CANADIAN BANKRUPTCY REPORTS Fifth Series/Cinqui`Eme S´Erie Recueil De Jurisprudence Canadienne En Droit De La Faillite VOLUME 98 (Cited 98 C.B.R

CANADIAN BANKRUPTCY REPORTS Fifth Series/Cinqui`eme s´erie Recueil de jurisprudence canadienne en droit de la faillite VOLUME 98 (Cited 98 C.B.R. (5th))

EDITORS/REDACTEURS´ (Atlantic and Ontario) The Honourable Mr. Justice Geoffrey B. Morawetz of the Superior Court of Justice (Ontario) (Western) (Quebec) Marcel J. Peerson Philippe H. Bélanger, LL.B., B.C.L. Fasken Martineau McCarthy Tétrault Vancouver, British Columbia Montréal, Québec

CARSWELL EDITORIAL STAFF/REDACTION´ DE CARSWELL Cheryl L. McPherson, B.A.(HONS.) Director, Primary Content Operations / Directrice des activit´es li´ees au contenu principal Ken Murphy, B.A.(HONS.), LL.B. Product Development Manager Nicole Ross, B.A., LL.B. Sharon Yale, M.A., LL.B. (Acting) Supervisor, Legal Writing Supervisor, Legal Writing Mike MacInnes, B.A.(HONS.), LL.B. Jocelyn Cleary, B.A.(HONS.), LL.B. Lead Legal Writer Senior Legal Writer Stephanie Hanna, B.A., M.A., LL.B. Lisa Rao, B.SC., LL.B. Senior Legal Writer Senior Legal Writer Amanda Stewart, B.A.(HONS.), LL.B. Andrea Toews, B.A., LL.B., LL.M. Senior Legal Writer Legal Writer Martin-Fran¸cois Parent, LL.B., Melissa Dubien LL.M., DEA (PARIS II) Content Editor Bilingual Legal Writer Terrapin Mortgage Investment Corp. v. Triple S. Farms Ltd. 165

[Indexed as: Terrapin Mortgage Investment Corp. v. Triple S. Farms Ltd.] Terrapin Mortgage Investment Corp., Petitioner and Triple S. Farms Ltd., Patricia Anne Spetifore, Quentin George Spetifore, Vernon Spetifore, Estate of George Leonard Spetifore, Deceased Ruby Holdings Ltd., Ruby Lake Country Developments Ltd., Respondents British Columbia Supreme Court Docket: Vancouver H120693, H120694 2012 BCSC 1805 N. Smith J. Heard: August 1, 2012 Judgment: December 3, 2012* Contracts –––– Formation of contract — Undue influence — Factors to be considered — Nature of relationship — Husband and wife –––– Mortgage secured loan made to company run by deceased and his two sons — Deceased’s wife signed promissory note and mortgage which was registered against family home — Documents were signed in office of company’s lawyer who reviewed them with everyone present — Wife was not actively involved in company — Wife applied to discharge mortgage — Application dismissed — Presumption of undue influence arose from relationship between deceased and wife as she generally relied on him in financial matters — Presumption was rebutted by facts of transaction — Agreements were not unduly disadvantageous to wife at time they were made — Wife previously participated in similar transactions and benefitted from household income generated by business — Wife had no direct dealings with mortgagee and it was entitled to assume she received appropriate legal advice. Cases considered by N. Smith J.: Bank of Montreal v. Courtney (2005), 2005 CarswellNS 506, 2005 NSCA 153, 261 D.L.R. (4th) 665, 239 N.S.R. (2d) 80, 760 A.P.R. 80 (N.S. C.A.) — distinguished Gold v. Rosenberg (1997), (sub nom. Gold v. Primary Developments Ltd.) 19 E.T.R. (2d) 1, 35 O.R. (3d) 736, 1997 CarswellOnt 3273, 1997 CarswellOnt 3274, 152 D.L.R. (4th) 385, 219 N.R. 93, [1997] 3 S.C.R. 767, 104 O.A.C. 1, 35 B.L.R. (2d) 212, [1997] S.C.J. No. 93 (S.C.C.) — considered

*A corrigendum issued by the court on December 5, 2012 has been incorporated herein. 166 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

Goodman Estate v. Geffen (1991), 1991 CarswellAlta 557, 1991 CarswellAlta 91, [1991] 5 W.W.R. 389, 42 E.T.R. 97, (sub nom. Geffen v. Goodman Es- tate) [1991] 2 S.C.R. 353, 125 A.R. 81, 14 W.A.C. 81, 80 Alta. L.R. (2d) 293, (sub nom. Geffen v. Goodman Estate) 81 D.L.R. (4th) 211, 127 N.R. 241, [1991] S.C.J. No. 53, EYB 1991-85679 (S.C.C.) — considered

APPLICATION by mortgagor for discharge of mortgage.

M.R. Davies, for Petitioners K.M. Wellburn, for Respondent, Patricia Spetifore J.I. McLean, Q.C., for Receiver, LTA Consultants Inc.

N. Smith J.:

1 The respondent Patricia Anne Spetifore is the 83 year old widow of a real estate developer. Before her husband’s death, she allowed two mortgages to be registered against the family home as security for the financing of one of his projects. She now applies for discharge of those mortgages, saying that she simply signed whatever documents her husband told her to sign without any real understanding and without independent legal advice. 2 George Spetifore, who died in 2008, ran a development business with two of his five sons, Vernon and Quentin Spetifore. One of their projects was a condominium development known as the Ruby Lake Country Pro- ject, for which the petitioner Terrapin Mortgage Investment Corp. provided financing. Quentin, Vernon and George Spetifore were all directors of Ruby Lake Country Developments Ltd. (“RLCD”) and Ruby Holdings Ltd. (“Ruby”). The Ruby Lake Country Project encountered financial difficulties and a receiver was appointed in 2009. 3 The mortgages at issue were signed on the same day in February, 2007. One is for $2.3 million and secured a promissory note that the respondent signed as a coborrower, along with her husband and sons. The other is for $5 million and secures a loan agreement that the respondent signed only as a guarantor. In addition to the family home, both mortgages cover certain other properties owned by other family members. 4 The petitioner acknowledges that no funds were advanced under the $5 million mortgage and says it has already provided the respondent with a discharge document. However, counsel for the respondent says the $5 million mortgage remains in issue because the discharge cannot be registered due to a Certificate of Pending Litigation registered against the pro- Terrapin Mortgage Investment Corp. v. Triple S. Farms Ltd. N. Smith J. 167

perty in relation to the other mortgage. Even if the $2.3 million mortgage is the only one at issue, the amount owing far exceeds the value of the family home. 5 In addition to the mortgages, the respondent signed as a guarantor of a subsequent loan of $16 million to RLCD. That loan was secured by a mortgage on the development property, not the family home, but the respondent says that any payments made on it were to be applied first to the $2.3 million mortgage. No relief is claimed on this application in regard to the $16 million mortgage. If the respondent is not successful on this application and the $2.3 million mortgage is not discharged, the question of whether any funds should have been applied to it may become relevant in any continued foreclosure proceedings. 6 The respondent has not worked outside the home since 1954. Before that she worked in a bank for six years following high school graduation and one year of secretarial training. She was not actively involved in the family development business, but became a 1/6th shareholder of Ruby in 2002. The family home in Kelowna was purchased in 1998 with funds obtained from the sale of a house in Tsawwassen that had been in the respondent’s name and of another property that she inherited. 7 The respondent says in her affidavit that she did not want to put up the family home as security but her husband assured her that it was only a temporary arrangement. She says: “I did not want to sign the papers but I knew that my life would be hell if I didn’t do what George asked.” She does not say what she believes her husband would have done to make her life hell. 8 The mortgages and related documents were signed in the office of the lawyer who acted for RLCD (presumably on the instructions of George Spetifore). The respondent says she attended along with her husband and sons and was present when the lawyer explained the documents to the group. She says she didn’t understand much of what was said, but didn’t want to “sound stupid or waste time by asking questions” and didn’t want to “cause a scene” by refusing to sign. 9 The petitioner had done business with George Spetifore and his companies in relation to various projects beginning in the 1990s and says the respondent had signed loan documents, either as borrower or guarantor, on previous occasions. 10 The respondent says she received no consideration for the $5 million mortgage. It is not necessary to deal with that issue because the petitioner 168 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

agrees that no funds were advanced and has provided a discharge document. 11 In regard to both mortgages the respondent relies on the doctrine of undue influence and the absence of independent legal advice. 12 Undue influence may be actual, arising from unfair or improper conduct, or it may be presumed to arise from the relationship between the parties: Goodman Estate v. Geffen, [1991] 2 S.C.R. 353 (S.C.C.). 13 There is no evidence in this case of actual undue influence. Although the respondent says she thought her “life would be hell” if she did not sign the mortgages, she gives no evidence of any threats or other conduct by her husband that put pressure her on her to sign the documents. She gives no evidence that she ever told him or anyone else that she did not want to sign. 14 In the absence of actual undue influence, a presumption of undue influence may arise when a security transaction is clearly detrimental to the person offering security and the relationship between that person and the debtor is particularly close, as in the case of husband and wife: Gold v. Rosenberg, [1997] 3 S.C.R. 767 (S.C.C.) at para 78. The presumption does not arise automatically in cases involving husband and wife, but may arise in circumstances where the wife relies on the husband in all financial matters and simply does what he suggests: Bank of Montreal v. Courtney, 2005 NSCA 153 (N.S. C.A.) at para 30. 15 In some cases, the circumstances may require the lender to make further inquiries. The court said in Gold at para 60: ... where a woman enters into a manifestly disadvantageous transaction, and where there is a substantial risk that the husband has committed some equitable or legal wrong (i.e., undue influence or misrepresentation) in order to secure the woman’s consent to the guarantee, the Bank is placed on its inquiry. It then must take reasonable steps to ensure that the wife’s agreement to stand as surety has been properly obtained. 16 Where the lender has a duty to make further inquiries, it can discharge the duty by explaining the risks to the surety, in a meeting not attended by the principal debtor, and advising her to take independent advice. However, the lender is only required to act reasonably in the circumstances: Gold at paras 78, 83. There is also some authority to the effect that this duty is only owed to a guarantor and not to a wife or other person who signs a loan as a direct borrower or co-borrower: Courtney at para 42. Terrapin Mortgage Investment Corp. v. Triple S. Farms Ltd. N. Smith J. 169

17 In this case, I am satisfied that the relationship between Mrs. Spe- tifore and her husband was one in which she generally relied on him in financial matters and the presumption of undue influence arises. How- ever, that presumption may be rebutted by evidence of the specific transaction. In Geffen, Wilson J. said at 378: Having established the requisite type of relationship to support the presumption, the next phase of the inquiry involves an examination of the nature of the transaction. When dealing with commercial transactions, I believe that the plaintiff should be obliged to show, in addition to the required relationship between the parties, that the contract worked unfairness either in the sense that he or she was unduly dis- advantaged by it or that the defendant was unduly benefited by it. From the court’s point of view this added requirement is justified when dealing with commercial transactions because, as already mentioned, a court of equity, even while tempering the harshness of the common law, must accord some degree of deference to the principle of freedom of contract and the inviolability of bargains. Moreover, it can be assumed in the vast majority of commercial transactions that parties act in pursuance of their own self-interest. The mere fact, therefore, that the plaintiff seems to be giving more than he is getting is insufficient to trigger the presumption. 18 In Courtney, a wife had signed promissory notes along with her husband to obtain funds for the husband’s business. The documents were signed in the presence of bank loans officers. There was evidence of ten- sion between the husband and wife over her signing the documents, but the loan officers had no indication she was not signing under her free will. She also would have benefitted if the investment had been successful. The Court of Appeal upheld the trial judge’s findings that Mrs. Courtney was not the victim of undue influence. 19 In this case, I am not persuaded that these agreements were unduly disadvantageous to the respondent at the time they were made or that the petitioner unduly benefited from them. These were commercial loans for use by a family business. The respondent had previously participated in similar transactions and benefited from the household income that the business generated. She would have similarly benefited if the Ruby Lake Country Project had been successful. 20 Unlike Courtney, this is not a case where a borrower brought his wife into the lender’s office to sign the guarantee without legal advice. The respondent had no direct dealings with the petitioner and received documents in which a lawyer had witnessed her signature, as well as those of 170 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

the other mortgagors. The petitioner’s representative knew that the same lawyer had been involved in previous transactions and assumed him to be acting for the respondent, as well as other family members. In fact, the respondent confirms that the lawyer reviewed the documents with her and others. 21 The petitioner, acting reasonably, was entitled to assume that the respondent had received appropriate legal advice. The respondent’s interests may or may not have differed from those of her husband to the point that independent legal advice should have been recommended. But in my view the lawyer who was providing advice to all members of the Spe- tifore family was in a far better position than the petitioner to make that assessment. Even if the petitioner had turned its mind to questions of undue influence and independent legal advice, it would have been entitled to assume that those matters had already been considered by the lawyer involved and that independent advice had either not been recommended or had been recommended but not sought. 22 The respondent has clearly been left in a difficult financial position by the death of her husband and the financial failure of the Ruby Lake Country Project, but the law does not permit the court to relieve her of contractual obligations on purely compassionate grounds. I can find no legal basis on which discharge of the mortgages can be ordered and her application must be dismissed. 23 This application was heard at the same time as an application for appointment of a replacement receiver and for approval of the actions, accounts and fees of the previous receiver. At the conclusion of argument on October 4, 2012, I made that order, except for the approval of the receiver’s actions, on which I reserved judgment. The respondent opposed that term because she may wish to sue the receiver for alleged failure to realize the full value of the development property and failure to apply funds to the $2.3 million mortgage on her house. 24 The receiver was appointed by order of the court on March 30, 2009 to deal with the assets of RLCD and Ruby, including the completion and marketing of the Ruby Lake Country Project. An order nisi of foreclosure was made on the $16 million mortgage the same day. Although the respondent is a guarantor of that mortgage, the order nisi does not include personal judgment against her. The petitioner’s representative says in an affidavit that there are no plans to enforce any claims under the $16 million mortgage against individual members of the Spetifore family. Terrapin Mortgage Investment Corp. v. Triple S. Farms Ltd. N. Smith J. 171

25 On the material before me, the only potential claim the respondent could have against the receiver would be if she is correct in her assertion that there was an agreement to pay out the $2.3 million mortgage from funds advanced under the $16 million mortgage and/or from the proceeds of the sale of the property. There is no evidence of any agreement to that effect. 26 The loan agreement says that the loan “will be used to repay the existing Terrapin first mortgage and to assist in the construction of a 72 unit, apartment condominium development on the subject lands.” The “existing Terrapin first mortgage,” is not described with any greater pre- cision. The $16 million mortgage provided that payments were to be applied first to interest and “secondly on account of any and all other amounts owing by the Mortgagor to the Mortgagee”. 27 Both those documents relate to a loan to the development company that was secured by a mortgage on the development property. In the absence of very clear and specific language, I doubt that references to other debts can be interpreted to give priority to payment of a mortgage on an entirely different piece of property owned by a different mortgagor. But if such an interpretation is possible, the respondent could claim a set off in any proceedings against her under the $2.3 million mortgage. She would not need to claim relief from the receiver. 28 I therefore agree that the order replacing the receiver should include all terms sought in the application, including approval of the receiver’s actions. The respondent’s application for the discharge of the two mortgages must be dismissed with costs. Application dismissed. 172 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

[Indexed as: Van Eeuwen, Re] In the Matter of the Bankruptcy of Dwain Grant Van Eeuwen British Columbia Supreme Court Docket: Vancouver B100974 2013 BCSC 26 Dist. Reg. Cameron Heard: December 18, 2012 Judgment: December 18, 2012 Bankruptcy and insolvency –––– Discharge of bankrupt — Conditional discharge — Tax obligations –––– Debtor was engineer who worked as construction manager — Debtor did not pay large portion of income tax owed between years 1993 until 2008, and filed returns late, in many cases by matter of years — Debtor made some voluntary payments and some money was garnished — Debtor entered bankruptcy with income tax debt of principal, interest, and penalties of approximately $660,000 and GST liability of approximately $110,000, which together constituted over 85 per cent of his debt — Debtor had been convicted of tax evasion and sentenced to pay fine of $101,000 — Debtor brought application for discharge — Application granted with conditions — Discharge conditional upon payment to trustee of $180,000, representing approximately 60 percent of principal amount due to Canada Revenue Agency for unpaid income taxes — Amount was at high end of range for tax driven bankruptcies, but persistent failure over span of more than 16 years to file tax returns and make payment of income tax owing required strong message — Debtor had continued to demonstrate unwillingness to comply with requirements of Income Tax Act after his assignment, and had not filed 2009 or 2010 income tax returns — Debtor was not honest but unfortunate debtor and acted improperly by not paying tax obligations — Amount for discharge not meant to be punitive as it reflected only percentage of principal owing for income tax and did not include any portion of accrued penalties and interest — Debtor ordered to file relevant tax returns — Excise Tax Act, R.S.C. 1985, c. E-15, s. 265. Tax –––– Goods and Services Tax — Miscellaneous –––– Debtor was engineer who worked as construction manager — Debtor did not pay large portion of income tax owed between years 1993 until 2008, and filed returns late, in many cases by matter of years — Debtor made some voluntary payments and some money was garnished — Debtor entered bankruptcy with income tax debt of principal, interest, and penalties of approximately $660,000 and GST liability of approximately $110,000, which together constituted over 85 per cent of his debt — Debtor had been convicted of tax evasion and sentenced to pay fine of Van Eeuwen, Re 173

$101,000 — Debtor brought application for discharge — Application granted with conditions — Discharge conditional upon payment to trustee of $180,000, representing approximately 60 percent of principal amount due to Canada Reve- nue Agency for unpaid income taxes — Amount was at high end of range for tax driven bankruptcies, but persistent failure over span of more than 16 years to file tax returns and make payment of income tax owing required strong message — Debtor had continued to demonstrate unwillingness to comply with requirements of Income Tax Act after his assignment, and had not filed 2009 or 2010 income tax returns — Debtor was not honest but unfortunate debtor and acted improperly by not paying tax obligations — Amount for discharge not meant to be punitive as it reflected only percentage of principal owing for income tax and did not include any portion of accrued penalties and interest — Debtor ordered to file relevant tax returns — Excise Tax Act, R.S.C. 1985, c. E- 15, s. 265. Tax –––– Income tax — Miscellaneous –––– Debtor was engineer who worked as construction manager — Debtor did not pay large portion of income tax owed between years 1993 until 2008, and filed returns late, in many cases by matter of years — Debtor made some voluntary payments and some money was garnished — Debtor entered bankruptcy with income tax debt of principal, interest, and penalties of approximately $660,000 and GST liability of approximately $110,000, which together constituted over 85 per cent of his debt — Debtor had been convicted of tax evasion and sentenced to pay fine of $101,000 — Debtor brought application for discharge — Application granted with conditions — Discharge conditional upon payment to trustee of $180,000, representing approximately 60 percent of principal amount due to Canada Revenue Agency for unpaid income taxes — Amount was at high end of range for tax driven bankruptcies, but persistent failure over span of more than 16 years to file tax returns and make payment of income tax owing required strong message — Debtor had continued to demonstrate unwillingness to comply with requirements of Income Tax Act after his assignment, and had not filed 2009 or 2010 income tax returns — Debtor was not honest but unfortunate debtor and acted improperly by not paying tax obligations — Amount for discharge not meant to be punitive as it reflected only percentage of principal owing for income tax and did not include any portion of accrued penalties and interest — Debtor ordered to file relevant tax returns. Cases considered by Dist. Reg. Cameron: Kaleniuk, Re (July 7, 2004), Doc. Vancouver 220612/VA01 (B.C. S.C.) — referred to Williams, Re (2005), 10 C.B.R. (5th) 304, 2005 BCSC 289, 2005 CarswellBC 505, [2005] B.C.J. No. 465 (B.C. S.C.) — followed Zinkiew, Re (2004), 2004 BCSC 1831, 2004 CarswellBC 3709, 32 C.B.R. (5th) 148 (B.C. S.C.) — referred to 174 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

Statutes considered: Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 Generally — referred to s. 170 — considered Excise Tax Act, R.S.C. 1985, c. E-15 Pt. IX [en. 1990, c. 45, s. 12(1)] — referred to Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) Generally — referred to

APPLICATION by debtor for discharge from bankruptcy.

P. Daniel Le Dressay, for Bankrupt F. Harold Saunders, for Trustee Christine N. Matthews, for Creditor, Her Majesty The Queen in Right of Canada as represented by the Minister of National Revenue

Dist. Reg. Cameron (orally):

1 Dwain Van Eeuwen, (hereinafter The Bankrupt) applies for his discharge having made an assignment into bankruptcy on October 13, 2009. His discharge is opposed by both his Trustee and the principal creditor, Canada Revenue Agency, (hereinafter CRA.). 2 Counsel for CRA submitted that there should be a conditional discharge that would require the Bankrupt to make a payment for the general benefit of his creditors in the sum of $200,000 at a rate of not less than $2,500 per month, commencing January 15, 2013. 3 The Trustee, Mr. Saunders, supported the CRA submissions, and noted in his Section 170 report pertinent failures on the part of the Bank- rupt to provide necessary documentation and information to determine whether he had received any surplus income since his assignment to the present. He also noted the Bankrupt had not provided the necessary information to allow preparation of his 2009 pre-bankruptcy income tax return. 4 Mr. Le Dressay for the Bankrupt submitted that a suspended discharge order should be made that would provide the Bankrupt with his discharge in six months, without any payment conditions. 5 The Bankrupt is 59 years old. He held a designation as a professional engineer and currently is employed as a construction manager in the oilfields of Alberta. He declared his insolvency in 2009, buttressed on a startling record of having not filed income tax returns or having remitted Van Eeuwen, Re Dist. Reg. Cameron 175

income taxes for the period from 1993 until 2008. There was no explanation offered for his failure to abide by the requirements of the Income Tax Act for the period from 1993 until 2002. In that latter year, the Bank- rupt had to cope with a very trying and stressful event, his young child was diagnosed with a serious liver ailment that ultimately required travel to Ontario for a liver transplant. For the ensuing five years, the Bankrupt says he poured all of his resources and as much of his energy as he could into supporting his son and family. 6 By the time of his assignment in 2009, the Bankrupt had accumulated a tax debt of principal, interest, and penalties of approximately $660,000. He also had a GST liability of approximately $110,000. These liabilities were in excess of 85 percent of his obligations proven in the bankruptcy. 7 A collections officer for CRA, Mr. Dhudwal, provided an affidavit that attested to the history of the investigation and the steps that were taken by CRA to deal with the longstanding tax delinquency of the Bank- rupt. He said: As of the date of bankruptcy the Bankrupt was indebted to Her Maj- esty the Queen for unpaid income tax, penalty and interest in the total amount of $661,474.93. This amount represents income tax that was not remitted for the taxation years 1993, 1994, 1995, 1996, 1997, 1998, 1999, 2000, 2001, 2002, 2003, 2004, 2005, 2006, 2007 and 2008. The Bankrupt is also indebted to Her Majesty the Queen for unremit- ted Goods and Services Tax ... interest, and penalty in the amount of $110,261.97. This represents GST that was collected but not remitted for the taxation years 1993, 1994, 1995, 1996, 1997, 1998, 1999, 2000, 2001, 2002, 2003, and 2004. The Bankrupt had not filed his personal income tax returns for the years 1993 ... [through] 2004 [inclusive], which resulted in charges filed. ... In the past 18 years the Bankrupt never filed his tax return on time, including after the conviction for tax evasion in 2007.... The Bankrupt’s income for 1993 through to 2011 was $1,049,729.98, and the taxable income for that same period was $1,038,486.98. 8 Despite earning income each year prior to assigning himself into bankruptcy, the Bankrupt failed to declare and account for any income for the years 1993 to 2004, until he filed his returns for those years on 176 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

September 7, 2005. The Bankrupt’s returns for 2005, 2006, 2007, and 2008 were also filed late. 9 The tax debt of the Bankrupt has been the subject of collection activ- ity since September 2006. The Minister recovered $1,229 from the Bank- rupt’s bank account through garnishment proceedings on March 28, 2009. From the time the Bankrupt’s tax debt was first in collection by CRA in 2006 to the date of the Bankrupt’s assignment, and in spite of being continuously employed, the Bankrupt only made a voluntary payment of income tax in the amount of $3,000 in January 2007, and a second payment of $10,000 in May 2009. 10 In early 2009, the Bankrupt was represented by a lawyer, Mr. Barrett who contacted CRA on his behalf on March 26, 2009, and advised that the Bankrupt would be making a significant voluntary payment. The only payment subsequently received totalled $10,000. At that time, the tax debt exceeded $535,000. No other payments were made before the Bank- rupt made his assignment in bankruptcy. 11 Canada Revenue Agency also obtained a writ of seizure and engaged a bailiff in the summer of 2009. The bailiff was unable to find any assets of the Bankrupt. 12 Unfortunately, the Bankrupt has continued to demonstrate an unwillingness to comply with the requirements of the Income Tax Act after his assignment. Since he made his assignment into bankruptcy, he has not filed his 2009 or 2010 income tax returns. 13 Mr. Le Dressay did not dispute this history but pointed out that the Bankrupt has already been punished for his tax evasion. On October 24, 2007, the Bankrupt was sentenced after pleading guilty to two counts of wilfully evading payment of taxes of $97,079.39 covering the period 1993 through 2004, and wilfully evading payment of GST of $39,391.93 covering the period 1993 to 2004. His Honour Judge Tweedale accepted a joint submission as to sentence resulting in a fine of $101,000 and a 12- month conditional sentence. 14 Mr. Le Dressay said: The discharge of tax debt in bankruptcy is not a simple morality play. The tax debtor is not to be simply judged and mulcted in onerous discharge conditions for not paying taxes, in comparison to ordinary Canadians. The reason why this simple moral exercise has been plainly rejected by Parliament is that income tax and its payment is not a simple moral exercise. Van Eeuwen, Re Dist. Reg. Cameron 177

15 He submitted that the case law that has dealt with other “tax driven” bankruptcies often imposing significant payment conditions for discharge ought not to be followed. He said the court should have concern for three primary considerations: (1) the circumstances of the Bankrupt at the time of the assignment; (2) the efforts to pay the tax debt; and (3) the future financial prospects of the Bankrupt. 16 He postulated that since 2002 the Bankrupt had some understandable reason to defer what he might otherwise have paid for taxes in favour of his child’s medical expenses, child support otherwise owing by him, and working expenses flowing from his self-employment. For the future, he relies on the Bankrupt’s own sworn evidence that a current heart condition will drastically curtail his employment and leave him with very little other employment opportunities. 17 However, there was no explanation put forward for what transpired before 2002 and why the Bankrupt has only made very limited payments for his overdue taxes that cover the 17 years before his assignment and with his healthy earnings history, it is hard to imagine there could be one. Mr. Le Dressay submitted that if I did not concern myself with the morality and that I recognized the criminal consequences that have already been imposed on the Bankrupt, then there was no reason to treat the CRA obligation as having an elevated or preferred status in the bankruptcy. With respect, I do not agree. 18 Ms. Matthews, in her submissions, provided a very a [sic] review of the law which I adopt and refer to as follows: A bankrupt who does not pay his tax liabilities is not an honest and unfortunate debtor. He is taking advantage of the fact that taxes are not collected by source deductions. This is misconduct. A taxpayer should not be permitted to not pay taxes when he incurs it, and when the liability reaches a large amount go into bankruptcy and piously say that he cannot now pay that large debt and it has caused his bankruptcy. Self-employed income earners cannot be allowed to evade their legal obligation to pay income tax through resort to the [Bank- ruptcy and Insolvency Act]. [Citing Re Trueman and Zinkiew, Re [2004 CarswellBC 3709 (B.C. S.C.)]] When a bankruptcy is tax- driven, the integrity of the bankruptcy system requires the courts to take into account not only the debtor’s interest and the creditor’s interest, but also the public interest in ensuring that every taxpayer makes an equitable contribution to the costs of operating the public sector. [Referencing Kaleniuk, Re [(July 7, 2004), Doc. Vancouver 220612/VA01 (B.C. S.C.)] Canada (M.N.R.) v. Dionne, Re Zinkiew] 178 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

This is not a case where a bankrupt incurs a liability expecting to pay it from future income which does not materialize. This is an income driven liability. It was supposed to be paid from the income as it was earned. This is not a case of cannot. It is a case of will not. The money was there to pay the taxes when they were incurred. In cases such as this, the overriding principle must be a message. The message is that tax cheaters are free riders and they are not to be absolved from that. [Re Williams] ... The Court in Re Pinc relied on Bennett on Bankruptcy for its summary of how the courts have considered the appropriate conditions for tax-driven bankruptcies. The list of consideration includes: 1) whether the bankruptcy arose as the result of an accident, or whether “...there was a persistent ignoring of the tax obligation”; 2) whether the purpose of bankruptcy was to escape the tax obligation; 3) the bankrupt’s ability to contribute towards a conditional order; 4) whether the bankrupt was maintaining a high standard of liv- ing at the expense of the creditors; 5) whether the bankrupt has continued to ignore tax obligations since bankruptcy. The amount to be repaid on a conditional discharge depends on a number of factors, including: (a) the conduct of the bankrupt which led to the bankruptcy, (b) the bankrupt’s conduct during the bankruptcy administration, (c) the net amount of surplus income available to repay a certain amount of the debts accumulated, (d) the future prospects of the bankrupt, (e) the amount of recovery in the bankruptcy, and (f) the amount of exempt property retained by the bankrupt or his family following bankruptcy. [Citing again Kaleniuk, Canada (M.N.R.) v. Dionne, and Re Powell] The authorities emphasize that “free riders” who choose not to pay taxes in a timely manner, or at all, should not be absolved of their duties as citizens simply by recourse to the bankruptcy process. The order must also serve as a deterrent to like-minded individuals. Where the sole or principal creditor is the Canada Revenue Agency, Van Eeuwen, Re Dist. Reg. Cameron 179

the court has made orders requiring payment somewhere between 40 and 65 percent of the claims as a deterrent. [Again relying on Re Williams and Re Pinc] 19 I was advised that the Bankrupt has not made any payment toward the fine imposed five years ago, although he has earned significant income over that period of time. The exact amount is not known, as the 2009 and 2010 post-bankruptcy returns have not been filed. In 2008, he earned $156,000; in 2011, he earned $66,936. While there is no clear forecast of what the Bankrupt will earn in the future, there was no medical evidence before me to support his own extremely pessimistic view of his employment prospects. 20 In Williams, Re, 2005 BCSC 289 (B.C. S.C.), Registrar Bouck, as she then was, said: Regrettably, I have little faith that Dr. Williams’ procrastination will be easily remedied. I have no confidence in his motivation to complete the duties required under the Act. It appears that a message must be sent to Dr. Williams that taxes are a priority. Anything less sends the message that the bankruptcy system can and should be used as the proverbial clearing house of this debt. ... Considering all of the circumstances, I order that the bankrupt’s discharge to be conditional upon payment to the trustee of the sum of $230,000, a sum which represents approximately 40% of C.R.A.’s debt...... Responsibility lies with Dr. Williams to demonstrate that he has been rehabilitated by the bankruptcy process. The authorities emphasize that “free riders” such as Dr. Williams who choose not to pay taxes in a timely manner, or at all, should not be absolved of their duties as citizens simply by recourse to this process. This order must also serve as a deterrent to like-minded individuals. 21 I agree with this sentiment. 22 As to the appropriate conditions for discharge, Ms. Matthews submitted: In spite of a criminal conviction for tax evasion, the Bankrupt still is not compliant with his obligations under the Income Tax Act. Clearly, he is not rehabilitated. 180 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

23 As to the payment terms, Ms. Matthews said: With respect to the appropriate payments for a conditional discharge and the Superintendent’s Guidelines, as the court stated in Re Barry, the Court is not bound by the standards of the Superintendent’s direc- tives in a tax-driven bankruptcy. Something more is asked of a bankrupt than what the surplus income standards direct to acknowledge the special characteristic of income tax obligations. The cases generally require payments greater in amount and for longer periods than required by the standards. 24 The principal amount of income tax not paid by the Bankrupt covering the period 1993 to the date of his assignment was approximately $272,000. In addition, there will be a tax liability for the nine month period of 2009 predating the assignment into the bankruptcy that will be determined once that return is filed. It is likely then that the total principal amount due for income tax will be $300,000 or more, taking into account the Bankrupt’s historical earnings pattern. 25 In keeping with the law that I have considered and the circumstances of the Bankrupt as I have found them, I will grant the Bankrupt’s discharge, conditional upon payment to the Trustee for the benefit of his creditors of the sum of $180,000, a sum which represents approximately 60 percent of the principal amount due to CRA for unpaid income taxes. This amount is at the high end of the range for “tax driven” bankruptcies but the persistent failure by the Bankrupt over a span of more than 16 years to timely file his tax returns and make payment of the income tax owing requires that a strong message be sent that paying taxes must be a priority in the public interest. 26 The amount is not meant to be punitive as it reflects only a percentage of the principal owing for income tax and factors out the accrued penalties and interest on that tax liability. In setting these payment terms, I have considered that the Bankrupt has been levied a significant fine for his failure to abide by his obligations to pay income taxes and I have taken into account his earning history. As it stands, it appears he still has the ability to earn his discharge over the ensuing years before retirement. This amount of $180,000 is to be paid in an amount of not less than $2,500 per month, commencing January 15, 2013. The Bankrupt will have the right to prepay the amount due in whole or in part at any time. 27 The Bankrupt will file his 2009 pre-bankruptcy income tax return and GST/HST returns, if applicable, as required by the Income Tax Act and Excise Tax Act. The Bankrupt will also file his income tax returns and Van Eeuwen, Re Dist. Reg. Cameron 181

GST/HST returns if applicable, as required by the Income Tax Act and Excise Tax Act, and pay any post-bankruptcy taxes owing as required by the Income Tax Act and Excise Tax Act for each taxation year until the payment condition is satisfied. Application granted with conditions. 182 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

[Indexed as: Technique acoustique (L.R.) inc., Re] Technique acoustique (L.R.) inc. (Débitrice) et Raymond Chabot inc. (Syndic-intimé) et Sun Life du Canada, compagnie d’assurance-vie (Requérante) Cour supérieure du Québec Docket: C.S. Laval 540-11-007355-110 2012 QCCS 4745 Gouin, J.C.S. Heard: 12 septembre 2012 Judgment: 10 octobre 2012 Faillite et insolvabilité –––– Preuve de réclamation — Rejet de la réclama- tion — Appel a` l’encontre du rejet — Principes généraux –––– Debiteur ´ etait´ un sous-traitant ayant et´´ e impliqué dans une histoire de fraude et ayant et´´ e con- damné pour fraude — Débiteur a déposé un avis d’intention de faire une proposition en vertu de la Loi sur la faillite et l’insolvabilité, et un syndic a et´´ e nommé—Créancière SLC n’apparaissait pas dans la liste des créanciers de l’avis d’intention, mais un montant etait´ inscrit sous la rubrique « dettes even-´ tuelles, réclamations de fiducie ou autres » — Lorsqu’elle a finalement et´´ e in- formée de l’avis d’intention et de l’avis de proposition, SLC a déposé une preuve de réclamation — Syndic a rejeté la réclamation de SLC, ce qui l’a em- pêchée de se prononcer sur la proposition — Créanciers ayant droit de vote ont voté a` l’unanimité pour l’adoption de la proposition — SLC a déposé une re- quête contestant la décision du syndic de rejeter sa preuve de réclamation — Syndic a déposé une requête visant a` obtenir la ratification de la proposition — Requête de SLC accueillie; requête du syndic rejetée — Selon la jurisprudence, la Cour ne devrait pas revoir la décision du syndic en l’absence d’une erreur manifeste et dominante — Preuve révélait que la preuve de réclamation de SLC avait et´´ e rejetée du revers de la main a` la suite d’une brève discussion entre le syndic et le dirigeant du débiteur — Tribunal etait´ d’avis que le syndic n’aurait pas dû faire confiance au dirigeant du débiteur, puisqu’il avait et´´ e personnellement impliqué dans une histoire de fraude et avait fait preuve de mauvaise foi a` l’égard de SLC — Droits de SLC auraient dû etreˆ considérés, même si cela devait entraˆıner la faillite du débiteur — En fait, la faillite du débiteur etait´ la meilleure issue en ce qu’elle protégeait l’ensemble des créanciers — Par consé- quent, la Cour a conclu que le syndic a commis une erreur manifeste et dominante et qu’il devrait revoir la décision du syndic. Bankruptcy and insolvency –––– Proving claim — Disallowance of claim — Appeal from disallowance — General principles –––– Debtor was subcontrac- Technique acoustique (L.R.) inc., Re 183 tor and had been involved in fraudulent scheme and convicted of fraud — Debtor filed notice of intention to make proposal under Bankruptcy and Insol- vency Act, and trustee was appointed — Creditor SLC was not listed as creditor in notice of intention, but amount was mentioned in notice of proposal under “contingent liability, trust claims and other debts” — When it was eventually made aware of notice of intention and notice of proposal, SLC filed proof of claim — Trustee disallowed SLC’s claim, which prevented if from voting on proposal — Creditors eligible to vote voted unanimously in favour of proposal — SLC brought motion challenging trustee’s decision to disallow its proof of claim — Trustee brought motion seeking approval of proposal — SLC’s motion granted; trustee’s motion dismissed — According to jurisprudence, Court should not interfere with trustee’s decision absent palpable and overriding error — Evi- dence showed that SLC’s proof of claim was disallowed out of hand by trustee after brief discussion between trustee and debtor’s officer — Court was of view that trustee should not have trusted debtor’s officer, as he had been personally involved in fraudulent scheme and had acted in bad faith with respect to SLC — SLC’s rights should have been taken into account, even if this led to debtor’s bankruptcy — Debtor’s bankruptcy was actually best scenario, as it protected whole body of creditors — Therefore, Court concluded that trustee made palpable and overriding error and that it should interfere with trustee’s decision. Cases considered by Gouin, J.C.S.: Brennan, Re (2001), 2001 CarswellQue 1257, REJB 2001-24715 (Que. S.C.) — referred to Chan, Re (2007), 2007 QCCA 727, 2007 CarswellQue 4488, EYB 2007-119945 (Que. C.A.) — referred to Côté, Re (2002), 2002 CarswellQue 724, REJB 2002-31416 (Que. S.C.) — referred to Housen v. Nikolaisen (2002), 10 C.C.L.T. (3d) 157, 211 D.L.R. (4th) 577, 286 N.R. 1, [2002] 7 W.W.R. 1, 2002 CarswellSask 178, 2002 CarswellSask 179, 2002 SCC 33, 30 M.P.L.R. (3d) 1, 219 Sask. R. 1, 272 W.A.C. 1, [2002] 2 S.C.R. 235, [2002] S.C.J. No. 31, REJB 2002-29758 (S.C.C.) — referred to Lama Transport & manutention ltée, Re (2002), 2002 CarswellQue 2986, REJB 2002-35944 (Que. S.C.) — referred to Magi, Re (2006), 2006 QCCS 5129, 34 C.B.R. (5th) 268, 2006 CarswellQue 10099, EYB 2006-109791 (Que. S.C.) — referred to 9025-6660 Québec inc., Re (2012), 2012 QCCS 4158, 2012 CarswellQue 8904, EYB 2012-210790 (Que. S.C.) — referred to 2713250 Canada inc., Re (2011), 2011 QCCS 6119, 2011 CarswellQue 12732, 86 C.B.R. (5th) 204, EYB 2011-198510 (Que. S.C.) — referred to 184 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

Statutes considered: Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 art. 37 — referred to art. 54(2)(d) — considered art. 59(2) — considered art. 69.4 [ad. 1992, c. 27, s. 36] — referred to art. 108 — considered art. 108(1) — considered art. 108(3) — considered art. 135(1.1) — considered art. 135(3) — considered art. 135(4) — considered

REQUETEˆ déposée par une créancière contestant la décision du syndic de rejeter sa preuve de réclamation; REQUETEˆ déposée par le syndic en ratification de la proposition.

Me Anne-Marie Williams, pour la requ´erante Me Marc Fernand Tremblay, pour le syndic / intim´e

Gouin, J.C.S.: 1. INTRODUCTION 1 La Requérante Sun Life du Canada, Compagnie d’assurance-vie (« Sun Life ») n’a pu voter sur la proposition de la Débitrice Technique Acoustique (L.R.) Inc. (la « Débitrice ») lors de l’assemblée convoquée a` cette fin, le Syndic Raymond Chabot Inc. (le « Syndic ») ayant rejeté, séance tenante, sa preuve de réclamation. 2 Le Tribunal est ainsi saisi, dans un premier temps, d’une « Requête de la Requérante [Sun Life] en Appel de la Décision du Syndic en Rejet de sa Preuve de Réclamation et Requête pour la Levée de la Suspension des Procédures Amendée » (la « Requête en appel ») aux termes des articles 37, 69.4, 108 et 135(4) de la Loi sur la faillite et l’insolvabilité (la « LFI »)1. 3 Sun Life a avisé le Tribunal que ses conclusions relatives a` la levée de la suspension des procédures n’avaient plus leur raison d’être, vu que les parties avaient déjà convenu d’une telle levée, et ce, afin de permettre la liquidation de la réclamation de Sun Life a` l’encontre de la Débitrice.

1L.R.C., 1985, ch. B-3. Technique acoustique (L.R.) inc., Re Gouin, J.C.S. 185

4 Puis, dans un deuxième temps, le Tribunal est aussi saisi d’une « Re- quête en Ratification de la Proposition de la Débitrice » (la « Requête en ratification ») présentée par le Syndic, et le Tribunal dispose donc, dans le présent jugement, de la Requête en appel et de la Requête en ratification. 5 Pour les motifs qui suivent, le Tribunal est d’opinion d’accueillir, en partie, la Requête en appel, de rejeter la Requête en ratification, et de prononcer la faillite de la Débitrice.

2. PRINCIPAUX FAITS 6 En 2008, Sun Life dépose une action a` l’encontre de sept défendeurs, incluant la Débitrice, pour malfa¸cons et vices de construction résultant d’infiltrations d’eau et de moisissures relativement a` son immeuble situé au [. . .], a` Montréal (l’« Immeuble »), et elle demande une condamnation solidaire pour un montant de 1 190 291,81 $ (l’« Action pour vices »)2. 7 L’implication de la Débitrice dans l’Action pour vices résulte d’un « contrat de sous-traitant a` forfait »3 convenu avec l’un des défendeurs, soit l’entrepreneur général, et relié aux « travaux de gypse, isolation et enduit acrylique » pour un montant de 479 000$, plus les taxes applicables. 8 Le 31 mars 2010, la Débitrice, représentée par le cabinet d’avocats Crochetière, Pétrin (le « Cabinet CP ») dépose sa défense a` l’Action pour vices. Il s’agit, en quelque sorte, d’une dénégation générale4, dans laquelle elle nie toute responsabilité, sauf de prétendre, en un simple paragraphe de 3 1/2 lignes, que le locataire Black et McDonald, non partie a` l’Action pour vices, serait a` l’origine des problèmes rencontrés. 9 Le 17 juin 2011, le juge Carol Richer, j.c.q., condamne la Débitrice pour fraude dans le cadre d’un stratagème de fausse facturation (le « Jugement pour fraude »)5.

2Pièces R-1 et R-1.1 (telle que précisée et ré-amendée). 3Pièce R-2. 4Pièce R-1.2. 5Pièce R-8.1, voir, entre autres, les paragr. [92], [93] et [94]. 186 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

10 Dans le Jugement pour fraude, le juge Richer ecrit,´ entre autres, ce qui suit : [75] La preuve révèle que Luc Bourdon et Louise Roy de Technique Acoustique ont contacté Exékut pour obtenir des factures; Sabin Gagné, lié a` Exékut, recevait des appels de Luc Bourdon ou de Lou- ise Roy pour que des factures soient emises´ a` Technique Acoustique. [83] Luc Bourdon, qui est président de Technique Acoustique, l’a contacté a` quelques reprises pour qu’une facture soit préparée par Exékut; lorsque ce n’était pas Luc Bourdon qui contactait Sabin Gagné, c’était Louise Roy qui etait´ comptable selon Sabin Gagné chez Technique Acoustique qui effectuait la même démarche. [85] Alors, prétendre que Technique Acoustique ne participait pas a` l’offense reprochée par l’intermédiaire soit de son président (Luc Bourdon) ou par un de ses agents (Louise Roy) est invraisemblable. [87] Bien que Luc Bourdon, ne soit pas personnellement accusé, son implication est clairement etablie´ par la preuve, notamment par le témoignage de Sabin Gagné; de plus, tous les chèques portent ap- paremment sa signature; ces chèques ont tous et´´ e encaissés et honorés par l’institution financière sur laquelle les chèques etaient´ tirés. Rien dans la preuve ne peut laisser croire que la signature de Luc Bourdon apparaissant sur les chèques ait pu etreˆ fausse. [92] Il ne fait aucun doute dans l’esprit du Tribunal que Technique Acoustique a participé au stratagème de fausse facturation d’une part par les actions de son président, Luc Bourdon qui etait´ evidemment´ un cadre supérieur de la corporation et d’autre part par les actions de Louise Roy, qui etait´ un « agent » au sens du Code criminel de la corporation; tous deux se sont impliqués dans la commission de l’infraction pour le bénéfice de Technique Acoustique. (Le Tribunal souligne) 11 La Débitrice porte en appel le Jugement pour fraude. 12 Le 13 décembre 2011, la Débitrice dépose un « Avis de l’intention de faire une proposition » aux termes de la LFI (l’« Avis d’intention »)6, et le Syndic accepte d’exercer les fonctions de syndic dans ce cadre. 13 Sun Life n’apparaˆıt pas sur la liste des créanciers jointe a` l’Avis d’intention et n’est pas informée du dépôt de l’Avis d’intention. Elle poursuit donc les etapes´ procédurales reliées a` l’Action pour vices.

6Pi`ece R-3. Technique acoustique (L.R.) inc., Re Gouin, J.C.S. 187

14 Ainsi, le 9 janvier 2012, la Débitrice, par l’intermédiaire du Cabinet CP, signe une entente sur le déroulement de l’Action pour vices (l’« Ech´´ eancier »)7. 15 Le 13 janvier 2012, la Débitrice se désiste de son appel du Jugement pour fraude et, le 17 janvier 2012, la Cour d’appel donne acte de ce désistement (le « Désistement »)8. 16 Les 10 et 17 février 2012, conformément a` l’Ech´´ eancier, des interrogatoires de représentants de certains des défendeurs a` l’Action pour vices, y inclus M. Luc Bourdon, président de la Débitrice, sont tenus (les « Interrogatoires »)9. M. Bourdon doit alors communiquer des engagements, au plus tard, le 17 mars 201210. 17 Le 14 mars 2012, suite au Désistement, le juge Carol Richer, j.c.q., prononce la peine reliée au Jugement pour fraude, et condamne la Débi- trice a` une amende de 190 256 $, et l’assujettit a` « une ordonnance de probation d’une durée d’un an où l’entreprise devra dénoncer a` la Régie du Bâtiment du Québec la liste de ses chantiers et de ses sous- traitants »11. 18 Le 12 avril 2012, la Débitrice dépose sa proposition (la « Proposition »)12. 19 Essentiellement, la Proposition prévoit le paiement des créances garanties par les equipements´ et immobilisations de la Débitrice, et le partage entre les créanciers ordinaires du solde d’un montant de 300 000 $, soit après avoir déduit les honoraires et frais de la Proposi- tion, les créances des ex-employés et les créances privilégiées de l’article 136 de la LFI, etant´ entendu que « le premier 250 $ dû a` chacun des Créanciers ordinaires sera payé a` 100% »13. 20 Le 19 avril 201214, Sun Life est informée, pour la première fois, de l’Avis d’intention et de la Proposition, et ce, suite a` la réception d’un

7Pièce R-6. 8Pièce R-8.2. 9Pièce R-7, paragr. 5. 10Pièce R-6, page 2. 11Pièce R-8.3. 12Pièce R-4. 13Pièce R-4, article 5.5.1. 14Pièce R-7, paragr. 9. 188 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

« Avis de suspension des Procédures »15 envoyé par le Syndic et daté du 16 avril 2012, soit dès que le Syndic fut informé par la Débitrice de l’existence de l’Action pour vices. 21 Le 23 avril 2012, le Syndic avise les créanciers de la Débitrice du dépôt de la Proposition (l’« Avis de la Proposition »)16 et de la tenue d’une assemblée générale convoquée pour le 3 mai 2012 (l’« Assemblée »), afin de voter sur la Proposition. 22 Sun Life n’apparaˆıt toujours pas sur la liste des créanciers jointe a` l’Avis de la Proposition, mais un montant de 1 241 578,67 $ est men- tionné a` titre de « dettes eventuelles,´ réclamations de fiducie ou autres » dans le « Formulaire – Bilan ». 23 De plus, un montant arrondi de 1 242 000 $ au chapitre des « récla- mations eventuelles´ non liquidées » est pris en considération par le Syn- dic pour le calcul du dividende estimatif qu’il fait dans son « Rapport du Syndic désigné sur l’état des affaires et des finances de la Proposante » (le « Rapport ») et joint a` l’Avis de la Proposition. 24 Le 26 avril 2012, la Régie du bâtiment annule la licence d’entrepreneur de construction (la « Licence ») de la Débitrice, et ce, suite au Jugement pour fraude (la « Décision de la Régie »)17. 25 Dans la Décision de la Régie, le régisseur Robert Généreux ecrit´ ce qui suit : [176] [. . .] le niveau de probité de monsieur Luc Bourdon, prési- dent, et de madame Louise Roy, comptable, de Technique Acoustique est sérieusement compromis compte tenu des gestes qu’ils ont posés dans cette affaire. [177] En effet, la reconnaissance de la participation active de ces personnes au stratagème de fausses facturations fait en sorte d’entacher sérieusement leur probité en tant que dirigeant ou encore en tant qu’employé de « TECHNIQUE ACOUS- TIQUE (L.R.) INC. » [178] Ainsi, considérant l’extrême gravité des gestes « criminels » qui ont et´´ e posés par les dirigeants de « TECHNIQUE ACOUSTIQUE (L.R.) INC. », ceux-ci doivent etreˆ reconnus

15Pièce R-5. 16Pièce R-4. 17Pièce R-8.4. Technique acoustique (L.R.) inc., Re Gouin, J.C.S. 189

comme ayant et´´ e malhonnêtes, frauduleux et ayant pour but de tromper l’intérêt public. (Le Tribunal souligne) 26 Le 3 mai 2012, avant le début de l’Assemblée, Sun Life dépose une preuve de réclamation (la « Réclamation »)18 pour un montant total de 1 655 125,22 $, soit 1 190 291,81 $ correspondant au montant de l’Action pour vices, plus 464, 833,41 $ a` titre d’intérêt et indemnité additionnelle. 27 Lors de l’Assemblée, les créanciers sont informés de la Réclamation de Sun Life et de l’annulation de la Licence aux termes de la Décision de la Régie. 28 Par ailleurs, voici un extrait du procès-verbal de l’Assemblée : [. . .] A` la demande du procureur de la Sun Life, l’assemblée est sus- pendue afin de permettre des discussions. A` la reprise de l’assemblée, le procureur de la Sun Life indique qu’il a l’intention de voter contre la proposition et demande une remise de l’assemblée a` une date ultérieure. Considérant que la créance de la Sun Life est eventuelle´ et non li- quidée, que la compagnie la qualifie sans fondement et que leur vote eventuel´ aura un impact fatal contre la débitrice, le président informe l’assemblée qu’il peut, en vertu de l’article 108(3) de la Loi sur la faillite et l’insolvabilité, rejeter la réclamation en totalité aux fins du vote et propose une suspension afin de préparer et remettre im- médiatement un avis de rejet d’une réclamation en vertu de l’article 135(1.1) a` la Sun Life. A` la reprise de l’assemblée, le syndic remet l’avis de rejet d’une réc- lamation a` la Sun Life. De plus, le président de l’assemblée avise Sun Life que, selon l’article 108(3), il rejette leur réclamation aux fins du vote. Un vote s’ensuit sur la demande d’ajournement de la Sun Life et celle-ci est unanimement rejetée par les créanciers [. . .].19 (Le Tribunal souligne) 29 Effectivement, avant la tenue du vote sur la Proposition, le Syndic rejette la Réclamation de Sun Life et lui remet un « Avis de rejet d’une

18Pi`ece R-9. 19Pi`ece R-11, page 2. 190 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

réclamation, du droit a` un rang prioritaire ou d’une garantie (paragraphe 135(3) de la Loi » (l’« Avis de rejet »)20, et ce, pour le motif suivant : La réclamation, eventuelle´ et non liquidée, est evalu´´ ee a` zéro con- sidérant les représentations de la débitrice et ses dirigeants. 30 Ainsi, en plus de se voir refuser le droit de voter sur la Proposition, l’Avis de rejet signifie pour Sun Life qu’elle n’a même pas de réclama- tion prouvable pour les fins d’un dividende eventuel.´ 31 Puis, les créanciers votent sur la Proposition, telle qu’alors amendée21 a` la demande du Ministère du Revenu du Québec, soit après avoir limité les honoraires et frais du Syndic a` 50 000 $ et avoir exclu les réclama- tions résultant d’amendes. 32 La Proposition est alors unanimement acceptée par les créanciers autorisés a` voter, soit 34 créanciers non garantis, ayant des réclamations totales de 1 062 640, 79 $, et un créancier garanti pour un montant de 1 128 937,28 $22. 33 Si Sun Life avait pu voter pour le montant total de sa Réclamation, etant´ donné qu’elle etait´ contre la Proposition, elle aurait et´´ e rejetée, vu que le seuil de 66 2/3%23 en valeur des créances non garanties n’aurait pas alors et´´ e atteint. 34 Le 13 mai 2012, Sun Life dépose une preuve de réclamation amendée (la « Réclamation amendée »)24 pour un montant total de 1 633 660,95 $, soit 1 190 291,81 $ correspondant au montant de l’Action pour vices, plus 443 369,14 $ a` titre d’intérêt et indemnité additionnelle. L’amendement résulte de la période prise en considération pour le calcul de l’intérêt, soit en date du dépôt de l’Avis d’intention. 35 Le 15 mai 2012, la Commission des relations du travail rejette25 la demande en sursis d’exécution de la Décision de la Régie présentée par la Débitrice, et elle la convoque pour une audience de sa contestation (la « Contestation ») de la Décision de la Régie.

20Pièce R-10. 21Pièces R-11 (page 2) et R-13. 22Pièce R-11, page 3. 23Article 54 (2) d) de la LFI. 24Pièce R-14. 25Pièce R-8.5. Technique acoustique (L.R.) inc., Re Gouin, J.C.S. 191

36 Le 18 mai 2012, Sun Life en appelle de l’Avis de rejet en déposant la Requête en appel, telle qu’amendée le 21 juin 2012. 37 Le 21 août 2012, la Débitrice se désiste26 de sa Contestation de la Décision de la Régie. 38 Le 4 septembre 2012, le Syndic dépose la Requête en ratification, laquelle est contestée par Sun Life.

3. POSITION DES PARTIES 3.1 Sun Life 39 Sun Life prétend que l’Avis de rejet est mal fondé, car le Syndic a basé l’évaluation de sa Réclamation uniquement sur l’opinion des dirigeants de la Débitrice, lesquels n’ont aucune crédibilité, et ce, a` la lumière de la Décision de la Régie où il est ecrit´ qu’ils doivent « etreˆ reconnus comme ayant et´´ e malhonnêtes, frauduleux et ayant pour but de tromper l’intérêt public »27. 40 Au surplus, le Syndic n’a pas tenu compte, pour les fins de son evalu-´ ation, des procédures et expertises faisant partie de l’Action pour vices. 41 Au mieux, le Syndic aurait dû, selon Sun Life, noter sa Réclamation comme etant´ contestée, tel que prévu a` l’article 108(3) de la LFI, et permettre a` Sun Life de voter sur la Proposition lors de l’Assemblée, le tout, sous réserve d’invalidation du vote au cas où la contestation de sa Réclamation par le Syndic serait maintenue. 42 Ainsi, Sun Life soumet que le Syndic a evalu´´ e sa Réclamation a` la somme de zéro dollar dans le seul but d’éviter le rejet de la Proposition. 43 Sun Life demande donc que l’Avis de rejet soit annulé, que sa Récla- mation soit acceptée au montant de 1 633 660,95 pour les fins du vote sur la Proposition et que le résultat final du vote du 3 mai 2012 soit sus- pendu jusqu’à qu’à jugement final sur l’Action pour vices. 44 Alternativement, Sun Life demande au Tribunal de prendre acte du fait qu’elle aurait voté contre la Proposition, et ce, en fonction du montant de sa Réclamation amendée, soit 1 633 660,95 $, entraˆınant par le fait même le rejet de la Proposition et la cession des biens de la Débi- trice en date de l’Assemblée, soit le 3 mai 2012.

26Pi`ece R-8.6. 27Pi`ece R-8.4, paragr. [178]. 192 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

3.2 Syndic 45 Le Syndic soumet qu’il a légitimement exercé le pouvoir prévu aux articles 108 et 135(3) de la LFI, lui permettant de rejeter la Réclamation de Sun Life. 46 Selon le Syndic, la Réclamation de Sun Life est eventuelle,´ non li- quidée et impossible a` evaluer,´ vu qu’elle résulte de l’Action pour vices qui implique six autres défendeurs et, selon la Débitrice et ses dirigeants, la Débitrice ne serait nullement responsable des dommages qui y sont réclamés. 47 Dans de telles circonstances, selon le Syndic, permettre a` Sun Life de voter signifiait la faillite de la Débitrice, Sun Life ayant déjà indiqué son intention claire de voter contre la Proposition, et ce, avant même qu’il ait et´´ e statué sur l’Action pour vices, ce qui pourrait prendre encore plusieurs mois, sinon des années. 48 Le Syndic prétend donc qu’il a agi de bonne foi, et que Sun Life n’a etabli´ aucune erreur de droit, ni aucune erreur manifeste et déterminante permettant au Tribunal d’intervenir.

4. QUESTION EN LITIGE 49 Le véritable question en litige pour le Tribunal est la suivante : le Syndic a-t-il erré en evaluant´ a` zéro la Réclamation de Sun Life et en la rejetant, non seulement pour les fins du vote sur la Proposition, mais aussi pour le fins de dividende? 50 En effet, l’Avis de rejet28 de la Réclamation de Sun Life fut emis´ aux termes de l’article 135(3) de la LFI et non de l’article 108(3) de la LFI. Par contre, le Syndic a aussi invoqué l’article 108 de la LFI pour refuser le vote négatif de Sun Life. 51 Puis, que la réponse soit positive ou négative a` cette question, le Tri- bunal se prononcera sur la Requête en ratification de la Proposition, telle qu’amendée

28Pi`ece R-10. Technique acoustique (L.R.) inc., Re Gouin, J.C.S. 193

5. LE DROIT 52 Les articles 108 et 135 de la LFI prévoient, entre autres, ce qui suit : 108. (1) Le président de l’assemblée a le pouvoir, pour les fins de la votation, d’admettre ou de rejeter une preuve de réclamation; sa déci- sion est susceptible d’appel devant le tribunal. [...] (3) Lorsque le président doute que la preuve d’une réclamation doive etreˆ admise ou rejetée, il note la preuve comme contestée et permet aux créanciers de voter, sous réserve d’invalidation du vote, au cas où la contestation serait maintenue. 135. (1) Le syndic examine chaque preuve de réclamation ou de garantie produite, ainsi que leurs motifs, et il peut exiger de nouveaux témoignages a` l’appui. (1.1) Le syndic décide si une réclamation eventuelle´ ou non liquidée est une réclamation prouvable et, le cas ech´´ eant, il l’évalue; sous ré- serve des autres dispositions du présent article, la réclamation est dès lors réputée prouvée pour le montant de l’évaluation. (2) Le syndic peut rejeter, en tout ou en partie, toute réclamation, tout droit a` un rang prioritaire dans l’ordre de collocation applicable prévu par la présente loi ou toute garantie. (3) S’il décide qu’une réclamation est prouvable ou s’il rejette, en tout ou en partie, une réclamation, un droit a` un rang prioritaire ou une garantie, le syndic en donne sans délai, de la manière prescrite, un avis motivé, en la forme prescrite, a` l’intéressé. (4) La décision et le rejet sont définitifs et péremptoires, a` moins que, dans les trente jours suivant la signification de l’avis, ou dans tel autre délai que le tribunal peut accorder, sur demande présentée dans les mêmes trente jours, le destinataire de l’avis n’interjette appel devant le tribunal, conformément aux Règles générales, de la décision du syndic. (5) Le tribunal peut rayer ou réduire une preuve de réclamation ou de garantie a` la demande d’un créancier ou du débiteur, si le syndic refuse d’intervenir dans l’affaire. (Le Tribunal souligne) 53 Ainsi, en rejetant purement et simplement la Preuve de réclamation de Sun Life aux termes de l’article 135(3) de la LFI, le Syndic a tout simplement refusé le statut de créancière a` Sun Life, la privant de tout droit rattaché a` un tel statut. 194 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

54 Le Tribunal n’est appelé a` intervenir dans un tel cas qu’en présence d’une erreur de droit ou d’une erreur manifeste et déterminante de la part du Syndic29. 55 Par ailleurs, la ratification de la Proposition est soumise, entre autres, aux dispositions de l’article 59(2) de la LFI qui prévoit ce qui suit : (2) Lorsqu’il est d’avis que les conditions de la proposition ne sont pas raisonnables ou qu’elles ne sont pas destinées a` avantager l’ensemble des créanciers, le tribunal refuse d’approuver la proposition; et il peut refuser d’approuver la proposition lorsqu’il est etabli´ que le débiteur a commis l’une des infractions mentionnées aux articles 198 a` 200. (le Tribunal souligne)

6. DISCUSSION 56 D’entrée de jeu, le Tribunal est d’opinion que l’Avis de rejet de la Réclamation de Sun Life n’aurait pas dû etreˆ emis´ tel quel, surtout qu’il fut rédigé sur-le-champ, lors d’une suspension de l’Assemblée, après avoir consulté rapidement les dirigeants de la Débitrice, y inclus le prési- dent Luc Bourdon, lequel fait l’objet de critiques très sérieuses et sévères dans le Jugement pour fraude et la Décision de la Régie. 57 A` la lumière de ces deux décisions, et des commentaires qualifiant deux des dirigeants de la Débitrice, dont M. Bourdon, comme ayant et´´ e « malhonnêtes, frauduleux et ayant pour but de tromper l’intérêt public »30, le Syndic se devait de n’accorder aucune crédibilité a` M. Bourdon. 58 Juste le fait que M. Bourdon n’ait informé le Syndic de l’existence de l’Action pour vices que le 16 avril 2012, alors que le dossier etait´ fort actif et que les parties suivaient les diverses etapes´ de l’Ech´´ eancier, dont l’interrogatoire de M. Bourdon le 10 février 2012, est une manifestation evidente´ que M. Bourdon ne se souciait nullement des intérêts de Sun Life.

29Housen v. Nikolaisen, [2002] 2 S.C.R. 235 (S.C.C.); 2713250 Canada inc., Re, 2011 QCCS 6119 (Que. S.C.) (présentement en appel, C.A. no 500-09- 022184-113); 9025-6660 Québec inc., Re, 2012 QCCS 4158 (Que. S.C.). 30Pièce R-8.4, paragr. [178]. Technique acoustique (L.R.) inc., Re Gouin, J.C.S. 195

59 D’ailleurs, le Tribunal est fort surpris de constater que le Syndic n’a pas et´´ e informé par le Cabinet CP, dès le dépôt de l’Avis d’intention, de l’Action pour vices. 60 Le Cabinet CP devait savoir que sa cliente, la Débitrice, avait déposé un Avis d’intention! Sinon, il y avait un sérieux problème de communi- cation. Et les honoraires légaux reliés a` la négociation de l’Ech´´ eancier et la tenue des Interrogatoires : qui les a payés? 61 Comment se peut-il que le Syndic n’ait pris connaissance de l’Action pour vices qu’après le dépôt de la Proposition, soit seulement quelques jours avant l’Assemblée du 3 mai 2012? 62 Quelles sont les vérifications faites a` ce sujet, surtout que, tel que mentionné précédemment, l’Ech´´ eancier fut signé le 9 janvier 2012 et les Interrogatoires furent tenus les 10 et 17 février 2012, avec l’obligation de M. Bourdon de communiquer ses engagements, au plus tard, le 17 mars 2012? 63 Une simple vérification des procédures inscrites au plumitif de la cour sous le nom de la Débitrice, et ce, dès le dépôt de l’Avis d’intention, aurait permis de découvrir l’Action pour vices. Ceci devrait etreˆ une pro- cédure standard dans tout dossier de proposition ou de faillite. Il en va de la protection des créanciers d’un débiteur. 64 Ainsi donc, sur simple vérification effectuée rapidement auprès des dirigeants de la Débitrice, le Syndic conclut et prépare, pendant une courte suspension de l’Assemblée, l’Avis de rejet en y incorporant le motif suivant : La réclamation, eventuelle´ et non liquidée, est evalu´´ ee a` zéro con- sidérant les représentations de la débitrice et ses dirigeants.31 65 Cette fa¸con de procéder, surtout en fonction des représentations de M. Bourdon, dont la probité a sérieusement et´´ e mise en doute dans le Juge- ment pour fraude et la Décision de la Régie, et qui, somme toute, ne cherche qu’à prendre les moyens pour que la Proposition soit acceptée, y inclus mettre en echec´ Sun Life qui compte voter contre la Proposition, ne peut etreˆ acceptée par le Tribunal. 66 Le Syndic aurait dû réagir fermement et, avec son expérience, il n’aurait pas dû se laisser prendre au jeu de M. Bourdon.

31Pi`ece R-10. 196 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

67 Le Tribunal ne peut pas accepter que Sun life fasse ainsi les frais de ce manque de rigueur, et ce, même si la Réclamation de Sun Life n’est pas encore liquidée et que le résultat ultime du vote puisse etreˆ la faillite de la Débitrice. 68 A` cet egard´ d’ailleurs, le Tribunal note dans le Rapport du Syndic joint a` l’Avis de la Proposition32 que, dans le cadre de la Proposition, les créanciers ordinaires se partageraient un montant approximatif de 250 000 $, alors que, dans le cadre d’une faillite, le montant serait d’approximativement 69 000 $, soit après la déduction pour frais de réal- isation de 150 000 $. 69 Le Syndic parle d’un dividende de 8% avec la Proposition, et d’une dividende de 2% dans une faillite33, incluant la Réclamation de Sun Life dans les deux cas34. 70 La différence est, somme toute, dans les circonstances, pas très im- portante. Elle pourrait même etreˆ a` l’avantage du scénario de faillite, si les frais et honoraires sont bien contrôlés et certaines autres avenues de réalisation sont explorées. 71 Ainsi, une faillite permettrait d’enquêter davantage sur l’existence de paiements préférentiels ou d’opérations sous-évaluées. En effet, a` la lumière des commentaires de la Régie du bâtiment du Québec, une analyse très rigoureuse s’impose a` cet egard,´ et il ne faut surtout pas se fier aux dires des dirigeants de la Débitrice. 72 Le Tribunal se demande si l’analyse effectuée par le Syndic a et´´ e rigoureuse lorsqu’il rapporte : L’étude des opérations-sous-évaluées et traitements préférentiels n’a permis d’identifier aucun el´´ ement litigieux.35 73 Au surplus, la Proposition contient une quittance36 au bénéfice des administrateurs de la Débitrice. Le Tribunal est d’opinion qu’une telle disposition est inacceptable a` la lumière du Jugement pour fraude et de la Décision de la Régie.

32Pièce R-4. 33Requête en ratification, paragr. 21. 34Pièce R-4, articles 6 et 9. 35Pièce R-4, article 8.1 du Rapport. 36Pièce R-4, article 6. Technique acoustique (L.R.) inc., Re Gouin, J.C.S. 197

74 Quant aux créanciers garantis de la Débitrice, qu’il y ait une proposition ou une faillite de la Débitrice, il n’y aurait pas de différence pour eux vu, selon le Rapport du Syndic, qu’ils continueraient a` bénéficier de leurs droits sur les equipements´ et immobilisations de la Débitrice. 75 Il est même question que la Débitrice puisse financer a` nouveau ses equipements´ et immobilisations afin de repayer les créanciers garantis! 76 Comment se peut-il que la Débitrice, qui n’opère plus, vu l’annulation de sa Licence suite a` la Décision de la Régie, puisse ainsi se financer a` nouveau, comme si rien n’était? 77 Le Tribunal a la vague impression que la Débitrice et M. Bourdon ont un agenda caché. 78 La demande de sursis et la Contestation par la Débitrice de la Déci- sion de la Régie, parallèlement a` la période de l’Assemblée, puis le désis- tement subséquent, laissent le Tribunal fort perplexe. La stratégie adoptée par la Débitrice est très discutable dans les circonstances. Cela ressemble a` un scénario pour eviter´ les questions, sous prétexte que le tout est contesté devant les tribunaux. 79 Et, plus important que tout autre chose, Sun Life a des droits qui doivent etreˆ protégés, du moins reconnus comme eventuels,´ et non laissés pour compte, et ce, peu importe que cela puisse signifier la faillite de la Débitrice. 80 Les démarches de vérification et d’évaluation d’une preuve de récla- mation doivent etreˆ sérieuses et rigoureuses37. Le Syndic ne pouvait pas se fier uniquement aux représentations des dirigeants de la Débitrice pour evaluer´ la Réclamation de Sun Life. D’ailleurs, ces derniers ont limité leur défense a` l’Action pour vices a` une dénégation générale, sans plus. 81 Bref, le Syndic s’est fié a` leur parole, mais ils sont reconnus comme etant´ « malhonnêtes, frauduleux et ayant pour but de tromper l’intérêt public »38. 82 Le Tribunal est d’opinion que, nonobstant les négociations avec certains créanciers de la Débitrice, y inclus le Ministère du Revenu du Québec, vu le comportement des dirigeants de la Débitrice et le traite-

37Côté, Re, 19 mars 2002, Cour supérieure, (2002), REJB 2002-31416 (Que. S.C.); Lama Transport & manutention ltée, Re, 28 novembre 2002, Cour supér- ieure, (2002), REJB 2002-35944 (Que. S.C.). 38Pièce R-8.4, paragr. [178]. 198 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

ment réservé a` Sun Life, a` la dernière minute, le Syndic se devait de douter sérieusement de la bonne foi et de la crédibilité de la Débitrice et de ses dirigeants. 83 Le Syndic n’aurait pas dû recommander l’acceptation de la Proposi- tion laquelle, en plus, mettait a` l’abri les administrateurs de la Débitrice. 84 Aussi, vu la position sans equivoque´ de Sun Life de voter contre la Proposition, permettre maintenant a` Sun Life de voter, tout en notant sa Réclamation comme contestée, conformément a` l’article 108(3) de la LFI, et ce, sous réserve de l’invalidation de son vote lorsque jugement final serait rendu dans l’Action pour vices, n’empêcherait pas l’effet im- médiat d’une faillite de la Débitrice dès après le vote. 85 A` tout ev´´ enement, le Tribunal est d’opinion que la faillite immédiate de la Débitrice est la meilleure solution afin d’assurer la meilleure protection de l’ensemble des créanciers de la Débitrice et du public, la Pro- position n’étant nullement a` l’avantage de l’ensemble des créanciers39.

7. CONCLUSION 86 Le Tribunal est d’opinion que le Syndic a commis des erreurs manifestes et déterminantes dans le traitement de la Réclamation de Sun Life et dans le déroulement de l’Assemblée, y inclus dans ses recom- mandations aux créanciers, et le Tribunal annulera l’Avis de rejet, refusera la ratification de la Proposition, et prononcera la faillite de la Débitrice.

POUR CES MOTIFS, LE TRIBUNAL : 87 ACCUEILLE, en partie, la Requête en appel de Sun Life; 88 ANNULE l’Avis de rejet de la Réclamation de Sun Life; 89 REJETTE la Requête en ratification du Syndic; 90 PRONONCE la faillite de la Débitrice, et ce, en date du présent jugement; 91 LE TOUT avec dépens au bénéfice de Sun Life et contre la masse. Requête de la créancière accueillie; requête du syndic rejetée.

39Chan, Re, 2007 QCCA 727 (Que. C.A.); Brennan, Re, 5 avril 2001, Cour supérieure, (2001), REJB 2001-24715 (Que. S.C.); Magi, Re, 29 août 2006, Cour supérieure, (2006), EYB 2006-109791 (Que. S.C.). Griffin v. 0904713 B.C. Ltd. 199

[Indexed as: Griffin v. 0904713 B.C. Ltd.] Scott Arthur Griffin, Brothers Oil & Gas, Inc., Church Bay Farms Corp., Lloyd Henderson and Kathy Wallace Petitioners and 0904713 B.C. Ltd. and Findlay Creek Ranch Co. Ltd. Respondents British Columbia Supreme Court Docket: Vancouver H120176 2013 BCSC 273 Fitzpatrick J., In Chambers Heard: January 21, 2013 Judgment: January 31, 2013* Real property –––– Mortgages — Foreclosure — Entitlement to interim judgment — Order nisi — Miscellaneous –––– Application to put matter on trial list — Respondent F Ltd. (“mortgagor”) granted mortgages (“2006 mortgages”) to mortgagees (“2006 mortgagees”) — Mortgagor granted another mortgage (“2007 mortgage”) to petitioner mortgagees, which was to take priority to 2006 mortgages — 2006 mortgagees obtained order nisi and assigned interest to respondent 904 Ltd. (“registered owner”), who then obtained order absolute and became registered owner of land, subject to 2007 mortgage — Petitioner mortgagees commenced foreclosure proceedings when 2007 mortgage went into default — Mortgagees brought application for order nisi — Registered owner brought application for order referring matter to trial list — Mortgagees’ application granted; registered owner’s application dismissed — Registered owner did not raise bona fide triable issue or defence in relation to 2007 mortgage, as allegations of misrepresentation and estoppel were not relevant to matters in issue — Order absolute resulted in extinguishment of 2006 mortgages, so no priority issue was extant as between petitioner mortgagees and registered owner as prior mortgagee — No claim in innocent or negligent misrepresentation arose as alleged statements were about future events, and registered owner did not suggest 2007 mortgage was invalid due to misrepresentations — There was little basis for claim of estoppel against 2007 mortgagees — Any issue arising from these allegations could be determined in another action — Foreclosure proceeding could proceed in usual summary manner as there would be no duplication of cost or effort.

*A corrigendum issued by the court on March 4, 2013 has been incorporated herein. 200 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

Real property –––– Mortgages — Foreclosure — Practice and procedure — Miscellaneous –––– Application to put matter on trial list — Respondent F Ltd. (“mortgagor”) granted mortgages (“2006 mortgages”) to mortgagees (“2006 mortgagees”) — Mortgagor granted another mortgage (“2007 mortgage”) to petitioner mortgagees, which was to take priority to 2006 mortgages — 2006 mortgagees obtained order nisi and assigned interest to respondent 904 Ltd. (“registered owner”), who then obtained order absolute and became registered owner of land, subject to 2007 mortgage — Petitioner mortgagees commenced foreclosure proceedings when 2007 mortgage went into default — Mortgagees brought application for order nisi — Registered owner brought application for order referring matter to trial list — Mortgagees’ application granted; registered owner’s application dismissed — Registered owner did not raise bona fide triable issue or defence in relation to 2007 mortgage, as allegations of misrepresentation and estoppel were not relevant to matters in issue — Order absolute resulted in extinguishment of 2006 mortgages, so no priority issue was extant as between petitioner mortgagees and registered owner as prior mortgagee — No claim in innocent or negligent misrepresentation arose as alleged statements were about future events, and registered owner did not suggest 2007 mortgage was invalid due to misrepresentations — There was little basis for claim of estoppel against 2007 mortgagees — Any issue arising from these allegations could be determined in another action — Foreclosure proceeding could proceed in usual summary manner as there would be no duplication of cost or effort. Cases considered by Fitzpatrick J., In Chambers: Auger v. Hume (2001), 2001 BCSC 416, 2001 CarswellBC 786, 88 B.C.L.R. (3d) 354 (B.C. S.C.) — referred to Bank of British Columbia v. Pickering (1983), 1983 CarswellBC 456, 62 B.C.L.R. 136 (B.C. C.A.) — considered Boffo Developments (Jewel 2) Ltd. v. Pinnacle International (Wilson) Plaza Inc. (2009), 89 R.P.R. (4th) 133, 2009 CarswellBC 3374, 2009 BCSC 1701, 83 C.P.C. (6th) 169 (B.C. S.C. [In Chambers]) — considered Canadian Western Bank v. 0777419 B.C. Ltd. (2009), 2009 BCSC 683, 2009 CarswellBC 1320 (B.C. S.C.) — considered Firstar Investment & Financial Co. v. Ridgewood Development Corp. (2003), 2003 BCCA 660, 2003 CarswellBC 3187, 34 C.L.R. (3d) 282 (B.C. C.A.) — considered Golden Hill Ventures Ltd. v. Kemess Mines Inc. (2002), 7 B.C.L.R. (4th) 1, 22 C.L.R. (3d) 26, 2002 CarswellBC 2425, 2002 BCSC 1460, [2002] B.C.J. No. 2340 (B.C. S.C.) — referred to HGE Administrative Services Ltd. v. Perrick (2011), 20 B.C.L.R. (5th) 24, 2011 BCCA 308, 2011 CarswellBC 1659, 308 B.C.A.C. 150, 521 W.A.C. 150, 338 D.L.R. (4th) 626, 7 C.P.C. (7th) 1, 83 C.B.R. (5th) 287 (B.C. C.A.) — considered Griffin v. 0904713 B.C. Ltd. 201

Kingu v. Walmar Ventures Ltd. (1986), 38 C.C.L.T. 51, 10 B.C.L.R. (2d) 15, 1986 CarswellBC 2, [1986] B.C.J. No. 597 (B.C. C.A.) — referred to Lee v. Chai (2008), 2008 BCSC 1148, 2008 CarswellBC 1777 (B.C. S.C.) — considered MacMillan v. Kaiser Equipment Ltd. (2003), 2003 BCSC 672, 2003 CarswellBC 1023, [2003] B.C.J. No. 1006 (B.C. S.C.) — referred to MacMillan v. Kaiser Equipment Ltd. (2004), 2004 BCCA 270, 2004 Car- swellBC 1066, 322 W.A.C. 117, 196 B.C.A.C. 117, 33 B.C.L.R. (4th) 44, [2004] B.C.J. No. 969 (B.C. C.A.) — referred to McCordic v. Hidden Rock Drilling Ltd. (2006), 2006 BCSC 1428, 2006 Car- swellBC 2353 (B.C. S.C. [In Chambers]) — considered Murray v. TDL Group Ltd. (2002), 2002 CarswellOnt 4474, [2002] O.T.C. 1024, [2002] O.J. No. 5095 (Ont. S.C.J.) — considered Northland Bank v. Kocken (1993), 77 B.C.L.R. (2d) 377, 43 W.A.C. 292, 100 D.L.R. (4th) 753, (sub nom. Northland Bank (Liquidation) v. Kocken) 25 B.C.A.C. 292, 1993 CarswellBC 78, [1993] B.C.J. No. 711 (B.C. C.A.) — considered P.S.D. Enterprises Ltd. v. New Westminster (City) (2012), 2012 BCCA 319, 2012 CarswellBC 2179, [2012] 10 W.W.R. 22, 99 M.P.L.R. (4th) 179, 34 B.C.L.R. (5th) 133, 326 B.C.A.C. 27, 554 W.A.C. 27 (B.C. C.A.) — considered PD Management Ltd. v. Chemposite Inc. (2006), [2007] 1 W.W.R. 245, 58 B.C.L.R. (4th) 197, 2006 BCCA 489, 43 C.C.L.T. (3d) 88, 2006 CarswellBC 2743, 381 W.A.C. 283, 231 B.C.A.C. 283 (B.C. C.A.) — referred to Punto e Pasta Manufacturing Inc. v. Henderson Development (Canada) Ltd. (2009), 79 R.P.R. (4th) 210, 2009 CarswellBC 65, 2009 BCSC 37 (B.C. S.C.) — referred to Royal Bank v. Rizkalla (1984), 50 C.P.C. 292, 1984 CarswellBC 450, 59 B.C.L.R. 324, [1984] B.C.J. No. 2747 (B.C. S.C.) — considered Royal Trust Co. v. Heelo Properties Ltd. (1986), 1986 CarswellBC 158, 4 B.C.L.R. (2d) 40, 29 D.L.R. (4th) 117, 41 R.P.R. 283, [1986] B.C.J. No. 436 (B.C. C.A.) — referred to Sanghera v. Danger Figure Centre (Burnaby) Ltd. (2007), 2007 BCSC 1308, 2007 CarswellBC 2035, [2007] B.C.J. No. 1947 (B.C. S.C.) — referred to Steele, Re (1979), 29 C.B.R. (N.S.) 269, 97 D.L.R. (3d) 412, 1979 CarswellBC 562, 9 B.C.L.R. 373 (B.C. S.C.) — referred to TCC Mortgage Holdings Inc. v. Alysen Place Developments Inc. (2011), 2011 CarswellBC 694, 2011 BCSC 383, 75 C.B.R. (5th) 239 (B.C. S.C.) — referred to Teknon Industries Inc. v. 475338 British Columbia Ltd. (2001), 2001 BCSC 311, 2001 CarswellBC 490 (B.C. S.C.) — referred to Thomson v. Stikeman (1913), 14 D.L.R. 97, 1913 CarswellOnt 855, 29 O.L.R. 146, [1913] O.J. No. 117 (Ont. H.C.) — considered 202 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

Thomson v. Stikeman (1913), 17 D.L.R. 205, 1913 CarswellOnt 890, 30 O.L.R. 123, [1913] O.J. No. 14 (Ont. C.A.) — referred to Statutes considered: Property Law Act, R.S.B.C. 1996, c. 377 s. 32 — considered Rules considered: Supreme Court Civil Rules, B.C. Reg. 168/2009 R. 21-7(5) — considered R. 21-7(5)(k) — considered R. 22-1(7) — considered R. 22-1(7)(d) — considered App. B, s. 2(2)(b) — referred to

APPLICATION by registered owner of land for order referring foreclosure matter to trial list; APPLICATION by mortgagee for order nisi.

S.H. Stephens for Petitioners R.V. Wickett, Q.T. Duong for Respondent, 0904713 B.C. Ltd. J.A. Hall for Respondent, Findlay Creek Ranch Co. Ltd.

Fitzpatrick J., In Chambers (orally): Introduction 1 This is a foreclosure proceeding arising from a failed development project located in Rossland, B.C., which was owned by the respondent Findlay Creek Ranch Co. Ltd. (“Findlay Creek”). 2 The circumstances are fairly complicated because many of the parties involved are related and many individuals had different roles and interests in the proceedings. 3 There are two applications for consideration: firstly, an application by the respondent 0904713 B.C. Ltd. (“904”) for an order referring the matter to the trial list; and secondly, an application by the petitioners for an order nisi. If the first application is rejected, there is no opposition to the granting of the order nisi on the terms sought. Accordingly, the question to be answered at this time is whether there is a bona fide issue raised by 904 in relation to the mortgage held by the petitioners.

Background Facts 4 Findlay Creek was incorporated for the purpose of acquiring and developing the subject property, which comprises some 290 acres of land Griffin v. 0904713 B.C. Ltd. Fitzpatrick J. 203

near Rossland, B.C. The directors of Findlay Creek include the petitioners Kathy Wallace and Lloyd Henderson. A further director is Allen Sewell. 5 In January 2006, Findlay Creek granted three separate mortgages to each of 0745369 B.C. Ltd. (“745”), Marilyn Sewell, and Gary Green (the “2006 Mortgagees”). Each of the mortgages secured $150,000 (the “2006 Mortgages”). Agreements were signed between Findlay Creek and the 2006 Mortgagees whereby the 2006 Mortgagees agreed to subordinate their security to construction development financing up to the amount of $3 million. 745, Ms. Sewell, and Mr. Green also entered into agreements with each other to effect a pari passu ranking of their respective mortgages. 6 The petitioner Scott Griffin is the principal of 745. Ms. Sewell is mar- ried to Robert Sewell (now Mr. Justice Sewell), who is the brother of Allen Sewell. 7 Subsequent to November 2005, the petitioners Church Bay Farms Corp. (“Church Bay”), Ms. Wallace, and Mr. Henderson provided some construction development financing to Findlay Creek. These demand loans later totaled in excess of $113,000. Church Bay’s sole director is Gail Sewell, the wife of Allen Sewell. 8 In 2007, Findlay Creek granted a mortgage to the petitioners as security for the principal amount of $300,000, with the petitioners each holding undivided interests in the one mortgage (the “2007 Mortgage” and the “2007 Mortgagees”). The 2007 Mortgage was funded in late 2007 as follows: (a) $100,000 from Mr. Griffin personally; (b) $100,000 from Brothers Oil & Gas, Inc. (a company in which Allen Sewell is a director); (c) $10,000 from Ms. Wallace and Mr. Henderson; and (d) $90,000 through a repayment of a portion of the demand loans made to Findlay Creek by Church Bay, Ms. Wallace, and Mr. Henderson that I earlier referred to. These repay- ments were recorded in the books as an offset as against the advances under the 2007 Mortgage. The explanation provided indicated that this was done to save unnecessary time and expense in relation to obtaining further advances from these parties and having them repaid to the same parties. 204 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

9 As requested, and in accordance with the original agreement to subordinate their security to construction development financing, the 2006 Mortgagees — 745, Ms. Sewell, and Mr. Green — signed Priority Agreements subordinating the 2006 Mortgages to the 2007 Mortgage. As a result, by late 2007, the 2007 Mortgage ranked as a first mortgage with the 2006 Mortgagees holding the second mortgages. 10 The 2006 Mortgages matured on December 31, 2009, but were not repaid as agreed. Foreclosure proceedings were commenced by 745, Ms. Sewell, and Mr. Green in June 2010. An order nisi was granted in these proceedings on July 16, 2010, with a six-month redemption period. In June 2011, the 2006 Mortgagees assigned their interest under their mortgages to 904, a company owned and controlled by Mr. Griffin. 11 In the time frame from 2006 to June 2011, Findlay Creek made substantial progress in the development of the property. 12 On June 1, 2011, 904, as the assignee of 745, Ms. Sewell, and Mr. Green, was substituted as petitioner in the 2006 Mortgage foreclosure action and an Order Absolute was granted. The 2006 Mortgages were then removed from title to the property in the ordinary course. Accord- ingly, since that time, 904 has been the registered owner of the subject lands in place of Findlay Creek, subject only to the 2007 Mortgage. 745, Ms. Sewell, and Mr. Green appear to have no current involvement in the matter. 13 The nub of the issue arises from a later demand by 904 in June 2011 for information regarding advances under the 2007 Mortgage. Mr. Grif- fin now says that the financial records of Findlay Creek disclose that Church Bay, Ms. Wallace, and Mr. Henderson did not advance any “new” money to the extent of $90,000 under the 2007 Mortgage. Specifi- cally, Mr. Griffin now says that the financial records reveal, and it is admitted by the petitioners, that some of the money actually advanced under the 2007 Mortgage was used to pay debts incurred by Findlay Creek to its directors, or their companies, prior to registration of the 2007 Mortgage. 14 Other miscellaneous payments of legal fees and interest after late 2007 are also contested. Ms. Wallace says that all monies raised were utilized for the development, and all payments were made to third parties with the exception of $7,000 paid to Henderson Construction Ltd., which is owned by her and her husband. 15 Mr. Griffin contends that when 745, Ms. Sewell, and Mr. Green granted the 2007 Mortgage priority over the 2006 Mortgages, they did so Griffin v. 0904713 B.C. Ltd. Fitzpatrick J. 205

in reliance of certain representations made to them by Allen Sewell regarding the 2007 Mortgage. Specifically, it is alleged that Allen Sewell made certain oral representations to Mr. Griffin that Findlay Creek required a further $300,000 for future expenses to take the steps necessary to proceed with the subdivision process in connection with the property and that $200,000 of this “new” money would be advanced as follows: by Brothers Oil & Gas, Inc., as to $100,000; by Church Bay, as to $50,000; by Ms. Wallace, as to $25,000; by Mr. Henderson as to $25,000. Together with the further advance of $100,000 by Mr. Griffin, these amounts would be secured by the $300,000 mortgage. 16 Mr. Griffin also says, on information and belief, that Robert Sewell was advised by his brother, Allen Sewell, prior to the execution of the Priority Agreements that the 2007 Mortgage was to borrow “new” money for future expenses to take the steps necessary to proceed with the subdivision process and that it was on this basis that his wife, Ms. Sew- ell, executed one of the Priority Agreements. 17 Nothing in the documentation relating to the 2007 Mortgage confirms that such representations were made, although the documentation does generally refer to Findlay Creek borrowing $300,000. 18 Mr. Griffin states in his evidence that he would not have executed the Priority Agreement on behalf of 745 and he would not have advanced his $100,000 as part of the 2007 Mortgage but for the representations by Allen Sewell. In particular, he says that 745 would not have granted priority over its 2006 Mortgage had he been told that any portion of the 2007 Mortgage was not to be advanced as “new” money or that any portion of the 2007 Mortgage was to be used to secure past debt. 19 Allen Sewell denies having made any misrepresentations to Mr. Griffin. 20 The 2007 Mortgage went into default when it was not paid when due in November 2008. The parties to the 2007 Mortgage, including Mr. Griffin, had signed a Mortgage Participation and Administration Agree- ment effective November 15, 2007. By that agreement, the petitioners appointed Allen Sewell as their manager for the purpose of administering the 2007 Mortgage on their behalf. In accordance with the unanimous agreement of the 2007 Mortgagees (including Mr. Griffin), Allen Sewell caused these foreclosure proceedings to be commenced by the petitioners in February 2012. 206 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

21 The amount owing under the 2007 Mortgage as at May 2012 was approximately $454,000. A somewhat dated appraisal of the property from 2009 indicates a value “as is” of $2.34 million.

Issues 22 The relief sought by the petitioners in this proceeding includes: A Declaration that the mortgage dated November 22, 2007 made between the Respondent, Findlay Creek Ranch Co. Ltd., as Mortgagor and the Petitioners, as Mortgagee ... on December 11, 2007 ... is a mortgage charging the following lands ... in priority to the interest therein or claims thereto of the Respondents... [Emphasis added.] 23 As stated above, the dispute arises from the contention that there were no actual new advances by Church Bay, Mr. Henderson, and Ms. Wal- lace under the 2007 Mortgage to the extent of $90,000. In addition, the dispute is that actual advances made were not used for future development expenses, but were used to pay debts that had already been incurred by that point. On the former point, and as argued by the petitioners, it is not unusual that some or all advances under a mortgage are not paid directly to the mortgagor. In that event, assuming that Church Bay, Mr. Henderson, and Ms. Wallace could have issued cheques for the $90,000 advances to be made by them (which would then have been used to repay certain debts owed to them), I consider that both arguments essentially amount to the contention that the proceeds from the 2007 Mortgage were used contrary to the representations said to have been made by Allen Sewell. 24 As a result, it is 904’s contention that Allen Sewell’s misrepresentations give rise to the following bona fide issues: (a) What advances were made and what amounts are properly owing under the 2007 Mortgage?; and (b) Are the petitioners estopped from asserting any priority over the interests of 904? 25 904 says that the issue of whether the petitioners are estopped from asserting that the 2007 Mortgage has priority over the interests of 904 is not an issue that can be determined by the court on documentary evidence and that it is necessary to refer the matter to the trial list. The premise of the argument by 904 is that it is the “successor in title to the 2006 Mortgages”. Griffin v. 0904713 B.C. Ltd. Fitzpatrick J. 207

26 There is no contest here as between Findlay Creek and the petitioners. Findlay Creek agrees that the 2007 Mortgage was intended to secure, and does secure, the advances of $300,000, which were actually made either directly to it or through the book entries. That is evident from the mortgage itself, which records on its face that the amount secured is $300,000. Further, the parties have acted in a manner consistent with this understanding of the obligations between them, including recording the secured debt in tax filings, preparing financial statements, and paying an interest payment to the petitioners in November 2008. 27 Accordingly, the petitioners say that there is no bona fide issue for determination in respect of the validity of the 2007 Mortgage and the amounts owing under it — in other words, there is no defence to the foreclosure action. Findlay Creek takes the same position and also opposes any order referring the matter to the trial list.

Discussion 28 The powers of the court on a foreclosure proceeding are set out under Supreme Court Civil Rule 21-7(5). Under Rule 21-7(5)(k), the court may make an order under Rule 22-1(7). 29 Rule 22-1(7)(d) provides that on the hearing of a chambers proceeding, the court may: (d) order a trial of the chambers proceeding, either generally or on an issue, and order pleadings to be filed and, in that event, give directions for the conduct of the trial and of pre-trial proceedings and for the disposition of the chambers proceeding. 30 There is no contest on this application as to the applicable test to be applied in respect of the application to refer the matter to the trial list. The test for conversion of a petition proceeding to an action is whether there is a bona fide triable issue that cannot be determined by reference to the documents and which would affect the outcome of the proceeding: Boffo Developments (Jewel 2) Ltd. v. Pinnacle International (Wilson) Plaza Inc., 2009 BCSC 1701 (B.C. S.C. [In Chambers]). 31 In Boffo Developments, Madam Justice Ballance stated: [48] The dominant principle is that the Court should exercise its discretion under the rule to convert a petition into trial where there is a bona fide triable issue that cannot be determined by reference to the documents, and would affect the outcome of the proceeding. A bona fide triable issue arises where on the evidence before the Court there is a dispute as to facts or law which raises a reasonable doubt or 208 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

suggests there is a defence that deserves to be tried: Douglas Lake Cattle Co. v. Smith, [1991] B.C.J. No. 484 (C.A.). The threshold is, appropriately, a relatively low one. [49] The authorities indicate a tendency of the Court to convert a summary process to a full trial where serious and disputed questions of fact or law are raised. ... 32 The low threshold on an application for conversion to an action was discussed by Mr. Justice Barrow in Canadian Western Bank v. 0777419 B.C. Ltd., 2009 BCSC 683 (B.C. S.C.): [30] ...The evidentiary threshold on an application of this nature is very low. I must be satisfied beyond a reasonable doubt, or to a degree of certainty that approaches that standard, that the contention [of the Respondent] cannot be proven on a balance of probabilities. ... 33 This test has been described in slightly different terms in the context of foreclosure proceedings, by stating that an order nisi will not be granted in summary chambers proceedings unless it is “manifestly clear” that there is no bona fide triable issue as to the entitlement to the remedy the petitioner seeks: HGE Administrative Services Ltd. v. Perrick, 2011 BCCA 308 (B.C. C.A.) at paras. 17-18; Firstar Investment & Financial Co. v. Ridgewood Development Corp., 2003 BCCA 660 (B.C. C.A.) at para. 2. 34 The onus of demonstrating the absence of a bona fide triable issue falls upon the petitioners: McCordic v. Hidden Rock Drilling Ltd., 2006 BCSC 1428 (B.C. S.C. [In Chambers]) at paras. 22-23, citing Firstar In- vestment at para. 3. See also HGE Administrative Services at paras. 23- 24. 35 In attempting to decide whether to remit a matter for trial, the court is not permitted to weigh the evidence or undertake a detailed consideration of the merits: McCordic at paras. 19-21; HGE Administrative Services at paras. 19-20. 36 The petitioners say that any claim against Allen Sewell is a separate matter and that a claim can be advanced against him in other proceedings. They say that the allegations do not amount to any defence in this foreclosure action, relying on the comments of Madam Justice McLach- lin (as she then was) in Royal Bank v. Rizkalla, [1984] B.C.J. No. 2747 (B.C. S.C.). That case involved a contested application for an order nisi of foreclosure where the mortgagors contended that the bank had realized on certain property in an improvident manner. McLachlin J. discussed the nature of a true defence, as opposed to a counterclaim, towards con- Griffin v. 0904713 B.C. Ltd. Fitzpatrick J. 209

cluding that the issues raised by the mortgagors did not constitute a bona fide defence to the claims of the bank: 9 A defence is a contention that the plaintiff’s claim is not established. It adopts one or more of the following positions: (i) an objection on grounds of jurisdiction; (ii) a denial of the plaintiff’s allegations (traverse); (iii) a submission that if the plaintiff’s allegations are true they disclose no cause of action (demurrer); and (iv) a submission that if the plaintiff’s allegations are true there are facts which provide a legal justification for the defendant’s conduct (confession and avoidance). 10 A counterclaim, on the other hand, is an independent action raised by a defendant, which, because of the identity of the parties, can con- veniently be tried with the plaintiff’s claim. While a counterclaim frequently (although not necessarily) arises from the same events as the plaintiff’s claim, and while it may result in reduction of the plaintiff’s claim, it is in principle an independent action. 11 The bank’s claim is for money loaned pursuant to a contract of mortgage. No defences to that claim, whether in the nature of objec- tions to jurisdiction, denial, demurrer or confession and avoidance, are raised. It is not disputed that the money was loaned, nor that it is repayable, together with interest. Nor is it denied that the contracts which the mortgagors signed gave the bank an equitable mortgage on their home in the amount of their indebtedness. 12 The so-called “defences” raised by the mortgagors reduce, in essence, to the contention that the amount which they owe the bank would have been less had the bank not taken the steps of which they complain. This allegation is not a defence, but an independent claim for damages — a claim founded not upon the contracts upon which the bank bases its claim (the promissory notes and mortgage agreement) but upon a separate contract of assignment of a security. [Emphasis added.] 37 There are many other foreclosure cases which have applied the foregoing test. In McCordic, the court refused to allow an issue of set-off of debts under promissory notes unrelated to the mortgage to be referred to the trial list: paras. 8-16. Only a bona fide issue asserted by the respondent mortgagor as to the amount due and owing under the mortgage was referred to the trial list: paras. 17, 23. 38 In HGE Administrative Services, a bona fide triable issue arose relating to the validity of and the amounts owing under a guarantee which 210 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

was the underlying obligation secured by the mortgage: see paras. 12, 21. Similarly, in Firstar Investment, there was a bona fide issue as to whether a forbearance agreement had been breached that would have allowed the petitioner to commence the foreclosure. 39 In Bank of British Columbia v. Pickering (1983), 62 B.C.L.R. 136 (B.C. C.A.) at para. 11, the court found that allegations of fraudulent misrepresentation said to vitiate the mortgage and allegations of a collateral agreement to advance further funds were bona fide defences to the claim. 40 Following Pickering, the court in Canadian Western Bank found that the mortgagors’ assertions that the petitioner had collaterally agreed to fund construction costs, which would refute the right to demand amounts owing and commence a foreclosure, constituted a bona fide issue. 41 What I take from the above cases is the bona fide issue must go to the root or foundation of the foreclosure action. Those foundational issues must relate to the validity of the mortgage, the ability of the mortgagee to claim under the mortgage and commence the foreclosure, or the amount due and owing under the mortgage: see TCC Mortgage Holdings Inc. v. Alysen Place Developments Inc., 2011 BCSC 383 (B.C. S.C.) at para. 15. 42 In some cases, a collateral issue may be inextricably bound up with these fundamental issues such that it is appropriate to have them all heard together. In Northland Bank v. Kocken (1993), 100 D.L.R. (4th) 753 (B.C. C.A.), at 761, (1993), 77 B.C.L.R. (2d) 377 (B.C. C.A.), guarantors of the debt contended that the bank had negligently realized on certain collateral which would otherwise have satisfied or decreased the mortgage amount. The court rejected the bank’s alternative argument that the appellants could pursue their claims in other proceedings. The court stated: 39 ...There are issues with respect to the mortgage itself which are so linked with the issue raised by way of set-off that they should be resolved together. In my view, if there is to be a trial of this proceeding it would be neither convenient nor just to adopt the Bank’s alternative submission. 43 In addition, if issues arise by way of set-off and counterclaim that relate to the ability of the mortgagor or others liable under the mortgage to address or comply with orders in the foreclosure action, orders may be made to address any prejudice in that respect: see Rizkalla at para. 13. For example, if a successful set-off or counterclaim may allow the mortgagor to exercise rights of redemption, then the court may allow that Griffin v. 0904713 B.C. Ltd. Fitzpatrick J. 211

matter to be decided before the court makes any orders concerning the property, such as granting orders for sale or orders absolute.

Discussion 44 It is useful at the outset to clearly delineate the status of the respondents to this proceeding. 45 Findlay Creek, as mortgagor, is no longer the registered owner of the property. It purports to have certain interests that may be exercised in the event of any future development of the property, but whether that is the case is not a relevant issue here. Findlay Creek certainly remains liable for the debt arising under the 2007 Mortgage and will be liable for any shortfall in respect of that debt after any sale of the land. 46 Arising from the assignment of the 2006 Mortgages from 745, Ms. Sewell, and Mr. Green to 904, Findlay Creek, as mortgagor, became liable in debt to 904, who, as mortgagee, held the legal title to the subject property by virtue of the 2006 Mortgage, subject to Findlay Creek’s equitable right to redeem. 47 But upon the granting of the Order Absolute in June 2011, all that changed. By reason of the doctrine of merger, upon the granting of that Order, that equity of redemption became vested in 904 and all indebtedness under the 2006 Mortgages was extinguished. 48 The doctrine of merger was discussed by Fenlon J. in Lee v. Chai, 2008 BCSC 1148 (B.C. S.C.) as follows: [162] Merger is discussed in Falconbridge (Walter M. Traub, ed., Falconbridge on Mortgages, 5th ed., looseleaf (Aurora, Ontario: Canada Law Book, 2008)) at para. 21:10: At common law, if a mortgage of land and the ownership of the land subject to the mortgage became united in the same person, the mortgage was said to be merged in the ownership and the mortgage was extinguished, either by analogy to the merger of a lesser estate in a greater estate or because a person cannot be his or her own debtor. In equity, however, merger did not necessarily follow upon the union of the two interests, and the equitable rule prevails in Ontario... There is a presumption of merger which can be rebutted if it is shown that the owner of the charge did not intend that merger should take place. 212 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

[163] In British Columbia, as in Ontario, the equitable rule against the presumption of merger has been codified in the Law and Equity Act, R.S.B.C. 1996, c. 253, at s. 12: There is not any merger, by operation of law only, of an estate the beneficial interest in which would not be deemed to be merged or extinguished in equity. [Emphasis added.] 49 See also Steele, Re (1979), 9 B.C.L.R. 373 (B.C. S.C.), at 375 -376; Auger v. Hume, 2001 BCSC 416 (B.C. S.C.) at para. 35; Royal Trust Co. v. Heelo Properties Ltd., [1986] B.C.J. No. 436 (B.C. C.A.) at para. 12; Teknon Industries Inc. v. 475338 British Columbia Ltd., 2001 BCSC 311 (B.C. S.C.) at paras. 44-45. 50 There is no suggestion here by 904 that its intention was to keep the 2006 Mortgages afoot, nor does 904 advance any argument or introduce any evidence to the effect that it has rebutted the presumption of merger. Accordingly, the effect of the granting of the Order Absolute is that the 2006 Mortgages have been extinguished. The effect of the granting of that Order is also addressed in the Property Law Act, R.S.B.C. 1996, c. 377, which provides: 32 After the making of an order absolute for foreclosure ..., a mortgagee... (a) has no right to enforce the personal covenant of the mortgagor or the purchaser to pay, and (b) may not issue execution on a judgment taken on the covenant to pay unless by process of law the order absolute is set aside or reopened. 51 904 does not indicate any intention to have the Order Absolute set aside or reopened. 52 I have already mentioned that 904 took title to the property subject only to the 2007 Mortgage. As such, 904 now holds the equity of redemption in respect of the 2007 Mortgage. The petitioners say that if Findlay Creek had remained the mortgagor today, it could raise no defence in relation to the amount secured by the 2007 Mortgage and that as a matter of law, 904 can be in no better position. Specifically, the petitioners say that a party who obtains title to lands subject to a mortgage has no greater or other rights than the mortgagor itself. In support of that contention, the petitioners cite Thomson v. Stikeman, [1913] O.J. No. 117 Griffin v. 0904713 B.C. Ltd. Fitzpatrick J. 213

(Ont. H.C.), aff’d [1913] O.J. No. 14 (Ont. C.A.) at para. 10. The court below stated: [53] At the trial, the original plaintiffs took the position that they had better rights by virtue of the Registry Act than Stratford, the mortgagor, himself had. In this, I think, they were wrong. The sole effect of the Registry Act is to render invalid a prior unregistered conveyance as against a subsequent registered conveyance. The purchaser from a mortgagor, where the mortgage is registered, takes subject to the true state of account as between the mortgagor and the mortgagee. The Registry Act affords him no protection. He is bound by any stated accounts, and has no greater or other rights than the mortgagor himself has. 53 904 does not dispute that this is an accurate statement of the law. It is therefore not accurate to say that 904 advances its position in this proceeding as a “successor in title to the 2006 Mortgagees”. It is not a successor in title under mortgages that no longer exist. As such, there is no doubt that the 2007 Mortgage has priority over the interests of 904 as the registered owner of the lands. Further, 904 takes subject to the accounts existing between the 2007 Mortgagees and Findlay Creek, by which it is acknowledged that $300,000 was advanced and is due and owing at this time. 54 That being said, it is difficult to say that the allegations of misrepresentation and estoppel by 904 are relevant at all to the matters in issue in this foreclosure proceeding. 55 I start from the proposition that if it is true that Allen Sewell made these misrepresentations, then a cause of action was available to the 2006 Mortgagees to claim against him, and possibly others who might be involved, for any damages arising. 904 does not clarify whether it alleges that the misrepresentations were made negligently or fraudulently. In any event, Allen Sewell is not a party in this proceeding. 56 There is no evidence that the assignment by the 2006 Mortgagees to 904 included this potential cause of action against Allen Sewell or any other person such that 904 acquired the rights to advance such claims. The only evidence is that 904 acquired the interest of the 2006 Mortga- gees under the 2006 Mortgages and in the foreclosure proceeding. 57 There is no doubt that claims of either negligent or fraudulent misrepresentation may give rise to an award of damages. In addition, a claim in misrepresentation may give rise to a remedy of rescission, although the only rescission that could possibly be sought here would relate to the 214 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

Priority Agreements signed by the 2006 Mortgagees. The contention is that these were the documents that were obtained by reason of the misrepresentations of Allen Sewell. It must be the case, however, that the Order Absolute has resulted in that issue becoming moot because the 2006 Mortgages are now extinguished and no priority issue is extant at this time as between the two mortgages. 904 does not address how the taking of the Order Absolute could not negatively affect the availability of any remedy relating to the priority as between the mortgagees. 58 There is no suggestion that Findlay Creek was induced to enter into the 2007 Mortgage through misrepresentations. Nor does 904 suggest that the 2007 Mortgage is invalid and should be set aside by reason of any misrepresentations. 59 A further difficulty arises from the misrepresentation claims of 904. It is well established that a claim for innocent or negligent misrepresentation must be based on a statement of an existing fact: Kingu v. Walmar Ventures Ltd. (1986), 10 B.C.L.R. (2d) 15 (B.C. C.A.), at 20 -21. In the recent case of P.S.D. Enterprises Ltd. v. New Westminster (City), 2012 BCCA 319 (B.C. C.A.) at para. 66, the Court of Appeal stated in the clearest terms that it is now “settled law that allegations of negligent misrepresentation pertaining to future events are not actionable at law.” This includes representations of future conduct and future events: PD Management Ltd. v. Chemposite Inc., 2006 BCCA 489 (B.C. C.A.) at para. 22. Accordingly, in order to establish a negligent misrepresentation, the misrepresentation must relate to existing facts, not future occurrences: MacMillan v. Kaiser Equipment Ltd., 2003 BCSC 672 (B.C. S.C.) at paras. 83-85, aff’d 2004 BCCA 270 (B.C. C.A.). 60 Here, the allegation is that Allen Sewell made statements about future events — that is, how the mortgage would be funded and how the mortgage advances would be used. As such, no claim in innocent or negligent misrepresentation arises. 61 I also see little basis for a claim of estoppel against the 2007 Mortga- gees. As noted by the authors in The Law of Contracts, 4th ed. (Toronto: Canada Law Book Inc., 1999) at 141, estoppel must be founded on a statement of fact as opposed to a promise as to the future. In Murray v. TDL Group Ltd., [2002] O.J. No. 5095 (Ont. S.C.J.) at para. 125, the court stated that a “claim of promissory estoppel will not apply to representations made as to the future state of things”. The court cited the fol- Griffin v. 0904713 B.C. Ltd. Fitzpatrick J. 215

lowing passage from G.H.L. Fridman, The Law of Contract in Canada, 4th ed. (Toronto: Carswell, 1999) at 132: What Jordan v. Money clarified, however, was that any such representation had to be as to the past or present if, without being put in a strictly contractual form, it was going to be binding upon the represent. If a representation were as to the future state of things it would have to be made contractually if it was to be binding and have legal effect. In other words, it would have to be supported or “bought” by consideration. Promises as to the future are contracts or they are nothing. 62 In other words — and it is trite to say — a promise about future conduct or occurrences that is not meant to be contractually binding on any parties cannot have any legal effect. 63 There is no allegation that there was an agreement entered into between the 2007 Mortgagees and the 2006 Mortgagees about how the later funding was to occur. Nor is there any allegation that there was a specific agreement about how the 2007 Mortgage advances would be used. It was possible, of course, for the parties to have agreed on this point. For example, the 2006 Mortgagees may have stipulated as a precondition of entering into the Priority Agreements that the funds advanced under the 2007 Mortgage were to be used in a specific manner. I note that this is exactly what the 2006 Mortgagees and Findlay Creek did regarding the use of funds under the 2006 Mortgages. The evidence indicated that 745 (and perhaps Ms. Sewell and Mr. Green) specifically agreed that Findlay Creek could use the mortgage funds “for general corporate purposes, in the sole discretion of [Findlay Creek]”. 64 A statement of future intention, if falsely made, may constitute a fraudulent misrepresentation: Punto e Pasta Manufacturing Inc. v. Henderson Development (Canada) Ltd., 2009 BCSC 37 (B.C. S.C.)at para. 146; Sanghera v. Danger Figure Centre (Burnaby) Ltd., 2007 BCSC 1308 (B.C. S.C.) at paras. 11-13; Golden Hill Ventures Ltd. v. Kemess Mines Inc., 2002 BCSC 1460 (B.C. S.C.) at paras. 303-305. Ac- cordingly, if the allegation is that Allen Sewell made these misrepresentations about the use of funds advanced under the 2007 Mortgage fraudulently, then a claim for damages and rescission is available. However, again, any claim for rescission would relate to the Priority Agreements, not to the 2007 Mortgage. 65 Given the seriousness of such a claim, without a clear and express allegation that Allen Sewell made fraudulent misrepresentations, I do not 216 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

consider that I am in a position to address any matter arising from the possibility of such a claim. In any event, I fail to see how any statement by Allen Sewell as to how Findlay Creek intended to use the funds could give rise to any claim against the 2007 Mortgagees. 66 904 advances the argument that Allen Sewell’s actions can be laid at the feet of the 2007 Mortgagees by reason of the Mortgage Participation and Administration Agreement. As stated earlier, that Agreement provided that Allen Sewell was the manager under the 2007 Mortgage. But a review of the Agreement confirms that his role as manager had nothing to do with the use of the funds advanced to Findlay Creek. Rather, as manager, his role was to receive advances made (and presumably remit them to Findlay Creek), and then administer the payments received by the 2007 Mortgagees and attend to other matters under the 2007 Mort- gage after the advances were made. I fail to see how his role under this Agreement can found any action against the 2007 Mortgagees based on any misrepresentations allegedly made by him. 67 Turning back to the estoppel argument, estoppel is also claimed in relation to the 2007 Mortgage and the amount owing under it. 904 also says this arises from it being a “successor in title to the 2006 Mortga- gees”. However, as noted by the petitioners, 904 is not a successor in title to the 2006 Mortgagees; it is a successor in title to Findlay Creek by reason of the Order Absolute, by which 904 inherited Findlay Creek’s equity of redemption under the 2007 Mortgage. As discussed in Thom- son, 904 has no greater or other rights than Findlay Creek had in relation to the 2007 Mortgage. 68 Put at its best, if the proper assignment is in place from 745, Ms. Sewell, and Mr. Green, 904 might be able to commence an action against Allen Sewell arising from these allegations. I do not mean to determine by these reasons what cause of action or causes of action, if any, might be advanced against him by the 2006 Mortgagees or 904 and what remedies, whether they be damages or rescission, might be available to them. However, I agree that the allegations of misrepresentation against Allen Sewell do not go to the validity of the 2007 Mortgage, nor do they affect the ability of the 2007 Mortgagees to commence and continue these foreclosure proceedings. 69 With respect to the amount outstanding, again, that is not in issue. The 2007 Mortgagees cannot be met with an estoppel argument based on allegations that Findlay Creek used the advances under that mortgage contrary to representations made by Allen Sewell. Put another way, it is Griffin v. 0904713 B.C. Ltd. Fitzpatrick J. 217

not alleged that the 2007 Mortgagees ever represented to Findlay Creek or the 2006 Mortgagees, either through Allen Sewell or otherwise, that the 2007 Mortgage would only secure amounts which were “properly” used for the payment of future costs of the development. 70 Further, even if such a cause of action against Allen Sewell is available to 904, I do not consider that it is either convenient or just to have that matter determined in this proceeding. As stated earlier, Allen Sewell is not even a party; nor are the 2007 Mortgagees parties to this proceeding, to the extent that they have any such cause or causes of action. Nor is any loss alleged by the 2006 Mortgagees, or even by 904. 71 The foreclosure proceeding can proceed in the usual summary manner, and any issue arising from these allegations can be determined in another action. I see no duplication of cost or effort in proceeding in this manner.

Disposition 72 In conclusion, I find that 904 has not raised a bona fide triable issue or defence in relation to the 2007 Mortgage. Accordingly, the application of 904 is dismissed, with party and party costs on Scale B. 73 I grant the order nisi on the terms sought, with one clarification that I will make to Mr. Stephens. As stated earlier, 904 does not contest the granting of the order nisi in the absence of any bona fide triable issue. The order nisi will be in accordance with the statement of accounting filed May 2, 2012 and will include a six-month redemption and judgment. However, I would direct the parties to update the amount outstanding as of today’s date for the purpose of setting the redemption and judgment amount. Again, party and party costs will be on Scale B. [DISCUSSION] 74 THE COURT: After addressing the one clarification, the relief is granted on the basis of the statement of accounting sought, save and except that the application for judgment as against the respondent 904 is adjourned generally. Owner’s application dismissed; mortgagee’s application granted. 218 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

[Indexed as: Unique Broadband Systems Inc., Re] In the Matter of the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36, as Amended In the Matter of a Plan of Compromise or Arrangement of Unique Broadband Systems, Inc. Ontario Superior Court of Justice Docket: CV-11-9283-CL 2013 ONSC 676 H.J. Wilton-Siegel J. Heard: January 31, 2013; February 1, 2013 Judgment: February 12, 2013 Bankruptcy and insolvency –––– Companies’ Creditors Arrangement Act — Arrangements — Approval by creditors –––– N Co. Ltd. Was shareholder in UBS, whose assets included tax losses and shares in L — UBS had contested election resulting in change of board, and new board ordered L to change directors, which it did — Litigation tied to election began, some claims of which were settled — UBS obtained protection under Companies’ Creditors Arrange- ment Act — N Co. Ltd. Sought to obtain shares of L in sale process under Act, but offer was rejected — Claim of litigation against UBS was greater than assets — N Co. Ltd. brought application to allow it to file plan of arrangement under which shares in L would be used to secure loan to N Co. Ltd. and business would be sought to utilize tax losses — Application dismissed — UBS had no independent interest and only considerations were that of its creditors and shareholders — Shares of UBS had value but value was uncertain due to possibility of success in litigation relating to change of directors — Claims based on litigation could be worthless based on success or failure at trial — Plan prevented possibility of cash distribution to shareholders — No Co. ltd. did not show that particular settlement claim was reasonable, and board of UBS as constituted wished to continue to trial — N Co. Ltd. had not shown that shareholder vote should be dispensed with — Interests of ordinary creditors outweighed that of UBS shareholders. Statutes considered: Business Corporations Act, R.S.O. 1990, c. B.16 Generally — referred to s. 122 — referred to Canada Business Corporations Act, R.S.C. 1985, c. C-44 Generally — referred to Unique Broadband Systems Inc., Re H.J. Wilton-Siegel J. 219

Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36 Generally — referred to s. 4 — considered s. 6 — referred to s. 6(1)(a) — referred to s. 11 — considered

APPLICATION by business to file proposal.

Melvyn L. Solmon, Geoff Hall, Raffaelo Sparano for Applicant, Niketo Co. Ltd. E. Patrick Shea, Clifford Cole for Debtor, Unique Broadband Systems, Inc. Matthew P. Gottlieb for Monitor, Duff & Phelps Canada Restructuring Inc. Joseph P. Groia, Gavin Smyth for Jolian Investments Limited and Gerald McGoey Peter Roy for DOL Technologies Inc. and Alex Dolgonos S. Michael Citak for Douglas Reeson Simon Bieber, Julia Wilkes for Henry Eaton and Robert Ulicki Aubrey Kauffman for Peter Minaki Brett D. Moldaver for Stellarbridge Management Inc.

H.J. Wilton-Siegel J.:

1 The applicant, Niketo Co. Ltd. (the “applicant” or “Niketo”), sought an order, among other things, authorizing Niketo, as a creditor of Unique Broadband Systems Inc. (“UBS”), to file with the Court a plan of arrangement or compromise with respect to UBS, approving the classifica- tion of the affected creditors under the proposed plan, and directing UBS and the Monitor to call, hold and conduct separate meetings of the classes of affected creditors to vote upon a resolution to approve the proposed plan. I previously advised the parties on February 4, 2013 that the application was denied and that written reasons would follow. These are the written reasons for the denial of the application.

Background The Parties 2 UBS is a public corporation incorporated in Ontario under the Busi- ness Corporations Act, R.S.O. 1990, c. B. 16 (the “OBCA”). The shares of UBS are listed on the TSX Venture Exchange (the “TSXV”). There are currently 102,747,854 UBS shares outstanding. UBS Wireless Ser- vices Inc. is a wholly-owned subsidiary of UBS. 220 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

3 LOOK Communications Inc. (“Look”) is a public corporation incorporated under the Canada Business Corporations Act, R.S.C. 1985, c. C- 44. 4 The principal asset of UBS consists of a share position in the capital of Look comprising 29,921,308 subordinate voting shares and a further 27,868,478 multiple voting shares (collectively, the “Look Shares”). The Look Shares represent approximately 39.2% of the equity and approximately 37.6% of the votes attached to all outstanding shares in the capital of Look. In addition, UBS has accumulated tax losses (the “Tax Losses”), the value of which depends upon the ability of UBS to acquire a new business having income that would be sheltered by the Tax Losses. 5 Niketo is a corporation incorporated in Cyprus. It is a wholly-owned subsidiary of NWT Uranium Corporation (“NWT”), a mining explora- tion and development corporation whose shares are listed on the Frank- furt Exchange. The shares of NWT are also listed on the TSXV, but trad- ing in the shares was halted on January 14, 2013 by order of the Investment Industry Regulatory Organization of Canada. The circumstances giving rise to this halt trade order are not on the record. 6 Niketo owns 19,805,323 shares in the capital of UBS. It acquired such shares in two transactions on or about December 9, 2012 and Janu- ary 7, 2013 from 2064818 Ontario Inc. (“206”) and 6138241 Ontario Inc. (“613”), both of which are owned by Alex Dolgonos (“Dolgonos”), the former chief technology officer of UBS. These shares represent approximately 19% of the outstanding shares of UBS. Niketo has also taken an assignment of a claim in the amount of $6,149.48 asserted against UBS by the former solicitors for UBS. By doing so, Niketo satisfied the requirement of creditor status in respect of UBS. 7 On January 9, 2013, NWT announced that Niketo would make a takeover bid for 49% of the outstanding shares in the capital of Look. Al- though no formal announcement has been made, Niketo advised the Court that the takeover bid will not proceed.

The Triggering Event — The Contested Election of UBS Directors in 2010 8 At a special meeting of the shareholders of UBS held on July 5, 2010, a new board of directors, consisting of Grant McCutcheon (“McCutch- eon”), Henry Eaton (“Eaton”) and Robert Ulicki (“Ulicki”), was elected pursuant to section 122 of the OBCA to replace the former directors, Unique Broadband Systems Inc., Re H.J. Wilton-Siegel J. 221

consisting of Gerald McGoey (“McGoey”), Douglas Reeson (“Reeson”) and Louis Mitrovich (“Mitrovich”). The election of these new directors had been the subject of a proxy contest between the existing management and the dissident shareholders who supported the election of the new directors. 9 On July 6, 2010, UBS advised Look that it had the support of shareholders of Look possessing sufficient votes to effect a change of control of the board of directors of Look. UBS requested that the then-current board of Look resign and appoint a replacement slate of directors proposed by UBS, which included McCutcheon, Eaton, Ulicki, Laurence Silber (“Silber”) and David Rattee (“Rattee”), without calling a special meeting of shareholders. 10 On July 20, 2010, all five Look directors resigned and McCutcheon, Eaton and Ulicki were appointed directors of Look to replace them. On July 21, 2010, McCutcheon was also appointed the chief executive officer of Look, replacing McGoey who had previously served in that position pursuant to the provisions of a management services agreement between UBS and Look which has since expired. Silber and Rattee were subsequently elected directors of Look on July 27, 2010. Ulicki resigned from the board of directors of Look on October 29, 2010. 11 McCutcheon, Eaton and Ulicki were re-elected as directors of UBS at the annual general meeting of UBS shareholders on February 25, 2011.

The Litigation Involving UBS and Look Commenced After the Contested Election of Directors 12 UBS had previously retained Jolian Investments Inc. (“Jolian”), a corporation controlled by McGoey, pursuant to an agreement dated January 1, 2006 (the “Jolian Agreement”) to obtain his services as chief executive officer of UBS. The Jolian Agreement was terminated by Jolian after the election of McCutcheon, Eaton and Ulicki as the directors of UBS, based both on the failure to elect McGoey to the UBS board and on “change of control” provisions in the Agreement. Jolian then commenced an action against UBS claiming amounts totalling approximately $8.6 million (the “Jolian Action”). The Jolian Action is being defended by UBS in the CCAA claims process described below, in which UBS also seeks a determination that the Jolian Agreement is void or unenforceable. 13 UBS had also previously retained DOL Technologies Inc. (“DOL”), a private corporation owned by Dolgonos, pursuant to an agreement dated July 12, 2008 (the “DOL Technology Agreement”) to obtain his services 222 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

as the chief technology officer of UBS. The DOL Technology Agree- ment was also terminated by DOL after the election of McCutcheon, Ea- ton and Ulicki as the directors of UBS, based on “change of control” provisions in the Agreement. DOL then commenced an action against UBS claiming amounts totalling approximately $7.6 million (the “DOL Action”). In addition, on December 22, 2010, 206, in its capacity as a shareholder, commenced an oppression action against, among others, UBS, and each of McCutcheon, Eaton and Ulicki, in their capacities as directors of UBS (the “Oppression Claim”). The DOL action and the Op- pression Claim were also defended by UBS in the CCAA claims process described below prior to the settlement referred to below. 14 In the Jolian Action and the DOL Action, Jolian, McGoey, DOL and Dolgonos brought motions seeking confirmation of their right to an advancement of funds in respect of the legal costs of pursuing their respective claims and defending the UBS counterclaims against them. UBS re- sisted such relief and sought an order requiring the parties to return certain retainers previously advanced by UBS to counsel for such parties. By order dated April 11, 2011 (the “Marrocco Order”), Marrocco J. held that these parties were entitled to an advancement of funds as more particularly specified therein. UBS appealed this order to the Court of Ap- peal but has since abandoned the appeal. It has not, however, advanced or paid any of the amounts mandated in the Marrocco Order. 15 Lastly, on July 6, 2010, Look commenced an action against Dolgo- nos, DOL, McGoey and Jolian, among others, seeking damages based on allegations of breach of fiduciary duty and negligence (the “Look Ac- tion”). The Look Action relates to certain restructuring awards paid by Look in 2009, for which Look seeks recovery.

The CCAA Proceedings 16 As a result principally of the Jolian Action and DOL Action, UBS concluded that its cash flow was insufficient to pay its debts as they fell due and, accordingly, that it was insolvent. Whether UBS was also insolvent on a balance sheet basis depended upon the outcome of the litigation described above, principally the Jolian Action and the DOL Action. 17 UBS sought and obtained protection under the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36 (the “CCAA”) pursuant to an initial order of the Court dated July 5, 2011 (the “Initial Order”). RSM Richter Inc. was initially appointed the monitor in the CCAA proceedings. Duff & Phelps Canada Restructuring Inc. was subsequently substi- Unique Broadband Systems Inc., Re H.J. Wilton-Siegel J. 223

tuted for RSM Richter Inc. and has acted as the monitor (the “Monitor”) since December 2011.

The Claims Process Order in the CCAA Proceedings 18 Pursuant to an order dated August 4, 2011, the court approved a claims process for the determination of all claims against UBS. The claims process has been conducted by the Monitor. The following claims have been filed in this claims process. 19 First, and most important, Jolian asserted a claim in the amount of $10,122,688, plus taxes, interest, professional fees and expenses, which is disputed by UBS (the “Jolian Claim”). This represents the claims in respect of the Jolian Action. The principal components of this claim are: (1) a deferred bonus in the amount of approximately $1.2 million previously awarded in 2009 by the board of directors of UBS but not paid; (2) an award of approximately $600,000 in respect of the former UBS share appreciation rights plan; and (3) damages for wrongful dismissal. A trial of the Jolian Claim is scheduled to commence on February 18, 2013. 20 In addition, Jolian and McGoey have filed contingent claims pertaining to their respective rights of reimbursement and indemnification as addressed in the Marrocco Order. As a practical matter, it appears that these rights would be relevant only in respect of professional and administrative fees in respect of the Look Action against Jolian and McGoey, among others, described above, but any such claim, while not quantified to date or quantifiable in total, could be in a significant amount. 21 Second, Reeson filed a claim in the amount of $585,000. This claim relates to an unpaid award in respect of the UBS share appreciation rights plan. 22 Third, DOL filed a claim in the amount of $8,042,716 plus taxes, interest, professional fees and expenses. This represented the claims in respect of the DOL Action. In addition, Dolgonos and 206 also filed contingent claims. The Dolgonos contingent claim pertained to his rights of reimbursement and indemnification as a former director and officer of UBS, which was the subject of the Marrocco Order. The 206 claim pertained to the Oppression Claim referred to above. DOL, Dolgonos, and 206 are herein collectively referred to as the “Dolgonos Parties”. 23 All of these aforementioned claims of DOL, Dolgonos and 206 (collectively, the “Dolgonos Claims”) were initially disputed by UBS. How- ever, by an agreement dated July 5, 2012 (the “Dolgonos Settlement Agreement”), the Dolgonos Claims were settled. Pursuant to the Dolgo- 224 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

nos Settlement Agreement, UBS agreed to accept the Dolgonos Claims in the amount of $500,000. In addition, UBS agreed to reconstitute its board of directors by appointing Victor Wells (“Wells”) and Kenneth Taylor (“Taylor”) to replace McCutcheon and Eaton who agreed to resign. A further contractual obligation in the Dolgonos Settlement Agree- ment is described below 24 The settlement of the Dolgonos Claims was approved by a consent order of Campbell J. dated July 6, 2012. Subsequently, the UBS board of directors was reconstituted in accordance with the terms of the Dolgonos Settlement Agreement. 25 At the time, Dolgonos also owned approximately 19% of the outstanding shares in the capital of UBS through 206 and 613. Subse- quently, as mentioned above, these shares were sold to Niketo 26 Fourth, five other creditors filed unsecured claims totalling approximately $300,000. These claims include the claim of $6,149.48 that has been assigned to Niketo. With the exception of a post-filing claim in the amount of $92,149.48 of Peter Minaki, a former director of UBS, these claims are asserted by parties who are entirely at arm’s length to UBS. 27 Lastly, Eaton, McCutcheon and Ulicki have filed contingent claims representing potential indemnification claims by them against UBS in respect of any actions taken in their capacities as directors, and, in the case of McCutcheon as an officer of UBS. Niketo has advised that the Pro- posed Plan will be amended to provide that such rights of indemnification will continue after plan implementation. On this basis, the Proposed Plan (as defined below) does not give these parties a vote as Ordinary Creditors (as defined below).

The Sales Process 28 By order dated November 12, 2012, the Court approved a process by which the Look Shares would be marketed for sale in a process to be conducted by the Monitor. A special committee was established by the board of directors of UBS, consisting of Taylor and Wells, to oversee the sales process. 29 The sales process culminated in a transaction entered into by UBS for the sale of 12,430,000 multiple voting shares and 14,630,000 subordinate voting shares in the capital of Look for an aggregate purchase price of approximately $3.8 million (the “Proposed Sale Transaction”). UBS is awaiting the outcome of the present proceeding before scheduling a motion seeking judicial approval of the Proposed Sale Transaction. Unique Broadband Systems Inc., Re H.J. Wilton-Siegel J. 225

30 Niketo submitted an offer in the sales process to acquire all of the Look Shares. This offer was rejected by the special committee on the basis that it was not as favourable as other offers received in the sales process, including the offer that has been accepted by UBS.

The Current Financial Status of UBS 31 As mentioned, the assets of UBS consist of the Look Shares and the Tax Losses. The purchase price of the Look Shares in the Proposed Sale Transaction has been set out above. The value of the Look Shares may also depend upon the outcome of the Look Action described above. There is no information on the record regarding the value of the Tax Losses. 32 At the present time, the liabilities of UBS consist principally of the claims set out above that were filed in the claims process, including the Dolgonos Claims as settled pursuant to the Dolgonos Settlement Agree- ment. In addition to the foregoing claims, there are also certain postfiling claims of UBS, which include a claim of McCutcheon in the amount of $200,000, but which are not material. 33 For present purposes, it is important to note that the amount of the Jolian Claim exceeds the estimated realizable value of the Look Shares and the Tax Losses, after payment of the remaining unsecured claims against UBS. Therefore, the value of the UBS shares depends inversely upon the value of the Jolian Claim as determined at trial or in any settlement between UBS and Jolian. I will address the significance of this relationship later.

The Proposed Plan 34 The following is a summary of the principal features of the plan of compromise or arrangement proposed by Niketo (the “Proposed Plan”). 35 The Proposed Plan contemplates three classes of Affected Creditors: (1) Class 1, being McGoey and Jolian; (2) Class 2, being Reeson; and (3) Class 3, being the five other unsecured creditors referred to above having quantified unsecured claims approximating $300,000 and the settled claim of the Dolgonos Parties (collectively, the “Ordinary Creditors”). 36 Under the Proposed Plan, the Jolian Claim would be settled on the terms set out in an agreement dated January 21, 2013 between Jolian and Niketo (the “Jolian Settlement Agreement”). Jolian and McGoey support the Proposed Plan, so that approval of the Class 1 creditors is assured. UBS is not a party to the Jolian Settlement Agreement. 226 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

37 The Jolian Settlement Agreement contemplates that the Jolian Claim would be settled by the payment of $2 million plus interest, taxes and all legal and accounting fees of Jolian in respect of its claims against UBS. Conceptually, this settlement is comprised of the following components: (1) the deferred bonus of approximately $1.2 million plus interest since July, 2009; (2) $600,000 in respect of the former UBS share appreciation rights plan plus interest since July, 2009; and (3) damages of $200,000 for wrongful dismissal. 38 It is agreed that the amount of $1,325,000 is payable for legal and accounting fees for the period to December 1, 2012. There is no estimate of the fees from such date to the plan implementation date. More significantly, the Jolian Settlement Agreement also provides that the indemnification and reimbursement rights of Jolian and McGoey provided for in the Marrocco Order shall continue after the plan implementation date. 39 The Proposed Plan contemplates that the Reeson claims would be settled on the terms of an agreement also dated January 21, 2013 between Reeson and Niketo (the “Reeson Settlement Agreement”). This agreement contemplates that the Reeson claim against UBS would be settled by the payment of $75,000. Reeson supports the Proposed Plan so that approval of the Class 2 creditor is assured. UBS is also not a party to the Reeson Settlement Agreement. 40 Under the Proposed Plan, each Ordinary Creditor would receive a cash distribution in the amount of the creditor’s proven claim in the sales process. The claims of the Dolgonos Parties are included in Class 3 under the Proposed Plan, bringing the total cash distribution contemplated in respect of the creditors whose claims have been quantified by UBS to approximately $800,000. 41 In order to fund the payment of the claims of the Affected Creditors, the Proposed Plan contemplates that the plan sanction order of the court shall, among other things, authorize and direct UBS to enter into a loan agreement with Niketo in a form scheduled to the Proposed Plan (the “Niketo Loan Agreement”). Under the Niketo Loan Agreement, Niketo would advance the principal amount of $4,514,401.55 to UBS on the plan implementation date in order to fund the distributions to be made to the Affected Creditors in respect of their claims. It is understood that Niketo has agreed to increase this amount to $5.8 million. The Niketo loan in such increased amount is referred to herein as the “Niketo Loan”. 42 The Niketo Loan would have a two year term commencing on the plan implementation date and would bear interest at prime plus 2%. In- Unique Broadband Systems Inc., Re H.J. Wilton-Siegel J. 227

terest would accrue until the maturity date of the loan, at which time the principal and all accrued interest would be payable. The Niketo Loan would be secured by a general security agreement covering all the personal property of UBS and a pledge of the Look Shares owned by UBS. Upon the Niketo Loan becoming due and payable on maturity or by virtue of an event of default, Niketo agrees not to exercise a right of foreclosure in respect of the Look Shares and to restrict any realization proceedings to power of sale proceedings. 43 The Proposed Plan further contemplates that, upon the Proposed Plan becoming effective, the terms of office of the current directors of UBS will terminate and a new board of directors will be appointed consisting of John Zorbas (“Zorbas”), David Subotic (“Subotic”) and David Tsubouchi (“Tsubouchi”), together with Wells and Taylor to the extent that either or both consents to remaining a director. Zorbas and Subotic are officers and directors of NWT. Tsubouchi is a member of the NWT advisory board and a partner of the law firm that acts as Niketo’s corporate counsel. 44 The Proposed Plan requires the sanction of this court pursuant to section 6(1)(a) of the CCAA after approval by each of the classes of Af- fected Creditors. The Proposed Plan does not, however, contemplate approval by the common shareholders of UBS.

The Dolgonos Voting Covenant 45 Pursuant to section 7 of the Dolgonos Settlement Agreement, DOL, 206 and 613 agreed to support UBS in matters pertaining to these CCAA proceedings: The Dolgonos Parties will, until the termination of the CCAA proceedings by way of a plan of compromise or arrangement by UBS or otherwise: (a) fully support decisions made by the reconstituted UBS board consisting of Mr. Ulicki, Mr. Wells and Mr. Taylor, including, inter alia, any decision made by the reconstituted UBS board with respect to the CCAA proceedings and how UBS will resolve or determine claims made against UBS by, inter alia, Jolian Investments Limited (“Jolian”) and Mr. Gerald McGoey, in accordance with the CCAA Claims Procedure; ... (c) not seek any Order terminating the CCAA proceedings, or support or assist any other person seeking such an Order; ... 228 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

46 Section 9 of the Dolgonos Settlement Agreement also contained an express reference to the understanding of the parties regarding the determination of the Jolian Action: Subject to the discretion of the UBS board, UBS will continue defending the disputed claims made against UBS by, inter alia, Jolian and Mr. McGoey, and reorganizing itself under the supervision of the Court. 47 UBS is of the view that, pursuant to the foregoing provisions, the Dolgonos Parties are contractually obligated to support the position of UBS in respect of the Proposed Plan. UBS argues that this requires the Dolgonos Parties to oppose the Proposed Plan, not just at this hearing and any plan sanction hearing, but also by voting against the Proposed Plan in their capacities as an Ordinary Creditor. On this basis, the Pro- posed Plan would not receive the requisite majority approval under section 6 of the CCAA. Given the conclusion reached below, it is unnecessary to address this issue and, accordingly, I decline to do so. However, I am of the view that the Court can take this commitment into consideration in making its determination as to whether the Proposed Plan requires shareholder approval. This is addressed below.

Applicable Law 48 The following three provisions of the CCAA are relevant background to the issues on this application. 49 First, the authority of the Court to order a meeting of the creditors and, if it so determines, of the shareholders, is set out in section 4 of the CCAA: Where a compromise or an arrangement is proposed between a debtor company and its unsecured creditors or any class of them, the court may, on the application in a summary way of the company, of any such creditor or of the trustee in bankruptcy or liquidator of the company, order a meeting of the creditors or class of creditors, and, if the court so determines, of the shareholders of the company, to be summoned in such manner as the court directs. 50 Even if approved by the requisite majority of each class of creditors, a proposed plan of compromise or arrangement must also be sanctioned by the court under section 6 of the CCAA: If a majority in number representing two thirds in value of the creditors, or the class of creditors, as the case may be - other than, unless the court orders otherwise, a class of creditors having equity claims - present and voting either in person or by proxy at the meeting or Unique Broadband Systems Inc., Re H.J. Wilton-Siegel J. 229

meetings of creditors respectively held under sections 4 and 5, or either of those sections, agree to any compromise or arrangement either as proposed or as altered or modified at the meeting or meetings, the compromise or arrangement may be sanctioned by the court and, if so sanctioned, is binding (a) on all the creditors or the class of creditors, as the case may be, and on any trustee for that class of creditors, whether secured or unsecured, as the case may be, and on the company; ... 51 Lastly, the Court retains inherent jurisdiction in respect of a proposed plan of compromise or arrangement in the manner and to the extent provided for in section 11 of the CCAA: Despite anything in the Bankruptcy and Insolvency Act or the Wind- ing-up and Restructuring Act, if an application is made under this Act in respect of a debtor company, the court, on the application of any person interested in the matter, may, subject to the restrictions set out in this Act, on notice to any other person or without notice as it may see fit, make any order that it considers appropriate in the circumstances. 52 The test regarding whether the Court should allow a plan of compromise or arrangement proposed by a creditor to be put to the stakeholders of a debtor subject to CCAA proceedings is whether it is in the best interests of the debtor and its stakeholders to do so: Re Canadian Red Cross Society, [1998] O.J. No. 3306 (Ont. C. J. (Gen. Div.)) per Blair. J. (as he then was) at para. 37. 53 In this case, I conclude that UBS has no independent interest as it is merely a holding corporation with no employees and no business activities. At an earlier hearing in this proceeding, it was even suggested that the only business of UBS was litigation. Accordingly, I have proceeded on the basis that the stakeholders of UBS whose interests must be considered on this application are the three classes of creditors and the shareholders. 54 Shareholders do not have a right to vote on a plan of compromise or arrangement under the CCAA unless the plan so provides or the court so orders. I agree with the applicant that shareholders who have no economic interest in a debtor should not be able to play with the creditors’ money. Accordingly, as Farley J. noted in Re Stelco Inc., [2006] 14 B.L.R. (4th) 260 (Ont. S.C.J.) at para. 16, the Court must address whether the equity presently existing in UBS has true value at the present time independent of the Proposed Plan and of what the Proposed Plan 230 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

brings to the table. If the equity has value independent of the Proposed Plan, then the interests of the shareholders must be “considered appropriately in the Plan”. The determination of whether shareholders have an economic value in a debtor is an analysis that should be conducted on a reasonable and probable basis: see Re Stelco Inc., [2006] 14 B.L.R. (4th) 260 (Ont. S.C.J.) at para. 19. While a shareholder vote is not necessarily a requirement even in circumstances in which the equity in a debtor has true value, it is one manner of assessing whether the shareholders have been considered appropriately in a proposed plan of compromise or arrangement. 55 The issue of a shareholder vote requirement must also be considered against the backdrop of the test to be applied at the plan sanction hearing if a proposed plan of compromise and arrangement is approved by the requisite majorities of the stakeholders. As the applicant argues in this proceeding, the fairness, reasonableness and equitable aspects of a plan must be assessed in the context of the hierarchy of interests recognized by insolvency legislation and jurisprudence: Re Stelco Inc., [2006] 14 B.L.R. (4th) 260 (Ont. S.C.J.) at para. 15 wherein Farley J. goes on to cite with approval the following passage of Paperny J. in Re Canadian Airlines Corp., 2000 ABQB 442 at paras. 143-145: Where a company is insolvent, only the creditors maintain a meaningful stake in its assets. Through the mechanism of liquidation or insolvency legislation, the interests of shareholders are pushed to the bottom rung of the priority ladder. The expectations of creditors and shareholders must be viewed and measured against an altered financial and legal landscape. Shareholders cannot reasonably expect to maintain a financial interest in an insolvent company where creditors’ claims are not being paid in full. It is through the lens of insolvency that the court must consider whether the acts of the company are in fact oppressive, unfairly prejudicial or unfairly disregarded. CCAA proceedings have recognized that shareholders may not have “a true interest to be protected” because there is no reasonable prospect of economic value to be realized by the shareholders given the existing financial misfortunes of the company: Royal Oak Mines Ltd., supra, para. 4., Re Cadillac Fairview Inc., [1995] O.J. No. 707, (March 7, 1995), Doc. B28/95 (Ont. Gen. Div. [Commercial List]), and T. Eaton Company, supra. To avail itself of the protection of the CCAA, a company must be insolvent. The CCAA considers the hierarchy of interests and assesses fairness and reasonableness in that context. The court’s mandate not to sanction a plan in the absence of fairness necessitates the determination as to whether the complaints Unique Broadband Systems Inc., Re H.J. Wilton-Siegel J. 231

of dissenting creditors and shareholders are legitimate, bearing in mind the company’s financial state. The articulated purpose of the Act and the jurisprudence interpreting it, “widens the lens” to balance a broader range of interests that includes creditors and shareholders and beyond to the company, the employees and the public, and tests the fairness of the plan with reference to its impact on all of the constituents. It is through the lens of insolvency legislation that the rights and interests of both shareholders and creditors must be considered. The reduction or elimination of rights of both groups is a function of the insolvency and not of oppressive conduct in the operation of the CCAA. The antithesis of oppression is fairness, the guiding test for judicial sanction. If a plan unfairly disregards or is unfairly prejudicial it will not be approved. However, the court retains the power to compromise or prejudice rights to effect a broader purpose, the restructuring of an insolvent company, provided that the plan does so in a fair manner.

The Position of UBS Regarding the Proposed Plan 56 The Proposed Plan was delivered to UBS on January 23, 2013. The board of directors of UBS met on January 25, 2013 to consider that Pro- posed Plan. The board has determined that the Proposed Plan is not in the best interests of the UBS stakeholders and does not support the Proposed Plan. The board is of the view that the Jolian Claim should be determined at the trial scheduled to commence on February 18, 2013. 57 The board of directors says its decision was based on the following nine conclusions regarding the Proposed Plan. 58 First, the Proposed Plan does not provide for shareholder approval, although it considers that there is considerable value in the UBS equity based on the value of the Look Shares. 59 Second, there is a risk that the UBS board of directors will not be constituted in a manner that will protect shareholder interests, given the terms of the Niketo Loan and the relationship of Zorbas, Subotic, and Tsubouchi to NWT, as described above. 60 Third, the proposed settlement of the Jolian Claim contemplated by the Jolian Settlement Agreement is inappropriate. The board says that the settlement cannot be characterized as reasonable when it was entered into by Niketo without any assessment of the merits of the Jolian Claim. 61 Fourth, the terms of the Niketo Loan to UBS will give Niketo de facto control over UBS and the Look Shares. 232 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

62 Fifth, there is no business plan proposed by Niketo that would create value for the shareholders or generate cash flow to repay the Niketo Loan. 63 Sixth, the Niketo Loan transaction documentation contains inaccurate representations of UBS, and certain covenants with which UBS may be unable to comply, as a result of Niketo’s failure to include UBS in the negotiation of such documentation. 64 Seventh, the proposed loan was insufficient at $4.5 million to fund the Proposed Plan, the post-filing creditors not covered by the Plan and UBS’ on-going business going forward. As noted, Niketo has since agreed to increase the principal amount of the Niketo Loan to $5.8 million. 65 Eighth, the Niketo Loan requires the consent of Niketo to any cash distribution to UBS shareholders. 66 Ninth, in the opinion of the board of directors, the Proposed Plan provides Jolian/McGoey and Reeson with more favourable terms than the remaining creditors of UBS, who are Ordinary Creditors under the Pro- posed Plan. 67 UBS also says that the Proposed Plan is doomed to fail for two reasons. First, as mentioned above, UBS says that the Dolgonos Settlement obligates the Dolgonos Parties to vote against the Proposed Plan in their capacities as, collectively, an Ordinary Creditor. Second, it argues that, as contingent creditors, McCutcheon, Eaton and Ulicki should have the right to vote as Ordinary Creditors. On either basis, the Proposed Plan would not receive the requisite majority of approval of the Ordinary Creditors under section 6 of the CCAA. Given the conclusion reached below, it is unnecessary to address these issues and, accordingly, I decline to do so. 68 At the hearing of this application, UBS also argued that the Proposed Plan fails to include certain mandatory provisions under the CCAA. In addition, as mentioned, it argues that the proposed loan documentation does not reflect the increase in the Niketo Loan to $5.8 million or an important principle which Niketo says it is prepared to accept, namely, that any realization proceeding must occur in the form of a power of sale proceeding. These are more technical issues that would need to be addressed before the Court could approve submission of the Proposed Plan to the creditors. However, in view of the conclusion reached below, it is not necessary to provide for a process to make the necessary revisions to the Proposed Plan. Unique Broadband Systems Inc., Re H.J. Wilton-Siegel J. 233

Analysis and Conclusions 69 Although UBS has raised a litany of issues in opposition to the application, I propose to concentrate on the issue of whether the Court should accept the Proposed Plan and order a meeting of the creditors to consider approval of the Proposed Plan in the absence of a shareholder vote on the Proposed Plan. Determination of this issue requires consideration of all of the significant issues raised by UBS.

Positions of the Parties Position of UBS and the Monitor 70 In its factum, UBS argues that there should be no meeting of creditors called to consider the Niketo Plan for the following reasons: 1. the Niketo Plan is being put forward for an improper purpose, being to provide Niketo with control of the Look Shares; 2. the Niketo Plan is doomed to failure because the Niketo Plan will not be approved by the Applicants’ creditors as required by the CCAA and the Niketo Plan; 3. the Niketo Plan, even if it were to be approved by the Ap- plicants’ creditors, could not be sanctioned by the Court because it: (a) is not in compliance with the CCAA; (b) purports to determine the Jolian Claim and the Ree- son Claim in a manner that is not authorized by the CCAA; and (c) is not fair and reasonable to all of the UBS stakeholders. 71 The Monitor supports the position of UBS in its Twelfth Report. However, I note that the Monitor has not reached an independent conclusion regarding the merits of the Jolian Claim in formulating its recommendation to the Court.

Position of the Applicant 72 Niketo makes the following four principal arguments to dispense with shareholder approval for the Proposed Plan. 73 First, it says that the shareholders should not be entitled to gamble with the creditors’ money by requiring UBS to proceed to trial on the 234 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

Jolian Claim. This argument assumes that there is currently no equity in the UBS shares, so that any success of UBS at trial will be for the account of the shareholders but any failure will be for the account of the creditors. I note that, in making this argument, the applicant concedes that it believes that the UBS shareholders would vote against the Pro- posed Plan. 74 Second, it says that the payment of approximately $3.5 million to Jolian/McGoey contemplated by the Jolian Settlement Agreement is a small price to pay to settle a claim of $10 million. It argues that a settlement in this amount is commercially reasonable as it avoids a further expense of $1.3 million through the end of May 2013 and the uncertainty of outcome of the Jolian Claim. 75 Third, the applicant says that any shareholder who opposes the Pro- posed Plan has the option to either sell his shares into the market or attend and speak at the court sanction hearing required under section 6 of the CCAA. As a related matter, the applicant argues that, based on the complexity of the Jolian Claim, it is unlikely that shareholders will be able to determine whether or not the proposed settlement with Jolian/McGoey and Reeson is fair and reasonable. Instead, it says the Court is in the best position to determine the merits of the Proposed Plan to all stakeholders. 76 Fourth, the applicant raises a number of more practical issues regarding the convening of a shareholder meeting. It says a requirement for a shareholder meeting will delay implementation of the Proposed Plan by approximately 60 days, which it characterizes as a significant delay. It also says that conducting a shareholders meeting will entail an unreasonable expense, ranging from $250,000 to $500,000. Niketo says that it is not prepared to spend this amount of money and, more generally, argues that the creditors should not be required to bear this expense. This argument is predicated on the assumption that there is no equity in the UBS shares. 77 In addition, the applicant denies the UBS arguments that the Proposed Plan is being proposed for an improper purpose or that the Proposed Plan is doomed to fail.

Preliminary Observations 78 The following observations inform the conclusions reached below. 79 First, the circumstances of this CCAA proceeding are unique. It has resulted from a proxy fight in which the dissident shareholders were suc- Unique Broadband Systems Inc., Re H.J. Wilton-Siegel J. 235

cessful in ousting the previous board of directors. As a result, McGoey and Dolgonos, together with their personal corporations, Jolian and DOL, asserted claims for monies accrued but not paid by UBS prior to their departure from the company, as well as damages for wrongful termination. The principal purpose of the CCAA proceedings has been to resolve these claims as expeditiously as possible. A settlement has been reached with the Dolgonos Parties. The trial of the Jolian Claim is scheduled to commence shortly. At the present time, the Jolian Claim, together with the Jolian and McGoey reimbursement and indemnification claims in respect of both the Jolian Claim and the Look Action, represent the overwhelming majority of the unsecured claims against UBS, being approximately 90% of the claims if the Dolgonos Parties are included and even higher if they are not. 80 Second, as a result, the unsecured creditors, excluding the Dolgonos Parties, are unwillingly caught in the middle of a fight in which they have no interest but which has prevented payment of their claims. 81 Third, Niketo’s submission that the Court must respect the hierarchy of claims in the insolvency in considering the appropriateness of the treatment of the shareholders under the Proposed Plan assumes that all three classes of unsecured creditors should be considered in the same manner. In this case, however, there is a significant difference between the claims of the Ordinary Creditors and the claims of Jolian/McGoey and Reeson. 82 The Ordinary Creditors have Claims that have been quantified and accepted by UBS. The Jolian/McGoey and Reeson claims have not yet been determined in the claims process and have not otherwise been accepted by UBS. Indeed, if UBS is successful at the trial of the Jolian Action, there would be no Class (1) unsecured claim of Jolian/McGoey to be dealt with in any plan of compromise or arrangement. In this sense, there is an element of contingency about these claims that distinguishes them from the claims of the Ordinary Creditors. Just as the Court must assess whether the UBS shares have true value at the present time independent of the Proposed Plan and what the Proposed Plan brings to the table, it must assess the Jolian/McGoey and Reeson claims independent of their treatment under the Proposed Plan. The fact that the applicant has reached an agreement with these creditors regarding their treatment in the Proposed Plan cannot have the effect of quantifying them for purposes of their current treatment under insolvency legislation. 236 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

83 Fourth, it is of fundamental importance to the issues in this application that there is a direct inverse relationship between the value of the Jolian/McGoey and Reeson claims, on the one hand, and the UBS shares, on the other hand — the larger the amount of the value of the Jolian/McGoey and Reeson claims as determined at trial or accepted by UBS, the lower the value of the UBS shares and vice versa. For this reason, the Jolian/McGoey and Reeson claims are no more or less uncertain or contingent than the UBS shares. 84 Given this relationship and the absence of a determination of the Jolian/McGoey and Reeson claims, the applicant cannot establish that the UBS shares have no value. In the absence of any evidence regarding the merits of the Jolian Claim, I consider that I must attach equal certainty or uncertainty to the unsecured claim of Jolian/McGoey as I do to the existence of value in the UBS shares. In order to find that the UBS shares have no value, the Court would have to conclude that the Jolian Claim will be substantially successful. This has not been established, and cannot be established, on the record before the Court. 85 Fifth, in the present circumstances, I think there is a reasonable argument that the UBS shares have some value, even if quantification of such value is uncertain and contingent upon the determination of the value of the Jolian/McGoey and Reeson claims. This conclusion is based on the following reasoning. 86 The UBS shares currently trade in the market at approximately $0.03 per share. This was also the price at which Niketo purchased its share position from 206 and 613. I think it is reasonable to consider that this price reflects the expectation of a cash distribution in the future after determination of the Jolian Claim. The UBS share price is also consistent with the financial statements of UBS, which exhibit an excess of assets over liabilities. In this regard, it is important to note that the UBS financial statements include an accrual of the Jolian/McGoey claims in respect of the deferred bonus and the award relating to the share appreciation rights plan, plus accrued interest, but not the claim of approximately $8 million for wrongful dismissal. On this basis, there is book value attribu- table to the UBS shares that represent assets that could be distributed to the shareholders after payment of the claims of the creditors shown on the books of UBS, including the claims of Jolian/McGoey and Reeson that have been accrued, unless the wrongful dismissal component of the Jolian Claim is successful. Unique Broadband Systems Inc., Re H.J. Wilton-Siegel J. 237

87 Sixth, under the Proposed Plan, although the shareholders would continue to own their UBS shares, the economic prospects for UBS, and therefore for the value of these shares, will be dramatically different. 88 At the present time, the shareholders have an expectation of a cash distribution in some amount under a plan of arrangement or compromise after determination of the Jolian Action, notwithstanding the legal expenses to be incurred by UBS in the forthcoming trial and any subsequent appeal. This assumes, of course, that UBS will be successful at the trial of the Jolian Claim, at least in respect of the wrongful dismissal component of the Jolian/McGoey claims and the Jolian/McGoey claims for reimbursement or indemnification regarding the Look Litigation, and that any fees and expenses awarded do not eliminate any excess assets. 89 On the other hand, Niketo is interested in UBS as a vehicle for future business activities. Under the Proposed Plan, the Look Shares will be preserved as an asset of UBS, but will be pledged to secure the Niketo Loan. Under the loan covenants, particularly the negative covenants, Niketo will have de facto control over the activities of UBS even before consideration of the relationship between the Niketo appointees to the UBS board of directors contemplated by the Proposed Plan. 90 It is Niketo’s intention to find a business to roll into UBS in order to utilize the Tax Losses. In all probability, such a transaction will involve the issue of a considerable number of additional shares in the capital of UBS, thereby diluting the value of the shares held by existing shareholders. It is also clear that Niketo does not intend that UBS would distribute any excess value of the Look Shares following repayment of the Niketo Loan. The covenants prevent such a distribution prior to repayment of the Niketo Loan. Any excess will, in all probability, be required for working capital for the new business. 91 In short, under the Proposed Plan, the UBS shareholders will lose the possibility of a cash distribution that could be made if UBS is successful in the trial of the Jolian Claim. In its place, they will retain an interest in a company effectively controlled by Niketo, the value of which will depend entirely upon Niketo’s decisions regarding the future business and financing of UBS. In addition, based on the evidence before the Court, I consider that there is no realistic possibility that UBS could continue to exist with any assets beyond the two-year window available to Niketo to find a suitable business for UBS based solely on the funding in the Pro- posed Plan. 238 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

92 Seventh, on the other hand, I do not accept the argument of UBS and the Monitor that the Proposed Plan should not be put to the creditors because it is not accompanied by a viable post-implementation business plan. There are two elements to this conclusion. 93 First, I consider that the foregoing description of Niketo’s intentions for UBS is sufficiently clear to constitute a business plan to which the Court should have regard in assessing the impact of the Proposed Plan upon the UBS shareholders. It involves the transformation of UBS into what is sometimes referred to as a “blind pool”. The fact that Niketo has not yet identified a business that it intends to roll into UBS, or the terms upon which it intends to effect such a transaction, does not prevent the Court from assessing the impact of such a transformation on the UBS shares. 94 Second, on the basis of the evidence before the Court, there is a reasonable possibility that UBS would be able to fund its ongoing expenses for up to two years, given the increase in the proposed Niketo Loan to approximately $5.8 million and the possibility of controlling and reducing its current expenses. This conclusion is, however, subject to UBS and Jolian/McGoey reaching an agreement or understanding regarding any claim that Jolian/McGoey might make for reimbursement or indemnification of their expenses in the Look Action, or a determination that no such rights exist. Given that the only assets of UBS, being the Look Shares, would be secured in favour of Niketo, I do not regard this as an unreasonable assumption. Accordingly, I do not consider it probable that UBS would default under the Niketo Loan, or would otherwise be rendered insolvent, shortly after implementation of the Proposed Plan as UBS and the Monitor suggest.

Conclusions 95 As set out above, the test regarding whether the Court should allow a plan of compromise or arrangement proposed by a creditor to be put to the stakeholders of a debtor subject to CCAA proceedings is whether it is in the best interests of the debtor and its stakeholders to do so. 96 In this case, UBS has no independent interest as it is merely a holding corporation with no employees and no business activities. For the reasons set out above, I have rejected the applicant’s submission that there is no equity in the UBS shares. Accordingly, I have proceeded on the basis that the stakeholders of UBS whose interests must be considered on Unique Broadband Systems Inc., Re H.J. Wilton-Siegel J. 239

this application are the three classes of creditors in the Proposed Plan and the UBS shareholders. 97 In addition, for the reasons set out above, I also consider that it is necessary to distinguish the interests of the creditors in Classes (1) and (2) of the Proposed Plan from the interests of the Ordinary Creditors in Class (3). The latter have had no involvement in the events giving rise to the insolvency of UBS, apart from the Dolgonos Parties. In addition, and more importantly, they have quantified claims that have been accepted by UBS. The creditors in Classes (1) and (2) of the Proposed Plan have asserted claims that have been disputed by UBS and are not yet established for the purposes of the CCAA. An agreement between these creditors and the applicant to treat their claims as quantified for purposes of the Proposed Plan does not make them unsecured creditors with established claims. Moreover, to the extent that they are unsuccessful in estab- lishing their claims, the value of the UBS shares, and the likelihood of a cash distribution being made in respect of these shares, will be corre- spondingly increased. 98 Accordingly, I propose to address the issue of a possible requirement of a shareholder vote in two stages. I will first consider the appropriateness of a shareholder vote requirement in the limited context of the respective interests of the creditors in Classes (1) and (2) of the Proposed Plan and the UBS shareholders. I will then consider whether the presence of the Ordinary Creditors in Class (3) should affect the conclusion.

Considerations as between the Creditors in Classes (1) and (2) of the Proposed Plan and the UBS Shareholders 99 In this section, I propose to consider the hypothetical situation in which there are no Ordinary Creditors, apart from the applicant holding an unsecured claim of $6,149.48, which it has acquired for the purpose of putting forward a plan of compromise or arrangement. 100 I conclude that, in such circumstances, a court would have no hesita- tion in concluding that a shareholder vote is required in respect of the Proposed Plan. There are two principal reasons for this conclusion. I will describe these two reasons and then consider whether any of the arguments raised by the applicant either address or offset these concerns. 101 First, as mentioned, it cannot be said that the creditors in Classes (1) and (2) of the Proposed Plan are unsecured creditors for the purposes of the CCAA whose claims must be presumed to be prior to those of the UBS shareholders. That remains to be established at trial. Until such time 240 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

as these claims are determined, or accepted by UBS, both classes of stakeholders must have a right to vote because of the direct inverse relationship of value between these interests described above. It is only in this way that any acceptance or compromise of the claims of the creditors in Classes (1) and (2) of the Proposed Plan that gives value to such claims can be established for purposes of the CCAA. Any approval of this nature would, in effect, substitute for an agreement between UBS and the creditors in Classes (1) and (2) of the Proposed Plan as an alternative to a determination of the Jolian/McGoey and Reeson claims at a trial. 102 Conversely, as discussed above, the applicant cannot establish that the UBS shares do not have any equity value due to this direct inverse relationship of value. This would require, in particular, a determination, or acceptance, of the Jolian Claim in favour of Jolian/McGoey. 103 In addition, because the Court has found that there is a reasonable argument that there is equity in the UBS Shares, the effect of the Pro- posed Plan is, at least potentially, to transfer some of that value from the UBS shareholders to the creditors in Classes (1) and (2) of the Proposed Plan. This is, however, a supplementary argument that reinforces the conclusion in this section. In the present context, it is not so much the finding that the UBS shares have value as the fact of the direct inverse relationship of value and the absence of any determination of the claims of the creditors in Classes (1) and (2) of the Proposed Plan that calls for a shareholder vote. A finding of actual value today, and the potential for a transfer of some of that value to the creditors in Classes (1) and (2) under the Proposed Plan, only makes the conclusion that much stronger. 104 Second, the Proposed Plan not only proposes to establish and pay out the claims of the creditors in Classes (1) and (2) of the Proposed Plan, but it also proposes to radically change the expectation of the benefits associated with ownership of the UBS shares. This raises a separate question regarding the appropriateness of the treatment of the UBS shareholders in the Proposed Plan. 105 As set out above, the UBS shareholders have an expectation of a cash distribution depending upon the outcome of the Jolian Claim. The Pro- posed Plan, if implemented, will transform UBS into a company that is effectively controlled by Niketo, the value of which will depend entirely upon Niketo’s decisions regarding the future business and financing of UBS. Under this scenario, there would be no expectation of a cash distribution to UBS shareholders, notwithstanding settlement of the Jolian Unique Broadband Systems Inc., Re H.J. Wilton-Siegel J. 241

Claim in an amount that would otherwise permit such a distribution. Moreover, there is no evidence of any track record of Niketo or NWT in respect of similar activities which provides comfort to the UBS shareholders that Niketo’s business plan for UBS is achievable and will generate value for them. I consider that the radical change in economic benefits associated with the UBS shares, if not an actual reduction in the anticipated value of such benefits, requires a shareholder vote. 106 The point may be illustrated by hypothesizing another possible plan in which the claims of the creditors in Classes (1) and (2) of the Proposed Plan would be determined at a trial but would, in any event, be limited to a maximum amount equal to the amount to be paid under the Proposed Plan. This hypothetical is intended to isolate the impact of the Proposed Plan on the economic benefits associated with the UBS shares. A plan of this nature might be considered to address, at least partly, the first reason for a shareholder vote discussed above. However, the transformation of the prospects for value from the UBS shares remains a consideration that the Court would have to address. While I am not satisfied that the proposed business plan for UBS can be characterized as being directed toward an improper purpose as UBS argues, I am of the view that the impact of the Proposed Plan on the prospects for the UBS shares is sufficiently material on its own to constitute an independent reason for requiring a shareholder vote. 107 Turning to the arguments of the applicant against the requirement of a shareholder vote, I have the following comments. 108 First, the argument that a shareholder vote would allow the shareholders to roll the dice using the creditors’ money, as the applicant puts it, does not apply to the creditors in Classes (1) and (2) of the Proposed Plan. They have not yet been established to be creditors entitled to insist upon compliance with the hierarchy of claims under insolvency legislation. If there is equity, or a reasonable prospect of equity depending upon the determination of the Jolian Claim, the UBS shareholders are rolling the dice with their own money. This is an argument that can only be made, if at all, by the Ordinary Creditors. 109 Second, as a related matter, I do not accept that a shareholder vote requirement gives the shareholders a veto in circumstances in which they should not have one. Any vote is potentially a veto. To avoid a veto, it is necessary to treat the shareholders appropriately under a proposed plan of compromise or arrangement. I leave open the issue of whether a court could grant a sanction order notwithstanding a negative vote in circum- 242 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

stances in which it considered that the shareholders were being treated appropriately. In the present circumstances, the absence of any benefit to the shareholders, and arguably some reduction in the value of the expected benefits to be derived from the UBS shares, constitutes a reason for requiring a shareholder vote. 110 Third, I do not consider that, in the present circumstances, it is an answer that the shareholders can oppose the Proposed Plan at the plan sanction hearing if they choose. The applicant candidly concedes that it would expect the shareholders to oppose the Proposed Plan. This begs the question of how a court could conclude that the Proposed Plan was fair and reasonable at a sanction hearing. 111 There is no evidence before the Court from either party regarding the merits of the Jolian Claim. In particular, there is no evidence as to how Niketo arrived at its settlement with Jolian. In the absence of such evidence, I think it is reasonable to draw the inference that it was established with regard to the financial viability of the Proposed Plan, rather than an assessment of the merits of the Jolian Claim. Given the lack of evidence regarding the Jolian Claim, how could the Court conclude that the Jolian Settlement Agreement, which is at the heart of the Proposed Plan, is fair and reasonable? 112 If the applicant wishes to make this argument, I think it has the onus to demonstrate that the proposed settlement with Jolian is at least commercially reasonable. In this regard, the applicant’s only submission is that it must be commercially reasonable to compromise a claim of $10 million for a payment of $3.5 million that could only be pursued at an additional cost, which it says is $1.3 million. Setting aside the dispute as to whether the additional cost would be $1.3 million or a much lower number as UBS argues, I do not see how it necessarily follows that the proposed settlement is commercially reasonable. To reach that conclusion, it is necessary to know the risk of failure if the additional expenditures are incurred. If the likelihood of success is high, it might be commercially unreasonable to forego the additional expenditures to retain $3.5 million. 113 Moreover, in the absence of any evidence, I think that the Court must assume that the current directors of UBS, two of whom the applicant has invited to stay on the board, are fulfilling their responsibilities in deciding that the Jolian Claim should proceed to trial despite the somewhat unsatisfactory evidence of Mr. Wells as to the nature of the deliberations Unique Broadband Systems Inc., Re H.J. Wilton-Siegel J. 243

of the UBS board in reaching its determination to oppose the Proposed Plan at its meeting on January 25, 2013. 114 Fourth, I do not consider that inconvenience in the form of the cost of convening a shareholders meeting or the delay involved in plan implementation are sufficient considerations to exclude a shareholders meeting. UBS is a public corporation; Niketo would not be proposing its plan if it were not. This is a case where it must deal with the inconvenience associated with a public corporation if it wishes to take the benefits after plan implementation. In addition, with respect to the cost, I am not persuaded that voluminous documentation is required to provide shareholders with proper disclosure. Further, delay is principally a consideration given the scheduled hearing date for the trial of the Jolian Claim. How- ever, if the Court were to order that the Proposed Plan be submitted to the shareholders, there would be a reasonably compelling argument for staying the trial in the Jolian Claim pending voting on the Proposed Plan, although such relief has not been requested to date by the applicant. Lastly, the issues of who would prepare the disclosure materials, the nature of any dissident materials, the responsibility for attendant costs and any issues of voting are practical issues that are not unusual for public companies and are not insoluble. They are not a reason on their own for denying a shareholder vote. In any event, as the applicant says it will not proceed if a shareholder vote is required, I am not sure that these are meaningful concerns on this application. 115 Lastly, in this case, I do not consider that it is a sufficient answer to say that opposing shareholders can sell their shares into the market. Niketo is not offering to purchase UBS shares at the current market price. There is good reason to be concerned that announcement of the Proposed Plan would result in a significant decline in the value of the UBS shares, as the expectation of a cash distribution would immediately cease given that approval of the Proposed Plan would be assumed in the absence of a requirement of a shareholder vote.

Consideration of the Interests of All of the Stakeholders Including the Ordinary Creditors 116 I turn then to the question of whether the inclusion of the Ordinary Creditors in the Proposed Plan affects the conclusion reached above. That is, is it in the best interests of all of the stakeholders of UBS, taking into consideration the Ordinary Creditors as well as the creditors in Clas- ses (1) and (2) of the Proposed Plan and the UBS shareholders, that the 244 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

Court order a meeting of the creditors of UBS on the Proposed Plan without also requiring a shareholder vote? 117 Before addressing this question, I would note an important distinction between the Dolgonos Parties and the other five unsecured creditors. 118 I have considerable sympathy for the five Ordinary Creditors who ar- gue that the Court should allow the Proposed Plan to go forward to allow them to be paid their claims under a plan of compromise or arrangement that will make them whole. As mentioned, they have had no involvement in the events that have resulted in the CCAA proceedings. 119 However, I think the Dolgonos Parties, while Ordinary Creditors, stand in a different relationship to the situation for purposes of assessing the interests of the stakeholders. Although it is not necessary to address the issue of the ability of the Dolgonos Parties to vote on the Proposed Plan as an Ordinary Creditor, I consider the provisions of the Dolgonos Settlement Agreement set out above to be relevant to the issue in this section. 120 The principle behind these provisions is a commitment of the Dolgo- nos Parties to a determination of the Jolian Claim within the CCAA proceedings. As such, it is acknowledged that the Dolgonos Parties cannot support the applicant or the Proposed Plan on this application. For the same reason, I do not think that the Dolgonos Parties can take the position of the remaining Ordinary Creditors that the Proposed Plan should be permitted to proceed in order to pay them out given that the remaining purpose of the CCAA proceeding which they committed to support — the determination of the Jolian Claim — has not yet been completed. 121 Accordingly, in the assessment below, I have distinguished the interests of the Dolgonos Parties from those of the other Ordinary Creditors. In short, only these Ordinary Creditors, whose claims total approximately $300,000, can legitimately insist that the Court have regard to the traditional hierarchy of priorities in assessing whether to allow the Pro- posed Plan to be put to the creditors. 122 Is it in the best interests of all the stakeholders to allow the Proposed Plan to be put to the creditors without a shareholder vote? This requires a balancing of the interests of each of the creditors, as described in these Reasons, and the interests of the shareholders. In my opinion, Niketo has failed to demonstrate a compelling reason not to require a shareholder vote even taking into consideration the claims of the five Ordinary Credi- tors in Class (3). Unique Broadband Systems Inc., Re H.J. Wilton-Siegel J. 245

123 The principal reasons for this conclusion have already been set out above in considering the balancing of interests between the creditors in Classes (1) and (2) of the Proposed Plan and the UBS shareholders. There is, in fact, a sense in which the proponents of the Proposed Plan shelter entirely under the claims of the small group of unsecured creditors comprising the Ordinary Creditors for the legitimacy of a plan of compromise or arrangement that would otherwise be without any princi- pled support. 124 The Ordinary Creditors, aside from the Dolgonos Parties who should be treated differently for the reasons stated above, have claims totaling $300,000. This is not a material amount in the context of the aggregate amount of the claims being dealt with in the CCAA proceedings. It is also not a material amount relative to the value of the equity in the UBS shares that might be eliminated if the Proposed Plan were implemented. 125 In addition, while the outcome of the Jolian Claim is uncertain, there is a reasonable possibility that the claims of the Ordinary Creditors will be paid eventually. Based on the UBS financial statements, the claims of the Ordinary Creditors would be paid in full even if the Jolian Claim were successful in respect of the deferred bonus and share appreciation rights components of that Claim. This must be balanced against the certainty of termination of the current expectation of the UBS shareholders of a cash distribution from UBS after the determination of the Jolian Claim, and of the probability of a reduction in the associated value of the UBS shares, if the Proposed Plan were implemented. 126 To summarize, I have concluded above that the interests of the UBS shareholders must be recognized in the Proposed Plan. The Court must also have regard to such interests in balancing the interests of the UBS stakeholders in any consideration of whether to allow a proposed plan of compromise or arrangement to be submitted to the stakeholders for approval. In the absence of any consideration having been given to the UBS shareholders in the Proposed Plan, after taken into consideration the interests of the stakeholders in accordance with the factors set out above, I do not think it would be appropriate for the Court to order a meeting of the creditors to consider the Proposed Plan without also requiring a shareholder vote. In particular, I am not persuaded that the interests of the Ordinary Creditors outweigh the interests of the shareholders for the reasons set out above. 246 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

Conclusion 127 Based on the foregoing, the application is denied. Application dismissed. Southpaw Credit Opportunity Master v. Asian Coast Develop. 247

[Indexed as: Southpaw Credit Opportunity Master Fund LP v. Asian Coast Development (Canada) Ltd.] Southpaw Credit Opportunity Master Fund LP, Southpaw Asset Management LP, Wilshire Institutional Master Fund SPC- Wilshire Southpaw Opportunity Seg Port, GPC 76, LLC and Old Westbury Funds, Inc. Petitioners and Asian Coast Development (Canada) Ltd., Harbinger Capital Investments S.`a.r.l., Harbinger Capital Partners Master Fund I, Ltd., Harbinger Capital Partners Special Situations Fund, L.P., Blue Line ACDL, Inc., Breakaway ACDL, Inc., and Harbinger II S.`a.r.l. Respondents British Columbia Supreme Court Docket: Vancouver S111477 2013 BCSC 187 Ross J. Heard: September 10-13, 2012 Judgment: February 6, 2013 Business associations –––– Specific matters of corporate organization — Shareholders — Shareholders’ remedies — Relief from oppression — Mis- cellaneous –––– Central complaint advanced by petitioners was that through two loan transactions respondent A Ltd. received money from H respondents on what were alleged to be very harsh terms — It was alleged that terms were so harsh as to disrupt A Ltd.’s efforts to raise additional capital, which in end resulted in A Ltd. entering into transaction with H respondents that had effect of severely diluting value of petitioners’ shares — Specific complaint advanced was A Ltd.’s failure to have sought financing on more preferential terms from petitioners — Petitioners brought oppression proceeding against respondents by way of petition — Petition dismissed — As regards claim against A Ltd., there was breach of petitioners’ reasonable expectation that was unfairly prejudicial to their interests with respect to first loan in issue, but not with respect to second loan in issue — Petitioners failed to establish causation, necessary element in oppression claim — Because petitioners failed to establish necessary element of claim, it followed that claim against A Ltd. was dismissed — Claim advanced against H respondents was one of accessory liability, one feature of which was that it could not be sustained if there was no primary liability — Since petitioners failed to establish claim against A Ltd., it followed that claim against H respondents also failed. 248 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

Debtors and creditors –––– Miscellaneous issues –––– Central complaint advanced by petitioners was that through two loan transactions respondent A Ltd. received money from H respondents on what were alleged to be very harsh terms — It was alleged that terms were so harsh as to disrupt A Ltd.’s efforts to raise additional capital, which in end resulted in A Ltd. entering into transaction with H respondents that had effect of severely diluting value of petitioners’ shares — Specific complaint advanced was A Ltd.’s failure to have sought financing on more preferential terms from petitioners — Petitioners brought oppression proceeding against respondents by way of petition — Petition dismissed — As regards claim against A Ltd., there was breach of petitioners’ reasonable expectation that was unfairly prejudicial to their interests with respect to first loan in issue, but not with respect to second loan in issue — Peti- tioners failed to establish causation, necessary element in oppression claim — Because petitioners failed to establish necessary element of claim, it followed that claim against A Ltd. was dismissed — Claim advanced against H respondents was one of accessory liability, one feature of which was that it could not be sustained if there was no primary liability — Since petitioners failed to establish claim against A Ltd., it followed that claim against H respondents also failed. Cases considered by Ross J.: BCE Inc., Re (2008), (sub nom. Aegon Capital Management Inc. v. BCE Inc.) 383 N.R. 119, 71 C.P.R. (4th) 303, 52 B.L.R. (4th) 1, (sub nom. Aegon Capital Management Inc. v. BCE Inc.) 301 D.L.R. (4th) 80, 2008 SCC 69, (sub nom. BCE Inc. v. 1976 Debentureholders) [2008] 3 S.C.R. 560, 2008 CarswellQue 12595, 2008 CarswellQue 12596, [2008] S.C.J. No. 37 (S.C.C.) — followed Brant Investments Ltd. v. KeepRite Inc. (1991), 1 B.L.R. (2d) 225, 3 O.R. (3d) 289, 45 O.A.C. 320, 80 D.L.R. (4th) 161, 1991 CarswellOnt 133, [1991] O.J. No. 683 (Ont. C.A.) — considered Budd v. Gentra Inc. (1998), 111 O.A.C. 288, 43 B.L.R. (2d) 27, 1998 Carswell- Ont 3069, [1998] O.J. No. 3109 (Ont. C.A.) — considered C.B.S. Songs Ltd. v. Amstrad Consumer Electronics PLC (1988), [1988] 1 A.C. 1013, [1988] 2 All E.R. 484 (U.K. H.L.) — considered Lumley v. Gye (1853), 118 E.R. 749, 2 El. & Bl. 216, 17 Jur. 827, 22 L.J.Q.B. 463 (Eng. Q.B.) — considered OBG Ltd. v. Allan (2007), [2007] 19 E.G. 165, [2007] E.M.L.R. 12, [2007] I.R.L.R. 608, [2007] Bus. L.R. 1600, [2008] 1 A.C. 1, [2008] 1 All E.R. (Comm) 1, [2007] 4 All E.R. 545, [2007] 2 W.L.R. 920, [2007] UKHL 21 (U.K. H.L.) — considered Pente Investment Management Ltd. v. Schneider Corp. (1998), 113 O.A.C. 253, (sub nom. Maple Leaf Foods Inc. v. Schneider Corp.) 42 O.R. (3d) 177, 1998 CarswellOnt 4035, 44 B.L.R. (2d) 115, [1998] O.J. No. 4142 (Ont. C.A.) — considered Southpaw Credit Opportunity Master v. Asian Coast Develop. Ross J. 249

Southpaw Credit Opportunity Master Fund LP v. Asian Coast Development (Canada) Ltd. (2012), 2012 CarswellBC 93, 2012 BCSC 14 (B.C. S.C.) — referred to Stern v. Imasco Ltd. (1999), 1999 CarswellOnt 3546, 38 C.P.C. (4th) 347, 1 B.L.R. (3d) 198, [1999] O.J. No. 4235 (Ont. S.C.J.) — considered 820099 Ontario Inc. v. Harold E. Ballard Ltd. (1991), 3 B.L.R. (2d) 123, 1991 CarswellOnt 142, [1991] O.J. No. 266 (Ont. Gen. Div.) — considered Statutes considered: Business Corporations Act, S.B.C. 2002, c. 57 Generally — referred to Canada Business Corporations Act, R.S.C. 1985, c. C-44 Generally — referred to s. 122(1)(b) — considered s. 241(1) — considered

RULING concerning oppression proceeding brought by petitioners by way of petition.

G. Gomery, Q.C., S. Schachter, Q.C. for Petitioners C. Naudie, S. Irving for Respondent, Asian Coast Development (Canada) Ltd. B. Bresner, K. Beitel for Respondents, Harbinger Capital Investments S.`a.r.l., Harbinger Capital Partners Master Fund I, Ltd., Harbinger Capital Partners Special Situations Fund, L.P., Blue Line ACDL, Inc., Breakaway ACDL, Inc., and Harbinger II S.`a.r.l.

Ross J.: I. Introduction 1 This is an oppression proceeding that has been brought by the petitioners, investment management funds based in New York, against the respondent Asian Coast Development (Canada) Ltd. (“ACDL”) and the respondents Harbinger Capital Investments S.`a.r.l., Harbinger Capital Partners Master Fund I, Ltd., Harbinger Capital Partners Special Situa- tions Fund, L.P., Blue Line ACDL, Inc., Breakaway ACDL, Inc. and Harbinger II S.`a.r.l. (collectively “Harbinger”), which are investment fund managers or investment funds also based in New York. Harbinger II is currently the largest shareholder of ACDL. The other Harbinger respondents are affiliates of Harbinger II. 2 The central complaint advanced by the petitioners is that through two loan transactions ACDL received money from Harbinger on what are alleged to be very harsh terms. It is alleged that the terms were so harsh as 250 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

to disrupt ACDL’s efforts to raise additional capital, which in the end resulted in ACDL entering into a transaction with Harbinger that had the effect of severely diluting the value of the petitioners’ shares. The specific complaint advanced is ACDL’s failure to have sought financing on more preferential terms from the petitioners.

II. Procedural History 3 This proceeding was commenced by way of petition. The petition was amended on April 11, 2011. 4 In April 2011, the parties agreed to a timetable that provided for the exchange of affidavits, including expert affidavits, the exchange of documents, cross-examination on affidavits, the exchange of written arguments and the hearing of the petition. The hearing of the petition was set for five days commencing November 28, 2011. This was at the request of the petitioners’ counsel in order to accommodate the possibility of conducting cross-examinations during the hearing. 5 Harbinger and ACDL served responding affidavits in June 2011. On June 29, 2011, the petitioners delivered a list of documents that they were seeking from the respondents. On August 8, 2011, the respondents produced most of the documents requested by the petitioner, but refused to produce some of them. 6 The petitioners then applied for an order for further production of documents. ACDL and Harbinger agreed to produce some of the categories of requested documents. On August 11, 2011, Madam Justice Gray ordered the respondents to produce certain categories of documents and to use their best efforts to produce the documents by September 2, 2011. 7 The petitioners’ counsel then advised the respondents that, having reviewed the documents produced pursuant to the order of Gray J., a tort action against Harbinger for intentional interference with economic relations was being considered. 8 The petitioners then brought an application seeking orders converting this proceeding into an action, granting leave to file a notice of civil claim against Harbinger (the “Tort Claim”), and permitting the Tort Claim and the oppression claim advanced in the petition (the “Oppres- sion Claim”) to be advanced in a single proceeding. In the alternative, the petitioners sought leave to make use of the documents that have been produced by the respondents in this proceeding to commence the Tort Claim against Harbinger, and to use the documents produced in the Op- pression Claim in the prosecution of the new action. Southpaw Credit Opportunity Master v. Asian Coast Develop. Ross J. 251

9 In reasons indexed at 2012 BCSC 14 (B.C. S.C.), the following relief was granted: In the result, having regard to the applicable test and to the factors to be addressed, I have concluded that at present, Southpaw has not met the onus for conversion of the proceedings. The application to convert this proceeding into an action is dismissed with liberty to renew the motion after the cross-examinations on affidavits have been conducted. In addition, as noted above, the petitioners are granted leave to make use of documents that have been produced by the respondents in this proceeding to commence a new action claiming damages in tort from the respondents Harbinger Capital Investments S.`a.r.l. and Harbinger Capital Partners Master Fund I, Ltd. and to use the documents in the prosecution of the new action. 10 The petitioners did commence an action in tort against Harbinger, but that claim is not ready for trial. The parties proceeded with the cross- examinations. The petitioners did not renew their application to convert the petition into a trial or to have the matter tried with the tort action.

III. Facts A. The Parties 11 ACDL is a small real estate development company that is based in Vancouver. It was incorporated on July 18, 2006 under the Canada Busi- ness Corporations Act, R.S.C. 1985, c. C-44 (“CBCA”), and continued under the British Columbia Business Corporations Act, S.B.C. 2002, c. 57 (“BCBCA”), in the fall of 2010. This proceeding is subject to the provisions of the CBCA. 12 ACDL was founded with the objective of developing luxury casinos and resorts on the Ho Tram Strip in Phuc Thuan Village, Xuyen district, Ba Ria, Vung Tau Province in Vietnam. The development plan includes hotels, conference space, casinos, a golf course, retail shopping areas and restaurants at a total estimated cost of US $4.2 billion (“the Project”). 13 Between January 2009 and April 2010, the independent directors of the company were Robert Wolfe, David Tsubouchi and Jack Maier, all of whom were experienced business persons. The management directors during that time, who were also the founders of the company, were Michael Aymong and David Subotic. In late April 2010, Messrs. Aymong and Subotic resigned and Mr. Wolfe became Chair of the Board. 252 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

14 In 2009, the management team consisted of Mr. Subotic, chief executive officer; Mr. Aymong, Chair of the Board; Stephen Shoemaker, president and chief financial officer; and John Legge, in-house counsel. In April 2010, Messrs. Subotic and Aymong ceased to be involved in management and Lloyd Nathan, formerly with MGM, became a director of the company and its chief executive officer. 15 In March 2008, ACDL secured a licence from the national and pro- vincial governments of Vietnam to fund, construct and operate the Pro- ject (“the Investment Certificate”). In order to obtain the Investment Cer- tificate, ACDL was required to commit to a number of deadlines to raise equity and debt financing and to construct the Project in a timely fashion. The Investment Certificate was subject to revocation in the event that ACDL failed to meet any of these deadlines. 16 Ho Tram Project Company Limited (“HTP”) is a Vietnamese corporation that is a wholly owned subsidiary of ACDL. HTP was formed pursuant to the Investment Certificate. At the material time, the principal assets of HTP were the Investment Certificate and a land lease for the Project site. At the material time ACDL’s principal asset was its interest in HTP. 17 Harbinger Capital Partners LLC (“Harbinger Capital”) is a private investment firm based in New York that specializes in distressed credit, event driven and value investing strategies. Harbinger Capital was the first institutional investor in ACDL, making its investments through subsidiaries named as respondents in the proceeding: Harbinger Capital In- vestments S.`a.r.l., Harbinger Capital Partners Master Fund I, Ltd., Har- binger Capital Partners Special Situations Fund, L.P., Blue Line ACDL, Inc., Breakaway ACDL, Inc. and Harbinger II S.`a.r.l. 18 The petitioner, Old Westbury Funds, Inc., is a legal entity that represents the Old Westbury Global Opportunity Fund (“GOF”), which made an investment in ACDL in 2008. Bessemer Investment Management LLC provides investment management services to Old Westbury Funds Inc. (collectively “Bessemer”). 19 The GOF specifically invests in speculative and high risk securities including investments in emerging markets and below investment grade securities. It caters to sophisticated investors and high net worth investors looking for risky investments in foreign countries. At the material times Gregory Lester was the portfolio manager responsible for the GOF. 20 The petitioner, Southpaw Credit Opportunity Master Fund LP, is a New York based investment firm managed by Southpaw Asset Manage- Southpaw Credit Opportunity Master v. Asian Coast Develop. Ross J. 253

ment LP. Wilshire Institutional Master Fund SPC-Wilshire Southpaw Opportunity Seg Port and GPC 76, LLC, are accounts managed by the principals of Southpaw Asset Management LP. All of these entities (collectively “Southpaw”) held shares in ACDL. 21 Southpaw has an institutional relationship with Bessemer, which invests Southpaw’s funds. Southpaw focuses in placing corporate credit investments primarily in stressed and distressed securities. Southpaw caters to sophisticated and high net worth investors who have a tolerance for risk and the financial ability and willingness to sustain a loss of their investment. Southpaw was founded by Howard Golden and Kevin Wy- man who shared the decision-making authority in respect of Southpaw’s investment in ACDL.

B. Harbinger’s Initial Investments 22 Harbinger made its original investment in ACDL in April 2007. It was the first institutional investor in ACDL and as a result of its early investment secured a number of preferential rights including rights of first refusal and/or consent in respect of future debt and equity financing and a broad security interest in all of ACDL’s assets. 23 On April 17, 2007, prior to issuance of the Investment Certificate by the Vietnamese government and prior to any investment by the petitioners, Harbinger invested $35 million of venture capital in ACDL (the “Start-up Investment”). Pursuant to the Start-up Investment, Harbinger negotiated and entered into: (i) a subscription agreement for 250,000 Preferred Special Shares, 1 million Common Special Shares and warrants representing 6.6% of the fully-diluted equity of ACDL; (ii) a shareholders’ agreement (the “2007 Shareholders’ Agree- ment”) with ACDL and certain of the other shareholders of ACDL (the “Principal Shareholders”); (iii) a Put Option Agreement with ACDL and its subsidiaries, which provided that, in the event of a default by ACDL, Harbinger could compel ACDL to repurchase the preferred shares for over $25 million; (iv) General Security Agreements with ACDL and its subsidiaries, providing Harbinger with security over all of the assets of ACDL and its subsidiaries; and 254 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

(v) a Voting Trust Agreement with ACDL and the Principal Shareholders. The 2007 Shareholders’ Agreement, the Put Option Agreement, the Gen- eral Security Agreements and the Voting Trust Agreement will be referred to as the “2007 Transaction Documents”. 24 The 2007 Transaction Documents provided Harbinger with a bundle of rights, including: • that ACDL would not issue any additional equity or incur any debt without Harbinger’s prior written consent, which was not to be unreasonably withheld; • if there was an event of default as defined under the 2007 Shareholders’ Agreement, ACDL agreed to ensure that Harbinger could nominate the majority of the board of whatever entity held the Investment Certificate and Lease Agreement (later, HTP); • if there was an event of default under the 2007 Sharehold- ers’ Agreement, the Principal Shareholders who were parties to the Voting Trust Agreement would deliver their shares to Harbinger and permit Harbinger to vote those shares, representing approximately 24% of the outstanding common shares; • a right of first refusal for 50% of the issuance of any equity or debt by ACDL; and • the right to enforce its security over all of the assets of ACDL and HTP. 25 Harbinger made additional equity investments in ACDL on October 25, 2007, February 8, 2008 and April 30, 2008. By April 30, 2008, Har- binger had invested approximately $42 million in ACDL.

C. Southpaw’s Initial Investment 26 Southpaw was the second institutional investor in ACDL, making its initial investment in June 2007. It purchased 301,277 common shares in ACDL at $10 per share for an aggregate purchase price of $3,012,770. At the time of its investment Southpaw conducted an extensive due diligence process which included review of ACDL’s confidential web-based data site which contained all of ACDL’s material corporate agreements and organizational information, including the 2007 Transactional Docu- ments. Thus, at the time of its investment, Southpaw was aware that Har- Southpaw Credit Opportunity Master v. Asian Coast Develop. Ross J. 255

binger was an existing investor with a senior position in the capital structure. 27 Southpaw made its investment pursuant to a formal subscription agreement in which it acknowledged that: (a) Southpaw had access to all the information that it considered necessary as part of its investment decision to invest in the common shares of ACDL (s. 4.2 (e)); (b) Southpaw had an opportunity to review and access ACDL’s material agreements, including Harbinger’s shareholder rights (s. 4.2(t)); (c) there were significant risks associated with the purchase of, and investment in, the common shares of ACDL (s. 4.2(s)); (d) ACDL and any of its subsidiaries could complete additional financings concurrently or in the future in order to develop the business of the Company and to fund its ongoing development and that there was no assurance that such financings would be available and, if available, on reasonable terms; and any such future financings could have a dilutive effect on current security holders, including Southpaw (s. 4.2(aa)); and (e) the purchase of the shares of ACDL was a highly speculative investment and that the investment in the shares was suitable only to sophisticated investors and required the financial ability and willingness to accept the possibility of the loss of all or substantially all of Southpaw’s investment as well as the risks and lack of liquidity inherent in an investment in ACDL (s. 4.2(mm)). 28 Mr. Golden acknowledged on cross-examination that, based on the representations of ACDL and the acknowledgements of Southpaw in each of the subscription agreements, Southpaw: (i) was aware of Harbinger’s security interest over the assets of ACDL, and understood and expected that its investments were subject to the security interest in favour of Harbinger; (ii) was aware that Harbinger held two series of special shares of ACDL, and understood and expected that its investments were subject to those special rights; (iii) was aware of the material contracts disclosed in Schedule B to the Southpaw Subscription to its agreements, including 256 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

Harbinger’s financing documentation, which it acknowledged receiving, and understood and expected that its investments were subject to those material contracts; (iv) was aware, and understood and expected, that its investments were subject to significant risks; (v) was aware, and understood and expected, that ACDL might complete additional financings and that there was no assurance that such financings would be available or, if available, that such financings would be on reasonable terms; (vi) was aware, and understood and expected, that ACDL might complete additional financings and that such financings could be dilutive to Southpaw’s equity interest in ACDL; and (vii) was aware and understood and expected, that its investments in ACDL were speculative, and were only for sophisticated investors who were willing to accept the possibility that all or substantially all of their investment might be lost.

D. Default 29 As of July 2007, ACDL was in default under the terms of the 2007 Transaction Documents. In light of this default, Harbinger was in a position to exercise its put option and its security and to seize all of the assets of the Company. 30 Given Harbinger’s right to act on its security interests, ACDL was required, on several occasions, to obtain the consent of Harbinger to forbear from enforcing its rights under its various agreements. ACDL sought and secured Harbinger’s agreement to forebear from exercising its rights. Harbinger’s initial forbearance was stated to be conditional upon curing the defaults relating to the Investment Certificate and Lease Agreement on or before October 1, 2007. Harbinger reserved its rights in the event of further acts of default. Forbearance agreements were sought by ACDL and entered into between ACDL and Harbinger on July 16, 2007, September 28, 2007, April 7, 2008, October 31, 2008, March 20, 2009, October 31, 2009 and January 29, 2010. Southpaw Credit Opportunity Master v. Asian Coast Develop. Ross J. 257

E. Subsequent Investments 31 In October 2007, Harbinger purchased 255,000 common shares at $10 per share. Harbinger purchased 437,478 common shares at $10 per share in February 2008. 32 Southpaw purchased 100,000 common shares at $10 per share in Oc- tober. 2007. In February 2008, Southpaw purchased 45,000 common shares at $10 per share. Prior to this purchase, Southpaw representatives had accessed various documents from the ACDL website. Given its access to the confidential website, at the time of this purchase Southpaw either was aware, or should have been aware of the state of ACDL’s default and of Harbinger’s forbearance. Southpaw’s total investment in ACDL was 446,277 common shares for an investment of $4,462,770.

F. Investment Certificate 33 As noted above, ACDL had obtained the Investment Certificate from the Government of Vietnam in March 2008. The Investment Certificate outlines the terms under which the Project is to be developed, including specific details regarding the scheduled completion of the various phases of the Project. 34 In order to obtain the Investment Certificate, ACDL was required to make a number of commitments relating to the financing and completion of the Project. In particular, ACDL represented that it had the ability to raise charter capital in the amount of $795 million (the “Charter Capi- tal”) and committed to arranging for total investment capital of up to $4.23. 35 In addition, under the terms of the Investment Certificate, ACDL committed to start construction on Phase 1 by September 2008 and make Charter Capital contributions in the amount of $105 million by Decem- ber 2009. 36 On April 7, 2008, Harbinger and ACDL entered into a further forbearance agreement in relation to three events of default: ACDL’s failure to enter into the Lease Agreement (the Investment Certificate had been granted on March 12, 2008) (the “Lease Condition”); its failure to obtain all required licences, consent and government approvals in relation to the development (the “Approvals Condition”); and, its failure to obtain the required financing within 12 months of closing of the Start-up Invest- ment, as required by the 2007 Shareholders’ Agreement (the “Mandatory Financing Condition”). Satisfaction of the Mandatory Financing Condi- tion required ACDL to raise $300 million in financing. 258 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

37 Pursuant to the forbearance agreement, Harbinger agreed to forbear from exercising its rights under the 2007 Transaction Documents until: (i) June 30, 2008 in relation to the Lease Condition; (ii) October 31, 2008 in relation to the Approvals Condition; and (iii) December 31, 2008 in relation to the Mandatory Financing Condition. 38 On June 20, 2008, Harbinger and ACDL amended the April 7, 2008 forbearance extending the date in relation to the Lease Condition to July 15, 2008.

G. Bessemer Investment 39 In July 2008, Harbinger purchased an additional 150,000 common shares at $40 per share. Bessemer then became the third institutional investor in ACDL, making its investment in July 2008. Bessemer purchased 500,000 common shares of ACDL at $40 per share for an aggregate purchase price of $20 million. Like Southpaw, Bessemer conducted due diligence prior to making the investment. 40 The Bessemer Subscription Agreement was very similar to the South- paw subscription agreements. In its agreement, Bessemer specifically acknowledged and agreed that: (a) Bessemer had evaluated ACDL and its investment in the shares and Bessemer had performed due diligence to its satisfaction (s. 4.2(g)); (b) Bessemer had an opportunity to review and access ACDL’s material agreements, including Harbinger’s shareholder rights (s. 4.1(s)); (c) ACDL had provided Bessemer with access to information concerning the Company, the business, the Project and the shares as considered necessary by Bessemer (s. 4.2(e)); (d) there were significant risks associated with the purchase of, and investment in, the common shares of ACDL (s. 4.2(u)); (e) ACDL and any of its subsidiaries could complete additional financings concurrently or in the future in order to develop the business of the Company and to fund its ongoing development and that there is no assurance that such financings will be available and, if available, on reasonable terms; and Southpaw Credit Opportunity Master v. Asian Coast Develop. Ross J. 259

any such future financings may have a dilutive effect on current security holders, including Bessemer (s. 4.2(dd)); (f) Bessemer understood the terms attaching to the Series I and Series II Special Shares of ACDL and that the holder of such shares was entitled to convert such shares to common shares, which conversion would have a dilutive effect (s. 4.2(ee)); (g) ACDL may not be able to proceed with or complete the Project and the Investment Certificate may be revoked if ACDL could not complete additional financings (s. 4.2(ff)); (h) a majority of the voting rights of ACDL were subject to the terms and conditions of the Shareholders’ Agreement (s. 4.2(rr)); and (i) the purchase of the shares of ACDL was a highly speculative investment and that the investment in the shares was suitable only to sophisticated investors and required the financial ability and willingness to accept the possibility of the loss of all or substantially all of Bessemer’s investment (s. 4.2(vv)). 41 In making its investment, Bessemer expressly negotiated for certain additional protection against the risk of dilution. In particular, Bessemer bargained for an anti-dilution protection contained in s. 5.6 of the Besse- mer Subscription Agreement, which provided for certain limited protection during ACDL’s early capital raises (the “Price Protection Clause”). However, this protection was limited in duration and it was subject to certain thresholds. Southpaw did not bargain for any similar protection.

H. World Financial Crisis 42 Between September 2006 and July 2008, ACDL completed approximately nine rounds of financing in which it had raised approximately $78 million. These initial financing rounds included the initial investments placed by Harbinger, Bessemer and Southpaw. 43 However, shortly after ACDL obtained the Investment Certificate in March 2008 and shortly after Bessemer and Southpaw made their respective investments, the world economy went through a financial crisis that culminated in the collapse of Lehman Brothers in September 2008. The financial crisis resulted in a global contraction of credit, and it had a significant effect on ACDL’s ability to raise the necessary debt and equity 260 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

financing. Many of the institutional and private investors that had expressed interest advised that they were no longer interested or were not able to raise the necessary funds. This lack of financing put ACDL into a perilous position, since (i) ACDL had committed to specific milestones for financing to the Government of Vietnam, and (ii) a failure to meet those milestones would place the Investment Certificate, and by extension, the future of the Company at risk. 44 In December 2008, ACDL approached the Government of Vietnam to request certain amendments to the Investment Certificate, in part, as a result of the financial crisis. ACDL sought, among other things, approval to reduce the size and scale of the first phase of the Project (“Phase 1”) and certain changes to the schedule for the Charter Capital contributions. A revised schedule was agreed upon in early July 2009. 45 Bessemer marked down its investment in ACDL by 25% in January 2009. Southpaw similarly marked down its investment, and Southpaw transferred its investment in ACDL to a “side-pocket” that was outside the fund due to its lack of liquidity.

I. Fund Raising 2008 - 2009 46 In April 2009, ACDL, through HTP, entered into a term sheet (the “BIDV Term Sheet”) with a syndicate of Vietnamese banks led by Bank for Investment and Development of Vietnam (“BIDV”), a state-owned commercial bank in Vietnam, to fund approximately 45% of the project costs required for Phase 1 of the Project, in the amount of up to $207 million. In order to secure the BIDV Term Sheet, ACDL committed to raising $230 million of project funding for Phase 1, later reduced to $150 million. The BIDV Term Sheet expired in October 2009, but additional term sheets were re-issued by BIDV on several occasions. 47 In May 2009, ACDL retained two prominent investment banks, Moe- lis & Company (“Moelis”) and Macquarie Group International (“Mac- quarie”), to assist with its efforts to raise equity. Pursuant to these engagements, ACDL was seeking a private placement to generate proceeds of at least $120 million, later increased to $150 million. Starting in the late summer of 2009, Moelis and Macquarie began contacting a long list of strategic and financial investors and qualified high net worth individuals to solicit their interest ACDL. 48 Road shows were held in Asia and North America in September 2009. At these road shows, ACDL met with many potential investors in Southpaw Credit Opportunity Master v. Asian Coast Develop. Ross J. 261

the hopes of securing equity investment in the Project. However, in spite of these efforts, ACDL was unable to attract a committed equity investor. 49 During this period, and throughout the process, ACDL kept Harbin- ger, Bessemer and Southpaw apprised of its marketing activities and the current status of the debt and equity financing process. Southpaw also received periodic updates from Guggenheim, another of the Company’s early financial advisors, on behalf of the Company. ACDL circulated financial statements periodically, and ACDL’s data site remained accessi- ble to investors. 50 On several occasions, ACDL actively solicited Bessemer and South- paw to make an additional investment in the Company. However, from the outset of these events, Mr. Golden advised ACDL that Southpaw was not interested in making any further investment in the Company due to its small fund size and its related inability to take on any additional expo- sure to the Project. Mr. Golden specifically told ACDL’s management that Southpaw could not make anything other than a “token” investment because he and Mr. Wyman were trying to raise money for a new, second fund, but that they were having difficulties in doing so. On cross- examination, Mr. Golden agreed that he had repeatedly declined offers made by ACDL to make an additional investment. 51 By the summer of 2009, Harbinger had agreed to forbear from enforcing its rights and remedies under its agreements with ACDL on a number of occasions. The then current forbearance agreement with Har- binger dated March 20, 2009, required ACDL to satisfy the Mandatory Conversion condition by no later than October 31, 2009. 52 By the summer of 2009, ACDL had not started full-scale construction for Phase 1 of the Project, largely due to its inability to secure the necessary equity funding. There was reason for ACDL to be concerned that if it did not commence construction for Phase 1 in the very near future, the Investment Certificate could be revoked. 53 ACDL’s board actively monitored these events. It met on a regular basis in the first half of 2009 to consider the progress of the equity raise. On several occasions, representatives of Moelis were invited to attend the board’s meetings to provide an update on their financing efforts. At each of these meetings, the board reviewed ACDL’s monthly financial statements and operating budget, including the projected future cash flow with Mr. Shoemaker, and the board was briefed on the increasing pressure to show progress at the site. 262 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

54 To address these concerns, ACDL, through HTP, entered into an agreement with a local Vietnamese construction company in June 2009 for the construction of the piles for Phase 1 of the Project. The cost of the pilings was estimated to be $4.5 million, which was required to be paid no later than November 15, 2009, later extended to December 31, 2009.

J. Harbinger Forbearance 55 As noted above, Harbinger had provided forbearance to ACDL in relation to various defaults under the 2007 Transaction Documents following July 2007. 56 In mid-March, ACDL approached Harbinger for a further forbearance, as the most recent forbearance was set to expire on March 31, 2009. ACDL requested that Harbinger extend its forbearance to Decem- ber 31, 2009. 57 Counsel for Harbinger responded to ACDL’s request advising that the form of the forbearance letter was acceptable, but that there might be a “business ask” if a forbearance was granted. The following day, counsel advised that Harbinger was willing to grant a forbearance but only to October 31, 2009 rather than December 31, 2009 as requested, and that future extensions as necessary would be addressed based on the progress of the equity raise and the state of negotiations as October 31, 2009 approached. 58 Joseph Cleverdon, the Vice President of Investments for Harbinger Capital Partners LLC, was the individual primarily responsible for Har- binger’s investment in ACDL. It was his evidence that he had not determined at that time whether Harbinger would continue to forbear from exercising its contractual rights and that protecting Harbinger’s investment might require it to act on ACDL’s defaults and attempt to recover its investment through bankruptcy and restructuring proceedings. 59 ACDL was also concerned with the possibility that Harbinger might not continue to grant forbearances. Stephen Shoemaker, ACDL’s Chief Financial Officer and President, stated that his view was that there was a substantial risk that Harbinger would move forward and execute because they could have attempted to sell the licence or flip the asset out to someone else after exercising their right. Robert Wolfe, an independent member of the ACDL board of directors at the material time, and Michael Aymong, then Chairman of the Board, expressed similar concerns. Southpaw Credit Opportunity Master v. Asian Coast Develop. Ross J. 263

K. The October 2009 Loan 60 By late July 2009, ACDL faced two significant problems; the need for further forbearance from Harbinger and an urgent need for additional financing. By late July 2009, it was becoming increasingly apparent that ACDL’s equity raising process would not be completed by October 31, 2009, the date that the most recent forbearance agreement with Harbin- ger was set to expire. 61 Up to that point, ACDL’s financial advisors had contacted over 80 potential investors and had entered into non-disclosure agreements with five of those parties. However, ACDL’s searches had not identified a committed investor. Based on their experience, ACDL’s financial advisors believed that it was unlikely that ACDL would receive a term sheet from any of the potential investors for several weeks. Moreover, even if an investor was identified, it would take a number of additional weeks to negotiate the financial terms of a deal and to close a formal transaction. 62 In response to its dwindling cash, ACDL cut expenditures including instituting significant salary deferrals for senior management. These measures, however, were not sufficient and ACDL’s internal budget showed that it would be out of cash by the middle of October and not able to meet its current obligations including payroll. 63 ACDL approached Harbinger to request consideration for bridge financing to give the company room to complete the project equity financing. Mr. Cleverdon reported to Phillip Falcone, the Chief Executive Of- ficer of Harbinger, with respect to this request by e-mail dated July 20, 2009. The e-mail concludes with Mr. Cleverdon’s recommendation: In my view, if you’re at all inclined to provide a bridge, I’d recom- mend doing it as part of a deal to provide (i) redeemable high-interest bridge financing to ACDL to get them through to the project launch, (ii) permanent capital to ACDL that would dilute other equity holders at a very low valuation and (iii) a commitment to provide a nominal amount of the project equity financing on the same terms and conditions as outside investors. 64 In response to ACDL’s inquiries, Harbinger indicated that it was “inclined” to provide the interim funding. On September 25, 2009, Mr. Cleverdon delivered a proposed term sheet to ACDL. Under this term sheet, Harbinger proposed to advance $3 million to ACDL by way of loan, with interest accruing at 20%, calculated monthly with principal and interest payable at maturity three years from issuance. In addition, ACDL would issue to Harbinger a penny warrant to purchase Series II 264 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

Special shares which would be exercisable for 10 years (the “Warrant”). The number of shares subject to the Warrant would be equal to 5% (the “Percentage Entitlement”) of the fully-diluted equity of ACDL as at the date of the Warrant. In the event that the full amount of the loan was not repaid within one year of advance, the Percentage Entitlement would increase to 25%. 65 Mr. Shoemaker consulted with ACDL’s financial advisors at Moelis with respect to the proposal, noting that the Warrant was “punitive in terms of dilution”. ACDL sought to negotiate more favourable terms. During the same timeframe, ACDL approached Harbinger seeking to extend the forbearance to January 31, 2009. 66 Shortly after receiving the term sheet from Harbinger, ACDL’s management identified another complication with the proposed Warrant. ACDL observed that the requested Warrant, if exercised, could arguably trigger the Price Protection Clause in the Bessemer Subscription Agree- ment. If the clause was applicable, ACDL would be required to issue more shares in connection with the Warrant, and the proposed loan would be even more expensive and would further dilute other shareholders. 67 As a result, Mr. Aymong organized a call with Mr. Lester on October 8, 2009. During the call, Mr. Aymong advised Mr. Lester of ACDL’s urgent need to secure interim funding to complete the equity financing process, and Mr. Aymong informed Mr. Lester of the price protection issue. To resolve the issue, ACDL requested that Bessemer either participate in the loan or waive its rights under the Price Protection Clause. John Legge, ACDL’s then chief legal officer, specifically followed up with Bessemer in an e-mail on October 10, 2009, and enclosed the term sheet that ACDL proposed to send to Harbinger. 68 Bessemer responded to ACDL on October 4, 2009. During a call with Mr. Shoemaker, Mr. Lester advised that Bessemer was not prepared to waive its price-protection rights, but was prepared to participate in “half the deal” i.e., Bessemer and Harbinger would each loan $1.5 million on the same terms as set out in the Harbinger proposal. 69 The following day, Mr. Legge delivered a revised term sheet to Mr. Lester reflecting the proposed 50:50 split that was discussed on the call. The material terms were as follows: (a) Harbinger and Bessemer would advance to ACDL, in equal amounts, up to $3 million by way of loan. ACDL would be entitled to draw down on the loan at any time after closing. Southpaw Credit Opportunity Master v. Asian Coast Develop. Ross J. 265

The minimum draw down amount would be $500,000 (the “Minimum Draw Down Amount”). Interest would accrue at 20% per annum; (b) ACDL’s existing security agreement with Harbinger would be amended so that Harbinger’s loan would be secured, and ACDL would enter into a new security agreement with Bessemer; and (c) ACDL would issue to each of Harbinger and Bessemer a warrant to purchase Series II Special shares (Harbinger) and common shares (Bessemer) for nominal consideration which would be exercisable for five years. The number of shares subject to the warrant would be equal to 0.25% for each of Harbinger and Bessemer for each Minimum Draw Down Amount advanced by them of the fully-diluted equity of ACDL as at the date of issue of the warrants. In the event that the loan was not repaid within one year, the Per- centage Entitlement would increase from 0.25% for each Minimum Draw Down Amount advanced to 2%. 70 Shortly after sending the proposed term sheet to Bessemer, Mr. Legge e-mailed Mr. Cleverdon to advise him of the issues raised by Harbinger’s request for the Warrant, and explained that ACDL had asked Bessemer to waive its price protection rights, but that Bessemer had declined to do so, preferring to participate in “half the deal”. Mr. Legge concluded by stating that he assumed that Harbinger would have “no difficulty” participating with Bessemer in the manner suggested. Mr. Aymong later followed up with Mr. Cleverdon, encouraging him to do the deal with Bessemer. 71 Mr. Cleverdon responded with some reluctance, raising questions with respect to the mechanics of Bessemer’s Price Protection clause and expressing concern that Bessemer was seeking to participate on a 50/50 basis rather than pro rata. 72 On October 21, 2009, Mr. Lester forwarded Bessemer’s revisions to the draft term sheet to ACDL. In particular, Bessemer sought to have the note secured by a “senior lien” over ACDL’s assets, effectively giving Bessemer access to Harbinger’s existing security. 73 The terms proposed by Bessemer were not acceptable to Harbinger. It was not prepared to share its security over the assets of the company. Mr. 266 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

Cleverdon deposed the following concerning his thought process at the time: After considering the implications of the different structures discussed, I concluded that it not in Harbinger’s best interests as a shareholder to agree to a transaction pursuant to which Harbinger would share security over ACDL’s assets, be diluted by Bessemer’s presence in a senior loan in the Company’s capital structure, and have to share decision making with Bessemer regarding the new loan. ACDL had already been in repeated default under the terms of the 2007 Transaction Documents and in my view there was a substantial possibility that Harbinger would need to realize upon its security if the Company failed to obtain Project financing again. A 50/50 split with Bessemer would introduce uncertainty as to the decision making under the loan and the outcome of any insolvency proceeding. Given the situation then facing the Company, that it faced imminent insolvency and was possibly already insolvent, reducing and complicating Harbinger’s rights would damage Harbinger’s interests and those of its investors. 74 By e-mail dated October 22, 2009, Mr. Cleverdon advised ACDL that: Thank you John — I’m doing a call with counsel tomorrow morning to discuss and should be back to you thereafter with a response. Given the complication of the down round clause in the Bessemer subscription agreement, I’m inclined to forego the warrant. However, given the venture/speculative nature of a new money investment at this stage i.e. prior to having project financing locked up, we’ll still need to provide for a commensurate return. Will circle back tomorrow. 75 By e-mail dated October 26, 2009, Mr. Cleverdon recommended to Mr. Falcone that Harbinger proceed with the no warrant high redemption price loan and grant the forbearance. The e-mail stated in part: Abandon the warrant concept in favor of a straight loan with high redemption price or a deep OID. To avoid the need for Bessemer’s consent but still provide us a return commensurate with the risk, I think it makes sense to abandon the warrant concept and instead propose a loan with either a high redemption price (thinking minimum 2x investment amount and increasing 0.5-ix per year after the first year or two) or a deep OID (thinking purchase price of 15-20% of face) on a 5 year loan. Over five years this would provide us a 30- 40% IRR. ... Southpaw Credit Opportunity Master v. Asian Coast Develop. Ross J. 267

Tie forbearance to new loan to justify higher rate of return. Obvi- ously it makes sense to grant the request, but I think it would be prudent to tie the forbearance to the new loan discussed in A above in order to give the board cover that a high rate of return is justified; will be easier for them from a fiduciary perspective if we’re both providing new capital and granting the request in exchange for the rate of return, rather than just providing new capital. 76 On October 27, 2009, Mr. Legge followed up on his earlier request for Harbinger to agree to a further forbearance. 77 The ACDL board of directors were briefed with respect to the situation at the meeting on October 28, 2009. The minutes record: INTERIM LOAN FROM HARBINGER As indicated by Mr. Shoemaker the Corporation requires additional monies to cover operating and development costs. John Legge reminded the Board: (a) That Harbinger’s forbearance agreement expires on October 31, 2009; (b) As to the various consequences of failing to satisfy the various conditions under the Corporation’s agreements with Har- binger; and (c) Historically Harbinger has been prepared to provided additional forbearance agreements but there is no guarantee that they will do so indefinitely Messrs. Shoemaker and Aymong are going to approach Harbinger for additional funding and request a further forbearance agreement. 78 By e-mail dated October 28, 2009, Mr. Cleverdon responded to ACDL advising that Harbinger would agree to forbear simultaneous with providing the loan. 79 The following day, ACDL received a revised term sheet from Harbin- ger that eliminated the Warrant. The loan proposed a $3 million advance with no minimum advances. The Transaction Premium, essentially the interest rate, ranged from 1.5 times principal, if repaid on the second anniversary, to 5.41 times principal, if repaid on the fifth anniversary. In his covering e-mail, Mr. Cleverdon stated that in exchange for the forbearance and the new funding, Harbinger would need a higher rate of return that was “appropriate for forbearance transactions and speculative investments of this kind”. 268 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

80 Pursuant to this proposal, Mr. Cleverdon also sent ACDL a revised forbearance letter that Harbinger would sign in conjunction with the completion of the interim loan. 81 By e-mail dated October 30, 2009, Mr. Cleverdon confirmed that Harbinger would fund the loan on an exclusive basis in a single com- bined transaction with the forbearance expressly contingent upon the funding. 82 ACDL sought to secure better terms from Harbinger. Revised term sheets were exchanged on November 4 and 9, 2009. ACDL did not, however, go back to Bessemer. The petitioners contend that management was negligent in failing to do so. 83 On November 22, 2009, ACDL convened a meeting of the board to consider the proposed transaction, particularly in light of ACDL’s need for cash to maintain operations as a going concern. At this meeting, ACDL’s management recommended to the board that ACDL accept the interim funding from Harbinger based on the November 9 term sheet. The revised terms were as follows: (a) the loan would be due five years after the closing date; (b) if the loan was repaid on maturity, the transaction premium would be 4.875 times the principal (i.e., $14.625 million); (c) the earliest the loan could be repaid was two years after the closing date. If the loan was repaid on this date the transaction premium would be 1.25 times the principal (i.e., $3.75 million); (d) the loan would be secured by a general security agreement over all of ACDL’s assets; and (e) Harbinger would agree to a further forbearance of its rights under various existing agreements with ACDL until Janu- ary 31, 2010. 84 ACDL’s board of directors approved the terms of the proposed transaction at a meeting held November 22, 2009. The minutes record: Management is recommending that the Corporation proceed with the loan on the basis of the conditions set out in the revised Term Sheet for the following reasons: (a) While the proposed interest rate is very high it is likely that the Corporation is better off with a higher interest rate rather than the 5% Penny Warrant (which would be highly dilutive): and Southpaw Credit Opportunity Master v. Asian Coast Develop. Ross J. 269

(b) The Corporation needs a further forbearance from Harbinger or it will be in default of the Shareholders Agreement. If this occurs then Harbinger is in a position to demand repayment of $25 million (plus interest). Based on the above information, the Board authorized Management to enter into the loan agreement with Harbinger on the above terms.

L. Discussions after the Bridge Loan 85 In November 2009, Mr. Legge advised Mr. Lester that Harbinger had taken care of the loan and that it had been done without the issue of warrants. There was no further discussion about the terms. The documentation was placed on the ACDL website and was available for review by Southpaw and Bessemer although it appears that the documents might not have been reviewed by Southpaw or Bessemer management at any relevant times. 86 Mr. Lester deposed that he advised Mr. Aymong in the fall of 2009 that Bessemer would be interested in investing a further $5 million as part of the equity raise. He then advised Mr. Aymong that he would require board approval for this. He deposed that this was not the case, that he made the statement that he required board approval to provide him with an excuse not to go forward if other investors were not stepping up. 87 The next event was a conference call involving Messrs. Lester, Aymong and Shoemaker. Mr. Lester made no reference to the call in his first affidavit. Mr. Aymong deposed that: I recall participating in a conference call with Lester and Stephen Shoemaker several days later in which Lester advised us that the Bessemer investment committee had rejected his proposal. I believe Lester used the words “hell no” to describe the reaction of the Besse- mer investment committee. Lester stated that the investment committee questioned why Bessemer had made the initial investment in ACDL in the first place, given that Bessemer usually invested in pub- licly traded companies and that ACDL was an unusual investment that carried significant risk. As a result, Lester told me at that time that Bessemer was not prepared to make any additional investment in ACDL at any amount. 88 Mr. Shoemaker’s evidence was to the same effect. He deposed: A conference call with Lester was held on December 16, 2009. Les- ter advised ACDL on the call that he had taken his proposal to Besse- mer’s board of directors for approval but that the request had been flatly rejected. I recall this discussion vividly. Lester stated that his 270 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

request was met with a “hell no” from the Bessemer board of directors. In fact, Lester told us that the board of directors wanted to know why he had made the initial investment in ACDL to begin with. 89 Mr. Lester then swore affidavit #3 in which he stated the following with respect to his now refreshed recollection concerning this conversation: On December 14, 2009, I sent an email to Messrs. Aymong and Shoemaker (attached as Exhibit 20 to my first affidavit) stating that I wanted to update them on my discussions with my “Board of Direc- tors”. In fact, I did not have any such discussions with a board, nor was I obliged to seek approval from anyone to make a loan or a further equity investment in the company. I now recall the telephone discussion with Messrs Aymong and Shoemaker on December 16, 2009 as follows. I believe that I told Messrs Aymong and Shoemaker that I had met with my board and that they were negative about the investment and that they were not prepared to participate in the equity raise. I may well have said that my board was questioning why the investment had been made in the first place. I did not say that the board’s reaction to a further equity investment was “hell no” or that it would not do so under any circumstances. 90 ACDL took Mr. Lester’s statements at face value and concluded that Bessemer’s board was directly involved in the matter and that the board had rejected any further investment in the company in whatever form. 91 ACDL also sought additional investment from Southpaw. However, these overtures were rejected. ACDL was told that Southpaw was not prepared to invest anything further beyond a “token”. ACDL’s management concluded that Southpaw was not prepared to make further investment of any form.

M. January 2010 Loan 92 In late December 2009, ACDL retained a new financial advisor, Pac- Bridge Partners (HK) Limited (“PacBridge”), to represent ACDL in its efforts to raise the equity necessary to finance Phase 1 of the Project. ACDL retained PacBridge in light of its extensive experience in Asia, as well the fact that PacBridge was optimistic that it could find investors who would be interested in a preferred equity type of financing. 93 However, in late 2009 and early 2010, ACDL experienced a number of negative developments in Vietnam, each of which put the future of the Project in further jeopardy. Southpaw Credit Opportunity Master v. Asian Coast Develop. Ross J. 271

94 ACDL had also recently received a notice from the BRVT tax depart- ment that HTP was required to repay an approximately $2.2 million value added tax (“VAT”) refund that HTP had earlier received, plus a penalty of 10%. Neither ACDL, nor HTP, had the funds to repay these amounts. The tax authorities demanded payment by December 28, 2009 and the amount was required to be repaid immediately under the laws of Vietnam. 95 In light of these negative developments, ACDL’s management determined in early 2010 that the funds that had been advanced to ACDL under the October 2009 Loan would not be sufficient to cover ACDL through to the completion of the equity financing. ACDL’s management further concluded that without a further infusion of cash, ACDL would likely run out of money again and be rendered insolvent. Under the circumstances, ACDL’s management decided to approach Harbinger to as- certain whether it would be willing to provide additional interim financing. 96 Accordingly, ACDL initiated contact with Harbinger in early Janu- ary. Several days later, Harbinger advised that it was prepared to advance additional interim financing of $12.5 million by way of a loan to bridge ACDL until it could complete the equity financing. In addition, Harbin- ger would agree to a further forbearance of its rights under its various agreements with ACDL until May 31, 2010, later extended, on the condition that ACDL issue a warrant in favour of Harbinger to purchase that number of common shares of ACDL which represented 29% of the fully- diluted equity as at that time. 97 While ACDL did canvass without success other possible sources for an interim loan, it did not approach either Southpaw or Bessemer with this request. The petitioners assert that this omission was negligent on the part of ACDL’s management. 98 The Harbinger proposal was presented to the ACDL board at a meeting held on January 21, 2010. The minutes record: 4. INTERIM LOAN AGREEMENT WITH HARBINGER CAPITAL PARTNERS The Board was advised that the: (a) Corporation has a financial obligation to its piling contractor in Vietnam, which had to be paid by January 31, 2010, and that should this not occur there was a risk of very significant adverse consequences. The amount outstanding to the contractor was approximately 13.8 million; 272 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

(b) Corporation needed monies to continue with its financing efforts and to close the financing; (c) Corporation’s largest shareholder, Harbinger Capital Partners (“Harbinger”), was prepared in loan the Corporation 12.5 million, on terms that were outlined; (d) This loan would be sufficient to satisfy the Corporation’s outstanding short term obligations and allow the Corporation to continue with its financing efforts; (e) In the circumstances, it was highly unlikely that the Corpora- tion could obtain interim funding from an entity other than Harbinger; and (f) The proposal from Harbinger was the only viable alternative in the circumstances; Bob Wolfe moved that management use its best efforts to negotiate an agreement with Harbinger for the interim loan along the terms outlined to the Board and that it is entitled to execute the agreement David Tsubouchi seconded the motion. Motion carried. 99 After further discussions and negotiations, ACDL entered into two binding term sheets (the “January Term Sheets”) with Harbinger, through two of its subsidiaries, Harbinger Master Fund and Harbinger Situation Fund (together, the “Harbinger Funds”), on January 28, 2010. Pursuant to the financing term sheet (the “January Financing Term Sheet”), Har- binger agreed to advance the sum of $12.5 million to ACDL by way of loan on the following terms: (a) Harbinger would advance $12.5 million to ACDL on closing. The loan would be due eight years after the closing; (b) ACDL would enter into an employment agreement with a new chief executive officer acceptable to Harbinger and reduce annual overhead expenses by $1 million per year by March 15, 2010 (together, the “Inside Date Conditions”); (c) ACDL would need to consummate equity and debt financing sufficient to fund 100% of the development, construction and pre-opening costs and working capital requirements for Phase 1 of the Project and obtain the necessary amendments to the Investment Certificate to provide for the delayed Charter Capital contributions and construction schedule by June 30, 2010 (together, the “Outside Date Conditions”); Southpaw Credit Opportunity Master v. Asian Coast Develop. Ross J. 273

(d) the Transaction Premium, which is essentially interest, at maturity would be 41.735 times the principal. However, if the Inside Date Conditions were met by ACDL, the Trans- action Premium at maturity would be reduced to 24.629. If both the Inside Date Conditions and Outside Date Condi- tions were met by ACDL, the Transaction Premium at maturity would set to 7.157; (e) the loan could be repaid prior to maturity starting with the fifth anniversary. If repaid on the fifth anniversary, the Transaction Premium would be 2.713 times the principal. If repaid on the sixth anniversary, the Transaction Premium would be 3.827 times the principal. If repaid on the seventh anniversary, the Transaction Premium would be 5.275 times the principal; (f) if the Outside Date Conditions were met, but the inside Conditions were not met, the loan terms would automatically be modified so that the January Transaction Premium at maturity would set to 18.541 and the loan would be re- purchasable prior to maturity upon the seventh anniversary at a Transaction Premium of 12.476; and (g) the loan would be secured by a general security agreement over all of ACDL’s assets. 100 Because of the urgent need to pay the piling contractor, ACDL secured a further obligation from Harbinger to advance $5 million to ACDL immediately, prior to the execution of definitive documentation, with the balance advanced upon closing. 101 Concurrently with the January Financing Forbearance Sheet, ACDL also entered into a binding forbearance term sheet (the “January Financ- ing Forbearance Term Sheet”) with Harbinger and the Principal Share- holders pursuant to which Harbinger agreed to forbear from exercising its rights as a result of certain existing and impending defaults under the 2007 Shareholders’ Agreement until June 30, 2010. In consideration for this forbearance, the parties agreed that ACDL would execute and place into escrow an undated warrant in favour of Harbinger to purchase that number of common shares of ACDL which represented 29% of the fully- diluted equity as of January 27, 2010. The strike price of the warrant was set at $40 per share. The January Forbearance Term Sheet provided that if Phase 1 of the Project was completed and if ACDL completed a financing or series of financings in which a minimum of $60 million of 274 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

equity proceeds was received by ACDL, the strike price would automatically change to $0.01 per share on the earlier of two specified dates. The January Forbearance Term Sheet also provided that if ACDL did not complete the financing within three years, the warrant would be cancelled and nullified. 102 Harbinger advanced $5 million to ACDL on January 29, 2010. The parties subsequently finalized the terms of the bridge financing loan agreement (the “January Loan Agreement”) and forbearance agreement (the “January Forbearance Agreement”) in April 2010, effective January 29, 2010 (collectively as the “January 2010 Loan”). The January Loan Agreement incorporated the binding terms of the January Financing Term Sheet, including the Inside Date and Outside Date Conditions, as well as adding certain other conditions. Included among those other conditions was the appointment of Mr. Wolfe as Chairman of the Board. The January Forbearance Agreement incorporated the binding terms of the January Forbearance Term Sheet.

N. Spring 2010 - Restructuring 103 ACDL recognized that Harbinger’s equity and debt interests in the Company would likely need to be restructured. Shortly before the term sheets were finalized, PacBridge, ACDL’s financial advisor, had expressed concern that the terms might negatively impact the Company’s equity raising efforts. PacBridge repeated these concerns in early Febru- ary with even greater force. Accordingly, PacBridge encouraged ACDL to meet with Harbinger to confirm that it would be amenable to a restructuring. ACDL’s management shared similar concerns. 104 As a result, ACDL approached Harbinger on several occasions in the spring of 2010 to request that it restructure the October 2009 Loan and the January 2010 Loan and Harbinger’s other interests. Mr. Cleverdon advised ACDL that Harbinger would be prepared to do so, but only as part of the equity being raised for the Project financing and only after a new CEO of ACDL had been appointed. 105 By early March 2010, almost two years had passed since ACDL had been granted the Investment Certificate. However, despite its efforts, ACDL had still not been able to raise the required equity. Aside from the piling work that had been commenced in mid-2009, very little construction was taking place on the Project site. The $2.2 million VAT refund was due to be repaid. Southpaw Credit Opportunity Master v. Asian Coast Develop. Ross J. 275

106 Given these developments, ACDL determined that it was imperative for ACDL to take steps to improve the situation. Accordingly, ACDL approached Harbinger to request a second early advance of monies in the amount of $2.5 million under the January 2010 Loan to repay the VAT refund. With the benefit of these funds, ACDL repaid the VAT refund in early April 2010. 107 During May and June 2010, PacBridge contacted over 60 institutional and high net worth investors. PacBridge convened road shows in London, Hong Kong, Singapore and New York, coupled with a series of on-site diligence and site visit meetings with various financial and strategic investors. 108 While the search for equity investors continued, ACDL was receiving considerable pressure to complete the equity financing by July 31, 2010. In particular, ACDL was subject to the following developments: (a) BIDV had repeatedly advised ACDL and its advisors that it would withdraw its commitment to advance the debt financing if ACDL did not raise the $125 million in equity financing by July 31, 2010. (b) ACDL’s Vietnamese advisors had repeatedly advised ACDL that there was a significant likelihood that ACDL would lose the Investment Certificate if the remaining $50 million Charter Capital contribution was not deposited by July 31, 2010. (c) ACDL was required under various agreements with Har- binger to satisfy the Mandatory Conversion condition by June 30, 2010, failing which ACDL would be in default under those agreements. (d) ACDL was once again close to reaching the point where its outstanding obligations would exceed its cash liquidity. 109 In light of these developments, ACDL’s management determined that it was imperative for ACDL to close a financing to develop Phase 1 of the Project by the deadline of July 31, 2010. 110 Harbinger was conscious of the need to restructure the debt in order to complete the equity raise. On April 10, 2010, Mr. Cleverdon sent an e- mail to Mr. Falcone providing him with an update. In respect of the equity raise process, he said this: Also, it was my view that, given the straightjacket we placed on the company in the last couple of financings, Harbinger would need to 276 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

restructure to some degree our preferred stock and debt positions in the company to help attract third party equity. I’ve been giving some thought to how this ought to look and will send you my views when I have specifics worked out. Needless to say, it will need to be a good trade for Harbinger, it will need to further dilute existing equity holders, and we may want to consider retaining a fixed claim of some sort to maintain seniority over the other existing equity or new equity. 111 Mr. Cleverdon followed up with further e-mail exchanges with Mr. Falcone on May 13 and May 19, 2010 which emphasized the need for restructuring to “clear a path for third party financing”. Mr. Cleverdon indicated that he was working out a plan for restructuring that would improve Harbinger’s position. 112 By June 2010, ACDL had received non-binding term sheets from potential investors. Potential investors had urged ACDL to pursue a restructuring of Harbinger’s interests. ACDL’s financial advisors had continued to emphasize that without restructuring, the Harbinger loans were an impediment to attracting investors. ACDL approached Harbinger and entered discussions with respect to the terms of a potential restructuring. 113 On June 22, 2010, Harbinger provided a term sheet proposal for the restructuring of its debt and equity interests. The term sheet contemplated that certain of Harbinger’s interests in ACDL would be consoli- dated into a new series of preferred equity shares (the “Series III Special Shares”). As part of Harbinger’s proposal, ACDL’s cash balance would be increased by $2.5 million of cash in order to permit the Company to continue to fund operations. Harbinger’s proposal did not contemplate a renegotiation of the monies advanced under the January 2010 Loan. 114 Harbinger’s proposal was presented to the ACDL board of directors at a meeting on June 30, 2010. Brian McCullough and Jeremy Choy from PacBridge discussed the proposal and expressed the view that the proposal as outlined was reasonable. They did not believe that it would interfere with the company’s ability to market a preferred share offering. ACDL management recommended that it be instructed to move forward with the proposal and the board directed management to do so. 115 A further meeting of the board of ACDL was held on July 4, 2010. The board was informed that the Prime Minister of Vietnam had confirmed that the project had the full support of the government so long as the corporation funded the equity required to develop the MGM Grand Ho Tram by July 31 and continued construction on the site. Two major investors had expressed an interest in the Project. However, the board Southpaw Credit Opportunity Master v. Asian Coast Develop. Ross J. 277 was further advised that neither would be in a position to close by July 31. The minutes record: Given that it is now July 5th it seems highly unlikely that the Corpo- ration can negotiate and close an equity financing with the potential investors other than Harbinger by July 31st. However, Management continues to explore every avenue and possibility of raising the required equity. 9. HARBINGER’S POSITION Management has advised Harbinger that the Corporation has agreed to the renegotiation of their existing investments into a new preferred equity (the “Harbinger Transactions”). Outside counsel for both parties are working on the necessary documentation. Management has also advised Harbinger that: (a) given ______position (i.e., they need 2 to 3 months to close) we are not in a position to close the ... financing by July 31st; and (b) we will be sending them a request to provide the terms on which Harbinger would fund the $150M; Mr. Cleverdon was non-committal on the funding of the equity. Man- agement will attempt to determine as quickly as possible if Harbinger is prepared to fund the required equity and if so, on what terms. 11. MOVING FORWARD Management is recommending to the Board that the Corporation send a written request to Harbinger: (a) asking them to confirm that they will fund the $150M in equity by July 31st and the terms on which they would be prepared to do so; and (b) confirming that it will allow the Corporation to continue to pursue the other investors and either bring them into the July 31 closing or sell down to them after that financing closes. The hope is that if the Corporation could close one of the other deals in the next few months then it could preserve more of the existing equity than if Harbinger is to fund on its own. Management sees no alternative to making this request at this time. If the Corporation delays pursuing a Harbinger funded equity investment there is a significant risk that the Corporation will not close by July 31st and that this will very likely result in the Corporation losing the Investment Certificate. 278 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

116 On July 12, 2010, following further negotiations between Harbinger and ACDL, Harbinger presented ACDL with a revised proposal for the restructuring of its debt and equity interests. Under the revised proposal, Harbinger would effectuate two separate transactions: Harbinger would purchase new preferred equity in the form of Series III Special Shares, and separately, Harbinger would sell to ACDL all of Harbinger’s debt and fixed claim instruments in ACDL, including the monies advanced to ACDL under the January 2010 Loan, and the Initial Harbinger Warrant. 117 Harbinger’s proposal was presented to the ACDL board at a meeting on July 13, 2010. ACDL management recommended that the board approve the restructuring proposal. The board accepted this recommendation. 118 ACDL and Harbinger entered into a series of concurrent transactions on July 13, 2010 (the “July Restructuring”) to effect the issuance of the new Series III Special Shares, including the entering into of a further subscription agreement (the “Sixth Harbinger Subscription Agreement”) and a purchase agreement (the “July Purchase Agreement”). Pursuant to the Sixth Harbinger Subscription Agreement, Harbinger acquired 588,615 newly created Series III Special Shares at $100 per share for aggregate gross proceeds of $58,861,500. The parties agreed that $3.5 million of the proceeds received from Harbinger in the Sixth Harbinger Subscription Agreement would be used to fund ACDL’s emergency cash flow needs, including payment of employee salaries. Using the remain- der of the proceeds received from Harbinger, ACDL agreed to repurchase Harbinger’s 250,000 Series I Shares, Harbinger’s initial warrant, Harbinger’s interest in the $3 million loan from the October 2009 Loan and Harbinger’s interest in the $12.5 million loan from the January 2010 Loan. 119 Pursuant to these transactions, ACDL repurchased Harbinger’s interest in the October 2009 Loan for $3,895,890 equivalent to a transaction premium of 0.3 times the principal and Harbinger’s interest in the Janu- ary 2010 Loan for $15,060,110 equivalent to a transaction premium of 0.2 times the principal. ACDL’s actual interest payments in respect of these loans were now approximately 20% to 30%, or roughly within the same order of magnitude as the original Bessemer proposal in connection with the October 2009 Loan. 120 Finally, as part of these transactions, ACDL cancelled the Series I Shares and the warrants. Pursuant to the July Purchase Agreement, Har- binger released HTP from its obligations under the Capital Mortgage and Southpaw Credit Opportunity Master v. Asian Coast Develop. Ross J. 279

the Put Option Agreement with a view to facilitating anticipated financing with BIDV.

O. July 2010 Transaction 121 ACDL had continued efforts to complete the equity financing process. However, by mid-July it became clear that the investors who had signalled an interest were not in a position to close prior to July 31, 2010. Management advised the board at a meeting held on July 22, 2010 that the interested investors were not in a position to close by the deadline and that Harbinger’s proposed investment continued to be the only available option for the company to satisfy the funding requirements by the deadline. Management advised that “there is no other source for these funds”. The board was instructed that Harbinger was prepared to provide the necessary Charter Capital ($50 million) by way of a loan coupled with warrants for the purchase of common shares. The board instructed management to proceed with the proposed transaction. 122 On July 23, 2010, ACDL provided an update to Southpaw’s U.S. counsel, Mr. Brett Lawrence on the equity raise and the approaching deadline in Vietnam. ACDL reported that it was negotiating an equity transaction with Harbinger, and that Harbinger was seeking a warrant that would carry significant dilution (up to 95%). Mr. Lawrence under- took to update Bessemer as well. ACDL advised that it would be a few days before the transaction was finalized. However, given their past re- jections of ACDL’s solicitations, ACDL did not expect that either Besse- mer or Southpaw would seek to participate in the transaction. Bessemer and Southpaw did not express any interest in providing the required equity financing, or in acquiring Harbinger’s positions. 123 ACDL proceeded to negotiate the terms of a transaction with Harbin- ger over the latter half of July which contemplated that Harbinger would advance the sum of $50 million upon closing and a deferred amount of $75 million in later instalments. The parties exchanged proposals, and after some improvements, Harbinger put forward a revised “take it or leave it” offer on July 25, 2010. Harbinger’s revised proposal contemplated a $125 million loan, with $50 million being advanced to ACDL immediately to satisfy the Charter Capital contribution. The interest on the loan would be calculated at 7.5% per quarter compounded quarterly, and the rate would increase to 8.75% per quarter upon the occurrence of an event of default. In consideration for making the new financing avail- 280 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

able, ACDL would issue warrants to Harbinger to purchase 250 million common shares of ACDL at $0.01 per share exercisable for 20 years. 124 Effective on July 27, 2010, ACDL entered into a loan agreement (the “July Loan Agreement”) with Blue Line, Breakaway ACDL and Harbin- ger whereupon Harbinger agreed to provide the sum of $125 million in financing to the Company on the terms described above. In consideration for entering the financing commitments under the July Loan Agreement, ACDL issued Harbinger certain warrants for the purchase of 250 million common shares of the Company at $0.01 per share exercisable for 20 years. 125 Upon execution of the July Loan Agreement, the $50 million advanced to ACDL was immediately deposited into HTP’s charter capital account to satisfy the Charter Capital contribution. As a result, ACDL was able to maintain its Investment Certificate. After receipt of the funds, ACDL was able to commence full-scale construction at the site. 126 On or about May 26, 2011, Harbinger exercised its warrants. ACDL had no participation in this decision. All shareholders of ACDL were significantly diluted through the exercise of the warrants. Prior to the Octo- ber 2009 Loan, the petitioners held approximately 8.4% of the fully diluted equity. After the exercise of the warrants, the petitioners’ share was reduced to .4% of the company. 127 On May 26, 2011, ACDL was able to secure an additional equity investor for the Project. The investor entered into a subscription agreement with ACDL to acquire a 26% interest for a $95 million investment. It further agreed to enter into a management agreement through 2058 for the second resort of the project.

IV. Legal Principles 128 The petitioners seek relief pursuant to s. 241 of the CBCA which provides: 241. (1) A complainant may apply to a court for an order under this section. (2) If, on an application under subsection (1), the court is satisfied that in respect of a corporation or any of its affiliates (a) any act or omission of the corporation or any of its affiliates effects a result, (b) the business or affairs of the corporation or any of its affiliates are or have been carried on or conducted in a manner, or Southpaw Credit Opportunity Master v. Asian Coast Develop. Ross J. 281

(c) the powers of the directors of the corporation or any of its affiliates are or have been exercised in a manner that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer, the court may make an order to rectify the matters complained of. 129 The legal principles to be applied in relation to a claim of oppression were described in BCE Inc., Re, 2008 SCC 69 (S.C.C.). The duties of directors of a corporation were described by the Court at para. 36: The directors are responsible for the governance of the corporation. In the performance of this role, the directors are subject to two duties: a fiduciary duty to the corporation under s. 122(1)(a) (the fiduciary duty); and a duty to exercise the care, diligence and skill of a reasonably prudent person in comparable circumstances under s. 122(1)(b) (the duty of care). 130 In the present case the petitioners allege a breach of the duty of care of the officers and directors of ACDL. 131 The court described the “business judgment rule” at para. 40: In considering what is in the best interests of the corporation, directors may look to the interests of, inter alia, shareholders, employees, creditors, consumers, governments and the environment to inform their decisions. Courts should give appropriate deference to the business judgment of directors who take into account these ancillary interests, as reflected by the business judgment rule. The “business judgment rule” accords deference to a business decision, so long as it lies within a range of reasonable alternatives: see Maple Leaf Foods Inc. v. Schneider Corp. (1998), 42 O.R. (3d) 177 (C.A.); Kerr v. Danier Leather Inc., [2007] 3 S.C.R. 331, 2007 SCC 44. It reflects the reality that directors, who are mandated under s. 102(1) of the CBCA to manage the corporation’s business and affairs, are often better suited to determine what is in the best interests of the corporation. This applies to decisions on stakeholders’ interests, as much as other directorial decisions. 132 The petitioners submit, however, that this case does not engage the business judgment rule because the conduct at issue was a failure to meet the standard of care, in particular, a failure to explore the appropriate alternatives before reaching a business decision. 133 The court noted at paras. 58 and 59 that oppression is an equitable remedy. The focus of the court should be at business realities not narrow legalities. The inquiry must be contextual and fact specific. 282 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

134 In considering an oppression claim, the court is to first consider whether there has been a breach of reasonable expectations. In this regard, the Court noted at para. 62: As denoted by “reasonable”, the concept of reasonable expectations is objective and contextual. The actual expectation of a particular stakeholder is not conclusive. In the context of whether it would be “just and equitable” to grant a remedy, the question is whether the expectation is reasonable having regard to the facts of the specific case, the relationships at issue, and the entire context, including the fact that there may be conflicting claims and expectations. 135 The Court continued at paras. 70 and 72: At the outset, the claimant must identify the expectations that he or she claims have been violated by the conduct at issue and establish that the expectations were reasonably held. As stated above, it may be readily inferred that a stakeholder has a reasonable expectation of fair treatment. However, oppression, as discussed, generally turns on particular expectations arising in particular situations. The question becomes whether the claimant stakeholder reasonably held the particular expectation. Evidence of an expectation may take many forms depending on the facts of the case. ... Factors that emerge from the case law that are useful in determining whether a reasonable expectation exists include: general commercial practice; the nature of the corporation; the relationship between the parties; past practice; steps the claimant could have taken to protect itself; representations and agreements; and the fair resolution of conflicting interests between corporate stakeholders. 136 The next question to be addressed is whether the reasonable expectation was violated by conduct falling within the terms “oppression”, “unfair prejudice” or “unfair disregard” of a relevant interest. In relation to this inquiry, the Court stated at paras. 89 and 91: Thus far we have discussed how a claimant establishes the first element of an action for oppression — a reasonable expectation that he or she would be treated in a certain way. However, to complete a claim for oppression, the claimant must show that the failure to meet this expectation involved unfair conduct and prejudicial consequences within s. 241 of the CBCA. Not every failure to meet a reasonable expectation will give rise to the equitable considerations that ground actions for oppression. The court must be satisfied that the conduct falls within the concepts of “oppression”, “unfair prejudice” or “unfair disregard” of the claimant’s interest, within the meaning of Southpaw Credit Opportunity Master v. Asian Coast Develop. Ross J. 283

s. 241 of the CBCA. Viewed in this way, the reasonable expectations analysis that is the theoretical foundation of the oppression remedy, and the particular types of conduct described in s. 241, may be seen as complementary, rather than representing alternative approaches to the oppression remedy, as has sometimes been supposed. Together, they offer a complete picture of conduct that is unjust and inequita- ble, to return to the language of Ebrahimi. ... The concepts of oppression, unfair prejudice and unfairly disregard- ing relevant interests are adjectival. They indicate the type of wrong or conduct that the oppression remedy of s. 241 of the CBCA is aimed at. However, they do not represent watertight compartments, and often overlap and intermingle. 137 Finally, the Court emphasized that causation is a necessary element of the claims, stating at para. 90: In most cases, proof of a reasonable expectation will be tied up with one or more of the concepts of oppression, unfair prejudice, or unfair disregard of interests set out in s. 241, and the two prongs will in fact merge. Nevertheless, it is worth stating that as in any action in equity, wrongful conduct, causation and compensable injury must be established in a claim for oppression.

V. Claim Against Acdl 138 The amended petition seeks: 1. an Order declaring that the affairs of the respondent, Asian Coast Development (Canada) Ltd. (“Asian Coast” or “the company”), are being and have been conducted, and that the powers of the directors of Asian Coast are being and have been exercised, in a manner oppressive to the shareholders of Asian Coast, including the petitioners; 2. an Order declaring that the following series of transactions: (a) a Loan and Forbearance Agreement between Asian Coast and the respondent, Harbinger Capital Invest- ments S.`a.r.l., dated October 31, 2009; (b) a Bridge Loan Financing Agreement between Asian Coast and the respondents, Harbinger Capital Invest- ments S.`a.r.l., Harbinger Capital Partners Master Fund I, Ltd. and Harbinger Capital Partners Special Situations Fund, L.P., dated January 29, 2010; 284 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

(c) a Share Subscription Agreement dated July 13, 2010 whereby Asian Coast issued 588,615 Series 111 Special Shares to Harbinger Capital Investments S.à.r.l. at a price of $100 per share; (d) a Purchase Agreement between Asian Coast and Harbinger Capital Investments S.à.r.l., Harbinger Capital Partners Master Fund I, Ltd. and Harbinger Capital Partners Special Situations Fund, L.P. dated July 13, 2010 whereby Asian Coast agreed to use approximately $55 million of the proceeds from the Subscription Agreement dated July 13, 2010 to acquire inter alia the indebtedness under the Loan and Forbearance Agreement dated October 31, 2010 and the Bridge Loan Financing Agreement dated January 29, 2010; and (e) a Loan Agreement between Asian Coast and Harbin- ger Capital Investments S.à.r.l., Blue Line ACDL, Inc., and Breakaway ACDL, Inc. dated July 27, 2010, part of the consideration being the issuance of warrants to purchase 250 million shares of Asian Coast at $.01 per share exercisable for 20 years (the “Warrants”); (collectively, the “Impugned Transactions”) were unfairly prejudicial to or unfairly disregarded the interests of the shareholders of Asian Coast, including the petitioners. 139 The specific allegations are as follows: 23. Without informing Bessemer of the rationale or the terms to be agreed with Harbinger, Asian Coast entered instead into a financial arrangement with Harbinger on far more onerous terms than the joint loan proposed in the October 15, 2009 term sheet. These terms were commercially unreasonable and were not in the best interests of the company. ... 28. The terms of the January 2010 loan from Harbinger were more onerous than the October 2009 loan from Harbinger, were likewise commercially unreasonable and were not in the best interests of the company. ... Southpaw Credit Opportunity Master v. Asian Coast Develop. Ross J. 285

31. By entering into the October 2009 and January 2010 loan agreements with Harbinger, the directors did not act in the best interests of the company and the company acted contrary to the reasonable expectations of the petitioners. These loan arrangements significantly and adversely affected the ability of the company to obtain future financing (either debt or equity) on reasonable terms. 32. By reason of its security arrangements with the company, Harbin- ger was able to exercise de facto control over the company from and after October 2009 or, in the alternative, from and after January 2010, and did so in a manner which benefitted it at the expense of the company and its other shareholders. Harbinger was privy to, and as- sisted the company in, the impugned conduct. 140 Although the amended petition characterizes the “Impugned Transac- tions” as unfairly prejudicial or made in unfair disregard of the petitioners’ interests, the submissions at the hearing were different. The focus of the conduct alleged to be oppressive was not on the decision of ACDL to enter into the “Impugned Transactions”, but on management’s alleged failure prior to the October and January bridge financing loans to use best efforts to secure the loans on better terms. 141 The petitioners stated their position as follows in their written submissions: The core point is that the company should never have accepted the terms of the two loans without determining whether its other institutional investors were prepared to offer better terms. Existing investors with the capacity to lend will always consider whether to provide bridge loans as a means of protecting their existing investment. In the middle of October 2009, Bessemer had shown interest in assisting the company with bridge funding. However, when Harbinger sought interest rates in excess of 40% on a $3 million loan late in October 2009, the company did not contact Bessemer, though it was the second largest investor in the company, to determine if Bessemer would lend on better terms. The evidence clearly supports a finding that Bessemer would have done so in order to protect its existing $20 million investment. Failing to contact Bessemer left the company with no bargaining leverage in its dealings with Harbinger. Allowing itself to be held hos- tage to Harbinger’s demands in those circumstances constituted a stark failure to properly look after the company’s interests. Contact- ing Bessemer to see if better terms could be obtained for the company was the only sensible course to follow and it failed to do so. 286 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

142 As stated in the petitioners’ reply submission: In short, the heart of the case is no more complicated than this. Exer- cising reasonable care in the interests of the company and its shareholders, Shoemaker should have canvassed for bridge financing in October 2009 and January 2010. This was a breach of the obligation owed by Shoemaker to the company and was conduct inconsistent with the reasonable expectations of the shareholders. Having regard to the known implications of those loan terms, the failure to try and improve upon them by canvassing Bessemer amounted to oppressive or unfairly prejudicial conduct. 143 The petitioners submit that the shareholders’ reasonable expectations include an expectation that the officers and directors will fulfill their statutory obligation, in the language of s. 122(1)(b) of the CBCA, to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. In particular, it is submitted that it was their reasonable expectation that when ACDL required bridge financing in October 2009 that the company would use its best efforts to obtain a loan on the most favourable terms. Once Harbinger presented its proposal, the company was required to determine whether its other institutional lenders would have been prepared to offer better terms. 144 It is clear that after receiving the revised term sheet from Harbinger on October 29, 2009, the company did not approach either Bessemer or Southpaw to determine if they would lend on better terms. The petitioners submit that this failure started a chain of events that ultimately resulted in the dilution that virtually extinguished the value of their shares. 145 The first link in the chain of causation alleged is that if approached, Bessemer would have agreed to lend on significantly better terms; namely with no security or warrants and at a much reduced lending rate from that proposed by Harbinger. 146 It is then submitted that ACDL would have either agreed to the loan on those terms or would have used that offer as leverage to secure better terms from Harbinger. It was submitted that it would be unreasonable for the company to think that Harbinger would refuse to forbear if the company could get a cheaper loan from Bessemer. In that regard, the petitioners submit that Harbinger never contemplated refusing forbearance and acting on the default and that it only suggested otherwise to justify the high rate on the proposed loan. 147 The next link in the chain is in relation to the January 2010 Loan. While it is clear that ACDL had contacted both Southpaw and Bessemer Southpaw Credit Opportunity Master v. Asian Coast Develop. Ross J. 287

to solicit further investment only to be rebuffed, ACDL did not specifically contact either Southpaw or Bessemer to request bridge financing in January 2010. The petitioners submit that failure to do so was negligent and a breach of their reasonable expectations that management would use best efforts to obtain bridge financing on the most favourable terms. 148 The petitioners submit that had Mr. Lester been told of the terms of the proposed January 2010 Loan, he would have known that the loan “would enable Harbinger to crush the equity of the existing shareholders”. The petitioners submit that in the circumstances, and given the implications of the loan on the equity raise, Bessemer would have made the loan on better terms. 149 The next step in the argument is the effect of the bridge financing on the equity raise in the early months of 2010. The petitioners submit that the terms of the October 2009 and January 2010 bridge loans created a substantial impediment to attracting investors and concluding any arrangements for an equity raise. The petitioners submit further that if those loans had been on materially better terms, the equity raise would have resulted in materially less dilution for the petitioners. 150 The petitioners submit that given the adverse effect created by the loans without restructuring, the company was not able to secure the investors it needed to meet the deadlines. This situation enabled Harbinger to control the situation by “running out the clock” and addressing restructuring so late in the day that there was no time left to obtain equity from anyone other than Harbinger. This then permitted Harbinger to insist upon the terms that resulted in the massive dilution. 151 The petitioners submit that had the loan terms not been so onerous, the company would have been able to secure investors within the applicable timeframe and on terms that did not result in the massive dilution of the Harbinger transaction.

A. Were the reasonable expectations of the petitioners breached? 1. October 2009 152 The first step in the analysis is a consideration of whether the reasonable expectations of the petitioners were breached. The first allegation of breach is the failure to approach the petitioners in October 2009 to seek better terms than Harbinger was demanding. Not only was there the possibility of obtaining financing on better terms, but a Bessemer offer could have been used to leverage Harbinger. Moreover, it was clear from Mr. 288 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

Shoemaker’s cross-examination that using Bessemer as a means of acquiring leverage was a consideration at the time. 153 ACDL submits that, while it may be prudent for a corporation to canvass alternative offers when possible, it is not legally necessary to do so. This is particularly so if there are particular constraints, such as time or contractual constraints, or a risk that an offer may be withdrawn, citing 820099 Ontario Inc. v. Harold E. Ballard Ltd., [1991] O.J. No. 266 (Ont. Gen. Div.), and Pente Investment Management Ltd. v. Schneider Corp. (1998), 42 O.R. (3d) 177 (Ont. C.A.), in support. In my view, ACDL’s submission overstates the position, which is more accurately captured in another submission by ACDL that the degree of canvassing required will depend upon the circumstances. 154 ACDL submits that in this case, the circumstances did not warrant any canvassing after October 29, 2009. It submits that ACDL did canvass Bessemer, in addition to the Vietnamese banks, prior to entering into the October 2009 Loan. It submits that once it learned of Harbin- ger’s position in respect of Bessemer’s participation, and in respect to the forbearance issue, ACDL’s management exercised their professional judgment and determined that it would be in the best interest of the company to negotiate the best deal it could with Harbinger and that this decision fell within the range of reasonableness. 155 Mr. Wolfe has deposed that the board concluded that it was prefera- ble to pursue further discussions with Harbinger as opposed to Bessemer or other potential lenders for a number of business reasons that he lists. However, the minutes of the October 2009 board meeting make no reference to any such discussion and make no reference to Bessemer at all. Mr. Wolfe testified in cross-examination that he has no recollection of the meeting beyond what is in the minutes. The minutes of the November 2009 board meeting do set out a history of the effort to obtain financing that does refer to Bessemer. However, the reasons noted in the minutes for the board to instruct management to proceed with the Harbinger transaction are not the same as the reasons stated in Mr. Wolfe’s affidavit. 156 Moreover, the evidence on this subject in his affidavit is not consistent with the evidence of Mr. Shoemaker and Mr. Aymong. Mr. Shoe- maker gave evidence that the decision about whether to approach Besse- mer was up to him and there was no direction from the board not to do so. Mr. Aymong testified that it was left to Mr. Shoemaker to obtain the best loan terms possible and that there was no direction that he go only to Southpaw Credit Opportunity Master v. Asian Coast Develop. Ross J. 289

Harbinger. I have concluded that Mr. Wolfe’s affidavit evidence on this issue is at best reconstruction. 157 In my view, ACDL should have approached at least Bessemer to see if it could secure the loan it required on better terms than Harbinger was prepared to offer. There was no downside. Nicholas Leone, an expert who was retained by ACDL and Harbinger, gave evidence that it would not be reasonable to assume that if the company had secured a loan on better terms Harbinger would not have acted on its default. A better offer from Bessemer could have been used as leverage in negotiations with Harbinger. 158 Both Messrs. Wolfe and Aymong gave evidence that they expected management of the company to make best efforts to obtain bridge financing and not to exclude any investors in those efforts. Mr. Leone stated that he would have advised the company to see if anyone was prepared to offer the loan on better terms, as one way of dealing more effectively with Harbinger. Moreover, he assumed that the company had approached Bessemer to see if it would be prepared to make the loan on better terms. Mr. Brandt, who provided an expert opinion on behalf of the petitioners, stated that in the event third party financing was unavailable, he would have expected the company to explore the possibility of securing financing from its existing shareholders and to see which would offer the most advantageous terms. 159 While I agree that the ultimate decision to negotiate with Harbinger fell within the range of reasonableness, it would be reasonable to expect management to equip themselves with as much leverage as possible to deal with the negotiation and not reasonable for management to neglect to do so. Further, it was not reasonable in these circumstances to make the decision to negotiate with Harbinger without canvassing the possibility of securing better terms from Bessemer. I find that the failure to contact Bessemer in relation to Harbinger’s straight loan proposal breached the reasonable expectations of the petitioners. I find further that this breach was unfairly prejudicial to the interests of the shareholders.

2. January 2010 160 The second allegation is with respect to the failure to contact the petitioners and, in particular, Bessemer, when ACDL required further financing in January 2010. It is common ground that ACDL did not do so. Mr. Lester has deposed that had he known of the terms proposed by Harbin- ger, he would have given serious consideration to a loan in January 2010 290 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

on materially better terms than those offered by Harbinger in order to protect the fund by not discouraging potential future equity investors. 161 ACDL management had approached Bessemer in December about making an additional investment. Mr. Lester advised Messrs. Aymong and Shoemaker that he had met with his board, that they were negative about the investment and refused to increase their investment. Mr. Lester admitted that he was lying when he told ACDL that the board was involved. He stated in cross-examination that [we] were not negative about the investment. His evidence was that he was trying to get ACDL to stop calling and used this as an excuse. In light of those refusals, ACDL did not approach either petitioner with a request for financing. 162 Mr. Shoemaker deposed that: Based on our conversation with Lester, and, in particular, the manner in which Bessemer’s board of directors had categorically rejected Lester’s request for approval to participate in equity financing, it was my belief that Bessemer was not willing (or perhaps able) to invest any further funds with ACDL. As a result, ACDL’s management did not continue updating Bessemer on the status of the equity raise or ACDL’s need for additional bridge financing thereafter. 163 In addition, Southpaw had declined solicitations to increase its investment, stating that it was a small fund and not prepared to extend its initial investment. 164 The petitioners submit that it was not reasonable for ACDL to conclude on the basis of a refusal to make an additional investment, that a request to participate in financing would have been refused. However, Mr. Lester did not just say that Bessemer was not prepared to invest further at this time; he told ACDL management in relatively strong language, that Bessemer’s board was negative about the investment. He did so to make ACDL stop soliciting further funds. ACDL had no reason to conclude that he was lying. I conclude that the inference that Mr. Shoe- maker drew was reasonable in the circumstances and that it was reasonable having been given that representation for him to not approach Besse- mer for financing. 165 ACDL notes that its management sought independent advice from its financial advisors who said that ACDL should take the Harbinger deal unless it could secure a better deal from one of the potential equity investors. It was not able to secure such an alternative deal. Management reported to the board that it was highly unlikely that the corporation could obtain interim funding from an entity other than Harbinger and that the Southpaw Credit Opportunity Master v. Asian Coast Develop. Ross J. 291

Harbinger proposal was the only viable alternative in the circumstances. The board then instructed management to negotiate with Harbinger. ACDL submits that this was a reasonable decision in the circumstances. 166 As noted above, I have concluded that given the communications he had received from the petitioners, it was not unreasonable for Mr. Shoe- maker to conclude that neither was prepared to invest any further funds. On the basis of that conclusion it was reasonable for him not to approach the petitioners for bridge financing. It follows that the failure to do so was not a breach of the petitioners’ reasonable expectations. I find further that the board decision was reasonable in all of the circumstances.

B. Causation 167 I have found a breach of the petitioners’ reasonable expectation that was unfairly prejudicial to their interests with respect to the October 2009 Loan, but not with respect to the January 2010 Loan. The next matter to be addressed is whether the breach caused any damage to the petitioners. The petitioners submit that the breach put in motion a chain of events that ultimately led to the extreme dilution of the petitioners’ shares. The “links” in this chain of events are as follows.

1. Would the October 2009 Loan have been made on more favourable terms? 168 Mr. Lester deposed in his first affidavit that: Had Bessemer been advised by the company in October 2009 of the terms that Harbinger was seeking (and which were ultimately agreed), Bessemer would have made the $3 million loan on behalf of the Fund on the terms of the term sheet attached as Exhibit 12 to my affidavit. As well, assuming that Harbinger advised the company that it was not prepared to forbear unless its loan terms were accepted, Bessemer would have assessed the risk that Harbinger would act on the company’s default (having forborne to date despite continuing defaults by the company and the risk to Harbinger that it would recover nothing on its investment) and would have given serious consideration to negotiating a buy out of Harbinger’s position on behalf of the Fund. If Bessemer had decided to buy out Harbinger’s position on behalf of the Fund, the total investment would still have been modest relative to the size of the Fund. 169 The term sheet to which he refers is the draft dated October 15, 2009 which provides for security to be issued to Bessemer, interest at 20% per annum and warrants to be issued. Since the amount at issue is relatively 292 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

small and since he was prepared to advance half of the $3 million on those terms, it seems probable that Mr. Lester would have approved a $3 million loan on these terms. 170 However, there are at least two problems with this scenario. It presumes that Bessemer would obtain security, but there was none to be had since Harbinger was unwilling to share its security. In addition, the ACDL board concluded at the November meeting that the revised proposal from Harbinger was more attractive than the term sheet with the warrant. That is a conclusion that is reasonable in the circumstances, and one supported by Mr. Leone’s opinion. I conclude that this option would likely not have occurred. 171 In addition, I conclude that a loan on the terms of the October 15 draft would not have had causal significance. I note that Mr. Brandt stated that the terms of the October 2009 Loan were significantly more onerous than the rate of return contemplated in the October 15 term sheet. 172 However, Mr. Leone concluded that the October loan was actually cheaper than the October 15 term sheet once all surrounding terms had been considered. In particular, he notes that Mr. Brandt does not account for the value of the warrants in the October 15 term sheet. This appears to have been the view that ACDL’s board took of the matter. 173 I have concluded that when the value of the warrants is considered, it is not the case that the terms of the October 2009 Loan are significantly more onerous than those of the October 15 term sheet. 174 In his third affidavit, Mr. Lester deposes that: had I known about the interest rate that Harbinger sought on its Octo- ber loan to the company, I would also have been prepared to do a straight loan on materially better terms for the company. 175 The petitioners note that the respondents did not suggest to Mr. Lester in cross-examination that he would not have been prepared to make a loan without warrant or security. This is certainly a factor in assessing the weight to be given to the evidence, but not the sole factor to be considered. 176 This evidence is not a reconstruction of business judgments that were made at the time or even, as is the case of the evidence from the first affidavit, a simple extrapolation from those judgments. Rather, it is an attempt to construct what judgments would have been made in response to a set of circumstances partly real and partly hypothetical. The effort is complicated by both hindsight and the existence of the litigation. Southpaw Credit Opportunity Master v. Asian Coast Develop. Ross J. 293

177 In that regard, I note that the first affidavit was sworn in February 2011. The third was sworn in August, after Mr. Leone’s expert opinion which was dated June 17, 2011 and the affidavits of Messrs. Wolfe, Aymong and Shoemaker. In making this observation I am not suggesting anything about Mr. Lester’s credibility. However, there can be no doubt that when giving this evidence in 2011, Mr. Lester has materially different knowledge that is bound to affect his thinking. 178 I think it is possible that, if approached and advised of what Harbin- ger was proposing, Bessemer would have offered an interest only loan without warrant or security on somewhat better terms. However, one difficulty in evaluating the potential causal significance of such a hypothetical transaction lies in the meaning to be given to the term “materially better”. In the context of this oppression claim the term “materially better” would have significance only if it provided a link in the causal chain, that is, materially better in the sense that it would change the assessment of the potential investment by a third party investor. To have causal significance in this regard it would mean that it was sufficient to change a potential investor who was not prepared to invest into one who was. 179 In that regard, at the material time Mr. Lester would have had regard to securing reasonable compensation to Bessemer for the risks it would assume in providing the financing. I note that even though he was presumably motivated by the concern he described in his affidavit that the terms of the loan could discourage new investors, when he did offer to participate in the loan, he did not offer ACDL materially better terms; he offered to participate on the same terms as Harbinger was offering. 180 In addition, this loan was for a relatively small amount, less likely on its own to make a decisive difference in the analysis of any potential investor. 181 I note Mr. Leone’s opinion that the terms of the October and January Loans were of a reasonable commercial quality having regard to the nature of the transaction, the surrounding commercial circumstances, the market conditions and the commercial practices of the time. 182 I conclude that it is not likely that had it been approached Bessemer would have offered a straight interest, unsecured loan without warrant on “materially better terms”, meaning sufficiently more favourable to ACDL as to make material difference in the analysis of the company by a potential new investor. 294 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

2. Would the January 2010 loans have been made on more favourable terms? 183 I have concluded that it was not a breach of reasonable expectations for ACDL management to conclude that neither of the petitioners was prepared to advance further funds to the company. In addition, there is no reason to conclude that had Bessemer advanced the October Loan on different terms, Mr. Lester would have responded in a different way to ACDL’s overtures for additional funds in December. 184 Even assuming that Mr. Lester were to have been approached, the same difficulties pertain. Mr. Lester deposed in his first affidavit that: Assuming that the Fund had advanced the $3 million loan in October 2009 and that the company had advised Bessemer in January 2010 that it required further interim funding in the amount of $12.5 million, Bessemer would have given serious consideration to making a further loan on behalf of the Fund on the same terms as the term sheet referred to in Exhibit 12 of my affidavit. If Harbinger’s 2007 security remained and it would not agree to continue to forbear unless the 12.5 million was done by it on its terms, Bessemer would have assessed the risk that Harbinger would act on the company’s default (having agreed to continue to forbear until January 2010 and the risk to Harbinger that it would recover nothing on its investment) and would have given serious consideration to negotiating a buy out of Harbinger’s position on behalf of the Fund. If Bessemer had decided to buy out Harbinger’s position on behalf of the Fund, the total investment would still have been modest relative to the size of the Fund. 185 He deposed in his third affidavit: As stated in my first affidavit, I would have given serious consideration to a loan for the urgently required funds in January 2010, had I known of the terms proposed by Harbinger. While paragraph 50 of my affidavit states this in the context of an assumption that Fund had made the October 2009 loan, I would have given the same consideration to a further loan of emergency funding in January 2010 on materially better terms for the company that those offered by Harbinger, even if the Fund had not made the October 2009 loan. I would have done so to meet the same concern; that materially better terms for the company would still protect the Fund but not discourage potential future equity investors. 186 I accept that if he had been presented with the situation in 2010, he would have given the matter serious consideration. However, I am not persuaded that the result of this “serious consideration” would have been Southpaw Credit Opportunity Master v. Asian Coast Develop. Ross J. 295

a loan on “materially better terms” in the sense described above. When actually considering the situation, in October, Mr. Lester did not offer materially better terms, he offered to participate on the same terms.

3. Would there have been investors prepared to invest in advance of the July 31, 2010 deadline? 187 The petitioners submit that the terms of the October 2009 and January 2010 loans had a materially adverse effect on ACDL’s ability to attract new investors in a timely way. It was submitted that had ACDL been able to attract new investors in a timely way, the July transaction that resulted in the dilution would have been avoided, and they would not have suffered the harm. 188 It is clear that ACDL recognized that the loans would need to be restructured and that the high cost of the loans would be a negative factor for potential investors. The advice that ACDL received from their advisors was to the same effect. 189 Mr. Brandt’s expert opinion was that the terms of the loans made it substantially more challenging for ACDL to raise equity financing after January 2010. Mr. Leone’s opinion was that the terms of the loans did not unreasonably impair the company’s ability to raise equity capital. He noted that the loans preserved ACDL’s ability to carry on with the project and kept the prospect of long term value alive. Without the loans, in his opinion the company would have likely shut down. 190 In addressing this element of the alleged chain of causation, it must be remembered that this venture was fraught with risk. The terms of the loans were but one of many factors that could cause an investor to conclude that this was not an attractive investment. Mr. Leone described these risks as follows: 25. The Company’s ability to raise the equity financing required to meet the Financing Condition was affected by a number of perceived risks to the Project, including but not limited to: (i) the green field nature of the Project; (ii) the Project’s location in a developing nation governed by the Communist party under one-party rule; (iii) the potential presence of substantial alleged political and economic corruption in Vietnam as measured by Vietnam’s ranking in global corruption rankings; (iv) poor roads, airports, and other civil infrastructure associated with the Project location; 296 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

(v) no construction drawings existed for the Project and therefore no reliable estimates of vendor and contractor costs or costs of procured construction materials existed; (vi) the high rate of inflation in Vietnam; (vii) gambling is illegal in Vietnam for Vietnamese nationals; (viii) potential competition from other similarly planned and announced resort projects in Vietnam; (ix) the inexperience of ACDL’s then management team; and (x) the lack of legislation providing the regulatory or tax laws required to enable ACDL’s business plan. 191 Moreover, no investor has been identified who declined to invest because of the terms of the October and January loans. Finally, what ACDL required in order to retain the investment certificate was $125 million, a substantial investment which would entail significant due diligence. In order to establish causation, one would have to posit the existence of an investor who was now prepared to invest because of more favourable terms of the October 2009 and January 2010 loans and who would have completed its due diligence before the July deadline. No such potential investor has been identified. In my view, it is pure speculation to conclude that one exists. 192 I find that the petitioners have failed to establish causation, a necessary element in the oppression claim. Every link in the alleged chain of causation is problematic. I have concluded that no link has been established to be probable. Viewed as a whole, the matter becomes one of pure speculation, far from sufficient to discharge the burden of proof. Because the petitioners have failed to establish a necessary element of the claim, it follows that the claim against ACDL is dismissed. 193 As noted at the outset of this section, I have addressed the case advanced by the petitioners in their oral and written submissions. In their submissions, the petitioners do not target ACDL’s decisions to enter into the Impugned Transactions. With regard to those decisions of the board, I am satisfied that in each case the decision was a reasonable business decision in all of the circumstances at the time that it was made. In addition, at the time the board made its decision to enter into each of the Impugned Transactions there was no available alternative identified, let alone one that was clearly beneficial, see Maple Leaf. Southpaw Credit Opportunity Master v. Asian Coast Develop. Ross J. 297

VI. Claim Against Harbinger 194 The claim advanced against Harbinger is one of accessory liability, one feature of which is that it cannot be sustained if there is no primary liability. Accordingly, since the petitioners have failed to establish the claim against ACDL, it follows that the claim against Harbinger also fails. However, in the event that I am wrong with respect to the conclusion reached concerning the liability of ACDL, I will consider the claim advanced against Harbinger. 195 As noted above, the amended petition includes an allegation that by reason of its security arrangements from and after October 2009, Harbin- ger was able to exercise de facto control over the company. This allegation was not pursued at the hearing. The petitioners stated in the written submission: The petitioners do not take the position that Harbinger acted, in effect, as a director of the company and that its acts can be treated as if they were the acts of the company. 196 The claim that was advanced was that Harbinger is liable as an accessory, procuring the wrongful conduct for its own purposes. It was submitted that Harbinger procured the oppressive conduct in that it induced, incited or persuaded ACDL to particular actions which it knew or ought to have known constituted oppression. 197 The petitioners submit that Harbinger procured ACDL’s oppression having regard to the following taken together: (a) Harbinger’s objective was to dilute the other equity holders; (b) it proposed loans on commercially unreasonable terms; (c) it misled the Company as to its intentions with respect to forbearance to “give cover” to the board with respect to the terms vis-`a-vis the shareholders; (d) it falsely represented its intention in order to persuade the company to pay an extortionate rate of interest under the October 2009 Loan; and (e) it took advantage of the position it had secured when negotiating the terms of the January 2010 Loan and in exercising control over the Company thereafter. 198 The petitioners submit that this is a case of Harbinger committing an intentional tort in order to persuade ACDL to breach its duty to its shareholders. It is important to note that the allegation that Harbinger commit- 298 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

ted an intentional tort is the subject of a separate action by the petitioners in which they allege that Harbinger unlawfully interfered with their economic relations. This action is based on conduct that includes the alleged misrepresentations made to ACDL during negotiations relied upon in this proceeding. While Harbinger denies any wrongdoing, it submits, in the alternative, that the tort action is the proper forum in which to try these allegations. 199 The petitioners cite Lumley v. Gye (1853), 118 E.R. 749 (Eng. Q.B.), for the proposition that a person who procures another to commit a wrong incurs liability as an accessory. In OBG Ltd. v. Allan, [2007] UKHL 21 (U.K. H.L.), Lord Hoffman noted that the accessory liability articulated in Lumley for inducing breach of contract required a degree of participation in the breach of contract which satisfies the requirement for accessory liability. He noted further that where there is no primary liability, there can be no accessory liability. Finally, with respect to liability for inducing breach of contract, the intent necessary for the accessory was the intent to cause a breach of contract. 200 The concept of the degree of participation required to establish accessory liability was addressed in C.B.S. Songs Ltd. v. Amstrad Consumer Electronics PLC, [1988] 1 A.C. 1013 (U.K. H.L.). In C.B.S. Songs Ltd., Lord Templeman described the requirements for a finding of liability as an accessory in a case involving allegations of breach of copyright as follows at p. 14: My Lords, I accept that a defendant who procures a breach of copyright is liable jointly and severally with the infringer for the damages suffered by the plaintiff as a result of the infringement. The defendant is a joint infringer; he intends and procures and shares a common design that infringement shall take place. A defendant may procure an infringement by inducement incitement or persuasion. But in the present case Amstrad does not procure infringement by offering for or unlawful copying and it does not procure infringement by ad- vertising the attractions of its machine to any purchaser who may decide to copy unlawfully. Amstrad is not concerned to procure and cannot procure unlawful copying. The purchaser will not make unlawful copies because he has been induced or incited or persuaded to do so by Amstrad. The purchaser will make unlawful copies for his own use because he chooses to do so. Amstrad’s advertisements may persuade the purchaser to buy an Amstrad machine but will not influence the puchaser’s later decision to infringe copyright. Buckley L.J. observed in Belegging- en Exploitatiemaatschappij Lavender BV v. Written Industrial Diamonds Ltd., (at 65): ‘Facilitating the doing of Southpaw Credit Opportunity Master v. Asian Coast Develop. Ross J. 299

an act is obviously different from procuring the doing of an act.’ Sales and advertisements to the public generally of a machine which may be used for lawful or unlawful purposes, including infringement of copyright, cannot be said to ‘procure’ all breaches of copyright thereafter by members of the public who use the machine. Generally speaking, inducement, incitement or persuasion to infringe must be by a defendant to an individual infringer and must identifiably procure a particular infringement in order to make the defendant liable as a joint infringer. 201 Harbinger asserts that it cannot be held liable for acting as an accessory to ACDL’s oppressive conduct pursuant to the provisions of either the CBCA or the BCBCA. It submits that shareholders of a corporation do not owe a duty to one another and are entitled to negotiate in their own self-interest, even if those interests are contrary to the interests of other shareholders, citing Brant Investments Ltd. v. KeepRite Inc. (1991), 80 D.L.R. (4th) 161 (Ont. C.A.). Thus, the petitioners could have had no reasonable expectation that Harbinger would act otherwise, or that they might not be diluted as a result. 202 Harbinger submits that it is only corporate conduct which is properly the subject of the oppression remedy, citing Budd v. Gentra Inc., [1998] O.J. No. 3109 (Ont. C.A.). It follows in Harbinger’s submission that the oppression remedy was never intended, and should not be extended to cover the conduct of arm’s length third parties such as Harbinger. 203 Harbinger relied upon the decision in Stern v. Imasco Ltd., [1999] O.J. No. 4235 (Ont. S.C.J.). In Stern, the defendant British American To- bacco P.L.C. (“BAT”) was a shareholder of Imasco Ltd. BAT and Imasco entered into an agreement by which BAT would acquire all of the shares of Imasco that it did not own. The plaintiff, a shareholder of Imasco, commenced an action alleging that the proposed transaction was oppressive. Cumming J. dismissed the claim against BAT on the basis that the pleadings did not disclose a reasonable cause of action, stating at paras. 95 and 97: The language is clear that the grounds of complaint must relate to the corporation, Imasco, of which Mr. Stern is a shareholder. However, the remedies available to a court under s. 241(3) are broad in that the court may make any “order it thinks fit”. In my view, while the alleged oppression must arise in respect of the complainant’s relationship to a corporation (as a shareholder of Imasco in the case at hand) the reach of oppressive conduct covered by s. 241(1) is general. The intent and language of s. 241(1) is to give status to a complainant 300 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

shareholder of a corporation in bringing an oppression application whenever the oppressive conduct affects adversely his reasonable expectations as a shareholder of that corporation. The source of the oppression will be from within the corporation. However, the source of the oppression can conceivably be from someone who is merely a shareholder. For example, it might be that a shareholder effectively controls corporate decision-making in a closely-held corporation through a shareholders’ agreement such as to cause the wrongdoing. However, in respect of a public corporation, such as Imasco, it is the board of directors that is the sole directing mind of the corporation. It is the corporation and the directors who are to be held responsible if grounds of oppression exist within the meaning of s. 241(2). For this reason, in my view, the statement of claim does not allege oppressive conduct against BAT to which s. 241 of the CBCA can apply. The claim for oppression against BAT under the CBCA cannot be sustained. ... In my view, all of these allegations state the obvious. BAT has negotiated the Agreement with Imasco. The directors of Imasco made the decision to enter into the Agreement. If there is oppressive conduct in respect of the public shareholders it is only Imasco and the directors who are accountable. 204 The petitioners do not assert that Harbinger acted in effect as the director of ACDL such that its acts can be treated as those of the company. This concession is consistent with the evidence which discloses that ACDL was a public company, with a board of directors, which at all material times was not controlled by any shareholder. Indeed at material times Harbinger did not have a representative on the board. 205 Given the tort claim, I will say as little as possible with respect to the allegations the petitioners make against Harbinger that are the subject of that litigation. In my view, the evidence does not support a finding that Harbinger had sufficient participation to found accessory liability as described in CBS. There is no evidence that Harbinger induced, incited or persuaded ACDL to do the acts that are alleged to have constituted the oppression. In particular, there is no evidence that Harbinger told, suggested or encouraged ACDL not to canvass bridge financing with the petitioners in October 2009 and January 2010. 206 The petitioners stated in their written submissions that Harbinger committed an intentional tort in order to persuade ACDL to breach its duty to the shareholders. In my view, the evidence does not support a conclusion that Harbinger intended that ACDL act in an oppressive man- Southpaw Credit Opportunity Master v. Asian Coast Develop. Ross J. 301

ner to its shareholders. There is no evidence that any of Harbinger’s officers ever turned their minds at the relevant times to this issue. The evidence before me does not lead me to infer that was the intention of any of the officers at its material times. 207 Assuming without deciding that the concept of accessory liability is applicable at all in the context of an oppression claim, I find that it is not made out in this case. The petitioners’ claim against Harbinger in essence is that it committed an intentional tort, and that in the result, ACDL op- pressed the minority shareholders. However, the necessary connection between Harbinger and the acts complained of as oppressive is not present. In the result, even if I am wrong in my conclusion that there is no oppression on the part of ACDL and hence no primary liability, I conclude that the petitioners have failed to establish that Harbinger is liable as an accessory. Accordingly, the claim against Harbinger is dismissed. 208 The petition is dismissed with costs to the respondents. Petition dismissed. 302 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

[Indexed as: IWHL Inc., Re] In the Matter of the Bankruptcy of IWHL Inc. of the City of Toronto in the Province of Ontario Ontario Superior Court of Justice Docket: 31-1362614 2013 ONSC 448 Mesbur J. Heard: January 11, 2013 Judgment: January 21, 2013 Bankruptcy and insolvency –––– Proving claim — Practice and procedure — Disallowance of claims — Miscellaneous –––– Settlement between bankrupt, I Inc., and one of creditors/stakeholders was approved, and money was paid to receiver for distribution in receivership — Receiver was discharged — Surplus in receivership was paid to trustee in bankruptcy, to be distributed in estate — Trustee disallowed claims of certain entities — New proof of claim was sent on behalf of one of same entities — Trustee brought motion for order expunging all claims of entities in question, order declaring that they were not creditors in estate, and order prohibiting them from filing further proofs of claim in this bankruptcy — Motion granted — Original disallowance were properly served — Appeal from disallowance was not filed with court, and disallowance of proofs were therefore final and conclusive — New proof of claim was stated to be on behalf of NFM, entity that was itself bankrupt, and there was no basis for proof of claim to be submitted on NFM’s behalf — NFM’s trustee did not respond to motion or appear, and it was assumed that it did not oppose relief sought — New proof of claim was essentially same claim as disallowed proofs of claim — To allow what was essentially same proof of claim to be advanced would be abuse of court’s process — Doctrine of res judicata and issue estoppel applied to bankruptcy proceedings, including establishment of proof of claim. Bankruptcy and insolvency –––– Practice and procedure in courts — Costs — Miscellaneous –––– Settlement between bankrupt, I Inc., and one of creditors/stakeholders was approved, and money was paid to receiver for distribution in receivership — Receiver was discharged — Surplus in receivership was paid to trustee in bankruptcy, to be distributed in estate — Trustee disallowed claims of certain entities — New proof of claim was sent on behalf of one of same entities — Trustee brought motion for order expunging all claims of entities in question, order declaring that they were not creditors in estate, and order prohibiting them from filing further proofs of claim in this bankruptcy — IWHL Inc., Re 303

Motion was granted — Trustee contended that order for costs should be made against officer of one of entities, and/or his corporations — Trustee contended that officer’s actions necessitated expenditure of legal fees on estate’s behalf, thus reducing funds available to distribute to creditors with proven claims — No order made as to costs of motion — This was first motion trustee had brought for advice and directions — Outcome of motion was likely to bring some finality to issue of further claims from entities in question and allow trustee to complete its administration of estate — In these circumstances there was no reason to depart from general practice of awarding no costs to estate. Civil practice and procedure –––– Judgments and orders — Res judicata and issue estoppel — Res judicata — Introduction — Where abuse of process –––– Settlement between bankrupt, I Inc., and one of creditors/stakeholders was approved, and money was paid to receiver for distribution in receivership — Receiver was discharged — Surplus in receivership was paid to trustee in bankruptcy, to be distributed in estate — Trustee disallowed claims of certain entities — New proof of claim was sent on behalf of one of same entities — Trustee brought motion for order expunging all claims of entities in question, order declaring that they were not creditors in estate, and order prohibiting them from filing further proofs of claim in this bankruptcy — Motion granted — Original disallowance were properly served — Appeal from disallowance was not filed with court, and disallowance of proofs were therefore final and conclusive — New proof of claim was stated to be on behalf of NFM, entity that was itself bankrupt, and there was no basis for proof of claim to be submitted on NFM’s behalf — NFM’s trustee did not respond to motion or appear, and it was assumed that it did not oppose relief sought — New proof of claim was essentially same claim as disallowed proofs of claim — To allow what was essentially same proof of claim to be advanced would be abuse of court’s process — Doctrine of res judicata and issue estoppel applied to bankruptcy proceedings, including establishment of proof of claim. Civil practice and procedure –––– Costs — Effect of success of proceedings — Successful party deprived of costs — Grounds — Miscellaneous –––– Settlement between bankrupt, I Inc., and one of creditors/stakeholders was approved, and money was paid to receiver for distribution in receivership — Re- ceiver was discharged — Surplus in receivership was paid to trustee in bankruptcy, to be distributed in estate — Trustee disallowed claims of certain entities — New proof of claim was sent on behalf of one of same entities — Trustee brought motion for order expunging all claims of entities in question, order declaring that they were not creditors in estate, and order prohibiting them from filing further proofs of claim in this bankruptcy — Motion was granted — Trustee contended that order for costs should be made against officer of one of entities, and/or his corporations — Trustee contended that officer’s actions necessitated expenditure of legal fees on estate’s behalf, thus reducing funds avail- 304 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

able to distribute to creditors with proven claims — No order made as to costs of motion — This was first motion trustee had brought for advice and directions — Outcome of motion was likely to bring some finality to issue of further claims from entities in question and allow trustee to complete its administration of estate — In these circumstances there was no reason to depart from general practice of awarding no costs to estate. Cases considered by Mesbur J.: Britannia Airways Ltd. v. Royal Bank (2005), 2005 CarswellOnt 1, 5 C.P.C. (6th) 262, [2005] O.J. No. 2 (Ont. S.C.J. [Commercial List]) — referred to EnerNorth Industries Inc., Re (2009), 2009 ONCA 536, 2009 CarswellOnt 3886, 55 C.B.R. (5th) 1, 96 O.R. (3d) 1, (sub nom. EnerNorth Industries (Bankrupt), Re) 254 O.A.C. 235, [2009] O.J. No. 2815 (Ont. C.A.) — referred to IWHL Inc., Re (2011), 2011 CarswellOnt 12311, 2011 ONSC 5762, 84 C.B.R. (5th) 223 (Ont. S.C.J. [Commercial List]) — referred to Stein, Re (1976), 21 C.B.R. (N.S.) 282, 67 D.L.R. (3d) 588, 12 O.R. (2d) 1, 1976 CarswellOnt 47 (Ont. C.A.) — referred to Statutes considered: Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 Generally — referred to s. 135(3) — referred to s. 135(4) — considered s. 135(5) — considered Words and phrases considered: finality The doctrines of res judicata and issue estoppel prevent the re-litigation of claims that have already been decided. They are founded on two public policy concerns, namely finality and fairness. The concept of finality means that it is in the public interest to put an end to litigation. The concept of fairness here means that no one should be “twice vexed by the same cause”. [footnote omitted]

MOTION by trustee for order expunging claims of certain entities, order declaring that they were not creditors in estate, and order prohibiting them from filing further proofs of claim in this bankruptcy

C. Francis for Trustee C. Chang for Creditor, New Solutions Financial Corporation IWHL Inc., Re Mesbur J. 305

Mesbur J.: Nature of the Motion: 1 The Trustee in Bankruptcy of IWHL Inc. moves for the court’s advice and direction, and in particular, for an order expunging all claims of 1078570 Ontario Limited operating as Dart Logistics (1078570), Dart Supply Chain Solutions Inc. (Dart) and NFM Investments Corp. (NFM), an order declaring they are not creditors in the estate of IWHL, and an order prohibiting them, or anyone affiliated with them, including NFM’s Trustee in bankruptcy, from filing any further proofs of claim in this bankruptcy.

Some history: 2 The bankrupt, IWHL was formerly in receivership. In September of 2011 I heard a motion in the receivership to approve a proposed settlement between IWHL and one of its creditors/stakeholders, TTR. I approved the settlement, which resulted in $1 million being paid to the Re- ceiver for distribution in the receivership. A portion of the money was paid out in the receivership proceedings, the Receiver’s activities were approved, and its fees approved and paid. The Receiver was then discharged. There was a surplus of about $750,000 in the receivership. It was paid to the Trustee in the IWHL bankruptcy, to be distributed in this estate. Segal & Partners Inc. was IWHL’s Receiver, and is also its Trus- tee in Bankruptcy. 3 In my reasons of September 2011 in the receivership1 I set out the convoluted and confusing history of IWHL and other entities, namely Wheels Holdco Inc., New Solutions Financial Corporation, NFM, Dart and 1078570. I will not repeat them here. 4 Once the remaining funds from the settlement came into the IWHL bankruptcy, the Trustee took steps to deal with the proofs of claim. Adrian Donnelley, who is the president and CEO of Dart, filed a proof of claim on behalf of 1078570 in the amount of $1.2 million, a proof of claim on behalf of Dart in the amount of $189,000 and a proof of claim on behalf of NFM in the amount of $600,000. 5 The Trustee, acting on the instructions of the inspector of the estate, disallowed each of the claims. As required by the Bankruptcy and Insol-

1IWHL Inc., Re, 2011 ONSC 5762 (Ont. S.C.J. [Commercial List]) at paragraphs 9 - 48 306 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

vency Act it sent notices of disallowance to each of Dart, 1078570 and NFM. Each disallowance set out in detail the reasons the claims were being disallowed.2 6 The Trustee disallowed 1078570’s claim because: a) The proof of claim was not properly filed with the Trustee; b) There was no Schedule “A” attached to the proof of claim; c) 1078570 did not advance $1,200,000 or any other amount to IWHL; d) IWHL borrowed $1.2 million from New Solutions and advanced this amount to 1078570, making 1078570 indebted to IWHL, not the other way around.3 7 The Trustee disallowed Dart’s claim because: a) Schedule “A” to the proof of claim was inadequate and failed to particularize or evidence the claim; b) IWHL was not indebted to Dart at the date of bankruptcy.4 8 The Trustee disallowed NFM’s claim because: a) The claim was filed by Andrew Wong, a purported director of NFM. NFM is bankrupt and the claim, if any, vested ex- clusively in Kunjar Sharma & Associates Inc. in its capacity as trustee in bankruptcy of NFM; b) Sharma has not filed a proof of claim on behalf of NFM; c) The documents attached as Schedule “A” to the proof of claim do not support the claim filed by NFM; d) The sum of $600,000 referenced in the documents attached to Schedule “A” represent an amount which was payable by IWHL to Wheels Holdco Inc. (Wheels) under the terms of a Share Purchase Agreement between NFM and Wheels; e) Payment of the $600,000 from IWHL to Wheels was fi- nanced by a loan from New Solutions to IWHL; f) NFM did not advance any funds to IWHL for the purpose of making this payment;

2See subsection 135(3) of the BIA. 3Trustee’s disallowance of 1078570’s claim, dated April 19, 2012 4Trustee’s disallowance of Dart’s claim, dated April 19, 2012 IWHL Inc., Re Mesbur J. 307

g) The advance of $600,000 forms part of a proof of claim filed by New Solutions, which has been accepted by the Trustee. Any claim by NFM violates the rule against double proofs of claim; h) Alternatively, if IWHL repaid the $600,000 advance to New Solutions, then IWHL owes nothing further on account of this advance, either to New Solutions of NFM; i) To the extent the funds New Solutions advance to IWHL for payment to Wheels could be construed as having been notionally advanced to NFM for the purpose of making the payment to Wheels, then NFM would be indebted to IWHL for the same amount, and set-off would apply.5 9 The BIA provides that a Trustee’s disallowance of a claim is final and binding unless “within a thirty day period after the service of the notice referred to in subsection (3) or such further time as the court may on application made within that period allow, the person to whom the notice was provided appeals from the trustee’s decision to the court in accordance with the General Rules.”6 . 10 On the last day before the disallowance became final and binding, the Trustee’s counsel received a motion record titled: “Appeal from Disal- lowance of Claim”. The appellants are described as “Dart Supply Chain Solutions Inc., 1078570 Ontario Ltd, and NFM Investment Corp.” The motion stated it was to be scheduled “on a date to be set”, and also sought an order approving the claims of the appellants, and for a further order “expunging the claims of the following creditors Train Trailers Rentals Limited, Wheels, PowerTrain Resources, Trailcon Trailers Inc, and Hazco Services Inc. 11 Trustee’s counsel, Ms. Francis, immediately contacted Mr. Quance, whose name appeared on the notice of appeal as counsel for “the Defend- ants, Dart Supply Chain Solutions Inc., 1078570 Ontario Ltd., and .....”. Trustee’s counsel asked for evidence the appeal had been filed with the court, evidence that the appellants had served the parties whose proofs of claim they wished to expunge, and evidence of Mr. Quance’s authority to act on behalf of NFM, a bankrupt.7

5Trustee’s disallowance of NFM’s proof of claim, dated April 19, 2012 6See subsection 135(4) of the BIA 7Ms. Francis’ email to Mr. Quance dated May 28, 2012. 308 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

12 Mr. Quance did not reply. Ms. Francis followed up the next day, asking for confirmation Mr. Quance had received her email from the day before. 13 Ms. Francis emailed Mr. Quance a second time on May 29, asking for confirmation the appeal record had been filed. Mr. Quance replied, saying “thank you ... am following up ...” 14 Two days later Ms. Francis emailed Mr. Quance again. She asked for a response to her earlier communications, saying she had been unable to find any record the appeal had been filed with the court. There was no response. 15 On June 25 Mr. Donnelly wrote to Ms. Francis saying: I understand that you are representing the Trustee of IWHL, Inc. as counsel. I have attached an electronic copy of the claim of NFM In- vestment Corp that was sent to Segal & Partners who are the Trustee of IWHL, INC. Please add this to the register of creditors of IWHL. Thank you. 16 The proof of claim Mr. Donnelly attached to his email was stated to be the proof of claim of NFM. It was in the sum of $1,989,000 — coinci- dentally the aggregate of the three claims the Trustee had formerly disallowed. 17 On July 23, Ms. Francis wrote to Mr. Quance again. In her letter, she outlined all her prior correspondence with him. She also mentioned that on June 25, 2012 Mr. Donnelly had sent her a new proof of claim, purportedly on behalf of NFM. She raised various questions about this new proof of claim, and asked Mr. Quance for a response to them. He replied the same day, saying his firm was not retained in relation to the new proof of claim, and Ms. Francis should deal directly with Mr. Donnelly. 18 She did. On July 23 Ms. Francis, on behalf of the Trustee, wrote to Mr. Donnelly, raising the same questions about the new proof of claim she had posed to Mr. Quance. There was no response. 19 On July 31 Ms. Francis followed up with another email to Mr. Don- nelly, requesting a response to her questions about the new proof of claim. Mr. Gord Steventon, a principal of 1078570, replied to this letter on Mr. Donnelly’s behalf, advising Mr. Donnelly was out of the office for the next week. He asked that Ms. Francis put her request “in writing.” 20 Ms. Francis asked what he meant. Mr. Steventon responded that he was referring to “a letter format”. IWHL Inc., Re Mesbur J. 309

21 Accordingly, Ms. Francis sent her request for information in letter format on August 7, 2012. Mr. Donnelly’s response was to ask Ms. Fran- cis in what capacity she was posing her questions, since Segal & Partners was the Trustee of IWHL’s estate. 22 Ms. Francis responded, reminding Mr. Donnelly that he had sent the new proof of claim to her, in her capacity as counsel for the estate. She confirmed that she was asking questions in that capacity. She set out her questions again. 23 Mr. Donnelly responded on August 10, saying: “now that your role has been clarified, I will respond to your questions in a reasonable time.” 24 Since no response was forthcoming, Ms. Francis emailed Mr. Don- nelly on August 27, stating her position that he had had more than a reasonable period of time to respond to the questions she had been posing since June. She said: “If we do not receive satisfactory responses by the end of the week, we will proceed on the assumption that you do not intend to respond.” 25 Mr. Donnelly did not respond. The Trustee then launched this motion. In support of the motion, the Trustee filed its Second Report in the Bank- ruptcy of IWHL Inc. In it, the Trustee sets out its position regarding the disallowed proofs of claim, and the new proof of claim. 26 The Trustee served its motion on Mr. Quance, as solicitor of record for 1078570, the lawyers for Wheels Holdco Inc., New Solutions Finan- cial Corporation, the trustee in bankruptcy of NFM, and Mr. Donnelly, as president and CEO of Dart. No one filed any responding material on the motion, although Mr. Donnelly filed a factum. He has still not responded to the questions the Trustee has been asking about the new proof of claim since June of last year. 27 The lawyer for New Solutions did not file any material, but appeared and supported the Trustee’s position. NFM’s trustee in bankruptcy did not appear on the motion or take any position.

Position of the Parties: 28 The Trustee takes the position that first, since Dart and 1078570 did not serve and file their appeal from the Trustee’s disallowance of their claims within the statutory 30-day period, the disallowances are final and binding. 310 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

29 Second, the Trustee says the new proof of claim, which is purportedly filed on behalf of NFM, is essentially the same proof of claim as the disallowed claims. 30 Third, the Trustee says that if the current proof of claim is purportedly filed on behalf of NFM, it is effectively a nullity, since NFM is a bankrupt, and any claims it has vested in its Trustee. NFM’s Trustee did not appear on this motion, and took no position on it, even though properly served. 31 Last, the Trustee says that to permit the new proof of claim to go forward would be an abuse of the court’s process, offending the principles of both res judicata and issue estoppel. 32 Mr. Chang appears for New Solutions, a major creditor of the bankrupt. He supports the Trustee’s motion. He says that to permit the new proof of claim to go forward would constitute a collateral attack on the Trustee’s initial disallowance of what is effectively the same claim. 33 Mr. Donnelly is the President and CEO of Dart. The court permitted him to make submissions on behalf of Dart and 1078570. Mr. Steventon appeared for Dart, and to assist Mr. Donnelly. Mr. Donnelly did not file any affidavit material in response to the Trustee’s motion. He did, however, file a factum. He relied on prior material filed in the IWHL bankruptcy as well as in the IWHL Receivership. 34 Mr. Donnelly had a great deal of difficulty articulating his response to the issue the court must actually decide. The focus of his remarks, as set out in his factum, can be simply stated as follows: The Respondents seek the dismissal of the Trustee’s Motion on the basis that the Trustee has failed to serve the disallowances on 107ONT, DART and NFM, nor have they properly reviewed the Proof of Claim. The Trustee has a statutory obligation to maintain impartiality and fairness in the review of the claims failing which in this situation the Claims of 107ONT, DART and NFM should be accepted as creditors of the estate.8 35 Mr. Donnelly did not actually respond to the Trustee’s position that the new proof of claim is essentially a re-submitting of the disallowed proofs of claim. Mr. Donnelly has not responded to the Trustee’s argu-

8Paragraph 45 of the factum filed on behalf of the “Respondents”, who are described as “NFM Investments Corp., Dart Supply Chain Solutions Inc., 1079570 Ontario Ltd. and Adrian Donnelly IWHL Inc., Re Mesbur J. 311

ment that the disallowances of the initial proofs of claim are final and binding. Mr. Donnelly seems to be of the view that the Trustee is in some kind of position of conflict, although he has not formally raised this issue on this motion.

Discussion: 36 Mr. Donnelly seems to be under the impression that the Trustee is trying to obtain an order that bars “the Respondents from taking any further civil remedies available at law against the Receiver and Trustee of IWHL.” This is how his factum describes the nature of the Trustee’s motion. 37 To be clear, the Trustee seeks only to expunge the first proofs of claim, expunge the second proof of claim, and/or declare that 1078570, Dart and NFM are not creditors in the estate of IWHL It also seeks an order barring 1078570, Dart, NFM or any affiliates of these companies, including NFM’s Trustee in bankruptcy, from filing any further claims in the estate of IWHL, on the basis that to permit further claims would be an abuse of the court’s process. 38 As far as the Receiver of IWHL is concerned, the receivership has been concluded, and the Receiver discharged. This motion is by IWHL’s Trustee in bankruptcy, and deals only with the IWHL bankruptcy, as opposed to IWHL’s receivership.

The Original Proofs of Claim 39 The law is very clear that an appeal from a Trustee’s disallowance of a proof of claim must be both served and filed with the court within thirty days of service of the disallowance.9 40 Mr. Donnelly suggests that the disallowances of the three original proofs of claim were not properly served, and thus the disallowances themselves are a nullity. I simply cannot accept this argument. 41 A notice of appeal from the three disallowances was served on the Trustee’s counsel. The disallowances must therefore have properly come to the attention of Dart, 1078570 and NFM. How else could they have started an appeal from the disallowances? I can only conclude the disallowances were properly served.

9Stein, Re (1976), 12 O.R. (2d) 1 (Ont. C.A.) 312 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

42 Although the appeal from the disallowances was served within the requisite time frame, it was not filed with the court within that time. In fact, it has never been filed with the court. As a result, section 135(4) of the BIA applies, and the disallowances of the three proofs of claim are final and conclusive. 43 The Trustee seeks an order expunging those claims. That is contemplated by s.135 (5) of the BIA. An order will therefore issue to that effect.

The New Proof of Claim 44 The new proof of claim is stated to be on behalf of NFM. NFM is bankrupt. All its assets have vested in its Trustee. There is no basis on which Mr. Donnelly has any ability or authority to submit a proof of claim on behalf of NFM. Only its Trustee has that authority. NFM’s Trustee was served with this motion. It did not respond, and did not appear. I assume, therefore, it does not oppose the relief sought. 45 That alone is really sufficient to deal with the new proof of claim. The Trustee, however, raises other bases on which it should be dealt with. These are important since they go to the Trustee’s position that the doctrines of res judicata, issue estoppel and abuse of process apply here, and that the new claim should be expunged as well. Counsel for New Solutions takes the same position, saying the new proof of claim is really a collateral attack on the original disallowances, thus constituting an abuse of process. 46 The new proof of claim is for $1,989,000, the sum of the amounts claimed in the disallowed original three proofs of claim. The Trustee, through its counsel, repeatedly sought information from Mr. Donnelly about the new proof of claim. The Trustee wanted information about on whose behalf the claim had been filed, confirmation of whether the new claim was in substitution for the three previously disallowed claims, and Mr. Donnelly’s authority to act on behalf of NFM, a bankrupt. The Trus- tee also sought a breakdown of and support for the amounts claimed in the new proof of claim. Mr. Donnelly has not responded in any meaningful way to these questions. 47 When I look at the first proofs of claim, and the material filed in support of them, and the material filed in support of the new proof of claim, IWHL Inc., Re Mesbur J. 313

I can only conclude the new proof of claim is essentially the same claim as the three disallowed proofs of claim. I say this because: a) In his affidavit filed in support of the appeal of the disallowed proofs of claim, Mr. Donnelly alleged that Dart had advanced $790,000 to NFM on August 14, 2009, attaching a copy of a cheque and wire transfer from Dart to IWHL. Mr. Donnelly has attached the same cheque and wire transfer as attachments to support the new proof of claim; b) It was New Solutions that had advanced $790,000 to Dart so that Dart could finance NFM’s acquisition of IWHL’s shares in 2009. Since the Trustee has admitted New Solu- tions’ claim for this sum, a further claim by Dart or NFM for this sum would constitute a double proof of claim. c) In his affidavit filed in support of the appeal of the disallowed proofs of claim Mr. Donnelly alleged that Dart and other affiliated companies had provided staff and services to IWHL under a Shared Services Agreement. He attached copies of 84 invoices to support what he claimed was IWHL’s indebtedness to Dart and its affiliates. Mr. Don- nelly has attached the same 84 invoices to support the new proof of claim. d) In his affidavit filed in support of the appeal of the disallowed proofs of claim, Mr. Donnelly alleged that on June 27, 2010 Dart had filed a claim in support of the outstanding balances related to the services provided. The new claim appears to relate to the same alleged Shared Services Agreement.10 48 The doctrines of res judicata and issue estoppel prevent the re-litigation of claims that have already been decided. They are founded on two public policy concerns, namely finality and fairness. The concept of finality means that it is in the public interest to put an end to litigation. The concept of fairness here means that no one should be “twice vexed by the same cause”.11 49 The doctrines of res judicata and issue estoppel apply to all claims which properly belonged to the subject matter of the previous litigation.

10See paragraph 35 of the Trustee’s Second Report 11EnerNorth Industries Inc., Re, 2009 ONCA 536 (Ont. C.A.) 314 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

What this means is that a party cannot attempt to “re-litigate a case by advancing a new legal theory in support of a claim based on essentially the same facts.”12 This doctrine also applies to bankruptcy proceedings, including the establishment of a proof of claim.13 Therefore, Mr. Don- nelly cannot try to advance what is effectively the same proof of claim as the proofs of claim that have already been conclusively disallowed. To allow this would be an abuse of the court’s process, since it is no more than an attempt to re-file a proof of claim which has already been disallowed. 50 I accept the Trustee’s argument that the new proof of claim is frivo- lous and vexatious and an abuse of process. The Trustee needs an order dealing with the new proof of claim, as well as an order preventing a repetition of an attempt to re-file. It needs such an order so that it can proceed to finish its administration of the estate. The order the Trustee seeks is reasonable and appropriate in all the circumstances.

Conclusion: 51 An order will therefore issue in the following terms: a) Expunging the claims of 1078570 Ontario Limited operating as Dart Logistics, Dart Supply Chain Solutions Inc. and NFM Investments Corp.; b) Declaring that 1078570 Ontario Limited operating as Dart Logistics, Dart Supply Chain Solutions Inc. and NFM In- vestments Corp. are not creditors in the estate of IWHL; c) Barring 1078570 Ontario Limited operating as Dart Logis- tics, Dart Supply Chain Solutions Inc. and NFM Invest- ments Corp. or any affiliates of these companies, including the trustee in bankruptcy of NFM Investments Corp. from filing any further claims in the estate of IWHL. 52 The Trustee suggests I should make an order for costs against Mr. Donnelly and/or his corporations, pointing out that Mr. Donnelly’s actions have necessitated an expenditure of legal fees on the estate’s behalf, thus reducing the funds available to distribute to creditors with proven claims. The Trustee has delivered only two reports to the court in this

12Britannia Airways Ltd. v. Royal Bank, [2005] O.J. No. 2 (Ont. S.C.J. [Com- mercial List]) 13EnerNorth Industries Inc., Re, supra IWHL Inc., Re Mesbur J. 315 bankruptcy. As far as I am aware, this is the first motion the Trustee has brought for advice and directions. The outcome of the motion should bring some finality to the issue of further claims from 1078570, Dart or NFM, and allow the Trustee to complete its administration of the estate. In these circumstances I see no reason to depart from the general practice of awarding no costs to the estate. There will therefore be no order as to costs of the motion. Motion granted. 316 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

[Indexed as: Friedland, Re] In the Matter of the Bankruptcy of Steven B. Friedland and Western Liquid Funding Inc. Temple Consulting Group Ltd. Appellant (Claimant) and Abakhan & Associates Inc., in its capacity as Trustee of the Estates of Steven B. Friedland and Western Liquid Funding Inc. Respondent (Trustee) British Columbia Court of Appeal Docket: Vancouver CA039498 2013 BCCA 119 Chiasson, Bennett, A. MacKenzie JJ.A. Heard: December 20, 2012 Judgment: March 18, 2013 Bankruptcy and insolvency –––– Proving claim — Practice and procedure — Miscellaneous –––– Appellant’s appeal from decision ordering declaration that appellant failed to appeal from trustee’s disallowance of its security within 30-day time limit imposed by s. 135(4) of Bankruptcy and Insolvency Act, and that therefore court lacked jurisdiction to hear appeal, and dismissing appellant’s claim that it was secured creditor of estate, was dismissed by appellate court — Appellate court concluded that appellant was obliged to file its application to appeal trustee’s disallowance of its claim within 30 days in accordance with Supreme Court Civil Rules — Counsel for appellant on appeal later wrote to registrar of appellate court advising that, subsequent to release of appellate court’s reasons, he realized that trustee’s notice of disallowance had been served electronically on then counsel for appellant at 4:07 p.m. on date in issue — Under Rules, material filed after 4:00 p.m. was deemed delivered following business day — If that were case, appellant’s appeal would have been filed in time — Appellant brought application seeking reconsideration of appellate court’s decision — Application dismissed — Appeal should be re-opened to extent of considering whether to admit fresh evidence — Tendered fresh evidence would not be admitted — Appellant could not satisfy due diligence criterion — It was not clear that, if admitted, evidence would be determinative — Admission of fresh evidence was not in interests of justice. Cases considered by Chiasson J.A.: Doman Forest Products Ltd. v. GMAC Commercial Credit Corp. - Canada (2005), 7 C.P.C. (6th) 309, 209 B.C.A.C. 197, 345 W.A.C. 197, 2005 BCCA 111, 2005 CarswellBC 433 (B.C. C.A.) — followed Friedland, Re 317

Friedland, Re (2011), 2011 BCSC 1058, 2011 CarswellBC 2192, 86 C.B.R. (5th) 157 (B.C. S.C. [In Chambers]) — referred to Golder Associates Ltd./Golder Associes Ltee v. North Coast Wind Energy Corp. (2010), 288 B.C.A.C. 130, 488 W.A.C. 130, 88 C.P.C. (6th) 12, 2010 BCCA 263, 2010 CarswellBC 1285, 319 D.L.R. (4th) 653 (B.C. C.A.) — followed Gully (Trustee of) v. TD Canada Trust (2002), 36 C.B.R. (4th) 58, 2002 BCSC 1170, 2002 CarswellBC 1873 (B.C. S.C. [In Chambers]) — considered Hadcock v. Georgia Pacific Securities Corp. (2007), 64 B.C.L.R. (4th) 316, 2007 BCCA 127, 2007 CarswellBC 380 (B.C. C.A.) — considered Kerpan v. Vovers (2012), 2012 BCSC 154, 2012 CarswellBC 277 (B.C. S.C.) — considered Park City Products Ltd., Re (2001), 2001 MBQB 200, 2001 CarswellMan 433, 27 C.B.R. (4th) 314, (sub nom. Park City Products Ltd. (Bankrupt), Re) 159 Man. R. (2d) 168 (Man. Q.B.) — considered Park City Products Ltd., Re (2002), (sub nom. Park City Products Ltd. (Bankrupt), Re) 162 Man. R. (2d) 206, 33 C.B.R. (4th) 79, 2002 Car- swellMan 113, 2002 MBQB 71 (Man. Q.B.) — referred to R. v. Hummel (2003), 2003 YKCA 4, 2003 CarswellYukon 31, 175 C.C.C. (3d) 1, 182 B.C.A.C. 93, 300 W.A.C. 93, [2003] Y.J. No. 36 (Y.T. C.A.) — considered R. v. Hummel (2003), 327 N.R. 391 (note), 2003 CarswellYukon 150, 2003 Car- swellYukon 151, 207 B.C.A.C. 158 (note), 341 W.A.C. 158 (note), [2002] S.C.C.A. No. 434 (S.C.C.) — referred to Statutes considered: Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 Generally — referred to s. 135(4) — referred to Rules considered: Bankruptcy and Insolvency General Rules, C.R.C. 1978, c. 368 Generally — referred to R. 3 — considered R. 6(1) — considered R. 113 — considered Supreme Court Civil Rules, B.C. Reg. 168/2009 Generally — referred to R. 4-1(2) — referred to R. 4-2(6) — considered R. 4-6(1)(d) — considered R. 4-6(4) — considered

APPLICATION by appellant seeking reconsideration of decision reported at Friedland, Re (2012), 2012 BCCA 381, 94 C.B.R. (5th) 215, 2012 CarswellBC 318 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

2941, 36 B.C.L.R. (5th) 290, [2013] 1 W.W.R. 303, 354 D.L.R. (4th) 371 (B.C. C.A.), dismissing appellant’s appeal.

R. McFee, Q.C., E. Leduc for Appellant S.A. Turner for Respondent

Chiasson J.A.: Introduction 1 This case may be an illustration of the adage: what can go wrong will go wrong. On the present application, this Court addresses a number of issues: service of material under the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 [BIA]; the relationship between the Supreme Court Civil Rules, B.C. Reg. 168/2009 [Civil Rules], the BIA and Bankruptcy and Insolvency General Rules, C.R.C., c. 368 [General Rules]; the admissibility of fresh evidence; whether this Court should reopen this appeal; and, if so, whether the previous decision of this Court should be revised.

Background 2 On September 26, 2012, this Court released its decision dismissing the appeal of Temple Consulting Group Ltd. from the decision of Mr. Justice Pearlman ordering a declaration that “Temple, a creditor of the bankrupts, failed to appeal from the Trustee’s disallowance of its security within the 30-day time limit imposed by s. 135(4) of the BIA, and that, therefore, the Court lacks jurisdiction to hear the appeal” and dismissing Temple’s claim that it is a secured creditor of the estate. (Pearlman J.’s reasons and orders may be found at 2011 BCSC 1557, 86 C.B.R. (5th) 105 (B.C. S.C.); this Court’s decision is indexed as Friedland, Re, 2012 BCCA 381 (B.C. C.A.)). 3 In summary, this Court on appeal concluded that Temple was obliged to file its application to appeal the Trustee’s disallowance of its claim within 30 days in accordance with the Civil Rules. Temple had delivered a copy of its application to the Trustee on the final day of the appeal period, but did not file it in the Supreme Court Registry until the next day. 4 On November 6, 2012, counsel for Temple on the appeal, who was not counsel at the time the notice of disallowance was served, wrote to the Registrar of this Court advising that, subsequent to the release of our reasons, he realized that the Trustee’s notice of disallowance had been Friedland, Re Chiasson J.A. 319

served electronically on then counsel for Temple at 4:07 p.m. on July 18, 2011. Under the Civil Rules, material filed after 4:00 p.m. is deemed delivered the following business day (in this case, July 19, 2011). If that were the case, Temple’s appeal, which was filed on August 18, 2011, would have been filed in time. 5 This Court’s order has not been entered. Temple seeks a reconsideration of our September 26, 2012 decision. 6 In a November 7, 2012 memorandum, this Court advised the parties as follows: We are in receipt of November 6, 2012 letters from the parties ... [T]he present application is one to re-open the appeal to permit an application to adduce fresh evidence. If this were allowed, the Court would consider whether to admit the fresh evidence and would decide whether to alter its previous decision. In our view, in the circumstances of this case, all of these matters should be dealt with at one time at an oral hearing, preceded by written submission of modest length and the filing of any required supporting material. 7 On December 19, 2012, this Court provided further direction to the parties: The parties are asked to consider and to be prepared to address whether the notice of disallowance was served properly and if so whether the Supreme Court rules are relevant to determining when the notice was served.

Discussion Background to the present application 8 The cornerstone of Temple’s application for a reconsideration of this Court’s decision is tendered fresh evidence. That evidence must be put into context. 9 The Trustee’s notice of disallowance was delivered by e-mail to counsel for Temple. The cover letter accompanying the notice was dated July 18, 2011. It stated: Attached please find the Trustee’s Notice of Disallowance of the claim of security by your client, Temple Consulting Group Ltd. (“Temple”), delivered to the Trustee on April 29, 2011. Please acknowledge service of the same on behalf of Temple by endorsing and returning the attached copy of this letter to the undersigned at your convenience. In accordance with Madam Justice Kloegman’s Order 320 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

of June 17, 2011, Temple has 30 days to appeal from the Notice of Disallowance. 10 On July 19, 2011, counsel for Temple responded: Yesterday, we received the Trustee’s Notice of Disallowance of the Temple claim. We do not require a hard copy of it. In the penultimate paragraph of the letter, counsel for Temple stated: We will not require any extension of time beyond the existing statutory deadline of 30 days after July 18. 11 Receipt of the notice of disallowance on July 18, 2011 was confirmed by counsel for Temple in his September 28, 2011 affidavit filed on the application before Pearlman J. He stated, “I received the Notice of Disal- lowance by e-mail on July 18, 2011”. 12 Counsel for the Trustee responded on July 21, 2011: Thank you for your letter of July 19, 2011, which we will take as an acknowledgment of service on your client of the Trustee’s Notice of Disallowance as of July 18, 2011. We confirm your advice that you will not require any extension of time beyond the existing statutory deadline of 30 days after July 18, 2011, to file a Notice of Appeal from the Trustee’s Notice of Disallowance. 13 On August 15, 2011, counsel for the Trustee reminded Temple’s counsel that the deadline for perfecting the proposed appeal “is fast approaching”. Counsel for Temple responded that day, stating, “I am mind- ful of our deadline...”. The next day, counsel for the Trustee advised, “[b]y my calculation, your appeal deadline is tomorrow. [Thirty] days from July 18th”. The notice of appeal was delivered electronically to the Trustee on August 17, 2011. It was filed in court on August 18, 2011. 14 On August 18, 2011, counsel for the Trustee advised counsel for Temple that the Trustee had asked him to consider whether the appeal was out of time. Based on his advice, the Trustee instructed counsel to apply to court for directions, which led to the proceedings before Pearl- man J., the appeal to this Court and this application. 15 In his affidavit on the present application, counsel for Temple during the relevant period deposes: 3. When the Notice of Disallowance was sent to my office on July 18, 2011, I did not turn my mind to the precise time of day when Exhibit “A” was received. I did not consider or notice the precise time when Exhibit “A” was received until I was asked to do so by Jack Webster, Q.C. on or about October 3, 2012. Friedland, Re Chiasson J.A. 321

4. In particular, until on or about October 3, 2012 I did not turn my mind to whether service of the Notice of Disallowance had to take place by 4:00 p.m. on July 18, 2011 to constitute effective service on that day. 5. As a result, when I responded to Mr. Turner in my letter/email of July 19, 2011 stating, inter alia, “Yesterday, we received the Trus- tee’s Notice of Disallowance to the Temple claim”, and at page 3, that “We will not require any extension of time beyond the existing statutory deadline of 30 days after July 18”, I had not noticed that the Notice of Disallowance had been served after 4:00 p.m. and had not considered whether service in fact had been effective on July 18, 2011, or as now appears to be the case under the applicable procedural rules, service was deemed to be effective on July 19, 2011. 6. Similarly, when Mr. Turner emailed me on August 18, 2011 advising that the Trustee had asked him to consider whether, because I had not filed Temple’s application with the Court on August 17, I may be out of time under section 135(4) of the BIA, I did not consider the actual time of service on July 18, 2011. I assumed that Mr. Turner was correct on the timing issue and assumed that Temple’s service or filing of the Notice of Application/Notice of Appeal was out of time. 7. Thereafter I did not focus on whether the time had expired but rather on whether it was necessary to both file Temple’s Notice of Application/Notice of Appeal and serve a filed copy of Temple’s No- tice of Application/Notice of Appeal on or before August 17. I was aware that there were cases dealing with that question and my entire focus was on gathering and analysing those cases. That focus informed everything I did thereafter until October 3, 2012 as described below. 8. When Mr. Turner advised me that he had instructions from the Trustee to bring an application for a Declaration that Temple had failed to appeal from the Trustee’s disallowance of its security within the 30 day time limit, I advised Temple that it would be necessary for them to retain new counsel to oppose the Trustee’s application as I may have made a mistake. 9. Temple retained Robin McFee of Sugden McFee and Roos (“SMR”) to resist the Trustee’s application. When Temple retained SMR, I provided SMR with background materials and information, including my letter to Scott Turner dated July 19, 2011. 10. I later forwarded to SMR the Trustee’s Notice of Application filed August 23, 2011 together with Mr. McCourt’s affidavit filed August 23, 2011 in support. 322 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

11. When I reviewed the Trustee’s application and Notice of Disal- lowance, I did not consider the actual time of day when service of the Notice of Disallowance by email and therefore did not become alive to or take issue with the Trustee’s statements, nor did I provide a copy of the covering email to SMR. 12. When I swore my affidavit on September 29, 2011 in opposition to the Trustee’s application and stated at paragraph 3 that, “I received the Notice of Disallowance by email on July 18, 2011.”, I had not considered or turned my mind to the actual time of day when the email was received on July 18, 2011. 13. As a result, the evidentiary record before the Court did not include Burns Fitzpatrick’s July 18 covering email nor any other indication of the actual time of day when the Trustee’s Notice of Disal- lowance was served on July 18, 2011, which appears to be critical to determination of expiry of the time period in question here. 14. After the Court of Appeal’s Reasons for Judgment were released on September 26, 2012 dismissing Temple’s appeal, Mr. Webster, counsel appointed on my and my firm’s behalf, reviewed the issue of when the appeal period commenced based on actual time of service by Mr. Turner and when the time limit for the appeal would, as a matter of law, expire. 15. Mr. Webster requested from me a copy of Mr. Turner’s July 18, 2011 email serving the Notice of Disallowance, and then my attention was drawn for the first time to the fact that the covering email from Burns Fitzpatrick was not received by my office until 4:07 p.m. on July 18, 2011. 16 The Trustee also delivered an affidavit on the present application sworn by its vice-president, Philip McCourt. He deposes that he was una- ware that the notice of disallowance had been sent after 4:00 p.m. on July 18, 2011 and did not appreciate that the timing might have significance. Mr. McCourt confirmed that the Trustee instructed its counsel to provide an opinion on whether the appeal was out of time because it was concerned with the court’s jurisdiction. Mr. McCourt also recapitulated the impact of the ongoing litigation as follows: 25. Meanwhile, the creditors of the bankrupts in this matter have been waiting to receive their dividends for more than two years now. There are more than 120 creditors of the estates. The trustee has so far allowed claims totalling more than $11,000,000. 26. Most of the creditors are individuals who were friends or ac- quaintances of the bankrupt Steven Friedland. The three inspectors of the estate fall into this category. They entrusted their personal sav- Friedland, Re Chiasson J.A. 323

ings to Mr. Friedland who, unbeknownst to them, was running a Ponzi scheme. They have expressed to me their extreme frustration with the length that this process has taken, particularly the different court processes.

Reconsidering an appeal 17 In my view, reconsidering a decision of this Court involves a two- step process: first, should the appeal be re-opened in order to consider a position advanced by a party; second, if so, should the decision be recon- sidered, that is, changed. This is the approach taken by the court in R. v. Hummel, 2003 YKCA 4, 175 C.C.C. (3d) 1 (Y.T. C.A.), leave to appeal dismissed, (2003), [2002] S.C.C.A. No. 434 (S.C.C.), and applied by this Court in Hadcock v. Georgia Pacific Securities Corp., 2007 BCCA 127, 64 B.C.L.R. (4th) 316 (B.C. C.A.). I recognize that often, from a practical perspective, the two steps are conflated, but in a case like the present, this Court must consider whether to reopen the appeal to determine whether to admit the tendered fresh evidence. If we were to do so, only then would we decide whether to reconsider our decision based on the fresh evidence. 18 Reconsideration is guided by the words of this Court in Doman Forest Products Ltd. v. GMAC Commercial Credit Corp. - Canada, 2005 BCCA 111, 209 B.C.A.C. 197 (B.C. C.A.)at para. 6: The circumstances in which a reconsideration will be undertaken are limited and do not include simple re-argument of the appeal. Some- thing in the nature of overlooked or misapprehended evidence, or failing that, a clear and compelling case in law on the point and the prospect of a very serious injustice absent reconsideration, is required: Mayer v. Mayer. That is to say, an application for reconsideration is of an extraordinary nature. 19 The tendered fresh evidence goes to the central issue on this appeal: whether Temple filed its application in time. In my view, the appeal should be re-opened to the extent of considering whether to admit the fresh evidence.

Fresh evidence 20 This Court addressed the criteria for the admission of fresh evidence in Golder Associates Ltd./Golder Associes Ltee v. North Coast Wind 324 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

Energy Corp., 2010 BCCA 263, 288 B.C.A.C. 130 (B.C. C.A.)at paras. 33 - 37: [33] The test for the admission of fresh evidence was stated in Palmer v. The Queen, [1980] 1 S.C.R. 759 at 775: (1) The evidence should generally not be admitted if, by due diligence, it could have been adduced at trial provided that this general principle will not be applied as strictly in a criminal case as in civil cases: see McMartin v. The Queen. (2) The evidence must be relevant in the sense that it bears upon a decisive or potentially decisive issue in the trial. (3) The evidence must be credible in the sense that it is reasonably capable of belief, and (4) It must be such that if believed it could reasonably, when taken with the other evidence adduced at trial, be expected to have affected the result. The leading case on the application of s. 610(1) of the Criminal Code is McMartin v. The Queen, supra. Ritchie J., for the Court, made it clear that while the rules applicable to the introduction of new evidence in the Court of Appeal in civil cases should not be applied with the same force in criminal matters, it was not in the best interests of justice that evidence should be so admitted as a matter of course. Special grounds must be shown to justify the exercise of this power by the appellate court. [34] The Court in McMartin v. The Queen, [1964] S.C.R. 484 at 493, adopted the following passage from R. v. Buckle (1949), 94 C.C.C. 84 at 85-86, 7 C.R. 485, 1 W.W.R. 833, 3 D.L.R. 418 (B.C.C.A.): In my opinion the rule to be applied in criminal cases in relation to the introduction of fresh evidence and conse- quential relief which may be granted by the Court, is wider in its discretionary scope than that applied by the Court in civil appeals. If the newly-discovered evidence is in its nature conclusive, then the Court of Appeal, in both civil and criminal cases, may itself finally deal with the matter.... [35] This Court in Spoor v. Nichols, 2001 BCCA 426, confirmed that the Palmer criteria apply in civil cases and observed in para. 16 that “in Palmer the court said that the due diligence test should be applied more strictly in civil than in criminal cases”. Friedland, Re Chiasson J.A. 325

[36] In Scott v. Scott, 2006 BCCA 504, Ryan J.A. observed in para. 21: ... the nature of an appeal is to examine the record and determine whether there has been an error of law or a palpable error of fact: it is not a continuation of a trial at a different stage. Thus, generally speaking, the need for certainty and finality leaves no room for the admission of fresh evidence on appeal ... [37] In my view, the Palmer criteria reflect the caution with which the admission of fresh evidence must be considered, but they are not absolute. The source of the criminal law admissibility of such evidence is the present s. 683(1)(d) of the Criminal Code, R.S.C. 1985, c. C-46, which provides for the admission of evidence “in the interests of justice”. That, I think, must be the overarching consideration in civil as well as criminal appeals. 21 Before considering whether to admit the fresh evidence, I identify issues that arise in the present circumstances.

Service of the notice of disallowance 22 Section 113 of the General Rules provides that a notice of disallowance “must be served, or sent by registered mail or courier”. Section 6(1) of the General Rules states: 6. (1) Unless otherwise provided in the Act or these Rules, every notice or other document given or sent pursuant to the Act or these Rules must be served, delivered personally, or sent by mail, courier, facsimile or electronic transmission. While s. 6(1) provides for sending a notice by electronic transmission, s. 113 does not. The issue becomes: what is service? The time of day for service is not specified in the General Rules. 23 Section 3 of the General Rules states: 3. In cases not provided for in the Act or these Rules, the courts shall apply, within their respective jurisdictions, their ordinary procedure to the extent that that procedure is not inconsistent with the Act or these Rules. 24 Whether electronic service of a notice of disallowance is permissible under the General Rules may be an open question, but it is not expressly authorized. In Kerpan v. Vovers, 2012 BCSC 154 (B.C. S.C.)at paras. 34 - 35, the court reiterated that the object of service is to ensure that a party has notice of proceedings. In 2001 MBQB 200, 27 C.B.R. (4th) 314 (Man. Q.B.), aff’d 2002 MBQB 71, 33 C.B.R. (4th) 79 (Man. Q.B.), the 326 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

Manitoba Registrar took the same approach in the context of bankruptcy proceedings, albeit in a factually different context (at para. 24). Park City Products Ltd., Re was considered in Gully (Trustee of) v. TD Canada Trust, 2002 BCSC 1170, 36 C.B.R. (4th) 58 (B.C. S.C. [In Chambers]). In that case, the court exercised discretion under s. 187(9) of the BIA to cure service of a notice of disallowance by facsimile. 25 In the present case, counsel for Temple agreed to electronic service stating, “[w]e do not require a hard copy of it”. 26 If resort were had to the British Columbia Supreme Court Civil Rules, electronic service is authorized (Rule 4-1(2)). Rule 4-2(6) deems service after 4:00 p.m. to have taken place the next business day, but Rule 4- 6(1)(d) provides for acknowledgement of service by a lawyer and Rule 4-6(4) permits the court to consider “any other evidence of service that the court considers appropriate in the circumstances”. 27 In summary, the facts and rules in this case give rise to a number of issues: 1. service is not defined in the General Rules; there appears to be a distinction between “served” and being “sent...by electronic transmission”, but case authorities support establish- ing service as a matter of fact; in this case, electronic service was accepted; 2. if service in fact suffices, the General Rules do not specify the time of day by which it must take place; 3. if resort is taken to the Civil Rules, electronic service is permissible, but it must take place before 4:00 p.m. or it will be deemed to have occurred on the next business day; 4. on the facts of this case, counsel for Temple acknowledged electronic service on July 18, 2011; the significance of this fact, in the context of the rules, requires consideration. I now turn to consider the fresh evidence.

Should the fresh evidence be admitted? 28 It is clear that Temple cannot satisfy the due diligence criterion. The information was available to it before the application was heard in Su- preme Court. In that court and in this Court, timing of the service of the notice of disallowance was critical. 29 I am not satisfied that, if admitted, the evidence would be determinative because of the issues I have identified. That is, even if evidence that Friedland, Re Chiasson J.A. 327

the notice were served electronically at 4:07 p.m. on July 18, 2011 was admitted, it would be necessary to consider the effect of the General Rules and the Civil Rules, the relationship between those rules, the case law related to service and the exchanges between counsel. 30 I consider next whether the admission of the fresh evidence is in the interests of justice. 31 In their submissions, the parties reviewed some of the history of the dispute. It is somewhat convoluted. The Trustee was concerned that the security given by the bankrupt for the claim was not valid. Initially, the Trustee disallowed the claim as advanced by another party, Skeena Con- tracting Ltd. (“Skeena”). Although it was given an opportunity to do so, Skeena, which was associated closely with Temple or its principal, did not make submissions. Subsequently, Temple advanced the claim as an assignee of Skeena. The Trustee sought directions from the British Co- lumbia Supreme Court whether the claim was res judicata. On June 17, 2011, the court held that it was, but that it would not be appropriate to apply the doctrine in the circumstances of this case (reasons at 2011 BCSC 1058, 86 C.B.R. (5th) 157 (B.C. S.C. [In Chambers]). 32 As can be seen, this has been and remains a hotly contested and expensive dispute. 33 It is apparent from examining the communications between counsel that both proceeded on the assumption that the notice of disallowance was served on July 18, 2011. Counsel for Temple said so; counsel for the Trustee took this as an acknowledgement of service. I repeat his words: Thank you for your letter of July 19, 2011, which we will take as an acknowledgement of service on your client of the Trustee’s Notice of Disallowance as of July 18, 2011. 34 There was no suggestion from Temple that this was incorrect. In my view, counsel for the Trustee was entitled to rely on the statement of counsel for Temple. He did so and provided advice to his client based on it. The Trustee considered counsel’s advice and instructed him to seek directions from the court. In the fulfillment of his duties, he was concerned with proceeding with an appeal when there was a question whether there was jurisdiction for the court to entertain it. 35 Mr. McCourt deposed: 20. Based on Mr. Turner’s advice, and Mr. Brown’s acknowledgement of service, the Trustee believed that Temple was out of time, and that therefore the Trustee had no jurisdiction to deal with its appeal. 328 CANADIAN BANKRUPTCY REPORTS 98 C.B.R. (5th)

21. If at any time prior to the original Chambers application in this matter, Mr. Brown had raised the issue of deemed service under Rule 4-2(6) of the Civil Rules, I am sure that I would have asked Mr. Tur- ner to consider its import and its effect on his opinion of August 19, 2011, and the Trustee’s position. However, that issue was never raised, and we proceeded as I have described. 22. From and after August 18, 2011, to the conclusion of the appeal, the Trustee has spent approximately $38,000 on legal fees alone (including taxes and disbursements) in relation to the advice provided by Mr. Turner the preparation and presentation of the Notice of Ap- plication in the Supreme Court, and responding to and arguing the appeal in this court. This does not include the cost of responding to this application to reopen the appeal. 23. In addition to Mr. Turner’s fees, I have spent a considerable number of hours preparing affidavits, reviewing court materials, commu- nicating and meeting with inspectors and otherwise in connection with the Notice of Application and appeal, at a cost to the estate of approximately $5,000. 36 The bankruptcy was declared October 5, 2010. As noted, Mr. Mc- Court in his affidavit described the on-going impact of this litigation. I repeat his comments: 25. Meanwhile, the creditors of the bankrupts in this matter have been waiting to receive their dividends for more than two years now. There are more than 120 creditors of the estates. The trustee has so far allowed claims totalling more than $11,000,000. 26. Most of the creditors are individuals who were friends or ac- quaintances of the bankrupt Steven Friedland. The three inspectors of the estate fall into this category. They entrusted their personal sav- ings to Mr. Friedland who, unbeknownst to them, was running a Ponzi scheme. They have expressed to me their extreme frustration with the length that this process has taken, particularly the different court processes. 37 In my view, admission of the fresh evidence is not in the interests of justice.

Conclusion 38 I would not admit the tendered fresh evidence. It follows that I would dismiss Temple’s application for a reconsideration of this Court’s decision of September 26, 2012. Friedland, Re MacKenzie J.A. 329

Bennett J.A.:

I agree

MacKenzie J.A.:

I agree Application dismissed.