Jul 30, 2020

Can a Gross Overriding Royalty be extinguished by a vesting order granted in a receivership proceeding?

Third Eye Capital Corporation v. Ressources Dianor Inc./Dianor Resources Inc., 2019 ONCA 508 (CanLII)

1. The Debtor’s main asset was a group of mining claims located in Ontario and Quebec. The agreements under which the Debtor was to acquire certain mining claims provided for the payment of Gross Overriding Royalties (“GORs“) and the granting of royalty rights for diamonds and other metals and minerals. Notices of the agreements granting the GORs and royalty rights were registered on title to both the surface rights and the mining claims.

2. The Debtor ceased operations in December 2012. In October 2015, the Court made an order approving a sales process for the sale of the Debtor’s mining claims. The process generated two bids, both of which contained a condition that the GORs be terminated or impaired. Subject to obtaining Court approval, the Receiver accepted the bid submitted by the Debtor’s secured lender.

3. In August 2016, the Receiver sought Court approval of the sale of the mining claims, as well as a vesting order that purported to extinguish the GORs and royalty rights as required by the agreement of purchase and sale. The Appellant, who was to receive $250,000 in exchange for its GORs under the agreement, approved the order as to form and content, having made no changes. The transaction closed shortly after. On November 3, 2016, however, the Appellant filed a notice of appeal of the sale approval and vesting order.

4. The Appellant argued that the Court improperly exercised its jurisdiction to extinguish a real property interest that did not belong to the company in receivership. It submitted that if the real property interest was worthless, contingent, or incomplete, the court had jurisdiction to extinguish the interest. In this case, however, the Appellant held complete and non-contingent title to the GORs and its interest had value.

5. The Respondent purchaser argued that a broad, purposive interpretation of s. 243 of the BIA and s. 100 of the CJA allowed for the extinguishing of the GORs. The bid was contingent on the GORs being vested off. If the Court were to side with the Appellant, both the Debtor’s asset and the Appellant’s GORs would waste.

6. The necessity for a vesting order in the receivership context is apparent. A receiver selling assets does not hold title to the assets and a receivership does not effect a transfer or vesting of title in the receiver. Purchasers of assets do not wish to acquire encumbered property. Vesting orders provide for the conveyance of title and also serve to extinguish encumbrances on title in order to facilitate the sale of assets. The use of vesting orders is, in essence, incidental and ancillary to the power to sell.

7. If the power to vest did not arise under s. 243 with the appointment of a national receiver, the sale of assets in different provinces would require a patchwork of vesting orders. This interpretation is in line with commercial realities and the goal of the insolvency regime to facilitate the maximization of proceeds and realization of the debtor’s assets and ensure that third party interests are not inappropriately violated.

8. In considering whether to grant a vesting order that serves to extinguish rights, a court should consider:

a. the nature of the interest in land; and

b. whether the interest holder has consented to the vesting out of their interest either in the insolvency process itself or in agreements reached prior to the insolvency.

9. With respect to the first, a court should consider whether the interest in land is more akin to a fixed monetary interest that is attached to real or personal property subject to the sale (such as a mortgage or a 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. With respect to the second, the court should consider the priority of the interests reflected in freely negotiated agreements between parties.

10. If these factors prove to be ambiguous or inconclusive, the court may then engage in a consideration of the equities to determine if a vesting order is appropriate in the particular circumstances of the case. This would include:

  • consideration of the prejudice, if any, to the third party interest holder;
  • whether the third party may be adequately compensated for its interest from the proceeds of the disposition or sale;
  • whether, based on evidence of value, there is any equity in the property; and
  • whether the parties are acting in good faith.
This is not an exhaustive list and there may be other factors that are relevant to the analysis.

11. In this case, the GORs did not exist simply to secure a fixed finite monetary obligation; rather they were, in substance, an interest in a continuing and an inherent feature of the property itself. A GOR is a royalty granted normally by the owner of a working interest to a third party in exchange for consideration which could include, but is not limited to, money or services. The interest represented by the GOR is an ownership in the product of the mining claim, either payable by a share of the physical product or a share of revenues.

12. The imperatives of the mining claim owner did not trump the interest of the owner of the GORs. The motion judge erred in granting an order extinguishing the Appellant’s GORs.