RV-No: The Alberta Court of King’s Bench refuses to grant RVO in Cleo Energy Corp (Re)

Reverse vesting orders (RVOs) have become a mainstay in Canadian insolvency practice, especially in complex restructurings where buyers seek to acquire a company’s valuable regulatory licenses, contracts and tax attributes, while leaving behind unwanted liabilities—but their use and increasing prevalence is not without some controversy and commentary from our commercial courts. In Cleo Energy Corp (Re)¹, the Alberta Court of King’s Bench delivered a pointed reminder: although RVOs are now common, their approval is not automatic. The Court made it clear that convenience, purchaser preference or prevailing professional practice alone will not suffice. The decision underscores that RVOs must be justified by a robust evidentiary record, demonstrating both necessity and fairness to all stakeholders.

What you need to know

• Evidence, not assertions, must justify the necessity of an RVO. In Cleo, the Court refused the RVO because the record did not quantify the timing, cost or risk of transferring oil and gas licenses through the Alberta Energy Regulator (AER), which was said to be the reason that the RVO was “necessary”.
• Alternatives must be seriously considered and compared. The Court held that it is not sufficient to claim that an RVO is either preferable to other options or required by a purchaser. Applicants must provide a meaningful comparison to other options, such as a restructuring plan under the Companies’ Creditors Arrangement Act (CCAA) or a traditional asset sale, including an analysis of timing, costs and stakeholder impacts.
• Retaining contracts means retaining obligations. The Court rejected an attempt to keep valuable Crown mineral leases in the company while transferring unpaid royalties and rental arrears to a separate entity. If a contract is retained for its benefits, the associated monetary defaults should be cured.
• Outcome. The application for an RVO was dismissed without prejudice to a renewed application, leaving the door open for a renewed application with a stronger evidentiary record or a restructured transaction².

Background and context

Cleo Energy Corp., an Alberta oil and gas company, filed a Notice of Intention to Make a Proposal (NOI) under the Bankruptcy and Insolvency Act in December 2024. The NOI process paused creditor enforcement and gave Cleo time to pursue restructuring or a sale under the oversight of a licensed insolvency trustee. When Cleo was unable to complete a restructuring or sale within the statutory timeframe, the court appointed a receiver to take control of its remaining assets.

The receiver ran a remarketing process and ultimately, after several attempts to enter into a transaction, selected a bidder who required the transaction to proceed by way of an RVO. Unlike a traditional approval and vesting order, which transfers assets to a purchaser free and clear of claims, an RVO leaves the corporate entity intact but “vests out” unwanted assets and liabilities into a separate entity (often called “ResidualCo”). The purchaser acquires the cleansed company, which retains valuable licenses and attributes that might not otherwise transfer in a standard asset sale.

In Cleo’s case, the proposed RVO would have allowed the purchaser to acquire the company with its key oil and gas licenses and contracts, while transferring certain environmental liabilities and unpaid Crown royalties and rent to ResidualCo. The receiver argued that this structure was essential to (i) maximize value, (ii) avoid the time and risk associated with transferring licenses through the AER, and (iii) prevent environmental liabilities from falling to the Orphan Well Association, which manages abandoned wells in Alberta.

The Court’s analysis: raising the bar for RVOs

Justice Feasby’s decision in Cleo is notable for its insistence on substance over form. While acknowledging that RVOs are no longer “extraordinary” in Canadian insolvency practice, the Court made it clear that approval of an RVO is not automatic. The decision applied the four-factor framework from Harte Gold (Re), which requires courts to consider:

1. Necessity: is the RVO truly required in the circumstances?
2. Economic comparison: does the RVO produce an economic result at least as favorable as any other viable alternative?
3. Stakeholder impact: is any stakeholder worse off under the RVO than they would have been under another structure?
4. Value of preserved attributes: does the consideration paid reflect the value of licenses and other attributes preserved by the RVO?

In Cleo, the Court found that the receiver’s evidence fell short on several fronts. Assertions that the RVO was necessary to avoid delays, costs, and risks associated with AER license transfers were not supported by concrete data or analysis. The Court noted that oil and gas license transfers are routine in Alberta, and if they are said to be problematic in a particular case, the applicant must provide specifics—such as estimated timelines, costs, and regulatory hurdles—grounded in evidence.

The receiver also failed to provide a meaningful comparison to other options, such as a restructuring plan under the CCAA. A CCAA plan allows creditors to vote on a compromise or arrangement that can preserve the company and its attributes, but involves a more transparent and democratic process. The Court emphasized that simply preferring an RVO for its convenience or because the purchaser demands it does not satisfy the legal standard.

The Court highlighted the importance of fairness in retaining contracts, noting that the proposed RVO would have allowed Cleo to keep valuable Crown mineral leases while transferring unpaid royalties and rent to ResidualCo. It held that if a contract is retained for its benefits, the associated monetary defaults should be cured. Attempts to separate benefits from burdens will be closely scrutinized.

Implications

The Cleo decision may mark a recalibration of the evidentiary standards that a court will apply when asked to approve RVOs. Rather than accepting common practice or general assertions of benefits to justify the use of an RVO, the Court in Cleo required a detailed, evidence-based record addressing each element of the legal test for RVOs. Applicants will likely need to quantify the practical realities of regulatory processes, explain why alternatives such as a CCAA plan are not viable, and demonstrate that all stakeholders—including creditors and contract counterparties—are treated fairly.

More broadly, Cleo suggests that RVOs should not be used as a shortcut to bypass procedural safeguards and creditor protections in Canadian insolvency law. The decision reinforces that fairness and transparency remain paramount, and that attempts to retain valuable contracts while shedding associated obligations will be closely scrutinized. As the law in this area continues to develop, parties seeking RVOs may face increased scrutiny and a clear expectation that necessity and stakeholder impacts must be proven, not presumed.