The Unforeseen Scope and Effect of Third-Party Releases in Reverse Vesting Orders

A reverse vesting order, commonly referred to as an RVO, is a relatively new restructuring tool in the Canadian insolvency landscape. At a high level, an RVO involves the purchase of a financially distressed company’s shares, rather than its assets. All desired assets for the acquisition remain in the distressed company as part of the restructured entity. However, assets, liabilities and encumbrances that the purchaser cannot assume are vested in and transferred to a newly established company, which becomes the applicant in the insolvency proceeding. That new company then undergoes the winding down procedures.

Essentially, a reverse vesting transaction enables a purchaser to obtain its purchased assets free and clear of responsibilities, mirroring the benefits usually only available in an asset sale transaction.¹

This article will focus on the scope and effect of third-party releases in favour of the purchaser of the distressed company’s shares in the RVO.

The Scope and Effect of Third-Party Releases

When determining whether to grant releases sought in an RVO, courts apply the following factors:

• Whether the parties to be released were necessary to the restructuring of the debtor
• Whether the claims to be released are rationally connected to the purpose of the restructuring and necessary for it
• Whether the restructuring could succeed without the releases
• Whether the parties being released contributed to the restructuring
• Whether the releases benefit the debtors as well as the creditors generally²

A cautionary example of the type of release that may be sought in an RVO is PaySlate Inc. (Re), 2023 BCSC 608 [PaySlate].³ In PaySlate, the purchaser in an RVO transaction, alongside the debtor company and the monitor, sought broad releases and bars to claims against a large number of unsecured creditors and contractual parties who were deemed to be critical suppliers of the debtor company.⁴ The counterparties to these releases were required to continue providing services to the debtor company despite the restriction of their rights and the limitation of their claims to a set amount, all without being provided with appropriate notice of the proposed RVO transaction.⁵ Recognizing the prejudice against the unsecured creditors, Justice Walker refused the RVO application.

Concern may arise in the construction dispute context. On a construction project, there is generally an owner of the project, who owns the land and wants to develop it, and a general contractor, whom the owner hires to hire subcontractors and trades to do the actual work.  A situation could arise where the owner runs out of money to fund the project and the general contractor petitions the owner into insolvency proceedings. In this scenario, that general creditor also owes significant funds to the sub-contractors it hired for the project. Pursuant to the Builders Lien Act, SBC 1997, c 45 those sub-contractors have the right to file a lien against the land owned by the owner to protect their rights. In this case, the sub-contractors would have a potential remedy against the general contractor, pursuant to the contract between those parties, and against the owner, pursuant to the lien.

The concern arises in this example where the general contractor, as a participant in the insolvency proceedings, bids to purchase the shares of the owner in an RVO. As a condition of entering into that purchase agreement, the general contractor may seek a broad form release of any claims its sub-contractors and suppliers have against the general contractor related to the owner’s project.

In this context, if there is a shortfall arising out of the RVO, such that the lien claimants will not receive any funds from the share purchase, and if such a release is granted, those sub-contractors and suppliers would lose the benefit of their lien claim as well as their ability to pursue the general contractor for its breach of contract by reason of the release.

Key Considerations for Counsel

Counsel representing creditors of the purchaser of an insolvent company’s shares in an RVO must exercise particular care and caution when reviewing the scope of releases being sought in an RVO. This is particularly the case where the purchaser of the distressed company’s shares is also the senior secured creditor of the company. Releases sought in favour of the purchaser of the distressed company’s shares are common and the net result can be that the purchaser’s liabilities are effectively restructured alongside the affairs of the debtor company, notwithstanding that the purchaser itself is not an applicant in the insolvency proceedings.

1. Victor Olusegun, The Journey of Reverse Vesting Orders from “Extraordinary” to Ordinary: Is it Time for Parliamentary Intervention?, 2024 22 Annual Review of Insolvency Law, 2024 CanLIIDocs 3053, retrieved on 2026-09-14. (“Journey of RVO”)
2. Good Natured Products Inc. (Re), 2024 BCSC 2126 at para 92.
3. PaySlate Inc. (Re), 2023 BCSC 608.
4. Ibid at para 65.
5. Ibid at para 63.