Written By Keely Cameron, Adam Williams and Chris Simard
One of the main benefits to a purchaser who buys oil and gas assets in a proceeding under the Companies' Creditors Arrangement Act or a receivership is the near-absolute quieting of title via a "vesting order." In Manitok Energy Inc (Re), the Alberta Court of Appeal confirmed the importance and effect of Sale Approval and Vesting Orders (SAVOs) in vesting the assets covered by them absolutely in the purchaser.
The Ontario Court of Appeal recently conducted a comprehensive discussion of the purpose and history of vesting orders in Third Eye Capital Corporation v Dianor Resources Inc. The Court described the essential nature of vesting orders, and their importance in Canadian insolvency proceedings, as follows:
To appreciate the significance of vesting orders, it is useful to describe their effect. A vesting order "effects the transfer of purchased assets to a purchaser on a free and clear basis, while preserving the relative priority of competing claims against the debtor vendor with respect to the proceeds generated by the sale transaction"
[the vesting order] is the cornerstone of the modern "restructuring" age of corporate asset sales and secured creditor realizations ... The vesting order is the holy grail sought by every purchaser; it is the carrot dangled by debtors, court officers, and secured creditors alike in pursuing and negotiating sale transactions.
In Manitok, the Court considered whether the purchaser pursuant to a SAVO was entitled to receive the proceeds of the production of natural gas from the purchased assets, which had been produced and sold between the effective date and closing date.
On January 10, 2018, Manitok Energy Inc. (Manitok), a junior oil and gas exploration company, filed a Notice of Intention (NOI) to make a proposal under the Bankruptcy and Insolvency Act (the BIA). Yangarra Resources Limited (Yangarra) had previously purchased certain natural gas assets from Manitok, pursuant to an Asset Purchase Agreement (APA) effective October 1, 2017, and executed January 31, 2018.
The SAVO provided that Manitok's right, title and interest to the assets described in the APA "shall vest absolutely" in the name of Yangarra. It also provided that all persons claiming by, through or under Manitok "shall stand absolutely barred and foreclosed from all estate, right, title, interest … of the Purchased Assets." The SAVO provided that the proceeds of the sale were payable to National Bank of Canada in partial satisfaction of Manitok's indebtedness.
On February 20, 2018, Alvarez & Marsal Canada Inc. (the Receiver) was appointed receiver and manager of all assets of Manitok pursuant to the BIA and Judicature Act. The proposal proceedings were terminated, Manitok and its subsidiaries were deemed bankrupt and the Receiver became the trustee in bankruptcy of Manitok and its related entities.
Yangarra sought to collect from the Receiver its proportionate share of the proceeds from the production of the gas wells for the period between December 2017 and February 2018 (the Proceeds). The Receiver refused to pay these amounts, taking the position that these were unsecured pre-receivership obligations. The Receiver, Yangarra and a third party entered into a Consent Order, directing Yangarra to seek leave to file an application in Manitok's receivership proceedings, seeking payment of the Proceeds and certain other funds. Yangarra failed to seek leave and the Receiver brought an application to strike Yangarra's claims.
The chambers judge granted the Receiver's application to strike, concluding that Yangarra's claim to the Proceeds was an unsecured claim in Manitok's receivership and its status was not impacted by the SAVO. Yangarra appealed.
The Alberta Court of Appeal Decision
In addition to consideration of the substantive issue, the Court of Appeal considered whether Yangarra had an appeal as of right under section 193 of the BIA.
The Court of Appeal stated that, while the language of section 193 appeared broad, it had been interpreted narrowly and purposively, to ensure that bankruptcy proceedings were administered efficiently and expeditiously by minimizing appeals. The Court of Appeal noted that previous decisions had found appeals related to SAVO's as procedural and did not provide an appeal as of right. The Court of Appeal, however, determined in this case that the appeal raised a substantive issue: it concerned the status of the Proceeds and whether Yangarra's claim to the Proceeds was covered by the APA and SAVO, or whether it was an unsecured claim in the receivership. Yangarra therefore had an appeal as of right pursuant to s 193(c) of the BIA.
The Court determined that the chambers judge erred in her interpretation of the SAVO. The chambers judge had concluded that Yangarra's claim to the Proceeds was an unsecured claim in the Manitok receivership, and that there was nothing in the SAVO that would change the status of that claim.
In overturning the chambers judge, the Court of Appeal noted that vesting orders effect the transfer of purchased assets to a purchaser on a free and clear basis, while preserving the relative priority of competing claims against the debtor/vendor with respect to the proceeds generated by the sale transaction. The order conveys title and extinguishes encumbrances.
The SAVO in question was reviewed in depth and the Court of Appeal found that, based on the language of the APA, the Proceeds fell within the definition of the "Assets" that had been transferred in the APA, and within the definition of "Purchased Assets" in the SAVO. In the Court of Appeal's view, the unambiguous language of the SAVO made it clear that the Assets included the Proceeds and were vested absolutely in Yangarra. To find otherwise would have provided Manitok's secured creditor, National Bank of Canada, with a windfall as it would have received both the proceeds from the transactions but also the Proceeds.
In the result, the Court of Appeal directed that Yangarra bring an application to seek leave and file an application in Manitok's receivership proceedings for the payment of the Proceeds. That application, which had been contemplated by the Consent Order signed by the parties, would be the appropriate place for Yangarra to seek the balance of its relief, specifically a declaration that it was the rightful owner of the Proceeds and an order directing the Receiver to remit the Proceeds to Yangarra immediately.
This decision reaffirms the crucial role played by vesting orders but also potentially makes it easier for such orders to be appealed through the Court of Appeal's findings related to section 193. Already a heavily litigated proceeding, Manitok's insolvency may yet have more case law to offer the practice of insolvency.
For advice on the impacts of this decision, please contact a member of our Restructuring and Insolvency team.