In Third Eye v. Dianor, the Court of Appeal
for Ontario revitalized the law of vesting orders, confirming that a motion
judge of the Superior Court of Justice has jurisdiction to extinguish interests
in land in a receivership, and setting a new test for when that power should be
exercised. The Court also clarified the precedence between the 10-day appeal
period set out in the Bankruptcy and
Insolvency Act (“BIA”) Rules, and the 30-day period
prescribed through the Courts of Justice
Dianor was a mining company with mining
claims over a project in Wawa, Ontario. It purchased those claims from 2350614
Ontario Inc (“235Co”) in exchange for a Gross Overriding Royalty (“GOR”) for
diamonds and other metals and minerals.
In 2015, Dianor became insolvent and went
into receivership. Third Eye offered to purchase Dianor’s mining claims for $2
million, on the condition that it would acquire the asset unencumbered by 235’s
GORs. As part of the proposed deal,
Third Eye offered to pay 235Co $250,000, representing the fair market value of
the GORs as appraised. 235Co rejected the offer.
The motion judge approved the sale, holding
that the GORs were not an interest in land, and extinguishing them from title.
29 days after the Approval and Vesting Order was granted (8 days after the sale
transaction had closed), 235Co filed a notice of appeal. In March of 2018, the Court
of Appeal found that the GORs did constitute an interest in land, and asked
the parties for further argument on a number of issues related to the
extinguishment of the GORs.
The second phase of the appeal was argued
in September of 2018. The main questions
before the Court were:
- Whether a third party interest in land in the nature of a GOR could be extinguished by a vesting order in a receivership proceeding; and
- Whether the appeal period in the BIA (as opposed to that in the CJA) governs the appeal from the order of the motion judge.
Jurisdiction to Extinguish an Interest in
Land Using a Vesting Order
Prior to this case, there had been little
judicial consideration of a motion judge’s jurisdiction to extinguish interests
in land during a receivership, although this was frequently done and in fact
finds articulation in the Model Approval
and Vesting Order.
The Court undertook a comprehensive
analysis of the BIA and its
legislative history, ultimately concluding that s. 243(1) provides a court with
the jurisdiction to approve a sale proposed by a receiver, and that this
jurisdiction extends to the implementation of the sale through the use of a
The Court recognized the possibility that
s. 21 of the Conveyancing Law of Property
Act also provides authority for vesting property in purchasers free and
clear of encumbrances, but decided against determining that issue as it was not
before the motion judge.
Having found that jurisdiction exists under
s. 243(1) of the BIA to grant a
vesting order, the Court considered whether it was appropriate to vest out
235Co’s GORs. This analysis, the Court noted, was not one of jurisdiction, but
rather related to the scope and “appropriateness” of the vesting order.
The Test for
Extinguishing an Interest in Land
The Court established a two-part test for
determining whether a third party interest should be extinguished:
- First, the court should consider the nature and strength of the interest that is proposed to be extinguished; and
- Second, the court should consider whether the interest holder has consented to the vesting out of its interest.
The Court observed that interests in land
fall on a spectrum, ranging from an ownership interest tied to the inherent
characteristics of the property (such as a fee simple), to a fixed monetary
interest that is extinguished when the monetary obligation is satisfied (such
as a mortgage). The Court noted that a
reasonable expectation of the owner of the former type of interest is that its
interest is of a continuing nature, and that it will not be extinguished for
payment without consent.
With respect to the consent element, the
court should consider “whether the parties have consented to the vesting of the
interest either at the time of the sale before the court, or through prior
The Court directed that if the two
considerations set out above prove to be inconclusive, then the court may
engage in a consideration of the equities to determine if a vesting order is
appropriate in the circumstances. At
this stage, the court should consider (among other factors):
- Whether there is any prejudice
to the third party interest holder;
- Whether the third party may be
adequately compensated for its interest;
- Whether there is any equity in
the property; and
- Whether the parties are acting
in good faith.
Application of the Test
Relying on the
decision of the Supreme Court of Canada in Bank of Montreal v. Dynex Petroleum Ltd., 2002 SCC 7, the Court clarified that a GOR is an interest
in the gross product extracted from the land, and not a fixed monetary
sum. Importantly, the Court expressed
that 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”. On that basis, the Court found that
the motion judge had erred in granting an order extinguishing 235Co’s GORs.
In a closely followed decision on the
timing for an appeal in respect of vesting orders, the Court, relying on the
doctrine of federal paramountcy, decided that the 10-day appeal period set out
in Rule 31 of the BIA Rules takes
precedence over the 30 day appeal period prescribed by Rule 61.04(1) of the Rules of Civil Procedure. The Court
confirmed that this 10-day period begins to run from the date of the order or decision of the motion judge. The Court further directed that a receiver
should wait out the 10-day appeal period before closing a sale transaction to
which the vesting order relates.
The Court found no evidence that 235Co.
intended to appeal within the applicable time period, and ultimately refused to
grant an extension of time to appeal nunc
In the result, Third Eye was successful as
a result of 235Co’s failure to appeal the motion judge’s decision in time.
With notes from Adil Abdulla.