Can an Insolvency Court Extinguish Interests in Land Through Vesting Orders?

July 09, 2019

Written By Vivek Warrier, Alexis Teasdale, Isabel Langlois and Dylan Gibbs

The Ontario Court of Appeal recently released the second of two highly anticipated decisions stemming from the receivership proceedings of Dianor Resources Inc. The first decision clarified the test used to determine when a royalty interest constitutes an interest in land. We discussed this decision in an earlier blog post: Ontario Court of Appeal Clarifies and Reaffirms Dynex.

In the second decision, Third Eye Capital Corporation v Ressources Dianor Inc/Dianor Resources Inc, 2019 ONCA 508 [Dianor], the Court confirmed the jurisdiction of an insolvency court to grant a vesting order that extinguishes an interest in land and set out a framework to determine when it is appropriate for a third-party interest to be vested off title. Importantly for holders of overriding royalties in oil and gas and other minerals, the Court held that a royalty interest that qualifies as an interest in land could not be extinguished by a vesting order without the prior consent of the royalty holder.

Background

Dianor was engaged in the acquisition and exploitation of mining properties in Canada. When Dianor became insolvent, the Court appointed a receiver over the company's assets under section 243 of the Bankruptcy and Insolvency Act, RSC 1985, c B-3 [BIA] and section 101 of the Courts of Justice Act, RSO 1990, c C-43 [CJA]. In the course of the receivership proceedings, the receiver sought court approval of the sale of Dianor's mining claims, which were subject to gross overriding royalties (GORs), held by a third party. The royalty holder did not oppose the sale but argued that the mining claims had to be transferred to the purchaser subject to the GORs.

The motion judge concluded that the GORs were not interests in land and granted a vesting order, which authorized the sale of the mining claims free and clear of the GORs on the condition that $250,000 (based on expert valuation) of the proceeds of sale be paid to the royalty holder as compensation. On appeal, the Ontario Court of Appeal overturned the motion judge's decision and held that the GORs were interests in land. The Court then asked the parties to provide further submissions on whether the motion judge had jurisdiction to grant a vesting order that extinguished the GORs.

The Court of Appeal Decision

Justice Pepall, writing for the unanimous panel of the Court of Appeal, held that a broad, liberal and purposive interpretation of section 243 of the BIA gives the court the jurisdiction to authorize the receiver to enter into an agreement to sell property and in furtherance of that power, grant an order vesting the purchased property in the purchaser. The Court found that vesting orders were incidental and ancillary to the receiver's power to sell the debtor's property.

The Court then considered whether it is appropriate for a vesting order to extinguish interests in land. The Court set out a "rigorous cascade analysis" to make that determination. The framework requires considering: (i) the nature of the interest; (ii) the consent of the interest holder; and (iii) if necessary, the equities.

Regarding the nature of the interest, the Court held that the inquiry should be whether the interest in land is more akin to a fixed monetary interest, such as a mortgage or 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. An ownership interest is expected to be of a continuing nature and cannot be extinguished without the owner's consent. The second component of the analysis requires consideration of whether the interest holder has consented to its interest being removed from title. The interest holder can provide its consent at the time of sale or through prior agreement.

Where the nature of the interest and consent are inconclusive or ambiguous, the analysis turns to the equities. There is no exhaustive list of considerations at this stage, but the Court noted that relevant considerations include: any prejudice to the third party interest holder; whether the third party will be adequately compensated from the proceeds of sale; whether there is any equity in the property being sold; and whether the parties are acting in good faith.

Conclusion in Dianor

Applying the framework to the facts in Dianor, the Court found that the interest represented by the GORs is an ownership in the product of the mining claims, and that although a value could be ascribed to the GORs, it was more than an interest that secured a fixed monetary obligation. Given the nature of the GORs and the lack of consent by the royalty holder, the Court held that the motion judge erred in granting an order extinguishing the GORs.

On the particular facts of this case, however, the Court held that the royalty holder could not succeed on the appeal because it failed to bring the appeal within the 10-day period established under the BIA, and that it would not be appropriate for the Court to grant an extension of time.

Implications

The decision of the Ontario Court of Appeal in Dianor reduces the uncertainty created by a statement made by the motion judge in obiter dicta that the court would have the authority to grant the vesting order free of the royalty rights whether the royalty rights "were or were not an interest in land." While the Court of Appeal affirmed the jurisdiction of an insolvency court to extinguish third-party interests through vesting orders, the Court also established a rigorous framework to guide the court's exercise of that jurisdiction.

Dianor provides some reassurance to royalty holders regarding the treatment of their interests in insolvency proceedings. The Court confirmed that when royalty interests qualify as interests in land, the court cannot vest those interests off title without the consent of royalty holders. We discussed in our previous blog the steps that royalty holders can take to ensure that their royalty interests qualify as interests in land and will "run" with the land to bind a third-party purchaser.