtor in CCAA proceedings. The unwanted liabilities, assets and contracts are then vested into this new corporation.
At this point, the original corporation’s shares can then be sold to a purchaser “free and clear” of all the unwanted liabilities that were vested out. The original corporation then emerges from CCAA, while the original company’s creditors are left with claims against the newly created company with the CCAA. That new company is then placed in bankruptcy or files a plan of arrangement.
“It’s a cleansing of the old company,” MacParland says. She adds that RVOs are used in transactions where you want to keep the original structure for tax purposes, obtain maximum value, or keep essential licences in the future company, such as in the cannabis sector.
Another potential key advantage of using RVOs, says MacParland, is that it can be faster.
In the case of Cirque, a hybrid structure using traditional vesting and reverse vesting was used an asset sale of most U.S. assets and a reverse vesting sale of the Canadian corporate group, which saw excluded liabilities transferred to a new “ExcludeCo.” The entire CCAA process took a relatively short 119 days.
MacParland says an “unusually low” number of insolvency filings made in 2020 is a trend carried into early 2021. While the exact reasons are unknown, MacParland says the belief is that government subsidies and patient lenders are helping firms stay afloat.
Creditors such as banks are trying to be “good corporate citizens and not take unnecessary steps,” MacParland says, adding that with the rollout of the Covid-19 vaccine, there’s a lot of hope that recovery is around the corner.
Still, the Davies report suggests that pressure on firms will “increase and continue as we move into the next stage.
“Early indications imply that the Canadian insolvency system has pivoted quickly and effectively; however, the institutional capacity of the system to address a potential onslaught of filings may be an issue in the future,” it says.
Geographically, the report says that while Ontario had the greatest number of CCAA filings, Quebec had filings with the highest cumulative value, driven by the $1.5-billion restructuring of Cirque du Soleil.
Out west, while Alberta and British Columbia had the same number of companies file under the CCAA, the aggregate value of those filings was higher in Alberta, “likely driven by Alberta’s depressed extractive sector seeking relief from creditors.”
Sector-wise, the report says the aggregate value of mining and oil and gas extraction liabilities topped other sectors at over $2 billion. Just under $2 billion worth of liabilities dealt with under the CCAA were in retail, the second-highest value across industries. Significant turmoil in the cannabis sector across the country led to large manufacturing insolvencies, especially in Ontario and British Columbia.
The report says the accommodation and food services sector “provides an example of the general trend seen throughout the pandemic: the big get bigger; the small and local struggle.”
The only CCAA proceeding in a sector that includes hotels and restaurants was the King Street Food Company in Toronto, which owns and operates a series of fine dining establishments across the city.
“With government lockdowns banning indoor dining, a business with locations exclusively in an area with especially high infection rates had little chance of avoiding insolvency,” the report says. However, larger businesses with both better brand recognition and established takeout/delivery infrastructure have avoided the need for the protections the CCAA affords struggling giants.”
MacParland says there is also concern regarding industries such as manufacturing, real estate, construction and professional services, “where we are starting to see an increasing number of receiverships, something we’re keeping an eye on.”