British Columbia v. Peakhill Capital Inc., 2024 BCCA 246

The Province appealed from an order pronounced in a receivership under the Bankruptcy and Insolvency Act (Canada) approving a reverse vesting order (“RVO”), under which the shares of the insolvent debtor were sold to a purchaser after removal of unwanted assets and liabilities. This share sale avoided the imposition of property transfer tax (“PTT”) under the Property Transfer Tax Act (B.C.) thereby enhancing the value of the estate to be distributed to the secured creditors. The judge below had indicated that “[i]t is uncontested that the purpose for structuring the Transaction in this way, as opposed to through a conventional [asset sale], was to avoid paying PTT of approximately $3.5 million” (quoted at para. 5).

After finding that the judge had jurisdiction pursuant to s. 243 of the BIA to authorize the RVO, Harris JA turned to the Province’s argument that the judge’s order effectively deprived the Province of the ability pursuant to s. 2.001(3) of the PTTA (the “Recapture Provisions”) to deny the tax benefit from the transaction on the basis that it was an “avoidance transaction.” This term referred inter alia to a transaction that “is not one that may reasonably be considered to have been undertaken or arranged primarily for a bona fide purpose other than for the purpose of obtaining the tax benefit.” In rejecting this submission, Harris JA stated (at paras. 30-31):

[S]tructuring a transaction to avoid the transfer of title and thereby PTT is a legitimate commercial practice outside the insolvency context. … I can see no reason why that which is legitimate and proper outside the insolvency context should be viewed differently within it.

In any event, I can find no air of reality to the suggestion that the Recapture Provisions could apply to this transaction. The Province fastens on to the suggestion that the sole purpose of the transaction is to avoid PTT, but that is not entirely accurate. As the judge found, the purpose of the transaction was to maximize recovery for the creditors and it did so by avoiding PTT. The goal of maximizing recovery for creditors is a bona fide purpose intended to further the objectives of the BIA. Avoiding PTT was simply the means by which that benefit was conferred. To use the language of the provisions, the RVO is a transaction that may reasonably be considered to have been undertaken or arranged primarily for a bona fide purpose other than for the purpose of obtaining the tax benefit.

The Province appealed from an order pronounced in a receivership under the Bankruptcy and Insolvency Act (Canada) approving a reverse vesting order (“RVO”), under which the shares of the insolvent debtor were sold to a purchaser after removal of unwanted assets and liabilities. This share sale avoided the imposition of property transfer tax (“PTT”) under the Property Transfer Tax Act (B.C.) thereby enhancing the value of the estate to be distributed to the secured creditors. The judge below had indicated that “[i]t is uncontested that the purpose for structuring the Transaction in this way, as opposed to through a conventional [asset sale], was to avoid paying PTT of approximately $3.5 million” (quoted at para. 5).

In finding that the judge had jurisdiction pursuant to s. 243 of the BIA to authorize the RVO, Harris JA stated (at para. 24):

[T]here is a clear jurisdiction to authorize an RVO found in s. 243, provided that the vesting order in question is incidental and ancillary to the receiver’s power to liquidate the assets by sale. The shares of the insolvent company are assets within the receivership. The receiver has taken possession and control of them. They are capable of being sold or liquidated just as underlying assets held by the company can be sold or liquidated. Just as the company’s underlying assets can be prepared for the sale in a manner intended to maximize their fair market value (as in an AVO [asset sale]), so too can arrangements be made to enhance the value of the shares by transferring the liabilities that serve to depress the value of those shares to another entity. I can see no reason to conclude that an RVO is not incidental or ancillary to a receiver’s power to sell. An RVO advances the same goals as an AVO — albeit by employing a different transaction structure. The Province was not able to explain why the RVO at issue here was not incidental or ancillary to powers of the court and receiver under s. 243.