Time To Learn The “Canadian Two-Step”?

Reverse vesting orders (RVOs) have emerged in Canada as an important restructuring tool for debtors. Instead of a traditional sale, debtors’ unwanted liabilities and assets are reverse vested out of the debtor company into a newly created entity, “ResidualCo,” leaving the clean, viable business and its assets in the debtor company for the purchaser to acquire. RVOs have sparked fierce debate. Critics argue they can be used unfairly to shed pension obligations, environmental liabilities, and employee claims in ways that prejudice stakeholders, allowing purchasers to cherry-pick assets to the detriment of creditors.

In In re Iovate Health Sciences International Inc.,¹ one of the first published opinions to analyze the enforceability of Canadian RVOs in the U.S. under Chapter 15 of the U.S. Bankruptcy Code (the Bankruptcy Code), the U.S. Bankruptcy Court for the Southern District of New York (the Bankruptcy Court) granted Iovate Health Sciences International Inc.’s (in its capacity as