Yukon (Government Of) V. Yukon Zinc Corporation, 2020 YKSC 16 May 26
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SUPREME COURT OF YUKON Citation: Yukon (Government of) v. Date: 20200526 Yukon Zinc Corporation, 2020 YKSC 16 S.C. No. 19-A0067 Registry: Whitehorse BETWEEN GOVERNMENT OF YUKON as represented by the Minister of the Department of Energy, Mines and Resources PETITIONER AND YUKON ZINC CORPORATION RESPONDENT Before Madam Justice S.M. Duncan Appearances: John T. Porter and Laurie A. Henderson Counsel for the Petitioner No one appearing Yukon Zinc Corporation No one appearing Jinduicheng Canada Resources Corporation Limited H. Lance Williams Counsel for Welichem Research General Partnership John Sandrelli and Cindy Cheuk Counsel for PricewaterhouseCoopers Inc. REASONS FOR JUDGMENT (Application by Welichem Opposing Partial Disclaimer) INTRODUCTION [1] Welichem Research General Partnership, (“Welichem”), is a secured creditor of the debtor company, Yukon Zinc Corporation (“YZC”). PricewaterhouseCoopers Inc. Yukon (Government of) v. Yukon Zinc Corporation, 2020 YKSC 16 2 (the “Receiver”) was appointed by Court Order dated September 13, 2019, as the Receiver of YZC. Welichem brings an application for the following relief: 1) the Receiver’s notice of partial disclaimer of the Master Lease is a nullity and of no force and effect; 2) the Receiver has affirmed the Master Lease and is bound by the entirety of its terms; and 3) the Receiver must pay to Welichem all amounts owing under the Master Lease from the date of the Receiver’s appointment and ongoing. BACKGROUND [2] The background set out in Yukon (Government of) v. Yukon Zinc Corporation, 2020 YKSC 15, applies here, in addition to the following facts. [3] On March 1, 2018, YZC sold 572 items, comprising most of the equipment, tools, vehicles and infrastructure at the Wolverine Mine (the “Mine”) to Maynbridge Capital Inc. (“Maynbridge”) for $5,060,000 (plus tax). Maynbridge and YZC entered into a Master Lease agreement also on March 1, 2018, for the lease of all 572 items. [4] The term of the Maynbridge lease was six months, with a total rental payment of $331,603.30 (plus applicable taxes) to be prepaid on the commencement date. Interest was 13%. The lease contained a purchase option of $5,060,000 on or before September 2, 2018. It was secured by a general security agreement dated March 1, 2018, over all of YZC’s present and after-acquired property, including the Master Lease items. [5] On May 31, 2018, YZC and Welichem entered into an initial loan agreement in the amount of $1,000,000 as principal. Yukon (Government of) v. Yukon Zinc Corporation, 2020 YKSC 16 3 [6] On July 23, 2018, Welichem advanced a second $1,000,000 loan to YZC. YZC granted a General Security Agreement in favour of Welichem, dated July 23, 2018. [7] On August 30, 2018, YZC and Welichem entered into a third loan agreement of $6,550,000 as principal. YZC granted a new General Security Agreement in favour of Welichem dated August 30, 2018. [8] On September 3, 2018, YZC used the monies from the third loan to purchase from Maynbridge the 572 Master Lease items for the sum of $6,550,000, by exercising the purchase option under the lease agreement with Maynbridge. [9] YZC sold these items to Welichem that same day, September 3, 2018, for $5,060,000. This reduced YZC’s loan debt to Welichem to $3,490,000. [10] Also on September 3, 2018, YZC and Welichem entered into a lease agreement (the “Master Lease”). Welichem leased to YZC all of the items purchased from Maynbridge and sold to Welichem. These are the same 572 Master Lease items that had been sold to Maynbridge and leased back to YZC, set out in Schedule A of the Master Lease (the “Master Lease Items”). The Master Lease and General Security Agreement with Welichem were in exactly the same form as those between YZC and Maynbridge. [11] The terms of the Master Lease with Welichem include the following: i) Rent of $338,430.82 plus taxes for each three-month period. Payment each month of $110,000. ii) Interest at 25% per annum, increasing to 50% on default. iii) Option to purchase the Master Lease Items for $5,060,000 plus taxes. iv) YZC to grant security against all of its present and after-acquired property. Yukon (Government of) v. Yukon Zinc Corporation, 2020 YKSC 16 4 v) YZC to keep the items in good repair, condition and mechanical working order. vi) YZC to deliver the Master Lease Items at its expense to a location specified by Welichem at the end of the term of the Master Lease, whether by expiry or termination. vii) YZC required to insure the Master Lease Items against theft, loss or destruction. [12] Welichem’s interests as a secured creditor and as a lessor were registered and perfected under the Yukon Personal Property Security Act, R.S.Y. 2002, c. 169, and the British Columbia Personal Property Security Act, R.S.B.C. 1996, c. 359, on September 26, 2018. [13] Welichem became the first-ranking secured creditor of the assets of YZC. They also held a first-ranking charge with the leasehold interest, as a result of subordination agreements with other parties with registered personal property security interests against YZC: namely, Jinduicheng Canada Resources Corporation Limited (“JDC Canada”), Jinduicheng Molybdenum Group Co. Ltd., Aihua Dang, Jingyou Lu, and Yu Luo. [14] A reserve for the full three-month payment (until December 2018) was retained by Welichem from the purchase price. After December 2018, YZC made no further payments. Nor did it make repayments on the outstanding amount of the loan of $3,490,000. By December 1, 2018, Welichem began charging 50% interest, and at the date of the receivership, it claimed the outstanding amount under the loan agreement was $6,820,000. Yukon (Government of) v. Yukon Zinc Corporation, 2020 YKSC 16 5 [15] Since September 2019, the Receiver has been responsible for ensuring the care and maintenance at the Mine is carried out, and the site is stabilized. The Receiver is also developing a sale and investment solicitation plan (“SISP”). [16] When the Receiver initially entered the Mine it found the following: i) The site crew consisted of two two-person teams for a two-week shift, the minimum number allowed for safety reasons. One shift did not have an individual with supervisor certification; ii) The employees had been ready to leave the Mine site because they were not being paid their wages and they had safety concerns; iii) The majority of the heavy equipment at the Mine was in need of repairs and subject to 10 outstanding work orders from YWCHSB; iv) The Mine was in a state of permanent closure under the Water Licence; and a state of temporary closure under the Mining Licence; and v) No lease payments had been made by YZC to Welichem since December 2018 and there was no insurance on any of the Master Lease Items. [17] The Receiver has identified 79 of the 572 Master Lease Items that it views as essential for the continuing and necessary care and maintenance and environmental remediation of the Mine (the “Essential Items”). These items include trucks - pick-ups, dump trucks, water trucks, vacuum trucks - trailers for staff accommodations, water treatment plant, fuel tanks, glycol storage tanks, generators, graders, excavators, skid steers, quad, water compressor, incinerator, compactor, frost fighter, scissor lift, pumps and a transformer. Yukon (Government of) v. Yukon Zinc Corporation, 2020 YKSC 16 6 [18] The Receiver reported that without the Essential Items, it has no means to control water on site, no ability to generate electricity for Mine facilities, no equipment to maintain the road or airstrip, no vehicles and no living accommodations for staff to carry out care and maintenance. [19] As of December 31, 2019, the Receiver incurred over $200,000 to repair Essential Items to a workable operating standard. [20] After several months of unsuccessful negotiations with Welichem, the Receiver issued a notice of partial disclaimer to Welichem on November 8, 2019. It provided that the Receiver intended to disclaim or resiliate (defined below) the Master Lease but was preserving the Receiver’s right to use the Essential Items, for a monthly payment of $13,500 as compensation for their use. The Receiver issued this notice after considering a number of factors, including the proportion of Essential Items in relation to all of the Master Lease Items; the feasibility of renting or purchasing alternate equipment; the amount spent by the Receiver on repairs to the Essential Items; and the projected wear and tear for use of the items during receivership. ISSUES [21] The issues in this application are: i) whether the Receiver has the authority to use the Essential Items to carry out its duties (i.e. partially disclaim the Master Lease); ii) if so, whether that authority was exercised properly in accordance with the Receiver’s duties; and Yukon (Government of) v. Yukon Zinc Corporation, 2020 YKSC 16 7 iii) whether the use of these items constitutes an affirmation of the Master Lease, requiring the Receiver to make full payments to Welichem from the date of its appointment and ongoing. POSITIONS OF THE PARTIES [22] Welichem’s grounds of objection are: first, at law the Receiver has a binary choice - affirm the entire contract or disclaim the entire contract. Second, the partial disclaimer was an attempt to alter unilaterally the material terms of the lease. This was beyond the Receiver’s authority and beyond the terms of the Court Order appointing them as Receiver. The Court has no authority or jurisdiction to impose an agreement with new terms on the parties. Third, s. 243(1)(c) of the Bankruptcy and Insolvency Act, R.S.C., 1985, c.