COURT FILE NUMBER 25-81252 Clerk’s Stamp
COURT COURT OF QUEEN’S BENCH OF ALBERTA
JUDICIAL CENTRE CALGARY
IN THE MATTER OF THE BANKRUPTCY AND INSOLVENCY ACT, R.S.C. 1985, C. B-3, AS AMENDED
AND IN THE MATTER OF THE BANKRUPTCY OF TRAKOPOLIS IoT CORP.
AND IN THE MATTER OF THE BANKRUPTCY OF TRAKOPOLIS SaaS CORP.
APPLICANT ESW HOLDINGS INC.
DOCUMENT BRIEF OF THE APPLICANT IN SUPPORT OF THE APPEALS FROM NOTICES OF DISALLOWANCE
ADDRESS FOR SERVICE AND MLT Aikins LLP CONTACT INFORMATION OF 2100, 222 3rd Avenue SW PARTY FILING THIS Calgary, Alberta T2P 0B4 DOCUMENT Phone: 604.608.4597/403.693.4347 Fax: 403.508.4349 Attention: William E.J. Skelly/Catrina Webster File: 0068641.00002
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TABLE OF CONTENTS
I. INTRODUCTION ...... - 2 - II. BACKGROUND AND FACTS ...... - 3 -
A. ESW EXTENDS CREDIT TO TRAKOPOLIS ...... - 3 -
B. THE WARRANT CERTIFICATE ...... - 4 -
C. THE MARCH 20, 2020 NOTICES OF DISALLOWANCE ...... - 6 -
D. MARCH 29, 2020 NOTICES OF DISALLOWANCE ...... - 7 - III. ISSUES ...... - 8 - IV. LAW AND ARGUMENT ...... - 8 -
A. THE NATURE OF AN APPEAL UNDER SECTION 135 OF THE BANKRUPTCY AND INSOLVENCY ACT . - 8 -
B. STANDARD OF REVIEW ...... - 9 -
C. THIS HONOURABLE COURT OUGHT TO ADMIT THE SUPPLEMENTAL EVIDENCE ...... - 10 -
D. THE ESW CLAIM IS A DEBT CLAIM, NOT AN EQUITY CLAIM ...... - 15 -
E. THE SAAS GUARANTEE SECURES OBLIGATIONS UNDER THE ARLA ...... - 21 - V. RELIEF REQUESTED ...... - 25 -
VI. TABLE OF AUTHORITIES……………………………………………..………………..…. - 25 -
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I. INTRODUCTION
1. This is the written brief of the Applicant, ESW Holdings Inc. (“ESW”), in support of ESW’s appeal (the “Disallowance Appeal”) from the Notices of Disallowance issued by the trustee in bankruptcy (the “Trustee”) of Trakopolis IoT Corp. (“IoT”) and Trakopolis SaaS Corp. (“SaaS”, and together with IoT, “Trakopolis”). The Disallowance Appeal is brought pursuant to section 135(4) of the Bankruptcy and Insolvency Act (the “BIA”).1
2. The Notices of Disallowance were issued on March 20, 2020 and March 29, 2020 with respect to Proofs of Claim filed by ESW (the “ESW Claim”) in the bankruptcy of IoT and the bankruptcy of SaaS.
3. First, ESW respectfully requests this Honourable Court to consider supplemental evidence (the “Supplemental Evidence”) contained in the Affidavit of Neeraj Gupta, sworn on April 22, 2020 and filed on April 24, 2020 (the “Affidavit of N. Gupta”), which supplements the information submitted in ESW’s Claim. The evidence contained in the Affidavit of N. Gupta is necessary to respond to, and correct, the Trustee’s incorrect conclusions.
4. Second, ESW requests this Honourable Court to set aside and vacate the Notices of Disallowance.
5. The Notices of Disallowance incorrectly asserted that ESW’s claim under the Warrant Certificate (as defined below) is an equity claim, rather than a debt claim. ESW never exercised the option to purchase shares in IoT, so never held an equity interest. Rather, ESW’s claim under the Warrant Certificate arises from the contractual obligation of IoT to buy the Warrant Certificate if an Acquisition (as defined below) occurred.
6. In addition, the Notice of Disallowance issued on March 20, 2020 held the SaaS Guarantee (as defined below) did not exist. However, in the Notice of Disallowance issued on March 29, 2020, the Trustee acknowledged the SaaS Guarantee existed, but advanced a tenuous interpretation that the Amended and Restated Loan Agreement excluded the SaaS Guarantee. The SaaS Guarantee was, in fact, incorporated in the Amended and Restated Loan Agreement, and expressly acknowledged in writing by the parties to continue to secure obligations under the Amended and Restated Loan Agreement.
1 Bankruptcy and Insolvency Act, RSC 1985, c B-3, at s. 135 (the “BIA”), at TAB 1 of the Book of Authorities (the “BOA”).
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II. BACKGROUND AND FACTS
7. The background and facts for the Disallowance Appeal are set out in the Affidavit of N. Gupta.
A. ESW Extends Credit to Trakopolis
8. On September 28, 2018, ESW provided IoT with a term sheet that contemplated ESW lending funds to IoT in order to refinance its existing indebtedness.
9. In the course of its due diligence, ESW identified two subsidiaries of IoT, namely SaaS and Trakopolis USA Corp. (“Trak USA”). SaaS owned the intellectual property of IoT and Trak USA acted as IoT’s payment agent in the United States.
10. On November 15, 2018, ESW advanced funds to IoT and SaaS pursuant to a Loan and Security Agreement dated November 15, 2018 (the “LSA”).
11. As part of the security for the LSA, on November 15, 2018, SaaS guaranteed the obligations of IoT to ESW pursuant to a guarantee (the “SaaS Guarantee”).
12. The parties intended to complete their financing transaction on November 15, 2018. In order to facilitate the financing, ESW was provided with what were purported to be IoT’s banking details to wire funds at closing.
13. On November 15, 2018, the following amounts were funded in accordance with the instructions provided to ESW by IoT:
a) USD $1,716,943.84 (the “Rejected Amount”) by ESW to IoT;
b) USD $60,000.00 to ESW as a lender’s fee;
c) USD $55,474.36 as the lender’s legal fees; and
d) USD $1,167,581.80 to Silicon Valley Bank, IoT’s creditor.
14. The Rejected Amount was not accepted by the receiving bank for IoT; the account that was represented to ESW as belonging to IoT, in fact, belonged to SaaS.
15. On or around November 16, 2018, ESW was informed that IoT was not the operating company as ESW had been led to believe, and IoT did not own the Canadian assets.
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16. On November 16, 2018, counsel for ESW, Aird & Berlis, e-mailed counsel for IoT and SaaS explaining ESW’s concern that as a result of the information ESW received concerning SaaS and IoT, IoT could not be in compliance with the terms of the LSA (in particular, the covenants).
17. As a result of ESW discovering that SaaS was actually the operating entity and owner of the Canadian assets, IoT, SaaS and ESW agreed to enter into, without novation, the Amended and Restated Loan Agreement dated November 27, 2018 (the “ARLA”, and collectively with the LSA, the “Credit Agreement”), pursuant to which the portion of funds not yet advanced (consisting of the Rejected Amount) would be funded to Trakopolis.
18. It was a term of the ARLA that IoT and SaaS acknowledge the security granted under the LSA, including the SaaS Guarantee, to be valid and enforceable in relation to the ARLA.2 To that end, on November 27, 2018, IoT and SaaS provided an executed acknowledgment to confirm and acknowledge the continuing effect and enforceability of all security documents that existed at the time of the LSA (the “Acknowledgment”).3 The SaaS Guarantee existed at the time of the LSA.
19. It was a term of the ARLA that IoT guarantee the obligations of SaaS to ESW, and on November 27, 2018, IoT guaranteed the obligations of SaaS to ESW pursuant to a guarantee.
20. On November 27, 2018, the ARLA was entered into and the Rejected Amount, being the only amount remaining to be funded under the Credit Agreement, was delivered to SaaS, subject to applicable disbursements.
B. The Warrant Certificate
21. It was a condition precedent of the Credit Agreement that IoT was to provide ESW with a share purchase warrant,4 as described in the warrant certificate (the “Warrant Certificate”).5
22. The Warrant Certificate provided ESW with the option to purchase 1,307,620 common shares in IoT (the “Warrant Shares”) at any point between November 15, 2018 and November 15, 2023 at the set price of $0.34 per common share (the “Purchase Option”).
2 Affidavit of Neeraj Gupta, sworn April 22, 2020 and filed April 24, 2020, at para 20 (the “Affidavit of N. Gupta”). 3 Affidavit of N. Gupta, at Exhibit “G”. 4 Affidavit of N. Gupta, at Exhibits “B” and “F”. 5 Affidavit of N. Gupta, at Exhibit “I”.
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23. If an “Acquisition” (as defined below) occurred while the Purchase Option remained outstanding, then IoT agreed under the Warrant Certificate to purchase the Warrant for cancellation at a price determined by the agreed-upon pricing formula (the “Re-Purchase Payment Obligation”).
24. The Re-Purchase Payment Obligation was the subject of specific negotiation between the parties and provided real and tangible value to Trakopolis as an alternative method of compensating ESW for providing funding with reduced ongoing interest costs relative to that offered by other lenders. The Re-Purchase Payment Obligation allowed Trakopolis to retain more capital for the operation of the business, a fact to which Trakopolis’ counsel testified in its filings to the TSX Venture Exchange.6
25. The Warrant Certificate defines acquisition as including, “the sale, lease, exclusive license, or other disposition of all or substantially all of the assets of [IoT]” (“Acquisition”).
26. On or about December 20, 2019, LLR Partners (“LLR”), through its subsidiary 1234600 BC Ltd., and Trakopolis entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”), pursuant to which LLR purchased all tangible and intangible assets, property, and rights of each of IoT and SaaS (the “Transaction”).
27. On January 9, 2020, the Honourable Justice A.D. Macleod granted a Sale Approval and Vesting Order approving the Transaction. The Transaction was completed on January 22, 2020.
28. The Transaction, comprising of the sale of all or substantially all of the assets of IoT, constituted an Acquisition pursuant to the Warrant Certificate, and triggered the Re-Purchase Payment Obligation, at a price determined by the relevant formula to be USD $600,000.00
29. It was specifically negotiated between counsel for ESW (MLT Aikins) and counsel for IoT and SaaS (Osler) that the Sale Approval and Vesting Order would only discharge the security granted by SaaS to ESW as it related to the assets described in the Asset Purchase Agreement. In all other respects, the security would remain valid and in full force and effect.7
6 Affidavit of N. Gupta, at para 29. 7 Affidavit of N. Gupta, at Exhibit “L”.
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30. At the time of the Transaction, ESW had not exercised its option to purchase any of the Warrant Shares, and as such, ESW never held an equity interest pursuant to the Warrant Certificate.
31. Prior to and after the completion of the Transaction, ESW never waived its rights under the Warrant Certificate and it was always the intention of ESW to rely on the Warrant Certificate. ESW’s intention to maintain its rights under the Warrant Certificate was made clear to counsel to Trakopolis on multiple occasions.
32. Further, ESW never released the obligations pursuant to the SaaS Guarantee or the IoT Guarantee.
33. The majority of the amounts owing from IoT and SaaS to ESW were paid out as a result of the Transaction. However, the parties expressly agreed to defer a decision on Trakopolis’ obligations with respect to the Re-Purchase Payment Option. ESW has continuously reserved its right to claim the USD $600,000.00 payment triggered by the Transaction.8
34. Following the completion of the Transaction, IoT and SaaS were assigned into bankruptcy to facilitate an orderly wind-up and liquidation of each company (such bankruptcies are respectively referred to as the “IoT Bankruptcy” and the “SaaS Bankruptcy”).
35. On February 12, 2020, ESW submitted its Proofs of Claim for the IoT Bankruptcy (the “IoT Claim”) and SaaS Bankruptcy (the “SaaS Claim”) to the Trustee in Bankruptcy for IoT and SaaS, both of which included ESW’s claim under the Warrant Certificate.
C. The March 20, 2020 Notices of Disallowance
36. On March 20, 2020, the Trustee served ESW with a Notice of Disallowance for ESW’s claim in the IoT Bankruptcy (the “March 20 IoT Disallowance”) and a Notice of Disallowance for ESW’s Claim in the SaaS Bankruptcy (the “March 20 SaaS Disallowance”, and collectively with the March 20 IoT Disallowance, the “March 20 Disallowances”).
8 Affidavit of N. Gupta, at para 41.
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(a) March 20 IoT Disallowance
37. In the March 20 IoT Disallowance, the Trustee concluded the IoT Claim arising from the Warrant Certificate is an equity claim pursuant to s. 140.1 of the BIA, and not entitled to any priority.
(b) March 20 SaaS Disallowance
38. Similarly, in the March 20 SaaS Disallowance, the Trustee concluded that the SaaS Claim arising from the Warrant Certificate is an equity claim pursuant to s. 140.1 of the BIA.
39. The Trustee also Trustee concluded that, “there is no evidence that was provided in the ESW 996 AB [SaaS] Claim that demonstrates an actual [SaaS Guarantee] exists. In the absence of an executed [SaaS Guarantee], it does not appear that Trak SaaS has any obligation to ESW pursuant to the Warrant.”
40. Counsel for ESW informed the Trustee, and the Trustee acknowledged, that executed copies of the SaaS Guarantee had previously been provided to the Trustee on February 12, 2020 as part of the SaaS Claim at Exhibit “F”.
D. March 29, 2020 Notices of Disallowance
41. On March 29, 2020, the Trustee issued a new Notice of Disallowance for the IoT Claim (the “March 29 IoT Disallowance”) and a new Notice of Disallowance for the SaaS Claim (the “March 29 SaaS Disallowance,” and together with the March 29 IoT Disallowance, the “March 29 Disallowances”).
(a) March 29 IoT Disallowance
42. Under the March 29 IoT Disallowance, the Trustee maintained the IoT Claim arising from the Warrant Certificate is an equity claim pursuant to s. 140.1 of the BIA.
(b) March 29 SaaS Disallowance
43. Under the March 29 SaaS Disallowance, the Trustee maintained the SaaS Claim arising from the Warrant Certificate is an equity claim pursuant to s. 140.1 of the BIA.
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44. In the March 29 SaaS Disallowance, the Trustee also advanced an interpretation of the SaaS Guarantee that the SaaS Guarantee was excluded by the ARLA. For the reasons that follow, this is an untenable interpretation.
III. ISSUES
45. There are six issues to be determined by this Honourable Court:
a) the process for hearing an appeal under s. 135(4) of the BIA;
b) the appropriate standard of review;
c) whether ESW is permitted to introduce the Supplemental Evidence contained in the Affidavit of N. Gupta;
d) whether the ESW Claim pursuant to the Warrant Certificate is an equity or a debt claim;
e) whether the SaaS Guarantee secures obligations pursuant to the ARLA; and
f) whether the ESW Claim ought to be approved.
IV. LAW AND ARGUMENT
A. The Nature of an Appeal under Section 135 of the Bankruptcy and Insolvency Act
46. Appeals brought under s. 135 of the BIA should be treated by the Court as an appeal “de novo” or in a “hybrid” fashion, in which the appeal is limited to the original record with the Court retaining discretion to admit fresh evidence where the interests of justice require it.
47. There is a line of decisions from this Honourable Court that stand for the proposition that a s. 135 appeal should be heard de novo. In Alberta Permit Pro Inc., Re (“Permit Pro”), Justice Veit addressed jurisprudence in other provinces and recognized that:
… there is no binding Alberta decision requiring ‘appeal’ to be interpreted as ‘appeal on the record’. On the contrary, Alberta has a long tradition of interpreting ‘appeal’ as ‘appeal de novo’: see former rules 299 and 500 [new rules 13.19(1) and 6.14 respectively]. Moreover, a purposive interpretation of the word ‘appeal’ in the BIA leads to the conclusion that business efficacy requires a re-hearing which will produce a substantive decision rather than
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merely a decision to return the issue to the Chair or the Trustee for renewed consideration.9
48. In Prue v MNP Ltd., a subsequent decision of Justice Veit, she noted:
… an appeal under [s. 135] is one of – an appeal on the record, an appeal by way of a fresh - or de novo - hearing, or a hybrid of the two… Given the summary nature of the process leading up to a Disallowance, and the short time lines to appeal, it seems entirely likely that the legislator is intended that a person whose claim was disallowed — here a claim in excess of $2 million — ought to have the right to a full hearing of its position, which can only occur in a de novo or fresh hearing. On a fresh hearing, or even on a hybrid of a fresh hearing and a hearing which contains material from the original process, the reasons of the Trustee for disallowing the claim are, of course, irrelevant: new material will presumably have to be assessed.10 [citations omitted]
49. In Experienced Equipment Sales & Rentals Inc. (“Experienced Equipment”), Justice Belzil cited Permit Pro, and simply stated that “… an appeal pursuant to s. 135(1.1) is de novo”.11
50. In Aronson v Whozagood Inc. (“Aronson”), Justice Eamon found it open to Alberta Courts to hear an appeal of a disallowance de novo, or to conduct a “hybrid” appeal and consider admitting fresh evidence where necessary. Aronson considered Permit Pro and Experienced Equipment, and weighed them against other decisions where courts adopted the hybrid approach.12 Justice Eamon noted the hybrid approach aims to conduct appeals with a view of holding efficient, expeditious, and fair proceedings, starting with the evidence already on the record and adducing fresh evidence at the Court's discretion. He also acknowledged there is no conclusive guidance as to whether an appeal de novo or a hybrid appeal is more appropriate.13
B. Standard of Review
51. In Aronson, Justice Eamon found that where a Court hears a s. 135 appeal in a hybrid fashion, then the standard of review is correctness.14 The standard of review when considering a trustee’s
9 Re Alberta Permit Pro Inc., 2011 ABQB 141, at para 2, at TAB 2 of the BOA. 10 Prue v MNP Ltd., 2014 ABQB 764 at para 30, at TAB 3 of the BOA. 11 Experienced Equipment Sales & Rentals Inc., 2011 ABQB 641 at para 13 (“Experienced Equipment”), at TAB 4 of the BOA. 12 Aronson v Whozagood Inc., 2019 ABQB 656 at para 29 (“Aronson”), at TAB 5 of the BOA, citing Re Galaxy Sports Inc., 2004 BCCA 284 ("Galaxy Sports"), at TAB 6 of the BOA; San Juan Resources Inc., Re, 2009 ABQB 55 (“San Juan”), at TAB 7 of the BOA; Transglobal Communications Group Inc., Re 2009 ABQB 195 (“Transglobal”), at TAB 8 of the BOA; Oil Lift Technologies Inc. v Deloitte & Touche Inc., 2012 ABQB 357 at TAB 9 of the BOA. 13 Aronson, at paras 29 & 34, at TAB 5 of the BOA. 14 Aronson, at para 36, at TAB 5 of the BOA.
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decision under s. 135 of the BIA is correctness for legal issues, including extricable legal issues arising from questions of mixed law and fact, and reasonableness for questions of fact.15
52. Justice Eamon relied on Transglobal Communications Group Inc., Re, in which Justice Yamauchi aligned with the British Columbia Court of Appeal's decision Re Galaxy Sports Inc. (“Galaxy Sports”), in which the Court:
…characterized the trustee's power to allow or disallow a claim (for which the trustee must give written reasons) under BIA s. 135 as a decision more of law than fact and, therefore, a matter on which the court might be assumed to have equal expertise. The court noted that such questions ‘have important legal consequences, in that a person whose proof of claim is disallowed or rejected may not participate as a creditor in the bankruptcy generally or in the distribution of the bankrupt's estate.’ This would attract a correctness standard. 16[Emphasis Added]
53. Accordingly, in the event a s. 135 appeal is not heard de novo and the hybrid approach is applied, the standard of review of a trustee's decisions to disallow a proof of claim is correctness.
C. This Honourable Court Ought to Admit the Supplemental Evidence
54. While ESW has put its best foot forward in the ESW Claim, the Supplemental Evidence is necessary to respond to the Notices of Disallowance, and ought to be admitted. If this Honourable Court decides to allow the Supplemental Evidence, then according to Aronson, the standard of review for questions of fact would change to correctness, and this Honourable Court would consider whether the Supplemental Evidence persuades the Court a better decision is available.17
55. Again, there are two options available to this Honourable Court: it can proceed with a trial de novo with the Supplemental Evidence before it, or it can consider the following application to admit the Supplemental Evidence under the “hybrid” approach used in Aronson.
15Aronson, at para 35, at TAB 5 of the BOA. 16 Transglobal, at para 70, at TAB 8 of the BOA. 17 Aronson, at para 36, at TAB 5 of the BOA.
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56. Where Courts have followed the de novo approach, they have accepted and considered all evidence relevant to the claim in order to generate a record. 18 Thus, if this Honourable Court decides to proceed with the de novo approach, it will consider all relevant evidence before it.
57. If, on the other hand, this Honourable Court prefers to proceed under the hybrid approach, it must consider the application below to decide if admitting the Supplemental Evidence is in the interests of justice.
58. In Galaxy Sports, the Court held that if the appellants wanted to introduce fresh evidence, they would need to apply to do so.19 If the appellants in Galaxy Sports had applied to introduce the evidence, the chambers judge would then be obligated to decide whether admitting the evidence was justified in the interests of justice, or on some other principled basis.20
59. In San Juan Resources Inc., Re (“San Juan”),21 following the hybrid approach, the Alberta Court of Queen’s Bench noted the conflicting case law, and ultimately opted to admit the particular evidence. Citing to Lloyd’s Non-Marine Underwriters v J.J. Lacey Insurance Ltd., the Court in San Juan noted,
“There is certainly merit to the suggestion that efficacy and expedition ought to be brought to the claims determination and disallowance procedure. It is undoubtedly true that the entry of fresh evidence at the appeal level may result in the loss of efficacy in the bankruptcy process in that the business at creditors’ meetings would be co-opted and extra expense, delay and formality would be imposed upon the process.
However, in my view efficacy, expedition, concerns over extra expense and delay or increased formality should not be permitted to trump fairness… In my view however the Court should not be denied the opportunity to hear such evidence simply because doing so would be disruptive to the efficacy of the claims determination process.”22
60. More recently, in Aronson the Alberta Court of Queen’s Bench held,
“The Court has discretion to admit fresh evidence where the interests of justice require it. The test for admitting fresh evidence is not limited to the stringent test which applies to appeals from trials conducted in a Court”.23
18 Eskasoni Fisheries Ltd., Re (2000), 16 CBR (4th) 173, at paras 16 and 19 (NS SC), at TAB 10 of the BOA; see also Permit Pro, at TAB 2 of the BOA and Experienced Equipment, at TAB 4 of the BOA . 19 Galaxy Sports, at para 42, at TAB 6 of the BOA. 20 Galaxy Sports, at para 42, at TAB 6 of the BOA. 21 San Juan, at TAB 7 of the BOA. 22 San Juan, at para 26, at TAB 7 of the BOA, citing to Lloyd’s Non-Marine Underwriters v J.J. Lacey Insurance Ltd., 2008 NLTD 9, at paras 17-18. 23 Aronson, at para 29, at TAB 5 of the BOA.
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61. The Court in Aronson relied on the following factors to determine whether the interests of justice require the Court to consider fresh evidence:
a) the grounds for disallowing the claim;
b) the evidence the appellants provided in their proof of claim;
c) the necessity, reliability, or importance of the fresh evidence; and
d) the fairness and integrity of the claims process.24
62. The interests of justice and fairness require the supplemental evidence to be introduced for the following reasons:
a) the Trustee’s grounds for disallowing the ESW Claim are based on the Trustee’s incorrect interpretations of the Warrant Certificate and Credit Agreements, as well as a the Trustee’s reliance on a state of affairs it has since acknowledged as incorrect;
b) ESW gave full and detailed evidence of the ESW Claim to the Trustee;
c) the Supplemental Evidence is necessary to respond to the Trustee’s incorrect conclusions and the Trustee’s reliance on a state of affairs it has since acknowledged as incorrect, and the Supplemental Evidence is consistent with documents submitted in the ESW Claim; and
d) allowing the Supplemental Evidence would allow ESW to respond to the Trustee’s issues in a manner that ensures procedural fairness.
(a) The Trustee’s Grounds for Disallowing the ESW Claim are Based on Incorrect Conclusions
63. The Trustee incorrectly interpreted two key elements of the ESW Claim: first, the Trustee incorrectly concluded that ESW held an equity interest in IoT pursuant to the Warrant Certificate; and second, the Trustee incorrectly interpreted the ARLA to conclude the ARLA excludes the SaaS Guarantee. The Supplemental Evidence is necessary to correct both of these conclusions.
24 Aronson, at para 39, at TAB 5 of the BOA.
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64. First, regarding the Warrant Certificate, it appears the Trustee incorrectly assumed ESW exercised the Purchase Option to purchase shares in IoT. The Supplemental Evidence is necessary to correct that assumption.
65. The Supplemental Evidence clarifies that ESW never purchased any shares in IoT.25 Further, the Supplemental Evidence explains that the ESW Claim under the Warrant Certificate is based on IoT’s contractual obligations, whereby IoT agreed to pay ESW USD $600,000.00 if an Acquisition occurred before ESW exercised the Purchase Option.26
66. Second, regarding the SaaS Guarantee, it should be noted the Trustee initially concluded in the March 20 SaaS Disallowance that the SaaS Guarantee did not exist, despite receiving a copy of the SaaS Guarantee in the ESW Claim. Once this was pointed out to the Trustee, the Trustee issued the March 29 SaaS Disallowance, in which the Trustee asserted there was “no evidence” the SaaS Guarantee was extended to the ARLA. The Trustee also noted in the March 29 SaaS Disallowance it was advised the SaaS Guarantee was only contemplated and considered for the LSA.
67. The Supplemental Evidence explains that in fact, the ARLA does contemplate the SaaS Guarantee, and in addition, the parties signed the Acknowledgment to expressly acknowledge the SaaS Guarantee secures IoT’s obligations under the ARLA.27
68. Thus, since the Trustee’s grounds for disallowing the ESW Claim are based on incorrect assumptions and understandings of the relevant documents, the Supplemental Evidence is necessary to respond to, and correct, the Trustee’s incorrect conclusions.
(b) ESW Gave Full and Detailed Evidence of the ESW Claim
69. In Aronson, the Court declined to admit the appellants’ fresh evidence, finding “no apparent reason” why the appellants did not disclose the evidence in the claims process.28 In contrast, ESW advanced all the relevant documents in support of the ESW Claim in the first instance.
25 Affidavit of N. Gupta, at para 37. 26 Affidavit of N. Gupta, at para 29. 27 Affidavit of N. Gupta, at para 20, and Exhibit “G”. 28 Aronson, at para 75, at TAB 5 of the BOA.
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70. ESW submitted copies of the LSA, the ARLA, the Warrant Certificate, and the SaaS Guarantee in the ESW Claim. ESW reasonably believed that the provision of this evidence in the first instance would support its claim.
71. However, based on the Trustee’s conclusions, it is now necessary to adduce the Supplemental Evidence to respond to the Trustee’s incorrect interpretations of the evidence advanced in the ESW Claim.
(c) The Supplemental Evidence is Necessary and Reliable
72. In Aronson, the Court found the appellants sought to introduce fresh evidence that was ambiguous and contradictory; the Court noted the evidence was inconsistent with the appellant’s records, internally inconsistent, and vague.29 Its reliability did not outweigh any necessity. This is not the case here. The Supplemental Evidence is consistent with the materials in the ESW Claim, and is necessary to the Trustee’s issues with the ESW Claim.
73. The Supplemental Evidence includes the Acknowledgment, which was signed by ESW, IoT, and SaaS, and clarifying explanations from Mr. Gupta that respond to the Trustee’s incorrect interpretation of the documents contained in the ESW Claim.
74. The Supplemental Evidence is necessary, in that it responds to the Trustee’s incorrect conclusions, as well as reliable, in that it is internally consistent and does not raise issues of credibility. In addition, the Trustee indicated in the March 29 SaaS Disallowance that it was advised on a statement of affairs that simply did not exist. It is now necessary to correct this misunderstanding.
(d) Allowing the Supplemental Evidence Ensures a Fair Procedure
75. Admitting the Supplemental Evidence ensures a fair procedure because it allows ESW to respond to the Trustee’s incorrect understanding of the documents submitted in the ESW Claim. In addition, the Supplemental Evidence is necessary to understand the record available to the Trustee.
76. First, ESW was not aware of the Trustee’s specific concerns when it submitted the ESW Claim. While the Court in Aronson took issue with the fact the appellants did not claim they were
29 Aronson, at paras 62, 66, 70, and 73, at TAB 5 of the BOA.
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unaware of the Trustee’s concerns,30 this is not the case here. When ESW submitted the ESW Claim, it was not aware the Trustee would (or could) conclude ESW purchased shares in IoT pursuant to the Warrant Certificate, and could not have reasonably anticipated the Trustee would first, conclude the SaaS Guarantee did not exist, or second, the ARLA excluded the SaaS Guarantee.
77. It is now necessary to provide ESW a fair opportunity to respond to the Trustee’s incorrect conclusions with the Supplemental Evidence.
78. Second, the Supplemental Evidence is necessary to understand the record available to the Trustee.31 The Trustee had possession of the LSA, the ARLA, the Warrant Certificate, and the SaaS Guarantee, when it made its decision to deny the ESW Claim. Although ESW submitted all the necessary documentation in the first instance, the Trustee’s conclusions are based on incorrect understandings of these documents. The Supplemental Evidence will assist in understanding the documents submitted in the ESW Claim.
79. In sum, it is necessary to introduce the Supplemental Evidence because it responds directly to the Trustee’s grounds for disallowance; ESW has, in good faith, submitted all the evidence it believed necessary in the first instance; the Supplemental Evidence is both necessary and reliable; and admitting the Supplemental Evidence ensures a fair process for ESW to respond to the Trustee’s incorrect understanding of the documents advanced in the ESW Claim.
D. The ESW Claim is a Debt Claim, not an Equity Claim
80. The Trustee’s decision to disallow the IoT Claim on the grounds that it is an equity claim under s. 140.1 of the BIA must be set aside. Under s. 140.1 of the BIA, a creditor is not entitled to a dividend respecting an equity claim until all claims, other than equity claims, have been satisfied.32 ESW is not seeking a dividend and ESW does not have, and never has had, an equity interest in IoT.
81. Rather, the ESW claim under the Warrant Certificate (the “Warrant Claim”) is properly classified as a debt claim, arising from IoT’s contractual obligation under the Warrant
30 Aronson, at para 76, at TAB 5 of the BOA. 31 Aronson, at para 77, at TAB 5 of the BOA. 32 BIA, at s. 140.1, at TAB 1 of the BOA.
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Certificate. The Trustee incorrectly interpreted the true substance of the Warrant Certificate, and wrongly concluded the Warrant Claim is based in equity, rather than debt.
82. Courts have often considered whether proofs of claim in insolvency proceedings are “debt” or “equity” claims. As Justice Morawetz of the Ontario Supreme Court (as he then was) noted in Re Sino-Forest Corp., the difference in debt and equity claimants’ place in the bankruptcy priority scheme flows from the fundamentally different nature of debt and equity investments. Shareholders have unlimited upside potential when purchasing shares, whereas creditors share in an enterprise’s risk but do not enjoy the corresponding potential upside.33
83. In other words, equity claimants, commonly thought of as investors, are considered to take a higher degree of risk in a company’s economic fortunes than creditors who do not share in any upside in the profits or value and the risk of failure. As a result, equity claimants do not share rateably with other creditors in a distribution of proceeds in any court-approved plan of arrangement or proposal.
84. The definitions of “equity claim” and “equity interest” are identical in the BIA and the Companies’ Creditors Arrangement Act, and were added in the suite of 2009 amendments to Canada’s insolvency legislation. However, in Bul River Mineral Corp., Re (“Bul River”), Justice Fitzpatrick confirmed that,
“[t]he 2009 amendments have not affected the ability of the court to continue to analyze the substance of the claims, albeit in the context of the expanded definition of ‘equity claim’.”34 [emphasis in original]
85. The Trustee’s conclusion that the Warrant Claim is an equity claim must be overturned for the following reasons:
a) when distinguishing a debt claim from an equity claim, it is necessary to consider the overall effect of the transaction and intention of the parties to determine if it creates a debt claim or equity claim;35 and
b) the effect of the Warrant Certificate imposed a contractual obligation on IoT to compensate ESW by USD $600,00.00 at the time of the Transaction.
33 Re Sino-Forest Corp., 2012 ONSC 4377, at para 24, at TAB 11 of the BOA. 34 Re Bul River Mineral Corp., 2014 BCSC 1732 at para 85, (“Bul River”) at TAB 12 of the BOA. 35 Bul River, at para 69, at TAB 12 of the BOA.
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(a) Overall Effect of the Warrant Certificate
86. The true substance of the Warrant Certificate, at the relevant time, imposed a contractual obligation on IoT, and as such, the Warrant Claim is properly classified as a debt claim, rather than an equity claim.
87. The BIA defines “equity interest” as a share in the corporation, or a warrant or option to acquire a share in the corporation, other than one derived from convertible debt.36
88. The BIA defines “equity claim” as a claim in respect of an equity interest, and includes a claim in a dividend, a return of capital, a redemption or retraction obligation, a monetary loss resulting from ownership, or contribution or indemnity in respect of the above.37
89. In Tudor Sales Ltd., Re, the Court considered whether a claim was an equity claim for the purpose of s. 140.1 of the BIA, and noted the following:
“At its heart, the difference between equity and debt lies in the fundamental nature of their respective claims on the assets and cash flow of the company. Debt involves borrowing funds subject to a legal commitment to repay the borrowed money with interest at an agreed rate by a stated maturity date. This commitment is embodied in a contract, and this contract is implemented by the borrower… In contrast to debt, an equity claim entitles the holder to a share of the company's profits and residual cash flows after the company has made all the contractually required debt service payments. That is, the debt ranks senior to the equity with respect to the company's cash flows.”38
90. In All Canadian Investment Corporation (Re) (“All Canadian”), Justice Walker summarized factors courts can consider when determining the substance of the relationship of shareholders to a debtor corporation:
a) The specific language contained in the company’s articles and the transaction documents.
b) The right of a shareholder to redeem shares. The absence of this right is inconsistent with a creditor relationship. A right of redemption is particularly compelling as an indicia of a creditor relationship where the articles or transaction documents expressly provide that the redemption is for the repayment of a loan.
c) Whether shareholders had upside potential in the return of their investment and also shared in the downside risk of a lower return, which indicates an equity relationship.
36 BIA, at s. 2, at TAB 1 of the BOA. 37 BIA, at s. 2, at TAB 1 of the BOA. 38 Tudor Sales Ltd., Re, 2017 BCSC 119, at para 36, at TAB 13 of the BOA.
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d) Whether the shareholder had the right to receive dividends, which is a strong indicia of an equity relationship.
e) Treatment on liquidation, dissolution, or winding up.
f) Whether the shares are treated as equity or debt in the financial statements of the corporation.39
91. According to All Canadian, the relevant test to distinguish between debt and equity claims is set out in Canada Deposit Insurance Corp. v Canadian Commercial Bank (“Canada Deposit”).40
92. In Canada Deposit, Justice Iacobucci urged Courts to “look at what the parties intended” in order to ascertain the substance of the relationship and invited Courts to admit additional evidence where appropriate:
“As in any case involving contractual interpretation, the characterization issue facing this court must be decided by determining the intention of the parties to the support agreements. This task, perplexing as it sometimes proves to be, depends primarily on the meaning of the words chosen by the parties to reflect their intention. When the words alone are insufficient to reach a conclusion as to the true nature of the agreement, or when outside support for a particular characterization is required, a consideration of admissible surrounding circumstances may be appropriate.”41 [emphasis added]
93. In Canada Deposit, it was further held that when distinguishing between debt and equity claims, the analysis must focus on the essence of the transaction, rather than its form:
“When a court is searching for the substance of a particular transaction, it should not be too easily distracted by aspects which are, in reality, only incidental or secondary in nature to the main thrust of the agreement.”42
94. In Bul River, Justice Fitzpatrick confirmed Justice Iacobucci’s approach in Canada Deposit to identify the substance of a transaction, and set out the following factors to assist in determining whether a party is a debt or equity claimant:
a) the fact that a transaction contains both debt and equity features does not, in itself, determine its characterization as either debt or equity;
39 All Canadian Investment Corporation (Re), 2019 BCSC 1488, at para 85 (“All Canadian”), at TAB 14 of the BOA. 40 Canada Deposit Insurance Corp. v Canadian Commercial Bank, [1992] 3 SCR 558 (“Canada Deposit”), at TAB 15 of the BOA. 41 Canada Deposit, at para 52, at TAB 15 of the BOA. 42 Canada Deposit, at para 55, at TAB 15 of the BOA.
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b) the characterization of a transaction under review requires the determination of the intention of the parties;
c) it does not follow that each and every aspect of a “hybrid” debt and equity transaction must be given the exact same weight when addressing a characterization issue; and
d) a Court should not too easily be distracted by aspects of a transaction which are, in reality, only incidental or secondary in nature to the main thrust of the agreement.43
95. In Canada Deposit, the Supreme Court of Canada (the “SCC”) considered whether a warrant to purchase common shares created an equitable claim under the BIA. The SCC acknowledged the participants could, under the warrant, exercise their option and own 75% of the common shares of the debtor company. However, the SCC held this was unlikely to occur. More significantly, the SCC noted the equitable nature of the warrant was merely incidental to its true purpose, which was to add incentive for the creditor to extend funds to the debtor:
“It is not without significance that none of the participants ever exercised any of their warrants nor did they assign them. In these circumstances, I agree with the Court of Appeal that the true effectiveness of the equity agreement was highly contingent and that the learned chambers judge erred in not considering the warrants for what they really were, namely, so-called ‘sweeteners’ or ‘kickers’ with respect to the advance of $255 million which were simply additional features to the underlying loan arrangement between the parties. Undoubtedly, the warrants are an equity feature of the transaction supporting a conclusion that the advance was an investment. However, in the facts of this case, only minimal weight should be given to this factor in the overall characterization of the agreement.”44
96. The Warrant Certificate is similar to the warrants at issue in Canada Deposit. The Warrant Certificate was entered into as part of the overall Credit Agreement. To use the language in Canada Deposit, the Warrant Certificate was a “sweetener” or a “kicker” for ESW – an extra piece of consideration to provide incentive for ESW to extend credit to IoT. Until exercise of the Purchase Option, the Warrant Certificate did not change the creditor-debtor relationship between ESW and IoT.
97. In essence, the Warrant Certificate provided ESW with consideration for the LSA and ARLA. The Re-Purchase Payment Obligation provided an alternative method to compensate ESW for extending credit at a reduced interest cost compared to other lenders. The Re-Purchase
43 Bul River, at para 69, at TAB 12 of the BOA. 44 Canada Deposit, at para 57, at TAB 15 of the BOA.
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Payment Obligation enabled Trakopolis to retain more capital for the operation of its business, and still ensured ESW would be compensated in the event of an Acquisition.45
98. The Warrant Certificate is also similar to the warrants at issue in Canada Deposit in that the effectiveness of the Warrant Certificate as an equity instrument was highly contingent; it depended on ESW exercising the Purchase Option. Since ESW never exercised the Purchase Option, it never held an equitable interest in IoT.
99. In Henderson v Minister of National Revenue, the Federal Court of Appeal considered the difference between share purchase warrants and share warrants.46 Citing to the trial decision, the Court held a share purchase warrant did not entitle the holder to rights in the optioned shares until exercised:
“However until subscription and allotment is made and communicated to the subscriber no shares come into existence. That being so the share purchase warrant does not confer rights on it holder in or over shares but only the right to have shares issued….
… in relation to the warrants there were no shares in being.”47
100. Similarly, until ESW exercised the Purchase Option, ESW had no rights or interest in the Warrant Shares.
101. In sum, the true essence of the Warrant Certificate does not create an equity interest without exercise of the Purchase Option. To the extent there are features of an equity claim, these are incidental, and do not change the true purpose of the Warrant Certificate, which was to provide additional consideration to ESW to extend credit to Trakopolis under the Credit Agreement. Whether the parties called it an equity instrument, a debt instrument, or a piece of furniture does not change the substance of the Warrant Certificate, or the creditor-debtor relationship.
(b) Warrant Certificate Imposed a Contractual Obligation on IoT at the Relevant Time
102. More particularly, IoT agreed under the Warrant Certificate that if an Acquisition occurred before ESW exercised the Purchase Option, then IoT would purchase the Warrant Certificate for cancellation from ESW in the amount of USD $600,000.00. Again, this was intended to
45 Affidavit of N. Gupta, at para 29. 46 Henderson v Minister of National Revenue, [1975] CTC 485 (Fed. CA) (“Henderson”), at TAB 16 of the BOA. 47 Henderson, at paras 30-31, at TAB 16 of the BOA.
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provide consideration to ESW for providing funding at a reduced ongoing interest cost, if an event of Acquisition occurred before ESW exercised the Purchase Option.
103. Section 1.6(c) of the Warrant Certificate provides,
“In the event of an Acquisition, the Company [IoT] shall acquire from the Holder [ESW] effective immediately prior to and contingent upon the consummation of such Acquisition all of the Warrants then outstanding for an aggregate price equal to [the amount dictated by the pricing formula, amounting to USD $600,000.00].”48
104. The Warrant Certificate imposed a contractual obligation on IoT to buy the outstanding Warrant Shares from ESW, which crystallized immediately prior to the Transaction.
105. Pursuant to s. 121(1) of the BIA, a “provable claim” is defined as all debts and liabilities to which the debtor is subject by reason of any obligation incurred before the day on which the debtor becomes bankrupt.49
106. On January 22, 2020, the Transaction whereby LLR purchased all tangible and intangible assets of IoT and SaaS, was completed. On January 22, 2020, ESW had not exercised the Purchase Option under the Warrant Certificate.50 As such, on January 22, 2020, the Re- Purchase Payment Obligation was triggered under the Warrant Certificate.
107. IoT’s contractual obligation to provide payment to ESW remains outstanding. ESW is entitled to claim the amount outstanding under the Warrant Certificate as a debt claim.
108. As noted, since ESW never exercised the Purchase Option under the Warrant Certificate, it did not agree to participate in IoT’s success, and nor did it agree to assume the risks of IoT’s financial losses. ESW has always maintained its status as a creditor, and is entitled to pursue the amount outstanding under the Warrant Certificate as a debt claim.
E. The SaaS Guarantee Secures Obligations Under the ARLA
109. The SaaS Guarantee was always intended to secure IoT’s obligations under the ARLA, and the Trustee was incorrect to conclude first, the SaaS Guarantee did not exist, and second, the ARLA excludes the SaaS Guarantee.
48 Affidavit of N. Gupta, at Exhibit “I”. 49 BIA, at s. 121(1), at TAB 1 of the BOA. 50 Affidavit of N. Gupta, at para 37.
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110. The validity and continued operation of the SaaS Guarantee under the ARLA is supported in the language of the ARLA itself. Considering the ARLA as a whole, the only commercially reasonable interpretation consistent with the entire document is that the ARLA incorporates the SaaS Guarantee as security for IoT’s obligations.
111. If the Court still finds ambiguity between the Trustee’s interpretation and ESW’s interpretation, then the factual matrix surrounding the formation of the ARLA objectively supports the parties’ intention for the SaaS Guarantee to secure IoT’s obligations under the ARLA. In particular, the Acknowledgment document is an express statement of the parties’ intentions for the SaaS Guarantee to secure IoT’s obligations under the ARLA.51
(a) Interpreting the ARLA as a Whole Supports the Inclusion of the SaaS Guarantee
112. The ARLA, when examined as a whole, incorporates the SaaS Guarantee. The Trustee, however, has advanced a tenuous interpretation that the “Entire Agreement” clause excludes the SaaS Guarantee. Following the Trustee’s interpretation and disallowing the SaaS Guarantee would be contrary to principles of contractual interpretation.
113. According to the SCC in Tercon Contractors Ltd. v British Columbia (Minister of Transportation & Highways) (“Tercon”),
“The key principles of contractual interpretation here is that the words of one provision must not be read in isolation but should be considered in harmony with the rest of the contract and in light of its purpose and commercial context.”52
114. Tercon also considered an exclusion clause. The SCC noted it was necessary to consider the exclusion clause in light of its purpose and commercial context, as well as its overall terms.53 Thus, it is necessary to consider the language of the “Entire Agreement” clause in light of the entire ARLA, as well as its purpose and commercial context.
115. It should be noted that a copy of the ARLA was provided to the Trustee at Exhibit “A” of the SaaS Claim, and an executed copy of the SaaS Guarantee was provided to the Trustee at Exhibit “F” of the SaaS Claim.
51 Affidavit of N. Gupta, at Exhibit “G”. 52 Tercon Contractors Ltd. v British Columbia (Minister of Transportation & Highways), 2010 SCC 4, at para 64 (“Tercon”), at TAB 17 of the BOA. 53 Tercon, at para 65.
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116. The “Entire Agreement” clause provides as follow:
“This Agreement and the other Loan Documents embody the entire agreement and understanding between the parties hereto and thereto and supersede all prior agreements and understandings between such parties relating to the subject matter hereof and thereof and may not be contradicted by evidence of prior or contemporaneous agreements of the parties.”54
117. The ARLA defines “Loan Documents” as including,
“any other document, instrument, or agreement entered into in connection with this Agreement or the Obligations, all as amended or extended from time to time.”55
118. The ARLA defines “Obligations” as, “all debt, principal, interest, Lender Expenses, fees, the Prepayment Premium, if any, and other amounts owed to Lender by Borrower [SaaS] pursuant to this Agreement or any other agreement, whether absolute or contingent, due or to become due, now existing or hereafter arising, including any interest that accrues after the commencement of an Insolvency Proceeding and including any debt, liability, or obligation owing from Borrower to others that Lender may have obtained by assignment or otherwise.”56
119. It is clear from the above that the parties intended the definition of “Loan Documents” to include other documents and instruments entered into in connection with the ARLA, as well as other Obligations owed from SaaS to ESW. It is also clear under s. 3.1(r) that the parties contemplated ESW requiring additional documents.
120. Thus, by definition, the “Entire Agreement” clause actually does contemplate additional documents and instruments in support of the ARLA. The SaaS Guarantee is a security instrument that secures obligations under the ARLA.
121. In addition, it is not commercially reasonable for the Trustee to conclude the ARLA excludes the SaaS Guarantee. The SCC recently confirmed that contractual interpretation requires courts to consider principles of commercial reasonableness and efficacy.57 According to Resolute FP Canada Inc. v Ontario (Attorney General),
“… commercial reasonableness is a crucial consideration in interpreting a contract (see Canadian Contractual Interpretation Law, at p. 55). This is simply a corollary of the object of discerning the parties’ intentions: when interpreting commercial contracts, courts seek to
54 Affidavit of N. Gupta, at Exhibit “F”. 55 Affidavit of N. Gupta, at Exhibit “F”. 56 Affidavit of N. Gupta, at Exhibit “F”. 57 Resolute FP Canada Inc. v Ontario (Attorney General), 2019 SCC 60, at para 79 (“Resolute”), at TAB 18 of the BOA.
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reach a commercially sensible interpretation, since doing so is more likely than not to give effect to the intention of the parties…
Discerning commercial reasonableness entails, like all contractual interpretation, an objective analysis (see Canadian Contractual Interpretation Law, at p. 57). Courts should therefore read commercial contracts in a ‘positive and purposive manner’, seeking to understand the structure of the agreement reached by the parties, the purpose of the transaction and the business context in which the contract was intended to operate.”58
122. It is not commercially reasonable to assume ESW would agree to enter into the ARLA without the security of the SaaS Guarantee, which the parties executed a mere two weeks before executing the ARLA.
123. Rather, the language in the rest of the ARLA and the commercial purpose of the ARLA indicate the parties’ objectively intended the SaaS Guarantee to secure obligations under the ARLA.
(b) Surrounding Circumstances Support the Application of the SaaS Guarantee
124. The surrounding circumstances, and the Acknowledgment in particular, demonstrate the parties’ objective intention for the SaaS Guarantee to secure obligations under the ARLA.
125. According to the Alberta Court of Queen’s Bench in Nexxtep Resources Ltd. v Talisman Energy Inc. (“Nexxtep”),
“The objective of contractual interpretation is to ascertain what the parties objectively intended by their bargain, when they made it. Primacy is given to the parties’ words, particularly in a written contract, because it is presumed that the parties chose words that embodied their intentions.
However, the objective remains the determination of the parties’ intention, not the meaning of words in a document. Thus, the authorities give guidelines for the consideration of the ‘factual matrix’ or ‘surrounding circumstances’ to help determine the parties’ contractual intention as would be determined by a reasonable person so situated. In other words, extra- textual evidence is used to help understand what the parties meant by the words they used.”59
126. If there is any ambiguity regarding whether the parties intended the SaaS Guarantee to secure obligations under the ARLA, this Court ought to consider the Acknowledgment.
58 Resolute, at paras 142-143, at TAB 18 of the BOA. 59 Nexxtep Resources Ltd. v Talisman Energy Inc., 2012 ABQB 62, at paras 5-6, aff’d 2013 ABCA 40, at TAB 19 of the BOA.
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127. Pursuant to s. 3.1(r) of the ARLA, the extension of credit under the ARLA was conditional upon any documents or certificates that ESW deemed necessary. Mr. Gupta’s unchallenged evidence is that ESW required IoT and SaaS to sign the Acknowledgment document before ESW would agree to the ARLA.60
128. On November 27, 2018, IoT and SaaS executed the Acknowledgment, pursuant to which IoT and SaaS acknowledged and confirmed the continuing effect and enforceability of all security documents that existed at the time the LSA was executed.61 Since the SaaS Guarantee existed at the time of the LSA, it is included under the Acknowledgment.
129. Pursuant to Nexxtep, the Acknowledgment is “extra-textual evidence” that will assist this Court in determining the objective intention of the parties regarding the SaaS Guarantee.
130. In light of the language in the entire agreement, the commercial purpose of the ARLA, and the surrounding circumstances, it is clear the parties intended the SaaS Guarantee to continue to secure IoT’s obligations under the ARLA. As such, this Court ought to overturn the Trustee’s incorrect conclusion that the “Entire Agreement” clause, read in isolation, excludes the SaaS Guarantee.
V. RELIEF REQUESTED
131. ESW respectfully requests that this Honourable Court grant an Order:
a) permitting ESW to submit Supplemental Evidence contained in the Affidavit of N. Gupta;
b) overturning the Notices of Disallowance;
c) directing the Trustee to allow the ESW Claim under the Warrant Certificate as a debt claim;
d) directing the Trustee to give full force and effect to the SaaS Guarantee;
e) granting ESW costs of this appeal on a solicitor and own client (full indemnity) basis; and
60 Affidavit of N. Gupta, at para 20. 61 Affidavit of N. Gupta, at Exhibit “G”.
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TABLE OF AUTHORITIES
Bankruptcy and Insolvency Act, RSC 1985, c B-3………………………………………………. .TAB -1 - Re Alberta Permit Pro Inc., 2011 ABQB 141 …………………………………………………….TAB - 2 - Prue v. MNP Ltd., 2014 ABQB 764 ………………………………………………………………TAB - 3 - Experienced Equipment Sales & Rentals Inc., 2011 ABQB 641………………………………….TAB - 4 - Aronson v Whozagood Inc., 2019 ABQB 656 …………………………………………………….TAB - 5 - Galaxy Sports Inc., Re, 2004 BCCA 284 …………………………………………………………TAB - 6 - San Juan Resources Inc., Re, 2009 ABQB 55 ……………………………………………………TAB - 7 - Transglobal Communications Group Inc., Re, 2009 ABQB 195 ………………………………...TAB - 8 - Oil Lift Technology Inc. v Deloitte & Touche Inc., 2012 ABQB 357 ……………………………TAB - 9 - Eskasoni Fisheries Ltd., Re (2000), 16 CBR (4th) 173 …………………………………………..TAB - 10- Re Sino-Forest Corp., 2012 ONSC 4377 ………………………………………………………...TAB - 11- Bul River Mineral Corp., Re, 2014 BCSC 1732 …………………………………………………TAB - 12- Tudor Sales Ltd., Re, 2017 BCSC 119………………………………………………………..…..TAB - 13- All Canadian Investment Corporation (Re), 2019 BCSC 1488………………………………...... TAB - 14 - Canada Deposit Insurance Corp. v Canadian Commercial Bank, [1992] 3 SCR 558 …………..TAB - 15 - Henderson v Minister of National Revenue, [1975] CTC 485 (Fed. CA)………………………...TAB - 16 - Tercon Contractors Ltd. v British Columbia (Minister of Transportation & Highways), 2010 SCC 4 ………………………………………………………………………………………………….TAB - 17 - Resolute FP Canada Inc. v Ontario (Attorney General), 2019 SCC 60 ………………………...TAB - 18 - Nexxtep Resources Ltd. v Talisman Energy Inc., 2012 ABQB 62 ……………………………....TAB - 19 -
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CANADA
CONSOLIDATION CODIFICATION
Bankruptcy and Insolvency Act Loi sur la faillite et l’insolvabilité
R.S.C., 1985, c. B-3 L.R.C. (1985), ch. B-3
Current to June 17, 2020 À jour au 17 juin 2020
Last amended on November 1, 2019 Dernière modification le 1 novembre 2019
Published by the Minister of Justice at the following address: Publié par le ministre de la Justice à l’adresse suivante : http://laws-lois.justice.gc.ca http://lois-laws.justice.gc.ca R.S.C., 1985, c. B-3 L.R.C., 1985, ch. B-3
An Act respecting bankruptcy and Loi concernant la faillite et l’insolvabilité insolvency Short Title Titre abrégé
Short title Titre abrégé 1 This Act may be cited as the Bankruptcy and Insol- 1 Loi sur la faillite et l’insolvabilité. vency Act. L.R. (1985), ch. B-3, art. 1; 1992, ch. 27, art. 2. R.S., 1985, c. B-3, s. 1; 1992, c. 27, s. 2. Interpretation Définitions et interprétation
Definitions Définitions 2 In this Act, 2 Les définitions qui suivent s’appliquent à la présente loi. affidavit includes statutory declaration and solemn af- firmation; (affidavit) accord de transfert de titres pour obtention de crédit Accord aux termes duquel une personne insolvable ou un aircraft objects [Repealed, 2012, c. 31, s. 414] failli transfère la propriété d’un bien en vue de garantir le paiement d’une somme ou l’exécution d’une obligation application, with respect to a bankruptcy application relativement à un contrat financier admissible. (title filed in a court in the Province of Quebec, means a mo- transfer credit support agreement) tion; (Version anglaise seulement) actif à court terme Sommes en espèces, équivalents de assignment means an assignment filed with the official trésorerie — notamment les effets négociables et dépôts à receiver; (cession) vue —, inventaire, comptes à recevoir ou produit de toute opération relative à ces actifs. (current assets) bank means actionnaire S’agissant d’une personne morale ou d’une (a) every bank and every authorized foreign bank fiducie de revenu assujetties à la présente loi, est assimi- within the meaning of section 2 of the Bank Act, lée à l’actionnaire la personne ayant un intérêt dans cette personne morale ou détenant des parts de cette fiducie. every other member of the Canadian Payments (b) (shareholder) Association established by the Canadian Payments Act, and administrateur S’agissant d’une personne morale autre qu’une fiducie de revenu, toute personne exerçant les every local cooperative credit society, as defined in (c) fonctions d’administrateur, indépendamment de son subsection 2(1) of the Act referred to in paragraph (b), titre, et, s’agissant d’une fiducie de revenu, toute per- that is a member of a central cooperative credit soci- sonne exerçant les fonctions de fiduciaire, indépendam- ety, as defined in that subsection, that is a member of ment de son titre. (director) that Association; (banque)
Current to June 17, 2020 1 À jour au 17 juin 2020 Last amended on November 1, 2019 Dernière modification le 1 novembre 2019 Bankruptcy and Insolvency Faillite et insolvabilité Interpretation Définitions et interprétation Section 2 Article 2
bankrupt means a person who has made an assignment affidavit Sont assimilées à un affidavit une déclaration or against whom a bankruptcy order has been made or et une affirmation solennelles. (affidavit) the legal status of that person; (failli) agent négociateur Syndicat ayant conclu une conven- bankruptcy means the state of being bankrupt or the tion collective pour le compte des employés d’une per- fact of becoming bankrupt; (faillite) sonne. (bargaining agent)
bargaining agent means any trade union that has en- banque tered into a collective agreement on behalf of the employ- ees of a person; (agent négociateur) a) Les banques et les banques étrangères autorisées, au sens de l’article 2 de la Loi sur les banques; child [Repealed, 2000, c. 12, s. 8] b) les membres de l’Association canadienne des paie- claim provable in bankruptcy, provable claim or claim ments créée par la Loi canadienne sur les paiements; provable includes any claim or liability provable in pro- ceedings under this Act by a creditor; (réclamation c) les sociétés coopératives de crédit locales définies prouvable en matière de faillite ou réclamation prou- au paragraphe 2(1) de la loi mentionnée à l’alinéa b) et affiliées à une centrale — au sens du même paragraphe vable) — qui est elle-même membre de cette association. collective agreement, in relation to an insolvent person, (bank) means a collective agreement within the meaning of the Bien de toute nature, qu’il soit situé au Canada ou jurisdiction governing collective bargaining between the bien ailleurs. Sont compris parmi les biens les biens person- insolvent person and a bargaining agent; (convention nels et réels, en droit ou en equity, les sommes d’argent, collective) marchandises, choses non possessoires et terres, ainsi common-law partner, in relation to an individual, que les obligations, servitudes et toute espèce de do- means a person who is cohabiting with the individual in a maines, d’intérêts ou de profits, présents ou futurs, ac- conjugal relationship, having so cohabited for a period of quis ou éventuels, sur des biens, ou en provenant ou s’y rattachant. ( ) at least one year; (conjoint de fait) property [Abrogée, 2004, ch. 25, art. 7] common-law partnership means the relationship be- biens tween two persons who are common-law partners of each biens aéronautiques [Abrogée, 2012, ch. 31, art. 414] other; (union de fait) cession Cession déposée chez le séquestre officiel. (as- corporation means a company or legal person that is in- signment) corporated by or under an Act of Parliament or of the leg- islature of a province, an incorporated company, wherev- conjoint de fait La personne qui vit avec la personne en er incorporated, that is authorized to carry on business in cause dans une relation conjugale depuis au moins un an. Canada or has an office or property in Canada or an in- (common-law partner) come trust, but does not include banks, authorized for- eign banks within the meaning of section 2 of the Bank conseiller juridique Toute personne qualifiée, en vertu Act, insurance companies, trust companies or loan com- du droit de la province, pour donner des avis juridiques. panies; ( ) personne morale (legal counsel) , except in paragraphs 178(1)(a) and (a.1) and sec- court contrat financier admissible Contrat d’une catégorie tions 204.1 to 204.3, means a court referred to in subsec- prescrite. (eligible financial contract) tion 183(1) or (1.1) or a judge of that court, and includes a registrar when exercising the powers of the court con- convention collective S’agissant d’une personne insol- ferred on a registrar under this Act; (tribunal) vable, s’entend au sens donné à ce terme par les règles de droit applicables aux négociations collectives entre elle et means a person having a claim provable as a creditor l’agent négociateur. (collective agreement) claim under this Act; (créancier) créancier Personne titulaire d’une réclamation prou- vable à ce titre sous le régime de la présente loi. (credi- tor)
Current to June 17, 2020 2 À jour au 17 juin 2020 Last amended on November 1, 2019 Dernière modification le 1 novembre 2019 Bankruptcy and Insolvency Faillite et insolvabilité Interpretation Définitions et interprétation Section 2 Article 2
current assets means cash, cash equivalents — includ- créancier garanti Personne titulaire d’une hypothèque, ing negotiable instruments and demand deposits — in- d’un gage, d’une charge ou d’un privilège sur ou contre ventory or accounts receivable, or the proceeds from any les biens du débiteur ou une partie de ses biens, à titre de dealing with those assets; (actif à court terme) garantie d’une dette échue ou à échoir, ou personne dont la réclamation est fondée sur un effet de commerce ou date of the bankruptcy, in respect of a person, means garantie par ce dernier, lequel effet de commerce est dé- the date of tenu comme garantie subsidiaire et dont le débiteur n’est responsable qu’indirectement ou secondairement. S’en- (a) the granting of a bankruptcy order against the per- tend en outre : son, a) de la personne titulaire, selon le Code civil du Qué- (b) the filing of an assignment in respect of the per- bec ou les autres lois de la province de Québec, d’un son, or droit de rétention ou d’une priorité constitutive de droit réel sur ou contre les biens du débiteur ou une (c) the event that causes an assignment by the person partie de ses biens; to be deemed; (date de la faillite) b) lorsque l’exercice de ses droits est assujetti aux date of the initial bankruptcy event, in respect of a règles prévues pour l’exercice des droits hypothécaires person, means the earliest of the day on which any one of au livre sixième du Code civil du Québec intitulé Des the following is made, filed or commenced, as the case priorités et des hypothèques : may be: (i) de la personne qui vend un bien au débiteur, (a) an assignment by or in respect of the person, sous condition ou à tempérament,
(b) a proposal by or in respect of the person, (ii) de la personne qui achète un bien du débiteur avec faculté de rachat en faveur de celui-ci, (c) a notice of intention by the person, (iii) du fiduciaire d’une fiducie constituée par le dé- (d) the first application for a bankruptcy order against biteur afin de garantir l’exécution d’une obligation. the person, in any case (secured creditor)
(i) referred to in paragraph 50.4(8)(a) or 57(a) or date de la faillite S’agissant d’une personne, la date : subsection 61(2), or a) soit de l’ordonnance de faillite la visant; (ii) in which a notice of intention to make a propos- al has been filed under section 50.4 or a proposal b) soit du dépôt d’une cession de biens la visant; has been filed under section 62 in respect of the person and the person files an assignment before c) soit du fait sur la base duquel elle est réputée avoir the court has approved the proposal, fait une cession de biens. (date of the bankruptcy)
(e) the application in respect of which a bankruptcy débiteur Sont assimilées à un débiteur toute personne order is made, in the case of an application other than insolvable et toute personne qui, à l’époque où elle a one referred to in paragraph (d), or commis un acte de faillite, résidait au Canada ou y exer- çait des activités. S’entend en outre, lorsque le contexte (f) proceedings under the Companies’ Creditors Ar- l’exige, d’un failli. (debtor) rangement Act; (ouverture de la faillite) disposition [Abrogée, 2005, ch. 47, art. 2] debtor includes an insolvent person and any person who, at the time an act of bankruptcy was committed by enfant [Abrogée, 2000, ch. 12, art. 8] him, resided or carried on business in Canada and, where the context requires, includes a bankrupt; (débiteur) entreprise de service public Vise notamment la per- sonne ou l’organisme qui fournit du combustible, de l’eau director in respect of a corporation other than an in- ou de l’électricité, un service de télécommunications, come trust, means a person occupying the position of di- d’enlèvement des ordures ou de lutte contre la pollution rector by whatever name called and, in the case of an in- ou encore des services postaux. (public utility) come trust, a person occupying the position of trustee by whatever name called; (administrateur)
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eligible financial contract means an agreement of a failli Personne qui a fait une cession ou contre laquelle a prescribed kind; (contrat financier admissible) été rendue une ordonnance de faillite. Peut aussi s’en- tendre de la situation juridique d’une telle personne. equity claim means a claim that is in respect of an equi- (bankrupt) ty interest, including a claim for, among others, faillite L’état de faillite ou le fait de devenir en faillite. (a) a dividend or similar payment, (bankruptcy)
(b) a return of capital, fiducie de revenu Fiducie qui possède un actif au Canada et dont les parts sont inscrites à une bourse de (c) a redemption or retraction obligation, valeurs mobilières visée par les Règles générales à la date de l’ouverture de la faillite, ou sont détenues en majorité a monetary loss resulting from the ownership, (d) par une fiducie dont les parts sont inscrites à une telle purchase or sale of an equity interest or from the bourse à cette date. (income trust) rescission, or, in Quebec, the annulment, of a pur- chase or sale of an equity interest, or garantie financière S’il est assujetti soit à un intérêt ou, dans la province de Québec, à un droit garantissant le (e) contribution or indemnity in respect of a claim re- paiement d’une somme ou l’exécution d’une obligation ferred to in any of paragraphs (a) to (d); (réclamation relativement à un contrat financier admissible, soit à un relative à des capitaux propres) accord de transfert de titres pour obtention de crédit, l’un ou l’autre des éléments suivants : equity interest means a) les sommes en espèces et les équivalents de tréso- (a) in the case of a corporation other than an income rerie — notamment les effets négociables et dépôts à trust, a share in the corporation — or a warrant or op- vue; tion or another right to acquire a share in the corpora- tion — other than one that is derived from a convert- b) les titres, comptes de titres, droits intermédiés et ible debt, and droits d’acquérir des titres; in the case of an income trust, a unit in the income (b) c) les contrats à terme ou comptes de contrats à trust — or a warrant or option or another right to ac- terme. (financial collateral) quire a unit in the income trust — other than one that is derived from a convertible debt; (intérêt relatif à huissier-exécutant Shérif, huissier ou autre personne des capitaux propres) chargée de l’exécution d’un bref ou autre procédure sous l’autorité de la présente loi ou de toute autre loi, ou de executing officer includes a sheriff, a bailiff and any of- toute autre procédure relative aux biens du débiteur. ficer charged with the execution of a writ or other process (sheriff) under this Act or any other Act or proceeding with re- spect to any property of a debtor; (huissier- exécutant) intérêt relatif à des capitaux propres financial collateral means any of the following that is a) S’agissant d’une personne morale autre qu’une fi- subject to an interest, or in the Province of Quebec a ducie de revenu, action de celle-ci ou bon de souscrip- right, that secures payment or performance of an obliga- tion, option ou autre droit permettant d’acquérir une tion in respect of an eligible financial contract or that is telle action et ne provenant pas de la conversion d’une subject to a title transfer credit support agreement: dette convertible;
(a) cash or cash equivalents, including negotiable in- b) s’agissant d’une fiducie de revenu, part de celle-ci struments and demand deposits, ou bon de souscription, option ou autre droit permet- tant d’acquérir une telle part et ne provenant pas de la (b) securities, a securities account, a securities entitle- conversion d’une dette convertible. (equity interest) ment or a right to acquire securities, or localité En parlant d’un débiteur, le lieu principal où, se- (c) a futures agreement or a futures account; (garan- lon le cas : tie financière) a) il a exercé ses activités au cours de l’année précé- General Rules means the General Rules referred to in dant l’ouverture de sa faillite; section 209; (Règles générales)
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income trust means a trust that has assets in Canada if b) il a résidé au cours de l’année précédant l’ouverture de sa faillite; (a) its units are listed on a prescribed stock exchange on the date of the initial bankruptcy event, or c) se trouve la plus grande partie de ses biens, dans les cas non visés aux alinéas a) ou b). (locality of a (b) the majority of its units are held by a trust whose debtor) units are listed on a prescribed stock exchange on the date of the initial bankruptcy event; (fiducie de reve- localité d’un débiteur [Abrogée, 2005, ch. 47, art. 2(F)] nu) ministre Le ministre de l’Industrie. (Minister) insolvent person means a person who is not bankrupt and who resides, carries on business or has property in moment de la faillite S’agissant d’une personne, le mo- Canada, whose liabilities to creditors provable as claims ment : under this Act amount to one thousand dollars, and a) soit du prononcé de l’ordonnance de faillite la vi- (a) who is for any reason unable to meet his obliga- sant; tions as they generally become due, b) soit du dépôt d’une cession de biens la visant; (b) who has ceased paying his current obligations in the ordinary course of business as they generally be- c) soit du fait sur la base duquel elle est réputée avoir come due, or fait une cession de biens. (time of the bankruptcy)
(c) the aggregate of whose property is not, at a fair opération sous-évaluée Toute disposition de biens ou valuation, sufficient, or, if disposed of at a fairly con- fourniture de services pour laquelle le débiteur ne reçoit ducted sale under legal process, would not be suffi- aucune contrepartie ou en reçoit une qui est manifeste- cient to enable payment of all his obligations, due and ment inférieure à la juste valeur marchande de celle qu’il accruing due; (personne insolvable) a lui-même donnée. (transfer at undervalue) legal counsel means any person qualified, in accor- ouverture de la faillite Relativement à une personne, le dance with the laws of a province, to give legal advice; premier en date des événements suivants à survenir : (conseiller juridique) a) le dépôt d’une cession de biens la visant; locality of a debtor means the principal place b) le dépôt d’une proposition la visant; (a) where the debtor has carried on business during the year immediately preceding the date of the initial c) le dépôt d’un avis d’intention par elle; bankruptcy event, d) le dépôt de la première requête en faillite : (b) where the debtor has resided during the year im- dans les cas visés aux alinéas 50.4(8) a) et 57 a) mediately preceding the date of the initial bankruptcy (i) et au paragraphe 61(2), event, or (ii) dans le cas où la personne, alors qu’elle est vi- (c) in cases not coming within paragraph (a) or (b), sée par un avis d’intention déposé aux termes de where the greater portion of the property of the debtor l’article 50.4 ou une proposition déposée aux termes is situated; (localité) de l’article 62, fait une cession avant que le tribunal Minister means the Minister of Industry; (ministre) ait approuvé la proposition; dans les cas non visés à l’alinéa d), le dépôt de la re- net termination value means the net amount obtained e) quête à l’égard de laquelle une ordonnance de faillite after netting or setting off or compensating the mutual est rendue; obligations between the parties to an eligible financial contract in accordance with its provisions; (valeurs f) l’introduction d’une procédure sous le régime de la nettes dues à la date de résiliation) Loi sur les arrangements avec les créanciers des com- pagnies. (date of the initial bankruptcy event) official receiver means an officer appointed under sub- section 12(2); (séquestre officiel) personne
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person includes a partnership, an unincorporated asso- a) Sont assimilés aux personnes les sociétés de per- ciation, a corporation, a cooperative society or a coopera- sonnes, associations non constituées en personne mo- tive organization, the successors of a partnership, of an rale, personnes morales, sociétés et organisations co- association, of a corporation, of a society or of an organi- opératives, ainsi que leurs successeurs; zation and the heirs, executors, liquidators of the succes- sion, administrators or other legal representatives of a b) sont par ailleurs assimilés aux personnes leurs hé- person; (personne) ritiers, liquidateurs de succession, exécuteurs testa- mentaires, administrateurs et autres représentants lé- prescribed gaux. (person)
(a) in the case of the form of a document that is by personne insolvable Personne qui n’est pas en faillite this Act to be prescribed and the information to be et qui réside au Canada ou y exerce ses activités ou qui a given therein, means prescribed by directive issued by des biens au Canada, dont les obligations, constituant à the Superintendent under paragraph 5(4)(e), and l’égard de ses créanciers des réclamations prouvables aux termes de la présente loi, s’élèvent à mille dollars et, se- (b) in any other case, means prescribed by the Gener- lon le cas : al Rules; (prescrit) a) qui, pour une raison quelconque, est incapable de property means any type of property, whether situated faire honneur à ses obligations au fur et à mesure de in Canada or elsewhere, and includes money, goods, leur échéance; things in action, land and every description of property, whether real or personal, legal or equitable, as well as b) qui a cessé d’acquitter ses obligations courantes obligations, easements and every description of estate, dans le cours ordinaire des affaires au fur et à mesure interest and profit, present or future, vested or contin- de leur échéance; gent, in, arising out of or incident to property; (bien) c) dont la totalité des biens n’est pas suffisante, proposal means d’après une juste estimation, ou ne suffirait pas, s’il en était disposé lors d’une vente bien conduite par autori- (a) in any provision of Division I of Part III, a propos- té de justice, pour permettre l’acquittement de toutes al made under that Division, and ses obligations échues ou à échoir. (insolvent per- son) (b) in any other provision, a proposal made under Di- vision I of Part III or a consumer proposal made under personne morale Personne morale qui est autorisée à Division II of Part III exercer des activités au Canada ou qui y a un établisse- ment ou y possède des biens, ainsi que toute fiducie de and includes a proposal or consumer proposal, as the revenu. Sont toutefois exclues les banques, banques case may be, for a composition, for an extension of time étrangères autorisées au sens de l’article 2 de la Loi sur or for a scheme or arrangement; (proposition concor- les banques, compagnies d’assurance, sociétés de fiducie dataire ou proposition) ou sociétés de prêt constituées en personnes morales. (corporation) public utility includes a person or body who supplies fu- el, water or electricity, or supplies telecommunications, prescrit garbage collection, pollution control or postal services; (entreprise de service public) a) Dans le cas de la forme de documents à prescrire au titre de la présente loi et des renseignements qui resolution or ordinary resolution means a resolution doivent y figurer, prescrit par le surintendant en appli- carried in the manner provided by section 115; (résolu- cation de l’alinéa 5(4) e); tion ou résolution ordinaire) b) dans les autres cas, prescrit par les Règles géné- secured creditor means a person holding a mortgage, rales. (prescribed) hypothec, pledge, charge or lien on or against the proper- ty of the debtor or any part of that property as security proposition concordataire ou proposition S’entend : for a debt due or accruing due to the person from the debtor, or a person whose claim is based on, or secured a) à la section I de la partie III, de la proposition faite by, a negotiable instrument held as collateral security au titre de cette section;
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and on which the debtor is only indirectly or secondarily b) dans le reste de la présente loi, de la proposition liable, and includes faite au titre de la section I de la partie III ou d’une proposition de consommateur faite au titre de la sec- (a) a person who has a right of retention or a prior tion II de la partie III. claim constituting a real right, within the meaning of the Civil Code of Québec or any other statute of the Est également visée la proposition ou proposition de Province of Quebec, on or against the property of the consommateur faite en vue d’un concordat, d’un ater- debtor or any part of that property, or moiement ou d’un accommodement. (proposal)
(b) any of réclamation prouvable en matière de faillite ou récla- mation prouvable Toute réclamation ou créance pou- (i) the vendor of any property sold to the debtor vant être prouvée dans des procédures intentées sous under a conditional or instalment sale, l’autorité de la présente loi par un créancier. (claim provable in bankruptcy, provable claim or claim prov- (ii) the purchaser of any property from the debtor able) subject to a right of redemption, or réclamation relative à des capitaux propres Réclama- (iii) the trustee of a trust constituted by the debtor tion portant sur un intérêt relatif à des capitaux propres to secure the performance of an obligation, et visant notamment : if the exercise of the person’s rights is subject to the a) un dividende ou un paiement similaire; provisions of Book Six of the Civil Code of Québec en- titled Prior Claims and Hypothecs that deal with the b) un remboursement de capital; exercise of hypothecary rights; (créancier garanti) c) tout droit de rachat d’actions au gré de l’action- settlement [Repealed, 2005, c. 47, s. 2] naire ou de remboursement anticipé d’actions au gré de l’émetteur; shareholder includes a member of a corporation — and, in the case of an income trust, a holder of a unit in an in- d) des pertes pécuniaires associées à la propriété, à come trust — to which this Act applies; (actionnaire) l’achat ou à la vente d’un intérêt relatif à des capitaux propres ou à l’annulation de cet achat ou de cette sheriff [Repealed, 2004, c. 25, s. 7] vente; special resolution means a resolution decided by a ma- e) une contribution ou une indemnité relative à toute jority in number and three-fourths in value of the credi- réclamation visée à l’un des alinéas a) à d). (equity tors with proven claims present, personally or by proxy, claim) at a meeting of creditors and voting on the resolution; (résolution spéciale) Règles générales Les Règles générales établies en ap- plication de l’article 209. (General Rules) Superintendent means the Superintendent of Bankruptcy appointed under subsection 5(1); (surinten- résolution ou résolution ordinaire Résolution adoptée dant) conformément à l’article 115. (resolution or ordinary resolution) Superintendent of Financial Institutions means the Superintendent of Financial Institutions appointed under résolution spéciale Résolution décidée par une majori- subsection 5(1) of the Office of the Superintendent of Fi- té en nombre et une majorité des trois quarts en valeur nancial Institutions Act; (surintendant des institutions des créanciers titulaires de réclamations prouvées, pré- financières) sents personnellement ou représentés par fondés de pou- voir à une assemblée des créanciers et votant sur la réso- time of the bankruptcy, in respect of a person, means lution. (special resolution) the time of séquestre officiel Fonctionnaire nommé en vertu du the granting of a bankruptcy order against the per- (a) paragraphe 12(2). (official receiver) son, surintendant Le surintendant des faillites nommé aux (b) the filing of an assignment by or in respect of the termes du paragraphe 5(1). (Superintendent) person, or
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(c) the event that causes an assignment by the person surintendant des institutions financières Le surinten- to be deemed; (moment de la faillite) dant des institutions financières nommé en application du paragraphe 5(1) de la Loi sur le Bureau du surinten- title transfer credit support agreement means an dant des institutions financières. (Superintendent of agreement under which an insolvent person or a Financial Institutions) bankrupt has provided title to property for the purpose of securing the payment or performance of an obligation of syndic ou syndic autorisé Personne qui détient une li- the insolvent person or bankrupt in respect of an eligible cence ou est nommée en vertu de la présente loi. financial contract; (accord de transfert de titres pour (trustee or licensed trustee) obtention de crédit) tribunal Sauf aux alinéas 178(1)a) et a.1) et aux articles transfer at undervalue means a disposition of property 204.1 à 204.3, tout tribunal mentionné aux paragraphes or provision of services for which no consideration is re- 183(1) ou (1.1). Y est assimilé tout juge de ce tribunal ain- ceived by the debtor or for which the consideration re- si que le greffier ou le registraire de celui-ci, lorsqu’il ceived by the debtor is conspicuously less than the fair exerce les pouvoirs du tribunal qui lui sont conférés au market value of the consideration given by the debtor; titre de la présente loi. (court) (opération sous-évaluée) union de fait Relation qui existe entre deux conjoints de trustee or licensed trustee means a person who is li- fait. (common-law partnership) censed or appointed under this Act. (syndic ou syndic autorisé) valeurs nettes dues à la date de résiliation La somme R.S., 1985, c. B-3, s. 2; R.S., 1985, c. 31 (1st Supp.), s. 69; 1992, c. 1, s. 145(F), c. 27, s. 3; nette obtenue après compensation des obligations mu- 1995, c. 1, s. 62; 1997, c. 12, s. 1; 1999, c. 28, s. 146, c. 31, s. 17; 2000, c. 12, s. 8; 2001, c. tuelles des parties à un contrat financier admissible effec- 4, s. 25, c. 9, s. 572; 2004, c. 25, s. 7; 2005, c. 3, s. 11, c. 47, s. 2; 2007, c. 29, s. 91, c. 36, s. 1; 2012, c. 31, s. 414; 2015, c. 3, s. 6(F); 2018, c. 10, s. 82. tuée conformément à ce contrat. (net termination val- ue)
L.R. (1985), ch. B-3, art. 2; L.R. (1985), ch. 31 (1er suppl.), art. 69; 1992, ch. 1, art. 145(F), ch. 27, art. 3; 1995, ch. 1, art. 62; 1997, ch. 12, art. 1; 1999, ch. 28, art. 146, ch. 31, art. 17; 2000, ch. 12, art. 8; 2001, ch. 4, art. 25, ch. 9, art. 572; 2004, ch. 25, art. 7; 2005, ch. 3, art. 11, ch. 47, art. 2; 2007, ch. 29, art. 91, ch. 36, art. 1; 2012, ch. 31, art. 414; 2015, ch. 3, art. 6(F); 2018, ch. 10, art. 82.
Designation of beneficiary Désignation de bénéficiaires 2.1 A change in the designation of a beneficiary in an in- 2.1 La modification de la désignation du bénéficiaire surance contract is deemed to be a disposition of proper- d’une police d’assurance est réputée être une disposition ty for the purpose of this Act. de biens pour l’application de la présente loi. 1997, c. 12, s. 2; 2004, c. 25, s. 8; 2005, c. 47, s. 3. 1997, ch. 12, art. 2; 2004, ch. 25, art. 8; 2005, ch. 47, art. 3.
Superintendent’s division office Bureau de division 2.2 Any notification, document or other information 2.2 Sauf dans le cas de la demande de licence prévue au that is required by this Act to be given, forwarded, paragraphe 13(1), les notifications et envois de docu- mailed, sent or otherwise provided to the Superinten- ments ou renseignements à effectuer au titre de la pré- dent, other than an application for a licence under sub- sente loi auprès du surintendant le sont au bureau de di- section 13(1), shall be given, forwarded, mailed, sent or vision spécifié par ses instructions. otherwise provided to the Superintendent at the Superin- 1997, ch. 12, art. 2. tendent’s division office as specified in directives of the Superintendent. 1997, c. 12, s. 2.
3 [Repealed, 2005, c. 47, s. 4] 3 [Abrogé, 2005, ch. 47, art. 4]
Definitions Définitions 4 (1) In this section, 4 (1) Les définitions qui suivent s’appliquent au présent article. entity means a person other than an individual; (entité) entité Personne autre qu’une personne physique. (enti- ty)
Current to June 17, 2020 8 À jour au 17 juin 2020 Last amended on November 1, 2019 Dernière modification le 1 novembre 2019 Bankruptcy and Insolvency Faillite et insolvabilité PART V Administration of Estates PARTIE V Administration des actifs Inspectors Inspecteurs Sections 120-121 Articles 120-121
time verify the bank balance of the estate, examine the de l’actif, examinent ses comptes, s’enquièrent de la suffi- trustee’s accounts and inquire into the adequacy of the sance de la garantie fournie par le syndic et, sous réserve security filed by the trustee and, subject to subsection (4), du paragraphe (4), approuvent l’état définitif des recettes shall approve the trustee’s final statement of receipts and et des débours préparé par le syndic, le bordereau de di- disbursements, dividend sheet and disposition of unreal- vidende et la disposition des biens non réalisés. ized property.
Approval of trustee’s final statement by inspectors Approbation par les inspecteurs de l’état définitif préparé par le syndic (4) Before approving the final statement of receipts and (4) Avant d’approuver l’état définitif des recettes et des disbursements of the trustee, the inspectors shall satisfy débours du syndic, les inspecteurs doivent s’assurer eux- themselves that all the property has been accounted for mêmes qu’il a été rendu compte de tous les biens et que and that the administration of the estate has been com- l’administration de l’actif a été complétée, dans la mesure pleted as far as can reasonably be done and shall deter- où il est raisonnablement possible de le faire, et doivent mine whether or not the disbursements and expenses in- établir si les débours et dépenses subis sont appropriés curred are proper and have been duly authorized, and the ou non et ont été dûment autorisés et si les honoraires et fees and remuneration just and reasonable in the circum- la rémunération sont justes et raisonnables en l’occur- stances. rence. inspector’s expenses and fees Frais et honoraires (5) Each inspector (5) Chaque inspecteur peut être remboursé des frais de déplacement réels et nécessaires engagés dans le cadre (a) may be repaid actual and necessary travel expens- de ses fonctions et il peut aussi recevoir les honoraires es incurred in relation to the performance of the in- prescrits pour chaque assemblée. spector’s duties; and
(b) may be paid such fees per meeting as are pre- scribed.
Special services Services spéciaux (6) An inspector duly authorized by the creditors or by (6) Un inspecteur régulièrement autorisé par les créan- the other inspectors to perform special services for the ciers ou par les autres inspecteurs à exécuter des services estate may be allowed a special fee for those services, spéciaux pour le compte de l’actif peut avoir droit à des subject to approval of the court, which may vary that fee honoraires spéciaux pour ces services, sous réserve de as it deems proper having regard to the nature of the ser- l’approbation du tribunal qui peut modifier ces hono- vices rendered in relation to the obligations of the inspec- raires comme il le juge à propos eu égard à la nature des tor to the estate to act in good faith for the general inter- services rendus par rapport à l’obligation qu’a l’inspec- ests of the administration of the estate. teur d’agir de bonne foi en vue de l’intérêt général de R.S., 1985, c. B-3, s. 120; 1992, c. 27, s. 49; 2001, c. 4, s. 30; 2004, c. 25, s. 65(F); 2005, c. l’administration de l’actif. 47, s. 85. L.R. (1985), ch. B-3, art. 120; 1992, ch. 27, art. 49; 2001, ch. 4, art. 30; 2004, ch. 25, art. 65(F); 2005, ch. 47, art. 85. Claims Provable Réclamations prouvables
Claims provable Réclamations prouvables 121 (1) All debts and liabilities, present or future, to 121 (1) Toutes créances et tous engagements, présents which the bankrupt is subject on the day on which the ou futurs, auxquels le failli est assujetti à la date à la- bankrupt becomes bankrupt or to which the bankrupt quelle il devient failli, ou auxquels il peut devenir assujet- may become subject before the bankrupt’s discharge by ti avant sa libération, en raison d’une obligation contrac- reason of any obligation incurred before the day on tée antérieurement à cette date, sont réputés des which the bankrupt becomes bankrupt shall be deemed réclamations prouvables dans des procédures entamées to be claims provable in proceedings under this Act. en vertu de la présente loi.
Current to June 17, 2020 171 À jour au 17 juin 2020 Last amended on November 1, 2019 Dernière modification le 1 novembre 2019 Bankruptcy and Insolvency Faillite et insolvabilité PART V Administration of Estates PARTIE V Administration des actifs Claims Provable Réclamations prouvables Sections 121-123 Articles 121-123
Contingent and unliquidated claims Décision (2) The determination whether a contingent or unliqui- (2) La question de savoir si une réclamation éventuelle dated claim is a provable claim and the valuation of such ou non liquidée constitue une réclamation prouvable et, a claim shall be made in accordance with section 135. le cas échéant, son évaluation sont décidées en applica- tion de l’article 135.
Debts payable at a future time Créances payables à une date future (3) A creditor may prove a debt not payable at the date of (3) Un créancier peut établir la preuve d’une créance qui the bankruptcy and may receive dividends equally with n’est pas échue à la date de la faillite, et recevoir des divi- the other creditors, deducting only thereout a rebate of dendes tout comme les autres créanciers, en en dédui- interest at the rate of five per cent per annum computed sant seulement un rabais d’intérêt au taux de cinq pour from the declaration of a dividend to the time when the cent par an calculé à compter de la déclaration d’un divi- debt would have become payable according to the terms dende jusqu’à la date où la créance devait échoir selon les on which it was contracted. conditions auxquelles elle a été contractée.
Family support claims Réclamations alimentaires (4) A claim in respect of a debt or liability referred to in (4) Constitue une réclamation prouvable la réclamation paragraph 178(1)(b) or (c) payable under an order or pour une dette ou une obligation mentionnée aux alinéas agreement made before the date of the initial bankruptcy 178(1)b) ou c) découlant d’une ordonnance judiciaire event in respect of the bankrupt and at a time when the rendue ou d’une entente conclue avant l’ouverture de la spouse, former spouse, former common-law partner or faillite et à un moment où l’époux, l’ex-époux ou ancien child was living apart from the bankrupt, whether the or- conjoint de fait ou l’enfant ne vivait pas avec le failli, que der or agreement provides for periodic amounts or lump l’ordonnance ou l’entente prévoie une somme forfaitaire sum amounts, is a claim provable under this Act. ou payable périodiquement. R.S., 1985, c. B-3, s. 121; 1992, c. 27, s. 50; 1997, c. 12, s. 87; 2000, c. 12, s. 14. L.R. (1985), ch. B-3, art. 121; 1992, ch. 27, art. 50; 1997, ch. 12, art. 87; 2000, ch. 12, art. 14.
Claims provable in bankruptcy following proposal Réclamations prouvables en faillite à la suite d’une proposition 122 (1) The claims of creditors under a proposal are, in 122 (1) Les réclamations des créanciers aux termes the event of the debtor subsequently becoming bankrupt, d’une proposition sont, dans le cas où le débiteur devien- provable in the bankruptcy for the full amount of the drait subséquemment en faillite, prouvables dans la claims less any dividends paid thereon pursuant to the faillite pour le plein montant des réclamations moins proposal. tout dividende payé à cet égard en conformité avec la proposition.
Interest Intérêts (2) If interest on any debt or sum certain is provable un- (2) Lorsque l’intérêt sur toute créance ou somme déter- der this Act but the rate of interest has not been agreed minée est prouvable sous le régime de la présente loi, on, the creditor may prove interest at a rate not exceed- mais qu’il n’a pas été convenu du taux d’intérêt, le créan- ing five per cent per annum to the date of the bankruptcy cier peut établir la preuve d’un intérêt à un taux maximal from the time the debt or sum was payable, if evidenced de cinq pour cent par an jusqu’à la date de la faillite à by a written document, or, if not so evidenced, from the compter de la date où la créance ou somme était exigible, time notice has been given the debtor of the interest si elle est attestée par un document écrit, ou, si elle n’est claimed. pas ainsi attestée, à compter de la date où il a été donné R.S., 1985, c. B-3, s. 122; 2004, c. 25, s. 66(E). au débiteur avis de la réclamation d’intérêt. L.R. (1985), ch. B-3, art. 122; 2004, ch. 25, art. 66(A).
Proof in respect of distinct contracts Preuve à l’égard de contrats distincts 123 Where a bankrupt was, at the date of the bankrupt- 123 Lorsqu’un failli était, à la date de la faillite, respon- cy, liable in respect of distinct contracts as a member of sable à l’égard de contrats distincts, en qualité de two or more distinct firms, or as a sole contractor and al- membre de plusieurs firmes distinctes, ou en qualité de so as member of a firm, the circumstance that the firms signataire individuel des contrats et aussi à titre de are in whole or in part composed of the same individuals, membre d’une firme, le fait que les firmes sont
Current to June 17, 2020 172 À jour au 17 juin 2020 Last amended on November 1, 2019 Dernière modification le 1 novembre 2019 Bankruptcy and Insolvency Faillite et insolvabilité PART V Administration of Estates PARTIE V Administration des actifs Proof by Secured Creditors Preuve des créanciers garantis Sections 132-135 Articles 132-135
Secured creditor may amend Le créancier garanti peut modifier l’évaluation 132 (1) Where the trustee has not elected to acquire the 132 (1) Lorsque le syndic n’a pas choisi d’acquérir la ga- security as provided in this Act, a creditor may at any rantie dans les conditions prévues à la présente loi, un time amend the valuation and proof on showing to the créancier peut modifier l’évaluation et la preuve en dé- satisfaction of the trustee or the court that the valuation montrant, à la satisfaction du syndic ou du tribunal, que and proof were made in good faith on a mistaken esti- l’évaluation et la preuve ont été faites de bonne foi sur mate or that the security has diminished or increased in une estimation erronée, ou que la garantie a diminué ou value since its previous valuation. augmenté en valeur depuis son évaluation précédente.
Amendment at cost of creditor Modification aux frais du créancier (2) An amendment pursuant to subsection (1) shall be (2) Une modification conforme au paragraphe (1) est made at the cost of the creditor and on such terms as the faite aux frais du créancier et selon les modalités que le court orders, unless the trustee allows the amendment tribunal prescrit, à moins que le syndic ne permette la without application to the court. modification sans requête au tribunal.
Rights and liabilities of creditor where valuation Droits et obligations du créancier lorsque l’évaluation amended est modifiée (3) Where a valuation has been amended pursuant to (3) Lorsqu’une évaluation a été modifiée conformément this section, the creditor au présent article, le créancier, selon le cas :
(a) shall forthwith repay any surplus dividend that he a) doit rembourser sans retard tout surplus de divi- may have received in excess of that to which he would dende qu’il peut avoir reçu en sus du montant auquel have been entitled on the amended valuation; or il aurait eu droit sur l’évaluation modifiée;
(b) is entitled to be paid out of any money for the time b) a droit de recevoir, sur les deniers alors applicables being available for dividend any dividend or share of à des dividendes, tout dividende ou part de dividende dividend that he may have failed to receive by reason qu’il peut ne pas avoir reçu à cause du montant de of the amount of the original valuation before that l’évaluation primitive, avant que ces montants soient money is made applicable to the payment of any fu- attribués au paiement d’un dividende futur; il n’a tou- ture dividend, but he is not entitled to disturb the dis- tefois pas le droit de déranger la distribution d’un divi- tribution of any dividend declared before the amend- dende déclaré avant que la modification soit déposée ment is filed with the trustee. chez le syndic. R.S., c. B-3, s. 103. S.R., ch. B-3, art. 103.
Exclusion for non-compliance Exclusion pour défaut de se conformer 133 Where a secured creditor does not comply with sec- 133 Lorsqu’un créancier garanti ne se conforme pas aux tions 127 to 132, he shall be excluded from any dividend. articles 127 à 132, il est exclu de tout dividende. R.S., c. B-3, s. 104. S.R., ch. B-3, art. 104.
No creditor to receive more than 100 cents in dollar Aucun créancier ne peut recevoir plus de cent cents par dollar 134 Subject to section 130, a creditor shall in no case re- 134 Sous réserve de l’article 130, un créancier ne peut ceive more than one hundred cents on the dollar and in- dans aucun cas recevoir plus de cent cents par dollar avec terest as provided by this Act. l’intérêt prévu par la présente loi. R.S., c. B-3, s. 105. S.R., ch. B-3, art. 105. Admission and Disallowance of Proofs Admission et rejet des preuves de of Claim and Proofs of Security réclamation et de garantie
Trustee shall examine proof Examen de la preuve 135 (1) The trustee shall examine every proof of claim 135 (1) Le syndic examine chaque preuve de réclama- or proof of security and the grounds therefor and may re- tion ou de garantie produite, ainsi que leurs motifs, et il quire further evidence in support of the claim or security. peut exiger de nouveaux témoignages à l’appui.
Current to June 17, 2020 176 À jour au 17 juin 2020 Last amended on November 1, 2019 Dernière modification le 1 novembre 2019 Bankruptcy and Insolvency Faillite et insolvabilité PART V Administration of Estates PARTIE V Administration des actifs Admission and Disallowance of Proofs of Claim and Proofs of Security Admission et rejet des preuves de réclamation et de garantie Sections 135-136 Articles 135-136
Determination of provable claims Réclamations éventuelles et non liquidées (1.1) The trustee shall determine whether any contin- (1.1) Le syndic décide si une réclamation éventuelle ou gent claim or unliquidated claim is a provable claim, and, non liquidée est une réclamation prouvable et, le cas if a provable claim, the trustee shall value it, and the échéant, il l’évalue; sous réserve des autres dispositions claim is thereafter, subject to this section, deemed a du présent article, la réclamation est dès lors réputée proved claim to the amount of its valuation. prouvée pour le montant de l’évaluation.
Disallowance by trustee Rejet par le syndic (2) The trustee may disallow, in whole or in part, (2) Le syndic peut rejeter, en tout ou en partie, toute ré- clamation, tout droit à un rang prioritaire dans l’ordre de (a) any claim; collocation applicable prévu par la présente loi ou toute garantie. (b) any right to a priority under the applicable order of priority set out in this Act; or
(c) any security.
Notice of determination or disallowance Avis de la décision (3) Where the trustee makes a determination under sub- (3) S’il décide qu’une réclamation est prouvable ou s’il section (1.1) or, pursuant to subsection (2), disallows, in rejette, en tout ou en partie, une réclamation, un droit à whole or in part, any claim, any right to a priority or any un rang prioritaire ou une garantie, le syndic en donne security, the trustee shall forthwith provide, in the pre- sans délai, de la manière prescrite, un avis motivé, en la scribed manner, to the person whose claim was subject to forme prescrite, à l’intéressé. a determination under subsection (1.1) or whose claim, right to a priority or security was disallowed under sub- section (2), a notice in the prescribed form setting out the reasons for the determination or disallowance.
Determination or disallowance final and conclusive Effet de la décision (4) A determination under subsection (1.1) or a disal- (4) La décision et le rejet sont définitifs et péremptoires, lowance referred to in subsection (2) is final and conclu- à moins que, dans les trente jours suivant la signification sive unless, within a thirty day period after the service of de l’avis, ou dans tel autre délai que le tribunal peut ac- the notice referred to in subsection (3) or such further corder, sur demande présentée dans les mêmes trente time as the court may on application made within that jours, le destinataire de l’avis n’interjette appel devant le period allow, the person to whom the notice was provid- tribunal, conformément aux Règles générales, de la déci- ed appeals from the trustee’s decision to the court in ac- sion du syndic. cordance with the General Rules.
Expunge or reduce a proof Rejet total ou partiel d’une preuve (5) The court may expunge or reduce a proof of claim or (5) Le tribunal peut rayer ou réduire une preuve de ré- a proof of security on the application of a creditor or of clamation ou de garantie à la demande d’un créancier ou the debtor if the trustee declines to interfere in the mat- du débiteur, si le syndic refuse d’intervenir dans l’affaire. ter. L.R. (1985), ch. B-3, art. 135; 1992, ch. 1, art. 20, ch. 27, art. 53; 1997, ch. 12, art. 89. R.S., 1985, c. B-3, s. 135; 1992, c. 1, s. 20, c. 27, s. 53; 1997, c. 12, s. 89. Scheme of Distribution Plan de répartition
Priority of claims Priorité des créances 136 (1) Subject to the rights of secured creditors, the 136 (1) Sous réserve des droits des créanciers garantis, proceeds realized from the property of a bankrupt shall les montants réalisés provenant des biens d’un failli sont be applied in priority of payment as follows: distribués d’après l’ordre de priorité de paiement sui- vant : (a) in the case of a deceased bankrupt, the reasonable funeral and testamentary expenses incurred by the
Current to June 17, 2020 177 À jour au 17 juin 2020 Last amended on November 1, 2019 Dernière modification le 1 novembre 2019 Bankruptcy and Insolvency Faillite et insolvabilité PART V Administration of Estates PARTIE V Administration des actifs Scheme of Distribution Plan de répartition Sections 139-142 Articles 139-142
Postponement of claims of silent partners Renvoi des réclamations d’un bailleur de fonds 139 Where a lender advances money to a borrower en- 139 Lorsqu’un prêteur avance de l’argent à un emprun- gaged or about to engage in trade or business under a teur, engagé ou sur le point de s’engager dans un com- contract with the borrower that the lender shall receive a merce ou une entreprise, aux termes d’un contrat, passé rate of interest varying with the profits or shall receive a avec l’emprunteur, en vertu duquel le prêteur doit rece- share of the profits arising from carrying on the trade or voir un taux d’intérêt variant selon les profits ou recevoir business, and the borrower subsequently becomes une partie des profits provenant de la conduite du com- bankrupt, the lender of the money is not entitled to re- merce ou de l’entreprise, et que subséquemment l’em- cover anything in respect of the loan until the claims of prunteur devient failli, le prêteur n’a droit à aucun recou- all other creditors of the borrower have been satisfied. vrement du chef d’un pareil prêt jusqu’à ce que les R.S., c. B-3, s. 110. réclamations de tous les autres créanciers de l’emprun- teur aient été acquittées. S.R., ch. B-3, art. 110.
Postponement of wage claims of officers and Renvoi des réclamations pour gages des dirigeants et directors administrateurs 140 Where a corporation becomes bankrupt, no officer 140 Dans le cas où une personne morale devient en or director thereof is entitled to have his claim preferred faillite, aucun dirigeant ou administrateur de celle-ci n’a as provided by section 136 in respect of wages, salary, droit à la priorité de réclamation prévue par l’article 136 commission or compensation for work done or services à l’égard de tout salaire, traitement, commission ou ré- rendered to the corporation in any capacity. munération pour travail exécuté ou services rendus à R.S., c. B-3, s. 111. cette personne morale à quelque titre que ce soit. S.R., ch. B-3, art. 111.
Postponement of equity claims Réclamations relatives à des capitaux propres 140.1 A creditor is not entitled to a dividend in respect 140.1 Le créancier qui a une réclamation relative à des of an equity claim until all claims that are not equity capitaux propres n’a pas droit à un dividende à cet égard claims have been satisfied. avant que toutes les réclamations qui ne sont pas des ré- 2005, c. 47, s. 90; 2007, c. 36, s. 49. clamations relatives à des capitaux propres aient été sa- tisfaites. 2005, ch. 47, art. 90; 2007, ch. 36, art. 49.
Claims generally payable rateably Réclamations généralement payables au prorata 141 Subject to this Act, all claims proved in a bankrupt- 141 Sous réserve des autres dispositions de la présente cy shall be paid rateably. loi, toutes les réclamations établies dans la faillite sont R.S., c. B-3, s. 112. acquittées au prorata. S.R., ch. B-3, art. 112.
Partners and separate properties Associés et biens distincts 142 (1) Where partners become bankrupt, their joint 142 (1) Dans le cas où des associés deviennent en property shall be applicable in the first instance in pay- faillite, leurs biens communs sont applicables en premier ment of their joint debts, and the separate property of lieu au paiement de leurs dettes communes, et les biens each partner shall be applicable in the first instance in distincts de chaque associé sont applicables en premier payment of his separate debts. lieu au paiement de ses dettes distinctes.
Surplus of separate properties Surplus des biens distincts (2) Where there is a surplus of the separate properties of (2) Lorsqu’il existe un surplus des biens distincts, il en the partners, it shall be dealt with as part of the joint est disposé comme partie des biens communs. property.
Surplus of joint properties Surplus des biens communs (3) Where there is a surplus of the joint property of the (3) Lorsqu’il existe un surplus des biens communs, il en partners, it shall be dealt with as part of the respective est disposé comme partie des biens distincts respectifs en
Current to June 17, 2020 180 À jour au 17 juin 2020 Last amended on November 1, 2019 Dernière modification le 1 novembre 2019
TAB 2
2 Alberta Permit Pro Inc., Re, 2011 ABQB 141, 2011 CarswellAlta 387 2011 ABQB 141, 2011 CarswellAlta 387, [2011] 10 W.W.R. 180, [2011] A.W.L.D. 2209...
2011 ABQB 141 Alberta Court of Queen's Bench
Alberta Permit Pro Inc., Re
2011 CarswellAlta 387, 2011 ABQB 141, [2011] 10 W.W.R. 180, [2011] A.W.L.D. 2209, [2011] A.W.L.D. 2210, [2011] A.W.L.D. 2211, [2011] A.W.L.D. 2212, 199 A.C.W.S. (3d) 705, 45 Alta. L.R. (5th) 106, 509 A.R. 313, 79 C.B.R. (5th) 169
In the Matter of the Division I Proposal of Alberta Permit Pro Inc.
J.B. Veit J.
Heard: March 1, 2011 Judgment: March 4, 2011 Docket: Edmonton BK03-115349
Counsel: Brian W. Summers, Shauna N. Finlay for Appellant, Regional Municipality of Wood Buffalo G. Scott Watson, Brent Mescall for Appellant, Canadian Natural Resources Limited Jeffrey M. Lee for Alberta Permit Pro Inc. Suzanne A. Thomas for Trustee
Subject: Insolvency Headnote Bankruptcy and insolvency --- Proposal — Practice and procedure Municipality and C Ltd. appealed decisions denying them voting rights at adjourned first meeting of creditors called to approve proposal of A Inc., and appealed subsequent decisions to disallow their claims in their entirety — Municipality's appeals and C Ltd.'s appeal of decision disallowing claim allowed; C Ltd.'s appeal of decision denying it voting rights allowed in part — Issue arose concerning whether appeal should be re-hearing or on record — Appeals pursuant to ss. 108 and 135 of Bankruptcy and Insolvency Act should be held by way of re-hearing rather than on record — Reasoning in certain case law did not apply in Alberta — There was no binding Alberta decision requiring "appeal" to be interpreted as "appeal on the record" — On contrary, Alberta had long tradition of interpreting "appeal" as "appeal de novo" — Moreover, purposive interpretation of word "appeal" in Act led to conclusion that business efficacy required re-hearing which would produce substantive decision rather than merely decision to return issue to chair or trustee for renewed consideration — In any event, in circumstances of this particular case, it was appropriate to allow appeal by way of rehearing in order to achieve fairness for parties — Finally, if this appeal had to be on record, then circumstances here would allow calling of fresh evidence. Bankruptcy and insolvency --- Proposal — Meeting of creditors to consider Municipality W and C Ltd. appealed decisions denying them voting rights at adjourned first meeting of creditors called to approve proposal of A Inc. — W's appeal allowed, and C Ltd.'s allowed in part — W's proof of claim gave address for service, and notice of adjourned meeting was served on large law firm indicated, but not to attention of either lawyer identified in proof of claim — Given circumstances including relative size of W's claim, W's clear intention to vote on proposal, specific information provided by W about its address for service, size of law firm which represented W, authority structure of W, and physical distance between W and its agent, W was not properly served with notice of meeting, and lack of notice deprived W of opportunity of voting against A Inc.'s proposal, and impugned meeting as whole — Moreover, proposal trustee wrongly decided W's claim did not comply with s. 124(4) of Bankruptcy and Insolvency Act as trustee had failed to ask W for production of additional documents to substantiate its claim or to otherwise make inquiries about W's claim — Proposal trustee was wrong in law in characterising W's claim as contingent and unliquidated — Trustee should have allowed W to vote at first meeting but marked vote "objected", following statutory mechanism — W's vote, recorded by trustee, should be recognized as vote against proposal — Although C Ltd. was improperly denied opportunity of voting at adjourned meeting on basis then advanced by chair, C Ltd. did not suffer any substantive injury as its claim was unliquidated and not yet valued and was recorded —
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 1 Alberta Permit Pro Inc., Re, 2011 ABQB 141, 2011 CarswellAlta 387 2011 ABQB 141, 2011 CarswellAlta 387, [2011] 10 W.W.R. 180, [2011] A.W.L.D. 2209...
However, C Ltd. had proved it now had right to have its claim valued by trustee with view to allowing C Ltd. to vote at any subsequent meeting called to approve another proposal or distribution. Bankruptcy and insolvency --- Proposal — General principles A Inc. was accredited inspection agency, authorized by municipalities to review applications for, and issue, certain types of permits — Municipality W delegated its permit-granting authority to A Inc. in exchange for 30 per cent share of payments received by A Inc. from its permit operations — C Ltd. was oilsands development company which paid A Inc. millions of dollars for permits for buildings in W municipality — W and C Ltd. appealed decisions denying them voting rights at adjourned first meeting of creditors called to approve proposal of A Inc., and subsequent decisions to disallow their claims in their entirety — W's appeals and C Ltd.'s appeal of decision disallowing claim allowed; C Ltd.'s appeal of decision denying it voting rights allowed in part — Post-meeting decision to disallow W's claim was wrong — In relation to both W and C Ltd., trustee's failure to consider discoverability as regards limitations issue infirmed trustee's decision — In relation to W, trustee erred in rejecting W's claim because W had failed to provide satisfactory breakdown as to how its claim had been derived — It was clear that A Inc.'s proof of payments made to W covered less than 20 remittances out of over 2,000 receipts of fees, so A Inc.'s own evidence supported W's claim — Post-meeting decision to disallow C Ltd.'s claim was wrong — C Ltd. provided clear evidence of agreement between itself and A Inc. to provide permits for certain work — Copies of invoices to C Ltd. from A Inc. and cheques from C Ltd. to A Inc. confirmed existence of agreement between them relating to obtaining permits — Evidence from A Inc. opposing C Ltd.'s claim was unpersuasive, mainly because A Inc. did not tender issued permits that resulted from over $10 million spent by C Ltd. Bankruptcy and insolvency --- Proposal — Approval by court — General principles Municipality W and C Ltd. appealed decisions denying them voting rights at adjourned first meeting of creditors called to approve proposal of A Inc., and appealed subsequent decisions to disallow their claims in their entirety — W's appeals and C Ltd.'s appeal of decision disallowing claim allowed; C Ltd.'s appeal of decision denying it voting rights allowed in part — Court could not approve proposal presented by proposal trustee — Parliament's intention was clearly to respect business decisions concerning proposals — Those business decisions must, however, reflect opinion of all of A Inc.'s creditors who, having been given fair opportunity to vote on proposal, had expressed their opinion in their vote — Such vote did not take place in circumstances here — Moreover, even if it were true that creditors who were not given fair opportunity to vote would not do better in bankruptcy, that would not be reason to approve proposal — If comparison to bankruptcy had been standard, Parliament would have said so — Parliament chose to allow creditors to exercise their business judgment, and so should courts.
APPEALS by municipality and company from decisions denying them voting rights at adjourned first meeting of creditors called to approve proposal, and subsequent decisions to disallow their claims in their entirety.
J.B. Veit J.:
Summary
1 Wood Buffalo and CNRL each appeal decisions denying them voting rights at the adjourned first meeting of creditors called to approve a proposal from Alberta Permit Pro Inc. Wood Buffalo and CNRL also each appeal the subsequent decisions to disallow their claims in their entirety.
2 At the appeal hearing, the court held, with reasons to follow, that appeals pursuant to ss. 108 and 135 of the BIA should be held by way of a re-hearing rather than on the record. Those reasons are provided herewith. The reasoning in Galaxy Sports Inc. does not apply in Alberta: there is no binding Alberta decision requiring "appeal" to be interpreted as "appeal on the record". On the contrary, Alberta has a long tradition of interpreting "appeal" as "appeal de novo": see former rules 299 and 500. Moreover, a purposive interpretation of the word "appeal" in the BIA leads to the conclusion that business efficacy requires a re-hearing which will produce a substantive decision rather than merely a decision to return the issue to the Chair or the Trustee for renewed consideration. In any event, in the circumstances of this particular case, it is appropriate to allow an appeal by way of re-hearing in order to achieve fairness for the parties: San Juan Resources Inc. Finally, if this appeal had to be on the record, then the circumstances here would allow the calling of "fresh evidence": Galaxy Sports Inc.
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3 On the re-hearing, the Proposal Trustee argues that the Chair's decision to deny Wood Buffalo the right to vote at the meeting was correct because Wood Buffalo, having had adequate notice of the meeting, had not provided a proxy or voting letter to its agent law firm. Moreover, the Proposal Trustee argued that, in any event, Wood Buffalo's proof of claim - filed prior to the meeting - did not disclose any claim because: it did not comply with s. 124(4) of the BIA; was contingent; and, was unliquidated.
4 The court concludes that, in the circumstances here, which include the relative size of Wood Buffalo's claim, Wood Buffalo's clear intention to vote on the proposal, the specific information provided by Wood Buffalo about its address for service, the size of the law firm which represents Wood Buffalo, the authority structure of Wood Buffalo, and the physical distance between Wood Buffalo and its agent: Wood Buffalo was not properly served with notice of the adjourned first meeting of creditors, the lack of notice improperly deprived Wood Buffalo of the opportunity of voting against APPI's proposal, and, the lack of notice to Wood Buffalo impugned the meeting as a whole.
5 Moreover, the court concludes that the Proposal Trustee wrongly decided that Wood Buffalo's claim did not comply with s. 124(4) of the Act since the Trustee had failed to ask Wood Buffalo for production of additional documents to substantiate its claim or to otherwise make inquiries about Wood Buffalo's claim: Northstone Power Corp.
6 Also, the court concludes that the Proposal Trustee was wrong in law in characterising Wood Buffalo's claim as contingent and unliquidated: the debt owing by APPI has already come into existence and was therefore not contingent, and the debt is a figure that is readily computed, and therefore liquidated.
7 Although these failure would, in other circumstances, have impugned the results of the first meeting and required the calling of a new meeting, the Trustee used the non-statutory mechanism of recording the vote of Wood Buffalo. That recorded vote should now be recognized as a vote against the proposal. The value of that vote is discussed hereunder.
8 The Proposal Trustee argues that the Chair's decision to deny CNRL the right to vote was correct because CNRL's proof of claim did not satisfy the requirements of s. 124(4) of the BIA.
9 The court concludes that although CNRL was improperly denied the opportunity of voting at the adjourned meeting of creditors on the basis then advanced by the Chair, CNRL did not thereby suffer any substantive injury since CNRL's claim is unliquidated and not yet valued and was recorded. However, CNRL has proved that it now has the right to have its claim valued by the Trustee with a view to allowing CNRL to vote at any subsequent meeting called to approve another proposal or a distribution.
10 The Proposal Trustee also argues that the post-first meeting decisions to disallow the Wood Buffalo and CNRL claims, thereby preventing those putative creditors from participating in the distribution approved at the proposal meeting, were correct.
11 The court concludes that the post-meeting decision to disallow Wood Buffalo's claim was wrong. First, in relation both to Wood Buffalo and to CNRL, it is imperative, when a defence of limitations is advanced, to assess discoverability: Peixeiro. The Trustee's failure to consider that key element of the limitations issue infirms the Trustee's decision. Also, specifically in relation to Wood Buffalo, the court concludes that the Trustee erred in rejecting Wood Buffalo's claim because Wood Buffalo had failed to provide a satisfactory breakdown as to how its claim had been derived. Finally in relation to Wood Buffalo, it is clear that the APPI's proof of payments made to Wood Buffalo covered less than 20 remittances out of over 2,000 receipts of fees; therefore, APPI's own evidence, far from undermining Wood Buffalo's claim, supports it.
12 The court concludes that the post-meeting decision to disallow CNRL's claim was wrong. CNRL provided clear evidence of an agreement between itself and APPI to provide permits for work in the Fort McMurray area. Copies of invoices to CNRL from APPI and cheques from CNRL to APPI confirm the existence of an agreement between the two parties in relation to obtaining permits. The evidence from APPI opposing CNRL's claim is unpersuasive, mainly because APPI does not tender the issued permits that resulted from the over $10 million spent by CNRL.
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13 The Proposal Trustee and APPI argue that the court should approve the proposal despite the problems relating to Wood Buffalo and CNRL. The Trustee and APPI argue that the court should prefer the positions of the 21 employees of APPI, the municipalities that rely on APPI to provide permit services, and the other creditors of APPI.
14 The court concludes that it cannot approve the proposal presented by the Proposal Trustee. Parliament's intention was clearly to respect business decisions concerning proposals; those business decisions must, however, reflect the opinion of all of APPI's creditors who, having been given a fair opportunity to vote on the proposal, have expressed their opinion in their vote. Such a vote did not take place in the circumstances here. Moreover, in my view, even if it were true that the creditors who were not given a fair opportunity to vote would not do better in a bankruptcy, that would not be a reason to approve the proposal; if comparison to bankruptcy had been the standard, Parliament would have said so. Parliament chose to allow creditors to exercise their business judgment, and so should the courts.
Cases and authority cited
15 By the appellant, Regional Municipality of Wood Buffalo: Black's Law Dictionary (9th ed.) definition of "liquidated amount"; Houlden and Morawetz' Bankruptcy and Insolvency Law of Canada, page 5-72, p. 5-85; Central Capital Corp., Re (1995), 29 C.B.R. (3d) 33 (Ont. Gen. Div. [Commercial List]); Diewold v. Diewold (1940), [1941] S.C.R. 35, 22 C.B.R. 329 (S.C.C.); Bearcat Explorations Ltd., Re (2004), 3 C.B.R. (5th) 173 (Alta. Q.B.); Muller, Re (1986), 62 C.B.R. (N.S.) 194 (B.C. S.C.); Mister C's Ltd., Re (1995), 32 C.B.R. (3d) 242 (Ont. Bktcy.).
16 By the appellant, Canadian Natural Resources Limited: San Juan Resources Inc., Re, [2009] A.J. No. 79 (Alta. Q.B.) at para 30; Business Development Bank of Canada v. Pinder Bueckert & Associates Inc., [2009] S.J. No. 696 (Sask. Q.B.) at para. 23; Able Automotive Ltd. v. Cameron-Okolita Inc., 2009 SKQB 476 (Sask. Q.B.) at paras. 25-26, aff'd 2010 SKQB 34 (Sask. Q.B.); Mamczasz Electrical Ltd. v. South Beach Homes Ltd., 2010 SKQB 182 (Sask. Q.B.); Charlestown Residential School, Re, [2010] O.J. No. 3140 (Ont. S.C.J.); Lloyd's Non-Marine Underwriters v. J.J. Lacey Insurance Ltd., [2008] N.J. No. 18 (N.L. T.D.).
17 By Alberta Permit Pro Inc.: Abou-Rached, Re, 2002 CarswellBC 1642, 2002 BCSC 1022, [2002] B.C.W.L.D. 861, 35 C.B.R. (4th) 165 (B.C. S.C.); Canadian Triton International Ltd., Re, 1997 CarswellOnt 3745, 49 C.B.R. (3d) 192 (Ont. Bktcy.); Claude Resources Inc. (Trustee of) v. Dutton, 1993 CarswellSask 26, 22 C.B.R. (3d) 56, 115 Sask. R. 35 (Sask. Q.B.); Farrell, Re, 2003 CarswellOnt 1015, 40 C.B.R. (4th) 53 (Ont. S.C.J. [Commercial List]); Galaxy Sports Inc., Re, 2004 CarswellBC 1112, 2004 BCCA 284, 240 D.L.R. (4th) 301, 20 R.P.R. (4th) 1, 1 C.B.R. (5th) 20, 29 B.C.L.R. (4th) 362, 200 B.C.A.C. 184 (B.C. C.A.); McCoubrey, Re, 1924 CarswellAlta 69, 5 C.B.R. 248, [1924] 3 W.W.R. 587, [1924] 4 D.L.R. 1227 (Alta. T.D.); Roman Catholic Episcopal Corp. of St. George's, Re, 2005 CarswellNfld 238, 2005 NLTD 150, 14 C.B.R. (5th) 211, 250 Nfld. & P.E.I.R. 179, 746 A.P.R. 179 (N.L. T.D.); Stone, Re, 1976 CarswellOnt 56, 22 C.B.R. (N.S.) 152 (Ont. S.C.); Wandler, Re, 2007 CarswellAlta 482, 2007 ABQB 153, [2007] A.W.L.D. 2170, 73 Alta. L.R. (4th) 48, [2007] 7 W.W.R. 371, 32 C.B.R. (5th) 292, 418 A.R. 55, [2008] A.W.L.D. 2228 (Alta. Q.B.); Northstone Power Corp. v. R.J.K. Power Systems Ltd., 2002 CarswellAlta 536, 2002 ABQB 405, 33 C.B.R. (4th) 261, 314 A.R. 169 (Alta. Q.B.); aff'd at 2002 CarswellAlta 1111, 2002 ABCA 201, 36 C.B.R. (4th) 272, 317 A.R. 192, 284 W.A.C. 192 (Alta. C.A.); Transglobal Communications Group Inc., Re, 2009 CarswellAlta 464, 2009 ABQB 195, [2009] A.W.L.D. 2005, 4 Alta. L.R. (5th) 157, 53 C.B.R. (5th) 122, [2009] 9 W.W.R. 165, 473 A.R. 167 (Alta. Q.B.).
18 By the Proposal Trustee: Bankruptcy and Insolvency Act, R.S.C. 1985 c. B-3, 102(1), 104(1), 108, 109(1), 109(2) and 124; Port Chevrolet Oldsmobile Ltd., Re (2004), 49 C.B.R. (4th) 146 (B.C. C.A.); London Bridge Works Ltd., Re (1926), 8 C.B.R. 73 (Ont. S.C.); Galaxy Sports Inc., Re, 2004 BCCA 284 (B.C. C.A.); Canadian Triton International Ltd., Re (1997), 49 C.B.R. (3d) 192 (Ont. Bktcy.); Lofchik, Re, [1998] O.J. No. 332, 1 C.B.R. (4th) 245 (Ont. Bktcy.); Arthur Fuel Co., Re (1926), 8 C.B.R. 46 (Man. K.B.); Morton, Re (1922), 3 C.B.R. 114 (Sask. K.B.); Claude Resources Inc. (Trustee of) v. Dutton, 1993 CarswellSask 26, 22 C.B.R. (3d) 56, 115 Sask. R. 35 (Sask. Q.B.).
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19 By the court: R. v. Sheppard, 2002 SCC 26, [2002] S.C.J. No. 30 (S.C.C.); Reform Party of Canada v. Canada (Attorney General), [1995] A.J. No. 212 (Alta. C.A.); Peixeiro v. Haberman, [1997] 3 S.C.R. 549, [1997] S.C.J. No. 31 (S.C.C.)
1. Background a) Factual
20 Alberta Permit Pro Inc., is an Alberta corporation which is an accredited inspection agency, authorized by municipalities to review applications for, and issue, permits within the building, electrical, fire, gas, and plumbing trades. APPI became insolvent as a result of a recent re-assessment by Canada Revenue Agency which, according to APPI, was attributable to previous ownership. APPI then sought to restructure its business and financial affairs through a proposal to creditors under Division 1 of Part 111 of the BIA.
21 Meyers Norris Penny Limited was appointed Proposal Trustee of APPI.
22 The Regional Municipality of Wood Buffalo is one of the municipalities which delegated its permit-granting authority to APPI; it did so in exchange for a 30% share of the payments received by APPI from its permit operations.
23 CNRL is an oilsands development company which paid APPI millions of dollars for permits for buildings in the Wood Buffalo regional municipality. i) First (re-scheduled) meeting of creditors
24 The first meeting of APPI creditors was scheduled for June 29, 2010 but was adjourned at the request of CRA to July 13, 2010.
25 The Division 1 proposal advanced at the July 13 th meeting was for the distribution to APPI's creditors of $150,000.00 in full satisfaction of the claims against it. MNP had proxies from five creditors, (Canada Revenue Agency, Town of Beaumont, County of Vermillion River, Airways Business Plaza Ltd. and Shelbra International) whose claims totalled $767,755.50, voting in favour of the proposal. There were five potential votes against the proposal, whose claims initially totalled approximately $19,000,000.00. None of the creditors intending to vote against the proposal was allowed to vote.
26 On July 13, 2010, the Chair of the meeting denied Wood Buffalo the right to vote at the meeting. On June 23, 2010, Wood Buffalo had filed a proof of claim in the amount of $6,202,159.16. The Proposal Trustee has reviewed the claim, found it deficient, but had not alerted Wood Buffalo to the perceived deficiencies prior to the first rescheduled meeting. At the rescheduled meeting, Wood Buffalo informed the Chair that it had not provided its agent with a proxy or voting letter because its agent had just learned about the date of the rescheduled meeting on July 12, 2010, i.e. one day prior to the meeting, and had not had time to prepare the required document. Wood Buffalo is located in North East Alberta, in the region of Fort McMurray, and Wood Buffalo's agent was located in Edmonton. The Chair refused Wood Buffalo's agent's request for an adjournment, stating that the Trustee's obligation was only to serve notice on the creditor and that obligation had been satisfied. Wood Buffalo's Proof of Claim contained the following information about service:
Form 31 Proof of Claim
Section 50.1, subsections 65.2(4), 81.2(1), 81.3(8), 81.4(8), 102(2), 124(2), 128(1), and paragraphs 51(1)(e) and 66.14(b) of the Act
All notices or correspondence regarding this claim must be forwarded to:
Kimberley D. Wakefield, Q.C./Shauna N. Finlay
Fraser Milner Casgrain LLP
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2900 Manulife Place
10180 - 101 Street
Edmonton, AB T5J 3V5
Fax: (780) 423-7276
Notice of the rescheduled meeting was served by the Trustee on the Fraser Milner Casgrain law firm but not to the attention of either lawyer identified in the Proof of Claim. Fraser Milner Casgrain is a large law firm.
27 Although the issue was moot because of the absence of a proxy or a voting letter, the Chair of the meeting also denied Wood Buffalo the right to vote because Wood Buffalo's claim: failed both to meet the requirements of s. 124(4) of the BIA and to set out the particulars of any claim that APPI had against Wood Buffalo; was contingent; and, was unliquidated and had not yet been valued. The Trustee added:
Specifically the proof of claim does not contain a detailed statement of account showing the particulars of the proof of claim, nor does it set out the vouchers or other evidence by which the proof of claim can be substantiated. Further, the proof of claim does not set out the particulars of any claim that Alberta Permit Pro Inc. has against RMWB, which is critical, since creditors who owe the debtor more than what is allegedly owed to them cannot vote. In addition, the proof of the claim is contingent or a proof of claim for unliquidated damages, and is only a provable proof of claim for the amount which it has been valued by the trustee pursuant to section 135(1.1) of the Act. A creditor with a proof of claim for unliquidated damages has no right to vote until his or her proof of claim has been valued, and at this time, the trustee has not had sufficient opportunity to value the proof of claim.
28 The Chair denied CNRL the right to vote stating that the latter's proof of claim, in the amount of $12,293,516.84 did not comply with s. 124(4) of the BIA as it did not contain a detailed statement of account showing the particulars of the claim, nor the vouchers or other evidence by which the claim could be substantiated.
29 It was suggested on behalf of both Wood Buffalo and CNRL that the votes for those claimants be allowed, but marked as objected. The Chair declined to take that course of action, deciding, instead, that the Trustee would record the votes, so advise the court, and that the votes could potentially affect later decisions. The Trustee added:
A letter outlining the deficiencies will be sent as is our protocol, and if the deficiencies are resolved to the trustee's satisfaction the vote may have an impact on the results of today's meeting. If the deficiencies are not resolved to the trustee's satisfaction then a notice of disallowance will be issued wherein a protocol in the Act is prescribed to have this matter heard by the Court. In any event, as the trustee is the representative of the Court, all information will be disclosed to the Court by the trustee so that the Court can make informed decisions.
30 It was then argued, on behalf of APPI, that s. 108(1) of the BIA did not require a formal disallowance of a claim. The Trustee responded:
[That] is correct. The Proof of Claim could take months to review which would delay the entire process. From what you're suggesting, a creditor could attend the meeting with their Proof of Claim in hand and the Trustee would not be able to reject for voting purposes and would be obligated to adjourn the meeting to fully review the Proof of Claim and provide notice of a disallowance. ii) Denials of claims
31 By letter dated October 7, 2010, Wood Buffalo provided the Trustee with additional information concerning its claim. When cross-examined, the representative of the Trustee stated that, at least this additional information if not the information originally supplied by Wood Buffalo, satisfied the requirements of s. 124(4) of the Act. That information was forwarded by the
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Trustee on November 26, 2010 to APPI for its comments. On December 3, counsel for APPI sent to the Trustee letters setting out the reasons why APPI felt that Wood Buffalo's claims were not valid. The Trustee's application to approve APPI's proposal and the Report to Court on Proposal were also filed and served on December 3, 2010. The December 3 letter concerning Wood Buffalo's claim was not forwarded by the Trustee to Wood Buffalo until January 28, 2011. The Trustee denied Wood Buffalo's claim for the following reasons:
First, approximately $2,424,839.36 of the claim advanced against APPI by RMWB is derived from transactions and events which occurred prior to April of 2008. As a result of the application of the standard two-year limitation period, such claims are statutebarred.
Second, the first component of the claim advanced against APPI by RMWB is a claim for $3,102,159.16 alleged to be comprised of unsubmitted remittances to RMWB, supposedly comprising RMWB's 30% share of safety code permit fees collected by APPI. This aspect of RMWB's claim does not stand up to scrutiny, insofar as:
(a) RMWB has failed to provide a satisfactory (or any) breakdown as to how these numbers were derived or calculated; and
(b) APPI has randomly audited a sample of select entries on the supporting spreadsheet provided by RMWB and has determined that many of these entries pertain to permits in respect of which APPI has in fact remitted payments to RMWB. By way of example only, each of items 56445-b, 59365-b, 57079-b, 58680-e, 58858-b, 59052-p, 56367-b, 56445-b, 56454b, 56488-b, 56636-b pertain to permits in respect of which APPI remitted the appropriate portion of safety code permit fees to RMWB on various dates in 2007 and 2008 (supporting documentation is available upon request).
32 After the first rescheduled meeting of creditors, CNRL also provided additional information to the Trustee concerning its claim; the Trustee shared that information with APPI but did not share APPI's response with CNRL, and then disallowed CNRL's claim on the following grounds:
(a) Most of the items set out in the Proof of Claim are not sustainable as they are in respect of debts that were statute barred at the time the Proposal was filed;
(b) With respect to the remaining items, the information reviewed by the Trustee does not substantiate a debt owing by APPI to CNRL; and
(c) There is no evidence of a contractual relationship between APPI and CNRL that would establish a debt owing by APPI to CNRL. b) Legislative
33 An appeal from the denial of the right to vote is set out in s. 108(1) of the BIA:
Chair may admit or reject proof
108. (1) The chair of any meeting of creditors has power to admit or reject a proof of claim for the purpose of voting but his decision is subject to appeal to the court.
Accept as proof
(2) Notwithstanding anything in this Act, the chair may, for the purpose of voting, accept any letter or printed matter transmitted by any form or mode of telecommunication as proof of the claim of a creditor.
In case of doubt
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(3) Where the chair is in doubt as to whether a proof of claim should be admitted or rejected, he shall mark the proof as objected to and allow the creditor to vote subject to the vote being declared invalid in the event of the objection being sustained.
R.S., 1985, c. B-3, s. 108; 1992, c. 27, s. 45; 2005, c. 47, s. 123(E).
34 An appeal from the denial of a claim is set out in s. 135(4) of the BIA:
Trustee shall examine proof
135. (1) The trustee shall examine every proof of claim or proof of security and the grounds therefor and may require further evidence in support of the claim or security. Determination of provable claims
(1.1) The trustee shall determine whether any contingent claim or unliquidated claim is a provable claim, and, if a provable claim, the trustee shall value it, and the claim is thereafter, subject to this section, deemed a proved claim to the amount of its valuation.
Disallowance by trustee
(2) The trustee may disallow, in whole or in part,
(a) any claim;
(b) any right to a priority under the applicable order of priority set out in this Act; or
(c) any security.
Notice of determination or disallowance
(3) Where the trustee makes a determination under subsection (1.1) or, pursuant to subsection (2), disallows, in whole or in part, any claim, any right to a priority or any security, the trustee shall forthwith provide, in the prescribed manner, to the person whose claim was subject to a determination under subsection (1.1) or whose claim, right to a priority or security was disallowed under subsection (2), a notice in the prescribed form setting out the reasons for the determination or disallowance.
Determination or disallowance final and conclusive
(4) A determination under subsection (1.1) or a disallowance referred to in subsection (2) is final and conclusive 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.
Expunge or reduce a proof
(5) The court may expunge or reduce a proof of claim or a proof of security on the application of a creditor or of the debtor if the trustee declines to interfere in the matter.
R.S., 1985, c. B-3, s. 135; 1992, c. 1, s. 20, c. 27, s. 53; 1997, c. 12, s. 89.
2. Appeals pursuant to s. 108 of the Act from the Chair's decision denying voting rights and pursuant to s. 135 of the Act from the Trustee's decision disallowing claims are both by way of re-hearing or hearing de novo rather than by way of appeals on the record
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35 Unhampered by any binding decision on the meaning of "appeal", this court determines that a purposive interpretation of ss. 108 and 135 of the BIA leads to the conclusion that appeals pursuant to those sections should be by way of rehearing, or hearing de novo, rather than by way of appeal on the record. Moreover, even if such appeals should normally be on the record, in the circumstances here, fairness requires a rehearing. Finally, even if appeals had to be on the record, in the circumstances here the court would allow fresh evidence to be called on the validity of the claims.
36 As opposed to the situation in British Columbia, where the Galaxy Sports court was perhaps bound, or at least guided, by earlier appellate decisions stating that the word "appeal", without more, in a statute meant "appeal on the record", this court does not face any such precedential hurdle. On the contrary, in this province, Rules 499 and 500 which referred simply to "appeal" were consistently interpreted to mean "appeal by way of hearing de novo". Therefore, in Alberta, it is still open to a court to conclude that a statutory reference to "appeal" must be interpreted contextually and could mean any one of a true appeal, or a hearing de novo, or even, presumably, a review of the type envisaged by Parliament in the Canadian Criminal Code with respect to bail where a reviewing court can reconsider bail if either the bail court made an error of law or if there are material new circumstances.
37 I am not certain if my view of the flexibility in Alberta accords with that of Yamauchi J., as expressed by him in Transglobal Communications Group where he stated, at para. 36, that "ordinarily, an appeal is on the record", and gave as authority for that proposition Reform Party of Canada at pp 185-186. With respect, I don't interpret the referenced passages in the same way. The majority in the latter case stated:
VI. FRESH EVIDENCE APPLICATION
95 The Respondents seek to introduce fresh evidence at the re-hearing of this appeal. At the trial and at the first hearing of this appeal, counsel for the Attorney General of Canada argued that the Respondents had failed to establish a factual base for their action in that they had failed to prove that the legislation had the effect of restricting their freedom of expression. The Respondents now seek to introduce evidence relating to the Reform Party's radio and television advertising and broadcasting campaign leading up to the election held in October, 1993.
96 In Palmer v. The Queen, [1980] 1 S.C.R. 759, the Supreme Court of Canada set out the following criteria for the admission of fresh evidence (at p. 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.
(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.
97 The evidence which the Reform Party seeks to introduce deals with its actual expenditures during the 1993 election campaign. This evidence was not available at the trial which was held before the commencement of the election campaign. Such evidence is relevant. I doubt that it is decisive or practically conclusive. However, I need not decide the issue here as I have already dealt with the factual basis and have decided that issue in favour of the Reform Party without reference to the new evidence.
In my view, that extract merely reminds us of the basic principles regarding the introduction of fresh evidence on appeal when the appeal is on the record.
38 Similarly, while one cannot help but applaud the concern expressed by Farley J. in Canadian Triton about "coopering up" a claim for voting rights with information provided after the fact, in my view that concern does not automatically lead to an
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 9 Alberta Permit Pro Inc., Re, 2011 ABQB 141, 2011 CarswellAlta 387 2011 ABQB 141, 2011 CarswellAlta 387, [2011] 10 W.W.R. 180, [2011] A.W.L.D. 2209... appeal on the record. Several points must be made: first, Farley J. was dealing only with the appeal pursuant to s. 108, not with the appeal pursuant to s. 135. Part of the difference between those two sections is that s. 108 involves an assessment of relatively narrow issues - relating to compliance with certain basic formalities. Even then, as Farley J. noted, an appeal should take into account "material then available to the Chair". In the circumstances here, what was available to the Chair on July 13, 2010 was the information provided by Wood Buffalo about its address for service; clearly that information should be available to the court, as part of the record, when deciding whether the Chair properly denied Wood Buffalo the right to vote on July 13, 2010. Moreover, as was established by Urquart J. in 1940, making the best possible assessment of a claim in a timely manner is part of a Proposal Trustee's obligation, even if satisfaction of the obligation involves giving the opportunity to a creditor to "cooper up" its claim; in the long run, investment at that stage of the proceedings is more efficacious than waiting for a court to overturn a decision. In any event, in practice, at least in Alberta, Chairs and Trustees do not prepare a "record" of what was available to the Chair in relation to a decision on voting. Indeed, it is possible that Wood Buffalo's proof of claim, which contained the address for service, was not produced and exhibited at the meeting on July 13. The notion of appeal on the record fails when established practice does not establish a record.
39 What did Parliament intend in ss. 108 and 135? I agree with Galaxy Sports to the extent that it stated that slightly different considerations apply in respect of each of those sections because of the privative clause which attaches to the latter but not to the former. Overall, however, given the tight time lines imposed by Parliament in respect of the proceedings, the limited resources of the Trustee, the cost of providing "records", and, most importantly, the considerable delay and additional expense caused by returning matters to the Trustee for reconsideration in every case where either the Trustee did not give sufficient reasons to allow an appeal court to adequately assess the Chair or the Trustee's reasons, or where the Trustee made an error of law on which correctness would be the standard of review, I have concluded that Parliament intended that the appeals be heard by way of re-hearing so that, at the conclusion of the hearing by the court, an answer would be provided to all the parties. As one of the parties on this hearing stated, albeit in connection with another issue, the nature of this process is such that it cannot bear the time and cost of fulsome review. With respect, the only time when the Galaxy Sports approach would operate to provide an efficacious result would be where the court denies the appeal and upholds the Chair or Trustee. Almost inevitably in an appeal on the record system as we know from our own Courts of Appeal, when an appellant succeeds in objecting to a Trustee's decision, the matter would have to be returned to the Trustee for re-assessment, thereby causing delay and additional expense. A system that automatically punishes a successful appellant cannot have been within Parliament's contemplation for the disposition of commercial matters where time is often of the essence.
40 However, if I were wrong in that analysis, then I would adopt the reasoning in San Juan Resources Inc. and state that, in the circumstances here, an injustice would result from the denial of a hearing de novo. In relation to Wood Buffalo's right to vote at the meeting, since Wood Buffalo's proof of claim gave a precise address for service, the Trustee should have served Wood Buffalo at that address. Service is like horseshoes: close is often good enough. A court would have the ability to deem service good and sufficient even if it did not formally comply with the requirements; were we dealing with a relatively small law firm, and a creditor/client with no unique authority issues as arise where a municipality must approve a certain course of conduct, and where the authority-granting individuals resided in the same city or town as the law firm agent, even a notice that had not been sent to the address for service specified may have been deemed sufficient. However, in this case, given the nature of the client, the size of the law firm, and the distance which separated the two, coupled with the clear knowledge that the creditor intended to file a claim, in fairness the requested adjournment should have been granted.
41 Even more important reasons than lack of adequate service ground a conclusion that it would be unfair to deal with this matter on the record: those relate to the substantive treatment by the Trustee of the Wood Buffalo and CNRL claims. In that context, APPI relies on Northstone Power Corp. which it cites for the proposition that the position of a major creditor need not always be taken into account, and should not be taken into account where the Trustee has disallowed that creditor's claim. However, within that decision we find the following citation from an earlier Ontario case where Urquhart J. stated:
Counsel for R.J.K. referred to the case of McCrie v. Gray, where Urquhart J. was dealing with an appeal by a creditor from a notice of disallowance served on him of his claim against the estate of the debtor. Particular reference was made to his comments where Urquhart J. said, at p. 4:
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 10 Alberta Permit Pro Inc., Re, 2011 ABQB 141, 2011 CarswellAlta 387 2011 ABQB 141, 2011 CarswellAlta 387, [2011] 10 W.W.R. 180, [2011] A.W.L.D. 2209...
Not only did the trustee give no reasons for rejection but it did not, as I think it was its duty to do, ask the creditor for production of vouchers, receipts or other documents substantiating his claim, nor make any inquiries. If it had, many of the items disputed would have been admitted.
I think I must lay down the rule, which is to be followed by trustees, that notices of disallowance must set forth, so far as is humanly possible, the grounds of rejection and must follow at least some semblance of investigation by the trustee....
18 I would first note that I am not dealing with an appeal of the Trustee's decision to disallow the claim. I have no quarrel whatsoever with the comments made by Urquhart J. in that case.
(Emphasis added)
The provisions of s. 135(1) appear to be a statutory implementation of Urquart J's outline of the duty of Trustees when examining claims.
42 On the facts here, not only did the Proposal Trustee not ask the creditors for explanations prior to the first rescheduled meeting of creditors after it had obtained some criticism of the proposals and while there was still 4 days left prior to the meeting during which additional information could have been supplied, but after the first meeting, when additional information was provided, the Trustee not only denied the creditors the opportunity of responding to APPI's position, but, given that APPI's letter was dated December 3 and that the Trustee's Report was dated December 3, appears to have failed to make any semblance of independent investigation of the positions taken by APPI.
43 Parenthetically, it is to be noted that Urquhart J. was prescient about the need to give reasons: although he spoke in 1940, it was only in 2002, in Sheppard, that the Supreme Court of Canada issued its leading decision on the need for judges to give reasons:
The trial judge erred in law in failing to provide reasons that were sufficiently intelligible to permit appellate review of the correctness of his decision.
The requirement of reasons is tied to their purpose and the purpose varies with the context. The present state of the law on the duty of a trial judge to give reasons, in the context of appellate intervention in a criminal case, can be summarized in the following propositions:
1. The delivery of reasoned decisions is inherent in the judge's role. It is part of his or her accountability for the discharge of the responsibilities of the office. In its most general sense, the obligation to provide reasons for a decision is owed to the public at large.
2. An accused person should not be left in doubt about why a conviction has been entered. Reasons for judgment may be important to clarify the basis for the conviction but, on the other hand, the basis may be clear from the record. The question is whether, in all the circumstances, the functional need to know has been met.
3. The lawyers for the parties may require reasons to assist them in considering and advising with respect to a potential appeal. On the other hand, they may know all that is required to be known for that purpose on the basis of the rest of the record.
4. The statutory right of appeal, being directed to a conviction (or, in the case of the Crown, to a judgment or verdict of acquittal) rather than to the reasons for that result, not every failure or deficiency in the reasons provides a ground of appeal.
5. Reasons perform an important function in the appellate process. Where the functional needs are not [page871] satisfied, the appellate court may conclude that it is a case of unreasonable verdict, an error of law, or a miscarriage
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 11 Alberta Permit Pro Inc., Re, 2011 ABQB 141, 2011 CarswellAlta 387 2011 ABQB 141, 2011 CarswellAlta 387, [2011] 10 W.W.R. 180, [2011] A.W.L.D. 2209...
of justice within the scope of s. 686(1)(a) of the Criminal Code, depending on the circumstances of the case and the nature and importance of the trial decision being rendered.
6. Reasons acquire particular importance when a trial judge is called upon to address troublesome principles of unsettled law, or to resolve confused and contradictory evidence on a key issue, unless the basis of the trial judge's conclusion is apparent from the record, even without being articulated.
7. Regard will be had to the time constraints and general press of business in the criminal courts. The trial judge is not held to some abstract standard of perfection. It is neither expected nor required that the trial judge's reasons provide the equivalent of a jury instruction.
8. The trial judge's duty is satisfied by reasons which are sufficient to serve the purpose for which the duty is imposed, i.e., a decision which, having regard to the particular circumstances of the case, is reasonably intelligible to the parties and provides the basis for meaningful appellate review of the correctness of the trial judge's decision.
9. While it is presumed that judges know the law with which they work day in and day out and deal competently with the issues of fact, the presumption is of limited relevance. Even learned judges can err in particular cases, and it is the correctness of the decision in a particular case that the parties are entitled to have reviewed by the appellate court.
10. Where the trial decision is deficient in explaining the result to the parties, but the appeal court considers itself able to do so, the appeal court's explanation in its own reasons is sufficient. There is no need in that case for a new trial. Such an error of law at the trial level, if it is so found, would be cured under the s. 686(1)(b)(iii) proviso. In the circumstances of this case, the majority of the Court of Appeal correctly concluded that the reasoning of the trial judge was unintelligible and therefore incapable of proper judicial scrutiny on appeal. There were significant inconsistencies or conflicts in the evidence. The trial judge's reasons were so "generic" as to be no reasons at all. The absence of reasons prevented the Court of Appeal from properly reviewing the correctness of the [page872] unknown, unexpressed pathway taken by the trial judge in reaching his conclusion and from properly assessing whether he had properly addressed the principal issues in the case. The trial judge's failure to deliver meaningful reasons for his decision was an error of law within the meaning of s. 686(1)(a)(ii) of the Criminal Code.
44 What is interesting about Sheppard in relation to the obligation of a Proposal Trustee to give reasons is that, until that SCC decision, there had been no necessity for judges to give reasons for their decisions. However, there had always been a duty, based in natural justice, on administrative tribunals to give reasons for their decisions. One way of looking at the Sheppard decision is that it merely imposed on judges the obligation that already existed on administrative tribunals.
45 The comments by Urquart J. therefore support the conclusion that an "appeal" in the context of ss. 108 and 135 should not be an appeal on the record but a re-hearing: to make an appeal "on the record" would impose on the Trustee or Chair an extremely onerous duty including the duty to give reasons - without providing to the Trustee the resources or the time to satisfy the duty.
46 In any event, however, in circumstances where the Trustee had not exercised its power under s. 135(1) of the Act to ask for additional information from Wood Buffalo, even after the Trustee had received submissions from APPI on the claim without having discussed those with Wood Buffalo, it would be unfair to hear an appeal on the record. The only way in which Wood Buffalo can have a fair opportunity to argue its case is to have a hearing de novo. A further argument in favour of the fairness of a rehearing in the circumstances here is the Trustee's own position at the first meeting that it would record Wood Buffalo's vote and put all relevant information before the court in full satisfaction of its obligation as a court-appointed official; that approach is best enabled by a rehearing.
47 As a third alternative, if an appeal on the record were the only permissible interpretation of the word "appeal", then I would have allowed the appellants to have introduced new evidence: it is clear from the Trustee's own position that it did not give either Wood Buffalo or CNRL the opportunity to learn what the objections were to the claims before the denials were issued. Therefore, the appellants could not, even with reasonable effort, have provided timely responses to the Trustee, and the responses are potentially material. Moreover, the Trustee has taken the position throughout that the court was entitled to
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 12 Alberta Permit Pro Inc., Re, 2011 ABQB 141, 2011 CarswellAlta 387 2011 ABQB 141, 2011 CarswellAlta 387, [2011] 10 W.W.R. 180, [2011] A.W.L.D. 2209... have all of the pertinent information and to make its decisions based on that information; the only way in which that state of information could be achieved was by a re-hearing.
48 In light of the various judicial comments on the type of appeal envisaged by the statute, clarification of its intention by Parliament might be useful.
3. The treatment of Wood Buffalo's claims: at the first meeting, Wood Buffalo should have been granted an adjournment; at the first meeting, Wood Buffalo should have been given the right to vote, even if the vote had been marked "objected"; after the first meeting, Wood Buffalo's claim should not have been rejected by the Trustee a) Wood Buffalo should have been granted an adjournment
49 In addition to the comments made above about the lack of notice of the first meeting to Wood Buffalo as an aspect of fairness requiring a hearing de novo, the court holds that Wood Buffalo was entitled to notice of the rescheduled meeting by notice given to the address for service which Wood Buffalo had clearly provided to the Trustee. With respect, the decision in Lofchik does not detract from that conclusion. The only evidence available to the court in the latter case was that the trustee there had done "what was mechanically required of them and particularly that such notice was mailed to all creditors of the debtor". Here, the evidence is clear that Wood Buffalo had provided an explicit address for service, and the Trustee itself acknowledged that it did not mail the notice to Wood Buffalo at that address.
50 It is perhaps also important to underline the importance of voting at a first meeting of creditors; that importance cannot be overestimated and is well illustrated by this case. Because Wood Buffalo was denied the right to vote on the proposal, the most that it could achieve now if the Chair's voting decision were upheld is that Wood Buffalo could participate in the proposed distribution. Given the size of Wood Buffalo's relative interest, which swamps that of all of the creditors who voted in favour of the proposal, such a result is not only undemocratic, but a result which skews the assessment of business wisdom in the situation. Although Wood Buffalo might have been given the right to participate in a subsequent distribution, that is meager comfort for the largest creditor who wanted to vote against the proposal.
51 Indeed, the very relative importance of Wood Buffalo amongst the creditors puts its situation in a unique light. One can well understand a situation where one minor creditor's position might be overlooked if one had the strong sense that all other creditors were of one mind and that the missing creditor - even if it had voted against the tide - could not have influenced the vote.
52 APPI takes the view that Northstone Power Corp. stands for the proposition that the failure of one creditor to vote should not be weighed against the decision of the majority of the shareholders. With respect, I disagree. Rather, I am of the view that the decision stands for the proposition that where all of the appropriate parties have been given the required notice, and where the Trustee has made the required assessment of all of the proofs of claim, the eligible votes then decide what should be done next. That case simply has no application here, where, for a start, one major creditor was not given notice of the meeting and was therefore placed in the position where it could not vote.
53 APPI argues that the Chair's decision to refuse an adjournment should be upheld because Wood Buffalo did not explain why it did not attend the first meeting of creditors, at which it was decided that a re-scheduled meeting would be held on a specific future date. This argument must be rejected on the facts here. In coming to that conclusion, I have taken the following into account:
• although there is no evidence on the point, because the argument was not raised prior to the hearing, the court accepts the submission of counsel for Wood Buffalo that the lawyers for Wood Buffalo had been informed, prior to the first meeting, that the meeting would be adjourned. They therefore did not attend the first meeting, and were not aware of the information provided to those who attended the meeting about the date on which the meeting was re-scheduled.;
• in those circumstances, Wood Buffalo and its agents were entitled to rely on being given proper notice of the meeting;
• I accept the representation of counsel that they did not receive notice of the meeting until July 12, 2010;
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 13 Alberta Permit Pro Inc., Re, 2011 ABQB 141, 2011 CarswellAlta 387 2011 ABQB 141, 2011 CarswellAlta 387, [2011] 10 W.W.R. 180, [2011] A.W.L.D. 2209...
54 In summary, therefore, Wood Buffalo was entitled to an adjournment of the first meeting of creditors in order to formalize its voting position. In all the circumstances here, the failure to grant an adjournment impugned the meeting as a whole and requires that a meeting to consider APPI's proposal be rescheduled.
55 However, in light of the fact that Wood Buffalo's vote was recorded by the Trustee, it will not be necessary to call a further meeting of creditors to discuss this proposal. b) At the first meeting of creditors, Wood Buffalo's vote should have been taken, even it was marked "objected"
56 Before interpreting the "objected" mechanism, the Court reviews the Proposal Trustee's rejection of Wood Buffalo's claim at the initial meeting. That rejection was based on three grounds: Wood Buffalo had not provided sufficient information about its claim to meet the standards of s. 124(4) of the Act, the claim was contingent and the claim was unliquidated.
57 The first ground for rejection, incompleteness, is, in my view, answered by Urquart J.'s outline of a "duty" of a Trustee, i.e. to ask for clarification if the Trustee cannot come to a decision on the material filed. Here, Wood Buffalo's original claim set out that a resolution of the municipal council approved an agreement between Wood Buffalo and APPI for the provision of safety code services for the period January 1, 2006 to Dcember 31, 2008. The claim stated that APPI would collect fees, issue permits and remit 30% of those fees to the municipality. Wood Buffalo claimed that APPI failed to remit 30% of the fees collected, failed to provide safety code services and failed to maintain proper paperwork that would allow the municipality to confirm which safety code permits had been applied for and which fees were outstanding. The claim went to quantify the cost of rectifying deficiencies in APPI's work and the shortfall in remittances. The claim also attached the pleadings filed in the litigation between Wood Buffalo and APPI in relation to these matters. If the Trustee was of the opinion that this outline was insufficient, it could have, and should have, asked for more information in support of the claim.
58 Wood Buffalo's claim was not contingent. I agree with Wood Buffalo's definition of "contingent" as reflected in the Houlden and Morawetz text: "A contingent claim is a claim that may or may not ever ripen into a debt according as some future event does or does not happen ..." Here, there was no future event that determined anything: Wood Buffalo's claim is that APPI took in permit fees, and that APPI failed to remit 30% of those fees to Wood Buffalo. That claim is not a contingent claim.
59 Wood Buffalo's claim was not unliquidated. Here again, I agree with Wood Buffalo's definition of "liquidated amount" as reflected in Black's Law Dictionary: "a figure readily computed, based on an agreement's terms". Here the 30% provision in the agreement between Wood Buffalo and APPI make Wood Buffalo's claim readily computed based on the total permit fees received by APPI.
60 Turning now to the issue of what should have been done in relation to the Wood Buffalo claim in light of the ability to characterize a claim as "objected" but allow the claim to vote, the court concludes that that statutory mechanism should have been followed at the first meeting of creditors.
61 In coming to that conclusion, the court notes that the objective of the statutory scheme of the BIA is to encourage efficacious, but fair, handling of claims.
62 APPI states that a vote cannot be characterized as "objected" unless the Trustee has made a decision that it is unable to evaluate the claim, and that, in the circumstances here, the Trustee had definitely rejected Wood Buffalo's claim.
63 Undoubtedly, some claims are clearly good, and some are clearly bad. The Trustee must be able to make a summary determination with respect to such claims.
64 However, where claims are relatively complicated, it stands to reason that the Trustee would come to the conclusion that it does not have the time, or the means, to assess the claim and that it should resort to the provisions of s. 108(3). It appears to me that a potentially useful guide to a Trustee is the case law which has developed around the issue of summary judgments: a Trustee is, in effect, called upon to make a summary judgment in respect of the claims advanced. In circumstances where it is not possible to make a summary judgment, the Trustee should take advantage of the statutory mechanism offered, mark a
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 14 Alberta Permit Pro Inc., Re, 2011 ABQB 141, 2011 CarswellAlta 387 2011 ABQB 141, 2011 CarswellAlta 387, [2011] 10 W.W.R. 180, [2011] A.W.L.D. 2209... claim "objected", but allow the putative creditor to vote. In the circumstances here, it is difficult to credit that the Trustee would have had sufficient information to categorically state that Wood Buffalo's claim was denied; Wood Buffalo should have been allowed to vote, and the vote should have been marked "objected".
65 Parliament's wisdom in developing the "objected" mechanism is apparent here; it may well be that Wood Buffalo's undeniable claim is only $1,713,407.61 rather than the $6,202,159.16 originally claimed. Working out a claim is part of what is expected to be done between the first meeting of creditors and the distribution. Here, if the $6 million claim had been noted as objected, the Trustee could still have ended up by approving a firm claim of $1.7 million which still would have swamped the other creditors' combined vote and determined the fate of the proposal. In other words, the notion of objection allows forward movement without denying property rights.
66 In all the circumstances here, the Proposal Trustee should have allowed Wood Buffalo to have voted at the first meeting, but should have marked the vote "objected".
67 In the result, however, by "recording" the vote, the Trustee has averted the necessity of calling a new first meeting. c) After the first meeting of creditors, Wood Buffalo's claim should not have been rejected by the Trustee
68 One of the grounds on which the Proposal Trustee eventually rejected both Wood Buffalo's and CNRL's claims is a limitations defence: a sizeable proportion of each of those claims allegedly fails because claims were not launched by the creditors within the standard two year limitation period.
69 I agree with Wood Buffalo's and CNRL's response to this ground for rejection. As was made clear by Wood Buffalo in communication with the Trustee prior to the first rescheduled meeting of creditors, the issue of discoverability had to be addressed by the Trustee when assessing the effect of limitations. The importance of discoverability in every situation where a limitations defence is advanced was identified by the Supreme Court of Canada in Peixeiro:
36 Since this Court's decisions in Kamloops (City of) v. Nielsen, [1984] 2 S.C.R. 2, and Central Trust Co. v. Rafuse, [1986] 2 S.C.R. 147, at p. 224, discoverability is a general rule applied to avoid the injustice of precluding an action before the person is able to raise it. See Sparham-Souter v. Town & Country Developments (Essex) Ltd., [1976] 1 Q.B. 858 (C.A.), at p. 868 per Lord Denning, M.R., citing Cartledge v. E. Jopling & Sons Ltd., supra:
It appears to me to be unreasonable and unjustifiable in principle that a cause of action should he held to accrue before it is possible to discover any injury and, therefore, before it is possible to raise any action. See also M. (K.) v. M. (H.), supra, at p. 32, and Murphy v. Welsh, supra, at pp. 1079-81.
37 In this regard, I adopt Twaddle J.A.'s statement in Fehr v. Jacob (1993), 14 C.C.L.T. (2d) 200 (Man. C.A.), at p. 206, that the discoverability rule is an interpretive tool for the construing of limitations statutes which ought to be considered each time a limitations provision is in issue:
In my opinion, the judge-made discoverability rule is nothing more than a rule of construction. Whenever a statute requires an action to be commenced within a specified time from the happening of a specific event, the statutory language must be construed. When time runs from "the accrual of the cause of action" or from some other event which can be construed as occurring only when the injured party has knowledge of the injury sustained, the judge-made discoverability rule applies. But, when time runs from an event which clearly occurs without regard to the injured party's knowledge, the judge-made discoverability rule may not extend the period the legislature has prescribed.
(Emphasis added)
70 The same principle applies to CNRL's claim.
71 In addition to the limitations defence, the second ground on which the Proposal Trustee rejected Wood Buffalo's claim was that there was no information about how the claim had been derived or calculated. However, Wood Buffalo had provided
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 15 Alberta Permit Pro Inc., Re, 2011 ABQB 141, 2011 CarswellAlta 387 2011 ABQB 141, 2011 CarswellAlta 387, [2011] 10 W.W.R. 180, [2011] A.W.L.D. 2209... at least 6 inches of materials supporting its claim; it was entitled to a proportionately detailed explanation of why the material provided did not satisfy the Trustee. Indeed, in cross-examination the Trustee's officer acknowledged that the claim met the standards established by s. 124(4) of the Act; therefore, it should have been possible for the Trustee to be explicit about the reasons for rejection of the claim.
72 The third ground on which the Proposal Trustee rejected Wood Buffalo's claim was that there were certain situations in which Wood Buffalo had received its 30% of the permit fee collected by APPI. However, during cross-examination subsequent to the first meeting, APPI acknowledged that the illustrations which it provided of situations in which the 30% had been paid related to less than 20 situations of the over 2,000 permit payments that had been reviewed; in other words, the very evidence on which the Trustee relied demonstrated that payments to Wood Buffalo had not been confirmed in 1,200 to 1,500 separate transactions.
73 It is correct, as APPI points out, that Wood Buffalo's claim has evolved over time; indeed, given the strict time elements of the process, it would be remarkable if there had not been revision to the claim. In any event, Wood Buffalo has stated that, for strategic reasons, it has abandoned those parts of its claim which might be the subject of dispute and has narrowed its claim to an essential nub which is beyond dispute. This approach by a creditor should not be a reason for wholesale disallowance of a claim.
4. The treatment of CNRL's claim: CNRL's claim should be valued
74 CNRL was not allowed to vote at the first re-scheduled meeting of creditors for a variety of reasons, including the fact that its claim was unliquidated and had not been valued. CNRL acknowledges that its claim was in fact unliquidated. Therefore, even if there were no s. 124(4) issues, CNRL could not vote until its unliquidated claim was valued; therefore, it suffered no prejudice as a result of the Trustee's denial of voting rights at the initial meeting.
75 One of the interesting features of the CNRL claim is that CNRL was not identified by APPI as one of its creditors. It was not surprising, in those circumstances, and given the size of the eventual CNRL claim, that the first information provided by CNRL may not have satisfied the requirements of s. 124(4). However, that is where Urqhuart J.'s rule would again come into play: the trustee should have made specific inquiries of CNRL about its claim, and, once APPI had had an opportunity to comment on the claim, CNRL should have been given the opportunity of responding to APPI.
76 CNRL has provided positive evidence of an agreement with APPI, of invoices from APPI to itself for services performed, of payments by way of cheque from itself to APPI, of a regulatory audit commenced in July 2009 to determine if the permits had in fact been issued, and of the conclusion reached by that audit that most permits had not been issued. CNRL has also retained an outside opinion In opposition to that evidence, APPI's current president states that, in his view, all of the millions of dollars that CNRL has spent on paying for permits has been satisfied by obtaining the permits for which CNRL was invoiced. The current president was not, however, president when the arrangements were first instituted between CNRL and APPI in 2005. Moreover, the current president is unable to provide all the permits, or indeed, photocopies of all the permits; he states that Wood Buffalo required APPI to return all of its records to Wood Buffalo and that APPI is not in a position to provide back-up to its assertions.
77 To the best of its knowledge, CNRL has not yet suffered any prejudice by reason of its failure to obtain permits, but it is presumably at risk both of being shut down because it does not have permits and of inadequate testing of its building operations. The inspection process itself would have been useful to CNRL in ensuring that its buildings were up to Code. CNRL states that a recent fire at the Horizon site illustrates the seriousness of CNRL's concern about its permits and Code status.
78 APPI argues that the person hired by CNRL to review CNRL's accounts to determine how many permits had been obtained is a competitor of APPI, and that the individual's evidence should be assessed in light of that caveat. The last criticism of CNRL's evidence by APPI is not persuasive: if that approach were taken, APPI's own evidence would be dismissed as entirely self-serving.
79 CNRL's evidence from its own employees is that of 111 buildings which it processed in the Fort McMurray area, only 17 have been completed or closed. The evidence provided by CNRL from an outside assessor, the person whose impartiality
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 16 Alberta Permit Pro Inc., Re, 2011 ABQB 141, 2011 CarswellAlta 387 2011 ABQB 141, 2011 CarswellAlta 387, [2011] 10 W.W.R. 180, [2011] A.W.L.D. 2209... was criticized by APPI, found that there were 26 permits rather than 17. In any event, however, CNRL states that there is a considerable shortfall between the permits that it paid for and the permits it received.
80 Finally, and going back to the issue of the kind of appeal that is alluded to in s. 135 of the Act, one cannot help but note that the Trustee's response to CNRL about the disallowance of its claim would, under a pure appeal, be rejected for error of law both in ignoring the discoverability issue and in failing to recognize that the sending of invoices is evidence of a contractual relationship, and also for failure to give adequate reasons in relation to the overall disqualification. Under an appeal on the record procedure, this court would then have had to send the matters back to the Trustee for the Trustee's re-assessment of the issues relating to CNRL's claim.
5. The proposal should be rejected at this time
81 APPI and the Trustee recommend that the Court should approve the proposal despite the problems described above because:
• 21 employees of APPI risk losing employment if the proposal is not approved;
• municipalities that depend on APPI for their inspection programs would find themselves, at least temporarily, without any service provider, and, most importantly,
• nobody would do better in a bankruptcy.
82 Indeed, courts have consistently held that, in determining whether to accept a proposal, the court must be satisfied, first, that its terms are reasonable and that the terms are calculated to benefit the general body of creditors: see para.10 of Lofchik. In the same paragraph,. Farley J. endorsed the view that courts must, in addition, also consider the "conduct and interests of the debtor, the interests of the public and future creditors and the requirements of commercial morality". In that articulation, it must be emphasized that the most important factor is the interest of creditors; that is not surprising since it tracks Parliament's language in s. 59(2).
83 The interests of the debtor will presumably usually, if not always, be to restructure their affairs without resort to bankruptcy. Therefore, the remaining factors are presumably the ones which require the most careful consideration.
84 As to the interests of the debtor and the persons who depend on the debtor in the circumstances here, the need for issuing permits has not ended; therefore, it seems likely that persons who are experienced in assessing permits will find employment with other service providers. Similarly, assuming that municipalities will still find it more economical to privatize the permit- issuing function, it is likely that someone will recognize that opportunity and provide that service.
85 As to the interests of the creditors, Parliament's intention in elaborating the BIA was clearly to respect the business acumen of creditors, weighted overall by the amount which those creditors have at stake. Such business decisions must, however, reflect the opinion of all of APPI's creditors who, having been given a fair opportunity to vote on the proposal, have expressed their opinion in their vote. A vote of the type intended by Parliament did not take place in the circumstances here. Moreover, in my view, even if it were true that Wood Buffalo and CNRL would not do better in a bankruptcy, that would not be a reason to approve the proposal; if comparison to bankruptcy had been the standard, Parliament would have said so. Parliament chose to submit proposals to creditors with a view to allowing the creditors to exercise their business judgment; therefore, the courts should also respect that judgment. Indeed, the Lofchik case cited by the Trustee is authority for the proposition that "if a large majority of creditors, i.e. substantially in excess of the statutory majority, have voted for acceptance of a proposal, it will take strong reasons for the court to substitute its judgment for that of the creditors": para. 13. The principle is correct whether the majority of creditors vote for or against the proposal.
86 I accept the opinion of the Trustee that the insolvency in the case here was caused by the previous ownership of APPI rather than by its current ownership. Therefore, I have concluded that there is no issue relating to commercial morality that must be taken into account in determining whether the proposal should be approved.
87 In the result, the proposal is not approved.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 17 Alberta Permit Pro Inc., Re, 2011 ABQB 141, 2011 CarswellAlta 387 2011 ABQB 141, 2011 CarswellAlta 387, [2011] 10 W.W.R. 180, [2011] A.W.L.D. 2209...
6. Costs
88 If the parties are not agreed on costs, I may be spoken to within 30 days of the release of this decision. Municipality's appeals and company's appeal of decision disallowing claim allowed; company's appeal of decision denying it voting rights allowed in part.
End of Document Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 18
TAB 3
3 Prue v. MNP Ltd., 2014 ABQB 764, 2014 CarswellAlta 2319 2014 ABQB 764, 2014 CarswellAlta 2319, [2015] A.W.L.D. 770, 22 C.B.R. (6th) 106...
2014 ABQB 764 Alberta Court of Queen's Bench
Prue v. MNP Ltd.
2014 CarswellAlta 2319, 2014 ABQB 764, [2015] A.W.L.D. 770, 22 C.B.R. (6th) 106, 248 A.C.W.S. (3d) 24, 603 A.R. 188
In the Matter of the Bankruptcy of Skyrider Holdings Ltd.
Stella Prue, Applicant and MNP Ltd., Trustee In Bankruptcy, Respondent
J.B. Veit J.
Heard: December 9, 2014 Judgment: December 10, 2014 Docket: Edmonton BK03-115694
Counsel: Trevor A. Batty for Applicant, Ms Prue Stephen J. Livingstone for Respondent, Trustee
Subject: Civil Practice and Procedure; Insolvency Headnote Bankruptcy and insolvency --- Proving claim — Disallowance of claim — Miscellaneous Reasons for disallowance — Creditor submitted claim in bankruptcy of her son's company, claiming over $4 million in secured and unsecured debt — Trustee disallowed claim on ground real properties which formed basis of claim had been sold by creditor to third parties (with proceeds loaned to bankrupt) after having been transferred from bankrupt to her for no consideration — In anticipation of appeal, creditor applied for order requiring trustee to provide further and better particulars of reasons for disallowance, alleging reasons were insufficient to allow for meaningful appeal — Application dismissed — As application was properly characterized as one for judicial review in nature of mandamus, standard of review was reasonableness — Trustee's reasons were not clearly deficient, and made it clear claim was denied because creditor had obtained property as gift and therefore was not in position to make claim — Even if reasons were deficient, application was unnecessary because creditor had right of appeal in s. 135 of Bankruptcy and Insolvency Act, which provides for appeal on record, appeal by way of de novo hearing, or hybrid of those two — Appeal process would over-ride trustee's conclusion — Balance of convenience did not favour prolonging claim process by requiring trustee to give reasons.
APPLICATION by creditor for order requiring trustee to provide further and better particulars of reasons for disallowance of claim.
J.B. Veit J.:
Summary
1 In the context of an anticipated appeal pursuant to the provisions of s. 135(3) of the Bankruptcy and Insolvency Act, Stella Prue applies for an order directing Skyrider Holdings Ltd.'s Trustee to provide further and better particulars of the reasons for its disallowance of her claim.
2 On November 12, 2014, Skyrider's Trustee issued a Form 77 Notice of Disallowance to Ms. Prue. With respect to three transactions which underlie Ms. Prue's claim, it gave the following generalized reasons for disallowance: "The real property described as ... sold by Stella Prue November 26, 2007 to a third party with sales proceeds of $.... paid to Skyrider Holdings Ltd. originates from (and subdivided from) real property legally described as .... originally owned by Skyrider Holdings Ltd. and
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 1 Prue v. MNP Ltd., 2014 ABQB 764, 2014 CarswellAlta 2319 2014 ABQB 764, 2014 CarswellAlta 2319, [2015] A.W.L.D. 770, 22 C.B.R. (6th) 106... transferred to Stella Prue for no consideration on November 29, 2006." With respect to the fourth basis of Ms. Prue's claim, the Trustee said: "Monies advanced through the RBC Line of Credit have not been proven to be expenditures of Skyrider Holdings Ltd. and were advanced at the direction of Derek Prue who is a joint account holder on the RBC line of credit". Derek Prue is the principal of Skyrider and is Ms. Prue's son. The Notice of Disallowance makes no reference to the Statute of Elizabeth.
3 The application is denied.
4 Although not styled as such, this application should probably be characterized as one for judicial review in the nature of mandamus. The standard on such reviews is reasonableness. Because the Trustee did give reasons, the law presumes those reasons to be correct and adequate. Indeed, as Ms. Prue has been legally represented throughout, the Trustee's reasons probably allow Ms. Prue's lawyer to assume that the Trustee was stating that the transactions which gave valuable corporate property to Ms. Prue for no consideration were fraudulent conveyances, according to the Statute of Elizabeth, and could therefore not ground a claim.
5 However, even assuming that the Trustee's reasons are inadequate, Ms. Prue has a statutory right to appeal the Trustee's decision. The appeal referred to in s. 135(3) of the BIA is one of - an appeal on the record, an appeal by way of a fresh or de novo hearing, or a hybrid of the two. Indeed, the circumstances of the situation here suggest that the appropriate type of appeal is one of the latter two. Nonetheless, if the appeal is on the record, the Trustee's reasons, or lack thereof, may presumably constitute a ground of appeal. If the appeal is by way of a fresh hearing, or a hearing based on the materials before the Trustee together with additional materials as authorized, then the Trustee's reasons are immaterial. Therefore, even assuming that the reasons provided by the Trustee to Ms. Prue are inadequate, the balance of convenience does not favour prolonging the claim process by requiring the Trustee to give reasons.
Cases and authority cited:
6 By the court: N.L.N.U. v. Newfoundland & Labrador (Treasury Board), 2011 SCC 62 (S.C.C.); Paragon Capital Corp. v. Morgan, 2014 ABCA 363 (Alta. C.A.); Apotex Inc. v. Canada (Attorney General) (1993), [1994] 1 F.C. 742 (Fed. C.A.); affirmed [1994] 3 S.C.R. 1100 (S.C.C.); Oil Lift Technology Inc. v. Deloitte & Touche Inc., 2012 ABQB 357 (Alta. Q.B.); Alberta Permit Pro Inc., Re, 2011 ABQB 141 (Alta. Q.B.); Galaxy Sports Inc., Re, 2004 BCCA 284 (B.C. C.A.); Eskasoni Fisheries Ltd., Re, [2000] N.S.J. No. 122 (N.S. S.C.).
Appendix A: Notice of Disallowance
1. Background
7 In January, 2014, Stella Prue submitted a Proof of Claim in the bankruptcy of Skyrider Holdings Ltd., which had gone into bankruptcy on December 19, 2013; she alleged an unsecured claim of $2,195,674.72, based on a judgment, and a secured claim of $2,045,536.00, plus interest and costs, based on a mortgage. Stella Prue is the mother of the principal of Skyrider, Derek Prue. At para. 5 of her Proof of Claim, Ms. Prue acknowledged her relationship with the debtor; however, she stated that she had not dealt with the debtor in a non-arm's length manner.
8 In April, 2014, Ms. Prue submitted additional information and documents to the Trustee. These documents included a Loan Agreement, dated February 4, 2011, pursuant to which the Lender, Stella Prue, and the Borrowers, Derek Prue and Skyrider Holdings Ltd. agreed to rewrite the original promissory notes and to execute a new promissory note in the amount of $2,045,536.00.
9 In June, 2014, the Trustee requested additional information from Ms. Prue. Between August 6 and August 25, 2014, Ms. Prue provided additional information to the Trustee.
10 On November 12, 2014, the Trustee forwarded a Notice of Disallowance in Form 77 to Ms. Prue; the Notice is attached as Appendix A. In summary, however, it states that, with respect to three real properties which form part of the basis of Ms. Prue's claim, two of those properties were sold by her in November 2007 and the third was sold by her in October 2009. The proceeds
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 2 Prue v. MNP Ltd., 2014 ABQB 764, 2014 CarswellAlta 2319 2014 ABQB 764, 2014 CarswellAlta 2319, [2015] A.W.L.D. 770, 22 C.B.R. (6th) 106... of those sales were then loaned to Skyrider. However, all of the properties had originally been owned by Skyrider and had been transferred to Ms. Prue for no consideration in November 2006. The Notice of Disallowance also states that monies advanced through a bank line of credit had not been proven to be expenditures of Skyrider but had been advanced at the direction of Derek Prue who is a joint account holder on the line of credit.
11 Ms. Prue brings this application for three areas of relief: an order extending the time to appeal the Trustee's disallowance; an order directing the Trustee to provide her "with further and better particulars with respect to the reasons contained in the Disallowance, including the legal principles in support of the Disallowance", and for an order setting out a litigation schedule for the appeal. The parties were able to agree on the first and third issues; the court was asked only to resolve the dispute arising out of the second claim. With respect to the second issue, Ms. Prue has particularized:
The Trustee's reasons contained in the Disallowance are insufficient to allow Ms. Prue to file a meaningful appeal, as the Disallowance contains no legal basis for the disallowance of portions of the Proof of Claim.
12 Ms. Prue indicates that part of the reason she had requested additional time to file her appeal is that she is looking for additional evidence relevant to the two concerns raised by the Trustee.
13 Alberta's Rules of Court provide:
3.15(1) An originating application must be filed in the form of an originating application for judicial review if the originating applicant seeks from the Court any one or more of the following remedies against a person or body whose decision, act or omission is subject to judicial review:
(a) an order in the nature of mandamus, prohibition, certiorari, quo warranto or habeas corpus;
(b) a declaration or injunction.
14 The pertinent provisions of the BIA include:
Admission and Disallowance of Proofs of Claim and Proofs of Security Trustee shall examine proof
135. (1) The trustee shall examine every proof of claim or proof of security and the grounds therefor and may require further evidence in support of the claim or security.
Determination of provable claims
(1.1) The trustee shall determine whether any contingent claim or unliquidated claim is a provable claim, and, if a provable claim, the trustee shall value it, and the claim is thereafter, subject to this section, deemed a proved claim to the amount of its valuation.
Disallowance by trustee
(2) The trustee may disallow, in whole or in part,
(a) any claim;
(b) any right to a priority under the applicable order of priority set out in this Act; or
(c) any security.
Notice of determination or disallowance
(3) Where the trustee makes a determination under subsection (1.1) or, pursuant to subsection (2), disallows, in whole or in part, any claim, any right to a priority or any security, the trustee shall forthwith provide, in the prescribed manner,
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to the person whose claim was subject to a determination under subsection (1.1) or whose claim, right to a priority or security was disallowed under subsection (2), a notice in the prescribed form setting out the reasons for the determination or disallowance.
Determination or disallowance final and conclusive
(4) A determination under subsection (1.1) or a disallowance referred to in subsection (2) is final and conclusive 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.
2. Should the court grant Ms. Prue an order in the nature of mandamus against the Trustee?
15 The court should not order the Trustee to provide better particulars of its reasons.
16 The Trustee has facially complied with its obligation to provide reasons for its disallowance of Ms. Prue's claim. a) What is the nature of Ms. Prue's application?
17 The court concludes that Ms. Prue's application is, technically, one for judicial review of a decision of a statutory decision maker, and the particular type of review requested is in the nature of mandamus.
18 It is important to characterize Ms. Prue's application in order to apply the correct standard of review. Because the Trustee is, in the situation here, a statutory decision maker, the standard of review of the Trustee's decision is reasonableness.
19 Ms. Prue's failure to make her application in the correct format is unimportant in the circumstances here since the objectives of Rule 3.15 relating, for example, to timing, notice, and the provision of a return, have all been achieved here by other means b) Are the Trustee's reasons inadequate?
20 Ms. Prue states that the Trustee's reasons for dismissal are inadequate because they do not spell out any legal basis for denying the claim. In particular, she states that the requirements of the BIA require a bankrupt only to disclose, in its statement of affairs, transactions during the 5 years preceding the act of bankruptcy. Here, Skyrider went into bankruptcy in December 2013 and the transfer of its real estate to Ms. Prue occurred in November, 2006; therefore, claims Ms. Prue, the circumstances of the transfer are presumptively outside any period relevant to the bankruptcy.
21 The issue of the five year period for which a bankrupt must provide information in its statement of affairs is a red herring in the situation here. Nothing in the BIA limits the Trustee's inquiries to the 5 year period immediately prior to the bankruptcy or sanitizes all transactions occurring earlier than the five year period. Nor does the statute in any way restrict the Trustee's ambit of decisions to fraudulent preferences, for example, as opposed to fraudulent conveyances.
22 The standard with respect to reasons given by a statutory decision maker has recently been set by the Supreme Court of Canada in N.L.N.U.
12 It is important to emphasize the Court's endorsement of Professor Dyzenhaus's observation that the notion of deference to administrative tribunal decision-making requires "a respectful attention to the reasons offered or which could be offered in support of a decision". In his cited article, Professor Dyzenhaus explains how reasonableness applies to reasons as follows:
"Reasonable" means here that the reasons do in fact or in principle support the conclusion reached. That is, even if the reasons in fact given do not seem wholly adequate to support the decision, the court must first seek to supplement them before it seeks to subvert them. For if it is right that among the reasons for deference are the appointment of the tribunal and not the court as the front line adjudicator, the tribunal's proximity to the dispute, its expertise, etc, then it is also the case that its decision should be presumed to be correct even if its reasons are in some respects defective.
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[Emphasis added.]
(David Dyzenhaus, "The Politics of Deference: Judicial Review and Democracy", in Michael Taggart, ed., The Province of Administrative Law (1997), 279, at p. 304).
See also David Mullan, "Dunsmuir v. New Brunswick, Standard of Review and Procedural Fairness for Public Servants: Let's Try Again!" (2008), 21 C.J.A.L.P. 117, at p. 136; David Phillip Jones, Q.C., and Anne S. de Villars, Q.C., Principles of Administrative Law (5th ed. 2004), at p. 380; and Canada (Citizenship and Immigration) v. Khosa, 2009 SCC 12, [2009] 1 S.C.R. 339, at para. 63.
13 This, I think, is the context for understanding what the Court meant in Dunsmuir when it called for "justification, transparency and intelligibility". To me, it represents a respectful appreciation that a wide range of specialized decision- makers routinely render decisions in their respective spheres of expertise, using concepts and language often unique to their areas and rendering decisions that are often counter-intuitive to a generalist. That was the basis for this Court's new direction in Canadian Union of Public Employees, Local 963 v. New Brunswick Liquor Corp., [1979] 2 S.C.R. 227, where Dickson J. urged restraint in assessing the decisions of specialized administrative tribunals. This decision oriented the Court towards granting greater deference to tribunals, shown in Dunsmuir's conclusion that tribunals should "have a margin of appreciation within the range of acceptable and rational solutions" (para. 47).
14 Read as a whole, I do not see Dunsmuir as standing for the proposition that the "adequacy" of reasons is a stand-alone basis for quashing a decision, or as advocating that a reviewing court undertake two discrete analyses — one for the reasons and a separate one for the result (Donald J. M. Brown and John M. Evans, Judicial Review of Administrative Action in Canada (loose-leaf), at s. 12:5330 and 12:5510). It is a more organic exercise — the reasons must be read together with the outcome and serve the purpose of showing whether the result falls within a range of possible outcomes. This, it seems to me, is what the Court was saying in Dunsmuir when it told reviewing courts to look at "the qualities that make a decision reasonable, referring both to the process of articulating the reasons and to outcomes" (para. 47).
15 In assessing whether the decision is reasonable in light of the outcome and the reasons, courts must show "respect for the decision-making process of adjudicative bodies with regard to both the facts and the law" (Dunsmuir, at para. 48). This means that courts should not substitute their own reasons, but they may, if they find it necessary, look to the record for the purpose of assessing the reasonableness of the outcome.
16 Reasons may not include all the arguments, statutory provisions, jurisprudence or other details the reviewing judge would have preferred, but that does not impugn the validity of either the reasons or the result under a reasonableness analysis. A decision- maker is not required to make an explicit finding on each constituent element, however subordinate, leading to its final conclusion (Service Employees' International Union, Local No. 333 v. Nipawin District Staff Nurses Assn., [1975] 1 S.C.R. 382, at p. 391). In other words, if the reasons allow the reviewing court to understand why the tribunal made its decision and permit it to determine whether the conclusion is within the range of acceptable outcomes, the Dunsmuir criteria are met.
17 The fact that there may be an alternative interpretation of the agreement to that provided by the arbitrator does not inevitably lead to the conclusion that the arbitrator's decision should be set aside if the decision itself is in the realm of reasonable outcomes. Reviewing judges should pay "respectful attention" to the decision-maker's reasons, and be cautious about substituting their own view of the proper outcome by designating certain omissions in the reasons to be fateful.
18 Evans J.A. in Canada Post Corp. v. Public Service Alliance of Canada, 2010 FCA 56, [2011] 2 F.C.R. 221, explained in reasons upheld by this Court (2011 SCC 57) that Dunsmuir seeks to "avoid an unduly formalistic approach to judicial review" (para. 164). He notes that "perfection is not the standard" and suggests that reviewing courts should ask whether "when read in light of the evidence before it and the nature of its statutory task, the Tribunal's reasons adequately explain the bases of its decision" (para. 163). I found the description by the Respondents in their Factum particularly helpful in explaining the nature of the exercise:
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 5 Prue v. MNP Ltd., 2014 ABQB 764, 2014 CarswellAlta 2319 2014 ABQB 764, 2014 CarswellAlta 2319, [2015] A.W.L.D. 770, 22 C.B.R. (6th) 106...
When reviewing a decision of an administrative body on the reasonableness standard, the guiding principle is deference. Reasons are not to be reviewed in a vacuum - the result is to be looked at in the context of the evidence, the parties' submissions and the process. Reasons do not have to be perfect. They do not have to be comprehensive. [para. 44]
. . .
21 It strikes me as an unhelpful elaboration on Baker to suggest that alleged deficiencies or flaws in the reasons fall under the category of a breach of the duty of procedural fairness and that they are subject to a correctness review. As Professor Philip Bryden has warned, "courts must be careful not to confuse a finding that a tribunal's reasoning process is inadequately revealed with disagreement over the conclusions reached by the tribunal on the evidence before it" ("Standards of Review and Sufficiency of Reasons: Some Practical Considerations" (2006), 19 C.J.A.L.P. 191, at p. 217; see also Grant Huscroft, "The Duty of Fairness: From Nicholson to Baker and Beyond", in Colleen M. Flood and Lorne Sossin, eds., Administrative Law in Context (2008), 115, at p. 136).
22 It is true that the breach of a duty of procedural fairness is an error in law. Where there are no reasons in circumstances where they are required, there is nothing to review. But where, as here, there are reasons, there is no such breach. Any challenge to the reasoning/result of the decision should therefore be made within the reasonableness analysis.
23 The arbitrator in this case was called upon to engage in a simple interpretive exercise: Were casual employees entitled, under the collective agreement, to accumulate time towards vacation entitlements? This is classic fare for labour arbitrators. They are not writing for the courts, they are writing for the parties who have to live together for the duration of the agreement. Though not always easily realizable, the goal is to be as expeditious as possible.
24 As George W. Adams noted:
The hallmarks of grievance arbitration are speed, economy and informality. Speedy dispute resolution is important to the maintenance of industrial peace and the ongoing economic needs of an enterprise. Adjudication that is too expensive contributes to industrial unrest by preventing the pursuit of meritorious grievances that individually involve small monetary values but collectively constitute a weathervane of employee satisfaction with the rules negotiated. The relative informality of grievance arbitration is facilitated by much less stringent procedural and evidentiary rules than those applicable to court proceedings. Informality permits direct participation by laymen, enhances the parties' understanding of the system and minimizes potential points of contention permitting everyone to focus on the merits of a dispute and any underlying problem....
... appeal to a higher authority by way of judicial review may be needed to correct egregious errors, to prevent undue extension of arbitral power and to integrate the narrow expertise of arbitrators into the general values of the legal system. The very existence of judicial review can be a healthy check on the improper exercise of arbitral responsibility and discretion.
(Canadian Labour Law (2nd ed. (loose-leaf)), at s. 4.1100 to 4.1110)
25 Arbitration allows the parties to the agreement to resolve disputes as quickly as possible knowing that there is the relieving prospect not of judicial review, but of negotiating a new collective agreement with different terms at the end of two or three years. This process would be paralyzed if arbitrators were expected to respond to every argument or line of possible analysis.
26 In this case, the reasons showed that the arbitrator was alive to the question at issue and came to a result well within the range of reasonable outcomes. I would dismiss the appeal with costs.
(Emphasis added)
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 6 Prue v. MNP Ltd., 2014 ABQB 764, 2014 CarswellAlta 2319 2014 ABQB 764, 2014 CarswellAlta 2319, [2015] A.W.L.D. 770, 22 C.B.R. (6th) 106...
23 I have quoted the portion of the decision dealing with grievance arbitration only because the objectives of speed, economy and informality are, in the circumstances of bankruptcy, just as important as they are in the context of grievance arbitration. This importance is highlighted by the statutory requirements of the BIA that the Trustee's decision is final and that any disagreement with the Trustee's disallowance must be brought on quickly.
24 Seen from the perspective outlined above, it is not obvious that the Trustee's reasons are deficient: the Trustee stated that the "creditor" obtained the property as a gift and therefore is not in a position to claim the proceeds of the property as a debt. In determining whether those reasons are adequate, a court would take into account the fact that Ms. Prue was represented throughout by a law firm. A court would also take into account that a law firm could be presumed to be aware of some aspects of the operation of common law, such as the Statute of Elizabeth, recently commented upon by our Court of Appeal in Paragon Capital Corp.:
9 We can quickly dispense with the submission that the trial judge erred in his understanding of the law and in applying it to the facts as he found them. We find no error here.
10 The reasons of the trial judge are found at 2013 ABQB 339. In brief, he correctly enunciated the legal principles flowing from the Statute of Elizabeth (UK), 13 Eliz I, c 5 and the Fraudulent Preferences Act, RSA 2000, c F-24. He also correctly outlined the burden of proof and the evidence required to shift that burden, referring to the judgment of Moody v Ashton, 2004 SKQB 488, 248 DLR (4th) 690, and specifically, the following passage (at para 141):
In other words, although proof of fraudulent intent to defeat creditors is required in all cases where the necessary consequence of the impugned transaction is to defeat creditors, proof of fraudulent intent will be presumed absent cogent and credible evidence to the contrary. Where there is such cogent and credible evidence to the contrary, the presumption of fraud no longer applies, the evidentiary burden of proving fraud shifts back to the creditor and the court must determine, on a consideration of all of the evidence available to it, whether the creditor has established on a balance of probabilities that the transferor had the fraudulent intent to defeat his or her creditors.
25 The portion of Hall J.'s decision to which the Court of Appeal was referring is:
5 The Statute of Elizabeth, prohibits fraudulent conveyances. Justice Clackson, in Proulx v. Proulx, 2002 ABQB 151, 316 A.R. 150, set out the principles defining the remedy in the Statute of Elizabeth at paragraph 14 as follows:
i. There must be a conveyance of either real or personal property;
ii. The transaction must have been for no or nominal consideration;
iii. It must have been the intent of the settlor to defraud, hinder or delay his creditors;
iv. The intent of the settlor may be inferred from his circumstances and the circumstances of the settlement or may be the result of direct evidence;
v. The fact that there was no consideration or voluntary consideration will in most cases justify the inference of necessary intent absent evidence rebutting that inference;
vi. Inference of intent will be strong if the settlor was insolvent at the time of settlement or the settlement effectively denuded him of assets sufficient to cover the existing obligations;
vii. The party challenging the conveyance must be a creditor or someone with a legal or equitable right to claim against the settlor;
viii. The conveyance must have had the intended effect.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 7 Prue v. MNP Ltd., 2014 ABQB 764, 2014 CarswellAlta 2319 2014 ABQB 764, 2014 CarswellAlta 2319, [2015] A.W.L.D. 770, 22 C.B.R. (6th) 106...
26 I dare say that even a member of the public with no legal training would assume that corporations cannot just give away valuable assets without explanation.
27 In summary, therefore, I am not satisfied that the reasons given by the Trustee are, in the circumstances here, insufficient. c) If the Trustee's reasons were inadequate, should the Trustee be required to give particulars of its reasons?
28 Even if the court were to assume that the reasons given by the Trustee were inadequate, based on the principles on which a court should order a tribunal to do something — that is where it should order mandamus — as found in the Federal Court of Appeal's decision in Apotex which reasons were approved by the Supreme Court of Canada — this is a situation in which the applicant has another remedy — an appeal — which makes the mandamus application unnecessary.
29 Mandamus is, of course, a discretionary remedy. The situations in which mandamus should be granted were usefully set out by Robertson J.A. in the Court of Appeal judgment in Apotex as follows:
Mandamus-The Principles
45 Several principal requirements must be satisfied before mandamus will issue. The following general framework finds support in the extant jurisprudence of this Court (see generally O'Grady v. Whyte, [1983] 1 F.C. 719 (C.A.), at pages 722-723, citing Karavos v. Toronto & Gillies, [1948] 3 D.L.R. 294 (Ont. C.A.), at page 297; and Mensinger v. Canada (Minister of Employment and Immigration), [1987] 1 F.C. 59 (T.D.), at page 66.
1. There must be a public legal duty to act: Minister of Employment and Immigration v. Hudnik, [1980] 1 F.C. 180 (C.A.); Jefford v. Canada, [1988] 2 F.C. 189 (C.A.); Winegarden v. Public Service Commission and Canada (Minister of Transport) (1986), 5 F.T.R. 317 (F.C.T.D.); Rossi v. The Queen, [1974] 1 F.C. 531 (T.D.); Canadian Wildlife Federation Inc. v. Canada (Minister of the Environment), [1989] 3 F.C. 309 (T.D.); affd [1990] 2 W.W.R. 69 (F.C.A.); Bedard v. Correctional Service of Canada, [1984] 1 F.C. 193 (T.D.); Carota v. Jamieson, [1979] 1 F.C. 735 (T.D.); affd [1980] 1 F.C. 790 (C.A.); and Nguyen v. Canada (Minister of Employment and Immigration), [1994] 1 F.C. 232 (C.A.).
2. The duty must be owed to the applicant: Rothmans of Pall Mall Canada v. Minister of National Revenue (No. 1), [1976] 2 F.C. 500 (C.A.); Distribution Canada Inc. v. M.N.R., [1991] 1 F.C. 716 (T.D.); affd [1993] 2 F.C. 26 (C.A.); Secunda Marine Services Ltd. v. Canada (Minister of Supply & Services) (1989), 38 Admin. L.R. 287 (F.C.T.D.); and Szoboszloi v. Chief Returning Officer of Canada, [1972] F.C. 1020 (T.D.); see also Jefford v. Canada, supra.
3. There is a clear right to performance of that duty, in particular:
(a) the applicant has satisfied all conditions precedent giving rise to the duty; O'Grady v. Whyte, supra; Hutchins v. Canada (National Parole Board), [1993] 3 F.C. 505 (C.A.); and see Nguyen v. Canada (Minister of Employment and Immigration), supra;
(b) there was
(i) a prior demand for performance of the duty;
(ii) a reasonable time to comply with the demand unless refused outright; and
(iii) a subsequent refusal which can be either expressed or implied, e.g. unreasonable delay; see O'Grady v. Whyte, supra, citing Karavos v. Toronto & Gillies, supra; Bhatnager v. Minister of Employment and Immigration, [1985] 2 F.C. 315 (T.D.); and Canadian Wildlife Federation Inc. v. Canada (Minister of the Environment), supra.
4. Where the duty sought to be enforced is discretionary, the following rules apply:
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 8 Prue v. MNP Ltd., 2014 ABQB 764, 2014 CarswellAlta 2319 2014 ABQB 764, 2014 CarswellAlta 2319, [2015] A.W.L.D. 770, 22 C.B.R. (6th) 106...
. . .
5. No other adequate remedy is available to the applicant: Carota v. Jamieson, supra; Maple Lodge Farms Ltd. v. Government of Canada, supra; Jefford v. Canada, supra; Harelkin v. University of Regina, [1979] 2 S.C.R. 561; and see Canada (Auditor General) v. Canada (Minister of Energy, Mines and Resources), [1987] 1 F.C. 406 (C.A.); appeal dismissed [1989] 2 S.C.R. 49.
6. The order sought will be of some practical value or effect: Friends of the Oldman River Society v. Canada (Minister of Transport), [1990] 2 F.C. 18 (C.A.), per Stone J.A., at pages 48-52; affd [1992] 1 S.C.R. 3, per La Forest J., at pages 76-80; Landreville v. The Queen, [1973] F.C. 1223 (T.D.); and Beauchemin v. Employment and Immigration Commission of Canada (1987), 15 F.T.R. 83 (F.C.T.D.).
7. The Court in the exercise of its discretion finds no equitable bar to the relief sought: Penner v. Electoral Boundaries Commission (Ont.), [1976] 2 F.C. 614 (T.D.); Friends of the Oldman River Society v. Canada (Minister of Transport), supra.
8. On a "balance of convenience" an order in the nature of mandamus should (or should not) issue.
30 Here, the Trustee had a statutory, non-discretionary, obligation to give reasons, those reasons had to be given to Ms. Prue, and there is no equitable bar to the relief sought. However, there is another adequate remedy available to Ms. Prue: the appeal in s. 135 of the BIA. An appeal under that section is one of — an appeal on the record, an appeal by way of a fresh - or de novo - hearing, or a hybrid of the two: Oil Lift Technology Inc.; Alberta Permit Pro Inc.; Galaxy Sports Inc.; Eskasoni Fisheries Ltd. The circumstances here suggest that one of the latter two types of appeal is the type of appeal that is envisaged in the legislation: given the summary nature of the process leading up to a Disallowance, and the short time lines to appeal, it seems entirely likely that the legislator intended that a person whose claim was disallowed — here a claim in excess of $2 million — ought to have the right to a full hearing of its position, which can only occur in a de novo or fresh hearing. On a fresh hearing, or even on a hybrid of a fresh hearing and a hearing which contains material from the original process, the reasons of the Trustee for disallowing the claim are, of course, irrelevant: new material will presumably have to be assessed. However, even if the appeal envisaged in s. 135 is a true appeal, i.e. an appeal on the record, the alleged absence of reasons is a possible ground of appeal. Therefore, because there will be an appeal of one type or another, the appeal process will itself over-ride the Trustee's conclusion. Given the fact that Parliament obviously intended these matters to be dealt with as quickly as fairly possible, on a balance of convenience it would be counter-productive to slow down the appeal process by requiring the Trustee to give better particulars of its reasons.
31 In summary, for the reasons given, Ms. Prue's application to have the Trustee give particulars of its reasons for disallowance is denied.
3. Costs
32 If the parties are not agreed on costs, I may be spoken to within 30 days after the release of this decision. Application dismissed.
Appendix A
Take notice that:
As trustee acting in the matter of the bankruptcy of Skyrider Holdings Ltd., we have disallowed your claim (or your right to priority or your security on the property) in whole, pursuant to subsection 135(2) of the Act, for the following reasons:
1) The real property described as legal 0729273, Block 1, Lot 3 sold by Stella Prue November 26, 2007 to a third party with sales proceeds of $649,000 paid to Skyrider Holdings Ltd. originates from (and subdivided from) real property
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 9 Prue v. MNP Ltd., 2014 ABQB 764, 2014 CarswellAlta 2319 2014 ABQB 764, 2014 CarswellAlta 2319, [2015] A.W.L.D. 770, 22 C.B.R. (6th) 106...
legally described as SE-13-54-3 W5M, originally owned by Skyrider Holdings Ltd. and transferred to Stella Prue for no consideration on November 29, 2006;
2) The real property described as legal SE-13-54-3-W5M sold by Stella Prue November 26, 2007 to a third party with sales proceeds of $290,000 paid to Skyrider Holdings Ltd. originates from (and subdivided from) real property legally described. as SE-13-54-3 W5M, originally owned by Skyrider Holdings Ltd. and transferred to Stella Prue for no consideration on November 29, 2006;
3) The real property described as legal 0723502 sold by Stella Prue October 7, 2009 to a third party with sales proceeds of $130,000 paid to Skyrider Holdings Ltd. originates from (and subdivided from) real property legally described as SE-13-54-3 W5M, originally owned by Skyrider Holdings Ltd. and transferred to Stella Prue for no consideration on November 29, 2006; and
4) Monies advanced through the RBC Line of Credit have not been proven to be expenditures of Skyrider Holding Ltd. and were advanced at the direction of Derek Prue who is a joint account holder on the RBC line of credit.
And further take notice that if you are dissatisfied with our decision in disallowing your claim in whole (or a right to rank or your security or valuation of your claim), you may appeal to the court within the 30- day period after the day on which this notice is served, or within any other period that the court may, on application made within the same 30-day period, allow.
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Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 10
TAB 4
4 Experienced Equipment Sales & Rentals Inc., Re, 2011 ABQB 641, 2011 CarswellAlta... 2011 ABQB 641, 2011 CarswellAlta 1751, [2012] A.W.L.D. 673, 208 A.C.W.S. (3d) 453...
2011 ABQB 641 Alberta Court of Queen's Bench
Experienced Equipment Sales & Rentals Inc., Re
2011 CarswellAlta 1751, 2011 ABQB 641, [2012] A.W.L.D. 673, 208 A.C.W.S. (3d) 453, 527 A.R. 319
In the Matter of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, as amended
In the Matter of Experienced Equipment Sales & Rentals Inc. and the Application by 1204590 Alberta Ltd.
R. Paul Belzil J.
Heard: October 12, 2011 Judgment: October 20, 2011 Docket: Edmonton BK03-115459
Counsel: Jeremy H. Hockin, for 1204590 Alberta Ltd. Kentgern A. Rowan, for Trustee in Bankruptcy of Experienced Equipment Sales & Rentals Inc., Deloitte and Touche Inc.
Subject: Insolvency; Contracts; Corporate and Commercial; Property Headnote Bankruptcy and insolvency --- Proving claim — Provable debts — Contingent claims In September, 2008 E Inc. filed builder's lien and caveat against property owned by 120 Ltd. — In October, 2008 E Inc. issued statement of claim against 120 Ltd. claiming on builder's lien — 120 Ltd. counterclaimed alleging that lien and caveat had been filed wrongfully and claiming damages based on tort of slander of title alleging that property would have been sold for higher amount but for filing of caveat and lien — E Inc. was declared bankrupt in 2010 — In 2011, 120 Ltd. filed proof of claim as unsecured creditor in bankruptcy in amount of $1,221,800, representing difference between highest offer received for property and actual sale price — Trustee in bankruptcy disallowed 120 Ltd.'s claim — 120 Ltd. appealed — Appeal allowed — Trustee erred in rejecting claim — Pleading which discloses recognized cause of action has potential to be reduced to judgment — 120 Ltd.'s counterclaim disclosed valid cause of action — Counterclaim, together with affidavit filed in support of it, was sufficient to meet requirement of s. 135(1.1) of Bankruptcy and Insolvency Act that claim be provable claim — Claimant is not required to prove its claim on balance of probabilities at emergent stage — Trustee could await outcome of litigation to determine whether claim was valid and if so in what amount.
APPEAL by creditor from disallowance of claim by trustee in bankruptcy.
R. Paul Belzil J.:
The Application
1 The Applicant 1204590 Alberta Ltd. ("120") appeals the disallowance of its claim by a Trustee in Bankruptcy.
Facts
2 At all times material the Applicants owned land in the Province of Alberta.
3 In the Spring of 2008, 120 entered into discussions with Experienced Equipment Sales & Rentals Inc. ("Experienced") for the purchase of the land by Experienced. No agreement to purchase was ever entered into.
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4 On September 2, 2008 Experience filed a Caveat against title to the land claiming an interest as purchaser. In addition on September 3, 2008 it filed a Builder's Lien claiming that it was owed money for services allegedly provided in clearing the land.
5 In 2008 Thomas Fath made three offers to purchase the land. These offers are described in paragraph 5 of the Affidavit of William Kocuipchyk, an officer of 120, sworn on June 20, 2011:
5. 120 had listed the Lands for sale in 2008 and a potential purchaser named Thomas Fath had made a number of approaches to 120's Realtor, Simon Schenn of Plum Realty Inc. concerning the Lands. Mr. Fath in fact offered to purchase the Lands for $3,332,050.00 and now shown to me and attached as Exhibit "D" to this my Affidavit is a true copy of Mr. Fath's offer dated June 26, 2008. Following discussions between Mr. Fath and 120's Realtor, a revised offer dated July 21, 2008 was drafted and now shown to me and attached as Exhibit "E" to this my Affidavit is a true copy of that subsequent draft offer evidencing an intended purchase price of $3,100,000.00. Mr. Fath made a further offer dated December 4, 2008 in which the purchase price was again revised to $3,332,050.00 and now shown to me and attached as Exhibit "F" to this my Affidavit is a true copy of the December 4, 2008 offer from Mr. Fath. None of Mr. Fath's offers or other overtures resulted in a sale of the Lands to him in 2008 or at all.
6 The land was sold in the Spring 2011 for $2,110,250.00.
7 On October 8, 2008 Experienced issued a Statement of Claim against 120, William Kocuipchyk and Caplink Financial Corporation pertaining to the Builder's Lien which it filed.
8 On December 23, 2008 the Defendants filed a Statement of Defence to the action and 120 filed a Counterclaim alleging that the Caveat and Builder's Lien were wrongfully filed and claimed damages based on the tort of slander of title arising from allegations that the land would have been sold for a higher amount but for the alleged wrongful filing of the Caveat and Builder's Lien.
9 Experienced was declared bankrupt on December 12, 2010 and Deloitte and Touche Inc. became its Trustee.
10 On June 20, 2011, 120 filed a proof of claim as an unsecured creditor in the amount of $1,221,800.00 representing the difference between the highest of the offers that 120 received in the Spring 2008 and the actual sale price of $2,110,250.00. The key paragraphs of the Kocuipchyk Affidavit filed in support of the application are as follows:
7. Based on my discussion with 120's Realtor, I verily believe that the presence of these instruments on title to the lands at the time had the effect of reducing purchaser interest in the Lands and likely contributed to 120's inability to close the sale of the Lands to Mr. Fath or to anyone else for that matter in mid to late 2008.
8. The Lands were finally sold by 120 to ETS Properties Ltd. in the spring of this year for $2,110,250.00. Now shown to me and attached as Exhibit "J" to this my Affidavit is a true copy of the Transfer of Land for this transaction.
9. Pursuant to a Consent Order granted in Action 14024 on April 28, 2011, the Bankrupt's Builders' Lien was discharged from title to the Lands and net sale proceeds from this transaction are currently being held in trust pending a determination of the merits of the parties' claims in Action 14024 or further Court Order. The Bankrupt's Caveat had been discharged in November, 2008.
10. Based on the foregoing, I verily believe that 120 has a valid claim against the Bankrupt for damages arising from the Bankrupt's slander of 120's title to the Lands which caused 120 to sustain damages in the amount equal to the difference between the highest of the offers made by Mr. Fath while either or both of the Bankrupt's registrations appeared on title to the Lands ($3,332,050.00) and the price for which the Lands were ultimately sold to ETS Properties Ltd. ($2,110,250.00), namely $1,221,800.00.
11 On July 13, 2011 the Trustee disallowed the claim in following terms:
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9. a) In the opinion of the Trustee, there is no probability of liability arising from the Court proceedings commenced by 1204590 Alberta Ltd.;
b) The nature of the claim of 1204590 Alberta Ltd. and the evidence adduced by them in support thereof is too remote and speculative in nature to establish any claim against the Bankrupt.
Discussion
12 This appeal engages s. 135(1.1) of the Bankruptcy and Insolvency Act, RSC 1985, c. B-3 which reads as follows:
(1.1) The trustee shall determine whether any contingent claim or unliquidated claim is a provable claim, and, if a provable claim, the trustee shall value it, and the claim is thereafter, subject to this section, deemed a proved claim to the amount of its valuation.
13 An appeal pursuant to s. 135(1.1) is de novo (Alberta Permit Pro Inc., Re, 2011 ABQB 141 (Alta. Q.B.) at para. 35).
14 There is limited reported jurisprudence dealing with this provision.
15 In Claude Resources Inc. (Trustee of) v. Dutton (1993), 22 C.B.R. (3d) 56 (Sask. Q.B.) the following passage appears at paragraph 17:
In my opinion the rights of a potential creditor of a bankrupt to establish a "provable" claim under s. 121 goes beyond evidence that the creditor has been sued and therefore the Court should recognize the potential and contingent liability that might flow from that claim. Surely there has to be some element of probability about the contingent liability arising from the Court action. In this instance the claimants Dutton and J.M.D. cannot rely just on the Alberta action resulting in a judgment — they must be able to claim indemnity against Claude before the claim becomes "provable". As I see it there are just too many "ifs" about the action itself and the applicability of the indemnity agreement to bring their claims into the "provable" category and in any event the valuation of it at this stage is speculative in the extreme.
16 This decision was followed in Wiebe, Re (1995), 30 C.B.R. (3d) 109 (Ont. Bktcy.) and at paragraph 7 the following passage appears:
A provable claim must be one recoverable by legal process. (Farm Credit Corp. v Holowach, 68 C.B.R. (N.S.) 255). To be a provable claim under Section 121(2), a claim must not be too remote and speculative. To establish that a contingent claim or unliquidated claim is a provable claim, a creditor must prove more than he has been sued, and that he has an indemnity agreement from the bankrupt. There has to be an element of probability of liability arising from the Court proceedings. If there are too many ifs about the action and the applicability of the indemnity agreement before a provable claim comes into being, the claim is not a provable claim under Section 121(2). See Claude Resources Inc. v Dutton (1993) Claude Resources Inc. v Dutton (1993) 22 C.B.R. (3d) 56.
17 In Confederation Treasury Services Ltd., Re (1997), 43 C.B.R. (3d) 4 (Ont. C.A.) the Ontario Court of Appeal disapproved of the reasoning in these two decisions and held at paragraph 4 that they imposed too high a threshold:
In so far as the cases of Claude Resources Inc. (Trustee of) v. Dutton (1993), 22 C.B.R. (3d) 56 and Re Wiebe (1995), 30 C.B.R. (3d) 109, relied upon by the trustee, articulate as a test for a valid contingent claim the need for probability of liability arising from the court proceedings in question, we believe that they impose too high a threshold for the establishment of such a claim. While there may be claims so remote and speculative in nature that they could not properly be considered contingent claims, the claim of E&Y in the present case for contribution and indemnity in respect of the relief sought against it in the Michigan proceedings does not fall into that category and, in our view, constitutes a valid contingent claim within the contemplation of sec. 121 of the BIA.
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18 The Court directed that the disputed claims be adjudicated on such evidence as may be adduced but did not articulate how one differentiates between a valid claim and one which is too remote and speculative but clearly a claimant is not required to prove its claims on a balance of probabilities at the emergent stage.
19 In the context of this application, it is conceded that the Counterclaim being advanced by 120 is based on a recognized cause of action, that is, slander of title. While I accept that a Statement of Claim or Counterclaim not reduced to judgment is proof of nothing, nonetheless a pleading which discloses a recognized cause of action has the legal potential to be reduced to a judgment.
20 It is also conceded that, as of the date of the application before me, the action is still extant and being actively pursued. Moreover, even if the action by Experienced were abandoned, the Counterclaim remains extant and can be pursued.
21 Mr. Kocuipchyk's Affidavit filed in support of the claim constitutes some evidence in support of the allegations in the Counterclaim.
22 I have concluded that the Counterclaim, which discloses a valid cause of action, coupled with the Kocuipchyk Affidavit is sufficient to meet the requirements of s. 135(1.1) and thus the Trustee erred in rejecting the claim of 120.
23 As was pointed out in Confederation Treasury Services Ltd., Re it is possible for the Court in these circumstances to direct an assessment of damages which is required, where as here, the claim is not liquidated. This procedure was adopted in the Alberta decision of Auctioneers' Assn. (Alberta) v. Hunter, 2002 ABQB 28 (Alta. Master).
24 Given that 120's Counterclaim is being pursued the Trustee can await the outcome of the litigation to determine whether the claim of 120 is valid and if so, in what amount.
25 It would be incongruous in the extreme if a Trustee rejected a claim as being too remote and speculative only to have a Court later conclude that the claim was valid and quantifiable.
26 In the result the appeal is allowed. The Trustee is directed to accept this claim, the ultimate validity and quantum of which will be determined in the extant litigation. Appeal allowed.
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Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 4
TAB 5
5 Aronson v. Whozagood Inc., 2019 ABQB 656, 2019 CarswellAlta 1800 2019 ABQB 656, 2019 CarswellAlta 1800, [2019] A.W.L.D. 3443, [2019] A.W.L.D. 3444...
2019 ABQB 656 Alberta Court of Queen's Bench
Aronson v. Whozagood Inc.
2019 CarswellAlta 1800, 2019 ABQB 656, [2019] A.W.L.D. 3443, [2019] A.W.L.D. 3444, 309 A.C.W.S. (3d) 244, 72 C.B.R. (6th) 35
IN THE MATTER OF THE BANKRUPTCY AND INSOLVENCY ACT, RSC, c B-3, AS AMENDED AND IN THE MATER OF WHOZAGOOD INC.
Andrew Aronson, Brian Cook, Nicole Foote, and Don Hawley (Appellants) and Whozagood Inc. (Respondent)
J.T. Eamon J.
Heard: June 11, 2019 Judgment: August 22, 2019 Docket: Calgary BK01-094950
Counsel: Brian Cook, Appellant, for himself Andrew Aronson, Appellant, for himself Don Hawley, Appellant, for himself Nicole Foote, Appellant, for herself Alexis Teasdale, for Respondent, Hardie & Kelly Inc (Trustee of WhoZaGood Inc) James Reid, for PDW Holdings Inc
Subject: Corporate and Commercial; Evidence; Insolvency Headnote Bankruptcy and insolvency --- Proving claim — Disallowance of claim — Appeal from disallowance — General principles Nature of appeal — Creditors provided services to bankrupt under written contracts that provided for compensation only if certain financial milestones were met — Those milestones were not met, but creditors alleged contracts had been modified by verbal agreements to provide compensation even though milestones were not met — Verbal modifications were evidenced by promissory notes and invoices — Bankrupt was placed into bankruptcy after deemed rejection of proposal — Creditors filed claims with trustee in bankruptcy, but trustee disallowed their claims — Creditors appealed — Appeals allowed on terms — Disallowances were set aside as trustee had erred in disallowing claims based on information provided, though trial of issues was required to determine whether claims should be allowed — Creditors were not permitted to provide fresh evidence of verbal modifications on appeal, though they could provide such evidence at trial of issues — Appeal was hybrid between de novo approach and true appeal, with trustee's fact findings being reviewed on deferential standard of palpable and overriding error — Creditors required permission to provide fresh evidence, and permission was refused — Fresh evidence was weak, there was no principled reason to permit it, and allowing it would undermine role and authority of trustee in claims examination and approval process. Bankruptcy and insolvency --- Proving claim — Disallowance of claim — Appeal from disallowance — Grounds Creditors provided services to bankrupt under written contracts that provided for compensation only if certain financial milestones were met — Those milestones were not met, but creditors alleged contracts had been modified by verbal agreements to provide compensation even though milestones were not met — Verbal modifications were evidenced by promissory notes and invoices — Bankrupt was placed into bankruptcy after deemed rejection of proposal — Creditors filed claims with trustee in bankruptcy, but trustee disallowed their claims — Creditors appealed — Appeals allowed on terms — Disallowances were set aside as trustee had erred in disallowing claims based on information provided, though trial of issues was required to determine whether claims should be allowed — Creditors were not permitted to provide fresh evidence of verbal modifications on appeal, though they could provide such evidence at trial of issues — In light of evidence before trustee, it had been unreasonable to
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 1 Aronson v. Whozagood Inc., 2019 ABQB 656, 2019 CarswellAlta 1800 2019 ABQB 656, 2019 CarswellAlta 1800, [2019] A.W.L.D. 3443, [2019] A.W.L.D. 3444... conclude that no oral agreement had been made and that promissory notes amounted to preferences, transfers at undervalue, and fraudulent transactions — More investigation or different process to resolve claims had been required — Trustee had also erred with respect to date when agreements had to be made by, though allegations of bias and conflict of interest against trustee had no merit.
APPEALS by creditors from decisions of trustee in bankruptcy disallowing their claims.
J.T. Eamon J.:
I Overview
1 The Appellants Andrew Aronson, Brian Cook, Nicole Foote, and Don Hawley claimed to be creditors in the bankruptcy of WhoZaGood ("WZG"). Each was retained or employed under one or more written contracts with WZG and provided services to WZG. These contracts provided the Appellants compensation only if certain financial milestones were met. These milestones were not met, so WZG did not owe compensation under those contracts. However, the Appellants claimed that the contracts had been modified by verbal agreements with WZG which provided them compensation even though the milestones were not met. Mr Aronson further claimed for a "franchise advance".
2 WZG's Trustee in Bankruptcy disallowed their claims. The Trustee rejected the existence of the verbal modifications. The Trustee further concluded that if the verbal modifications existed, they were not effective under insolvency laws against the Trustee or WZG's creditors. It also rejected the franchise advance claim.
3 The Appellants seek to have the Court allow their claims, under the appeal mechanism in section 135(4) of the Bankruptcy and Insolvency Act, RSC 1985, c B-3 ("BIA").
4 The main issues in the appeals are:
(a) Should the Appellants be allowed to use in this appeal, evidence concerning the verbal contract modifications which they had not previously provided to the Trustee in the claims process?
(b) Did the Trustee err in rejecting the claims that WZG and the Appellants verbally modified the written terms of the Appellants' compensation?
(c) Did the Trustee err in concluding that the alleged verbal modifications to the written contracts were not enforceable under insolvency laws?
(d) Was the Trustee biased against the Appellants?
(e) If the disallowances are set aside, how should the Appellants' claims be determined?
5 For the reasons set out in this Decision, I do not permit the Appellants to provide fresh evidence for the purpose of this appeal. The Trustee erred in disallowing the claims based on an oral agreement for compensation based on the information provided to it. Those disallowances are set aside. However, given the issues over the credibility or reliability of the evidence submitted in support of the claims, I refuse the Appellants' request that the claims be allowed. If the Appellants wish to further pursue the claims, they must arrange for a trial of the issues before a judge of this Court. The Appellants did not advance the claim to a franchise advance on the appeal and in any event, there is no basis to disturb the disallowance of that claim. The bias allegations against the Trustee have no merit.
II The background to the claims
(a) Introduction
6 Before dealing with the numerous issues arising in these appeals, I will set out brief details of the bankruptcy proceedings, the claims and the Trustee's decision on each claim.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 2 Aronson v. Whozagood Inc., 2019 ABQB 656, 2019 CarswellAlta 1800 2019 ABQB 656, 2019 CarswellAlta 1800, [2019] A.W.L.D. 3443, [2019] A.W.L.D. 3444...
7 WZG was a company developing an internet based platform which would include rating businesses based on their perceived integrity. It appears the company was also developing a franchise opportunity relating to cannabis supply or sales. It operated mainly out of the home of its President/CEO/majority shareholder Mr Zeviar.
8 The Appellants were either employees or contractors of WZG, though it does not matter which because none of them claimed priority over other creditors or filed a wage earner's claim.
9 The Appellants claimed that WZG owed them fixed amounts for services they provided to WZG. The Trustee gave several reasons for its decisions to disallow the claims. Many related to the circumstances in which the claims documentation was created, on the eve of bankruptcy. As an aid to understanding the context, I therefore turn to a brief description of the bankruptcy proceedings and the disputed claims
(b) Bankruptcy proceedings
10 In the spring 2018, a major creditor of WZG called PDW sought to place WZG in bankruptcy. That action led to a May 19, 2018 Consent Order between PDW and WZG permitting PDW or its agent to carry out a financial review of WZG and imposing certain reporting obligations on WZG.
11 WZG continued its business activities through the year, but the issues with PDW were not resolved. In late 2018 PDW again asked that the Court place WZG in bankruptcy. In response, WZG filed a Notice of Intention to Make a Proposal to Creditors under the BIA on December 6, 2018. The BIA provides that delivery of that notice stays most creditors' proceedings for a limited time, which allows an insolvent debtor time to formulate a proposal to resolve the claims of its creditors.
12 WZG then filed, on December 14, 2018, a Proposal for the creditors' consideration. Under the BIA, creditors decide whether to approve a proposal submitted by a bankrupt by voting for or against the proposal.
13 Each Appellant claimed in the Proposal proceedings that it was a creditor of WZG for remuneration for services provided, and therefore was entitled to vote.
14 At a creditors' meeting to consider the Proposal held January 4, 2019, PDW objected to the Appellants' claims that they were creditors. Issues also arose whether certain other individuals were barred from voting in favour of the Proposal by section 54(3) of the BIA because they were related to WZG. The Chairperson upheld the latter objections and adjourned the meeting to permit WZG to appeal his rulings. It appears the Chairperson did not rule on the objections to the Appellants' claims.
15 PDW then applied to this Court to place WZG in bankruptcy, and deem the Proposal rejected by creditors. WZG cross- applied to appeal the Chairperson's ruling on eligibility of related parties to vote. These applications were heard and decided on February 28, 2019. Justice Horner placed WZG in bankruptcy, deemed the Proposal refused by WZG's creditors under subsection 50(12) of the BIA, and appointed the Trustee as the bankruptcy trustee.
(c) The disputed claims
16 Each Appellant claimed they provided services to WZG in 2018. Each had agreed with WZG to one or more versions of a written "Letter of Undertaking". Each letter provided that compensation would commence once specified financial milestones were met. None of these milestones were met, so no compensation was due under these letters. However, each Appellant also held a promissory note from WZG dated effective October 30 or 31, 2018 promising them payment of a specific amount for "value received from services rendered and lost wages". They claimed the amounts of these notes in the bankruptcy.
17 In response to PDW's objections to their claims in the proposal proceedings, the Appellants asserted a verbal agreement modifying their written arrangements. Mr Hawley explained the circumstances of these claims at the January 4, 2019 creditors' meeting. I will briefly outline his explanation. WZG and the Appellants always expected they would be paid for their services. In 2018, the Appellants became concerned that WZG could not pay them. They discussed this concern with WZG, and WZG verbally agreed to "accrue" compensation for each. WZG promised these accruals although the financial milestones in the
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Letters of Undertaking had never been met. Their claims for these accrued fees were primarily evidenced by promissory notes and invoices. As mentioned below, some of the Appellants provided additional information about the alleged underlying verbal agreement in the bankruptcy proofs of claim.
18 The Trustee's reasons for disallowing the claims of the Appellants other than Ms Foote were:
(a) The claimed debts represented by the promissory notes were invalid because no agreement existed which provided for the obligation immediately prior to WZG's filing the Notice of Intention on December 6, 2018. There is no evidence that WZG made a binding agreement to pay the amounts of the promissory notes.
(b) If there were obligations incurred, they were void as creditors' preferences under section 95 of the BIA, because they were incurred during the three month period before the initial bankruptcy event (December 6, 2018) and ending on the date of the bankruptcy (February 28, 2019), and had the effect of giving the recipient a preference over WZG's other creditors. If the transaction is proven to have occurred outside this period, then the period is extended to one year before the initial bankruptcy event because the recipient was not dealing at arm's length with WZG when the transaction was made.
(c) If there were obligations incurred, they were void as creditors' preferences because they were made with a view to giving the recipient a preference over WZG's other creditors.
(d) The transactions were fraudulent conveyances or transfers at undervalue.
19 Also, Mr Aronson claimed US$ 50,000 for a "franchise advance". The Trustee disallowed this claim for lack of particulars and supporting records. (During oral argument, Mr Hawley stated that this part of the disallowance was not being pursued.)
20 In Ms Foote's case, the Trustee reasoned:
(a) The debt was invalid, because there was no evidence that the debt represented by promissory note was supported by a binding agreement.
(b) If there were obligations incurred, they were void as creditors' preferences under section 95 of the BIA, because they were incurred during the three month period before the initial bankruptcy event and ending on the date of the bankruptcy, and had the effect of giving Ms Foote a preference over WZG's other creditors.
21 The Trustee also raised issues over exchange rates which some of the Appellants used to convert US dollars to Canadian dollars. These are immaterial in this appeal.
III The procedure for the appeal
(a) Overview
22 On the appeal, the Appellants argued their case as if the appeal was a new hearing. They did not identify any standard by which the Trustee's decisions should be reviewed. They filed affidavit evidence on their appeals containing additional information, much of which existed and would have been available to them when they filed their proofs of claim but was not provided to the Trustee with their proofs of claim (I refer to this as fresh evidence).
23 In contrast, the Trustee argued that the Court should defer to the Trustee's fact findings on the reasonableness standard. These fact findings include that the accrued compensation transactions were outside the normal course of business, conducted in secret and not disclosed under the May 2018 Consent Order, represented by backdated promissory notes and invoices, not supported by any new contractual consideration, and entered into on the eve of the bankruptcy. Further, the transactions grossly inflated WZG's compensation obligations when compared to the Letters of Undertaking and had the effect of, and were designed to, defeat or delay other creditors.
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24 The Trustee also objected to the fresh evidence. It submitted that the appeals should be considered on the basis of the information before the Trustee when it disallowed the claims.
25 Before considering the grounds of appeal, I must address:
(a) The evidence and grounds of appeal which can be considered. Can these be expanded for the appeal, or are the Appellants limited to whatever information they provided to the Trustee during the claims process?
(b) The standards by which the decision under appeal should be reviewed. Should I defer to or pay any attention to the Trustee's decisions under review, or make my decisions without reference to the Trustee's conclusions?
26 There are many possible combinations, both in terms of the evidence or grounds which can be considered on the review and the nature of deference or attention which should be given to the decision under review (Pacer Construction Holdings Corporation v. Pacer Promec Energy Corporation, 2018 ABCA 113 (Alta. C.A.) at para 64).
27 For the reasons set out below, I conclude that the Appellants require permission to provide fresh evidence and permission should be refused. Further, the Trustee's fact findings should be reviewed on a deferential standard (palpable and over-riding error).
(b) Nature of appeal and review standards
28 Registrar Schlosser points out in Oil Lift Technology Inc. v. Deloitte & Touche Inc., 2012 ABQB 357 (Alta. Q.B.) [hereinafter Sapient Grid] at paras 30-33 that the authorities determining what evidence should be considered on appeal are mixed. There are three approaches:
(a) Appeals are de novo (conducted as if the original hearing had not taken place) and fresh evidence can be considered on appeal as a matter of course.
(b) Appeals from a Trustee are true appeals, on the record that was before the Trustee.
(c) Appeals are a hybrid, and are on the record that was before the Trustee, unless the Court permits the appeal to be conducted as a de novo appeal, involving fresh evidence, where the interests of justice require it.
29 There is conflicting authority in Alberta over which approach should be taken. Following the decision in Galaxy Sports Inc., Re, 2004 BCCA 284 (B.C. C.A.), the Alberta Courts have mainly adopted the hybrid approach (San Juan Resources Inc., Re, 2009 ABQB 55 (Alta. Q.B.); Transglobal Communications Group Inc., Re, 2009 ABQB 195 (Alta. Q.B.); Sapient Grid). This approach requires claimants to put their best foot forward with their proof of claim to ensure efficient and expeditious claims determinations, while ensuring that the process is fair to all concerned. The Court has discretion to admit fresh evidence where the interests of justice require it. The test for admitting fresh evidence is not limited to the stringent test which applies to appeals from trials conducted in a Court as set out in R. v. Palmer (1979), [1980] 1 S.C.R. 759 (S.C.C.) at p 775, 1979 CanLII 8.
30 In contrast, other Alberta judges have adopted the de novo approach (Alberta Permit Pro Inc., Re, 2011 ABQB 141 (Alta. Q.B.); Experienced Equipment Sales & Rentals Inc., Re, 2011 ABQB 641 (Alta. Q.B.)). In Alberta Permit Pro, Veit J preferred the de novo procedure, citing the "tight time lines imposed by Parliament in respect of the proceedings, the limited resources of the Trustee, the cost of providing "records", and, most importantly, the considerable delay and additional expense caused by returning matters to the Trustee for reconsideration in every case where either the Trustee did not give sufficient reasons to allow an appeal court to adequately assess the Chair or the Trustee's reasons, or where the Trustee made an error of law on which correctness would be the standard of review . . . " (at para 39).
31 The Alberta Court of Appeal does not appear to have ruled on the question. Some guidance might be taken from its decision in Pacer Construction, where the Court dealt with the procedures and standards of review in respect of a decision under a claims procedure order in a receivership.
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32 The claims officer in that case conducted a hearing between opposing parties, a situation which is not parallel to the manner in which a bankruptcy trustee typically proceeds in determining a claim under section 135 of the BIA. Nevertheless, some of the considerations mentioned by the Court suggest that the hybrid approach would best balance the competing considerations in a bankruptcy proceeding.
33 The Court held that the judicial review of the claims officer's determination contemplated gatekeeping scrutiny of additional evidence tendered on an appeal, to avoid encouraging a careless approach to the claims process and the effect of transferring the obligations imposed on claims officers to the court (ibid at para 104). Further, the standard of review was correctness on questions of law, and palpable and overriding error on questions of fact or mixed fact and law (ibid at para 104). This approach provided the adjudicative pragmatism required in commercial matters, ensured the process operated expediently, and respected the presumptions of fitness of the participants in the process (ibid at para 105). It also reminded that the correctness standard of review is critically different than the de novo standard because the former proceeds with no regard to the original decision while the latter raises a presumption of fitness (ibid at para 66).
34 I prefer the hybrid approach in San Juan and the cases that followed it.
(a) Parliament assigned the roles of investigating and disallowing claims to the bankruptcy trustee (BIA, s 135). Creditors must "specify the vouchers or other evidence, if any, by which [the claim] can be substantiated" and the trustee may require further evidence (BIA, ss 124(4), 135(1)).
(b) The de novo approach would seriously undercut a bankruptcy trustee's authorities and functions.
(c) The Court can ensure fairness and encourage diligence by creditors in submitting claims to the bankruptcy trustee by allowing fresh evidence in appropriate cases.
35 As to standard of review, I agree with the standard of review analysis of Yamauchi J in Transglobal (at paras 51-71), and his conclusions (ibid at paras 71-72) that legal issues including extricable legal issues arising in questions of mixed fact and law are assessed on the correctness standard, and questions of fact are assessed on the reasonableness standard. His conclusions are also consistent with the developing standards of review applicable to decisions of other adjudicators in insolvency proceedings (see Pacer at paras 83-106), and best accomplish the needs of commercial parties in insolvency proceedings identified in Pacer (at paras 93 and 105). Although a bankruptcy trustee does not conduct traditional adversarial hearings, this alone should not preclude the application of a deferential standard to meet the objectives of maintaining the autonomy and integrity of the process, given the Court's over-riding discretion to permit fresh evidence where necessary to do justice.
36 However, if I decide to allow fresh evidence, the standard of review of fact findings would change to correctness. The correctness standard in this context would require me to consider whether the evidence persuades me that a better decision is available (Pacer at para 66). The issue of whether to allow fresh evidence is addressed in Part IV below.
37 The Trustee submitted that the correctness standard applies to the Trustee's ultimate conclusion on each issue (whether the Letters of Undertaking govern the parties' contractual relationship; whether the promissory notes are unenforceable under insolvency laws). These are issues of mixed fact and law, so the Trustee's position would substitute the standard of correctness for the usual standard of review for questions of mixed fact and law (palpable and overriding error unless an extricable error of law is identified). I do not agree with the Trustee's position, but the possible difference in the standard of review for questions of mixed fact and law makes no difference in this case because the errors are apparent on either standard.
IV Should the Appellants be allowed to use in this appeal, evidence concerning the verbal contract modifications which they had not previously provided to the Trustee in the claims process?
(a) Overview
38 I must consider whether to allow the fresh evidence on the appeal for the purpose of impugning the Trustee's determinations.
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39 This requires me to consider what the interests of justice require. In this case, the relevant factors are the grounds for disallowance of the claims, the evidence the Appellants provided to the Trustee, the need for, reliability or importance of the fresh evidence, and the fairness and integrity of the claims process.
40 For the reasons that follow, I conclude the fresh evidence should not be permitted in the present appeal. The evidence is weak (ambiguous, contradictory and vague), there is no principled reason to permit it, and allowing it would undermine the role and authority of the Trustee in the claims examination and approval process.
(b) The record before the Trustee
(i) The proofs of claim and documentation provided to the Trustee by the Appellants
41 The Appellants provided a proof of claim using the standard form (Form 31) under the BIA, in the following amounts:
(a) Mr Aronson, CDN$301,500 (US$225,000 promissory note).
(b) Mr Cook (for Perfect Processing), CDN$134,000 (US$100,000 promissory note).
(c) Ms Foote, US$25,000 (promissory note of US$25,000).
(d) Mr Hawley, US$175,000 (promissory note of US$175,000; converted to CDN$234,500 in his revised and supplemented claim form).
42 Each proof of claim stated that the claimant did not claim any right of priority and did not make a wage-earner's claim.
43 Each claimant provided a promissory note issued by WZG in US dollars in the amounts reflected in their proof of claim.
(a) The notes issued to Mr Cook and Mr Hawley were dated effective October 31, 2018 (the end of WZG's fiscal year). The notes issued to Mr Aronson and Ms Foote were dated effective October 30, 2018.
(b) Each note was signed on behalf of WZG by Mr Zeviar and Mr Hawley.
(c) Each note recited that WZG acknowledged itself indebted to the claimant for "value received from services rendered and lost wages . . . "
(d) Each note was payable December 31, 2018 and acknowledged that a creditor proposal process was currently underway.
(e) Each note provided that it "contains the entire agreement of the parties with respect to the subject matter hereof and supercedes all other understandings and agreements, oral or written, with respect to the subject matter hereof."
44 Each claimant provided invoices in support of their claim.
(a) Mr Aronson: four invoices for "Professional Fees related to Consulting", purporting to be dated March 31, 2018, June 30, 2018, September 30, 2018, and December 20, 2018, and totalling US$175,000. Also, one invoice purporting to be dated December 19, 2018 for US$50,000 for a "franchise advance".
(b) Mr Cook: three invoices purporting to be dated December 20, 2018 totalling USD$100,000 for "Professional services related to Consulting Agreement" for the second, third and fourth quarters (either for calendar 2018 or fiscal 2018).
(c) Ms Foote: Two invoices purporting to be dated July 30, 2018 and October 31, 2018, for "Professional services related to Consulting Agreement" for the third and fourth quarters (presumably of fiscal 2018) totalling US$25,000.
(d) Mr Hawley: Four invoices purporting to be dated January 31, 2018, April 30, 2018, July 30, 2018, and October 31, 2018 reflecting monthly or quarterly fees under a "Consulting Agreement", totalling US$175,000.
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45 Each claimant provided various versions of the Letter of Undertaking that provided for the appointment of the claimant to a specific position, defined their role in WZG (and, in some cases, its United States subsidiary), and dealt with compensation.
(a) Mr Aronson: Letters dated February 19, 2018 (unsigned), March 6, 2018 (signed), September 10, 2018 (draft). Mr Aronson was to be Senior Vice President, Business Development of WZG. His employment was to commence March 12, 2018.
(b) Mr Cook: Letter of Undertaking dated October 23, 2018, which superseded a Letter of Undertaking dated April 18, 2018 and all other email or verbal "overtures", and pursuant to which he was to serve as a Vice President.
(c) Ms Foote: Letter of Undertaking dated October 31, 2018, under which she was engaged as Director, Franchise Development for the US subsidiary and to assist with WZG's franchise business development efforts effective August 1, 2018.
(d) Mr Hawley: Letter of Undertaking dated January 29, 2018 under which he was engaged as Chief Financial Officer; Letter of Undertaking dated August 27, 2018, to act as Chief Financial Officer and Executive Vice-president, and general manager of the US subsidiary. The August letter provides among other things:
This LOU overture supercedes the LOU dated Jan. 29, 2018 and the agreement that we owe you nothing other than the $50,000 credit in the payment of the Cannabis Franchise from our previous engagement.
46 Each Letter of Undertaking provided that compensation (or in Mr Cook's case, "deferred compensation") would commence when specified financial milestones of WZG were met, and specified the amounts of compensation associated with the various milestones.
47 Some versions of the Letters of Undertaking expressed a "future compensation goal" to develop a cash compensation plan providing for an annual salary. The stated range of the salary objective varied among these versions of the letters, and was conditional on various contingencies occurring or milestones being defined and agreed to.
48 The Appellants did not represent or claim that WZG achieved any of the milestones triggering the specified compensation, or that the contingencies and milestones for future compensation goals were developed or occurred.
49 Ms Foote's Letter of Undertaking also provided for fees payable to another entity for sales or marketing events, and an hourly rate to Ms Foote accrued monthly and payable when financial milestones were met. Ms Foote did not provide any account or record of hours worked or events held.
50 Mr Hawley represented in his revised proof of claim form that in the spring 2018 the United States executives (the Appellants) began to assert that salaries should be accrued in their favour because no cash compensation had been paid, and this created a danger that executives would quit without any prospect of payment. Two other individuals had already quit WZG because they were not paid compensation. Further, other employees/contractors communicated their discomfort and need for an assurance of some cash compensation. Mr Hawley represented that against that backdrop, and after the issue had been raised from March 2018 through September, 2018, Mr Zeviar instructed him to prepare a specific proposal for each employee/ contractor including amounts to be accrued. He stated that he did so, and after some discussion prepared promissory notes reflecting the accrual. Further, Mr Zeviar agreed that the $175,000 accrual for Mr Hawley was fair and reasonable compensation for 2018.
51 Mr Hawley did not state when the proposals were agreed to by WZG or whether or how he relied on them.
52 Mr Aronson submitted in his proof of claim:
(a) A note to WZG in March 2018 where he asked for compensation in securities during the negotiation of his Letter. This note does not ask for accrued cash compensation.
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(b) A redraft of a September 2018 draft letter of undertaking, prepared by Mr Aronson in response to WZG's draft, that provided for a fixed amount of accrued cash compensation.
53 Mr Aronson did not state that his redrafted September 18, 2018 letter was accepted, that an agreement to accrue was made, that he relied on any such agreement, or when such an agreement was made.
54 Mr Cook stated in his proof of claim that soon after joining WZG (April 2018) he had a discussion with Mr Aronson about compensation:
Soon after I had a discussion with Andy [Aronson] that the funding was taking a long time to come in and we had not been paid. Our discussion led to asking Don [Hawley] and Zale [Zeviar] to accrue our salaries so at some future time we would receive payment. We were in agreement that the actual payments may take some time based on the economy having revenues but at least we had assurance in writing that the monies were owed and would be paid in future.
55 The above quotation refers to a written assurance, which could only be the promissory note issued to Mr Cook in mid- December 2018. Mr Cook did not state that he would have terminated his position without changing the compensation structure for past services, that he relied on any such agreement, or when such an agreement was made.
56 Ms Foote did not provide information about a verbal arrangement or explain the background of her promissory note.
(ii) Other information available to the Trustee
57 In addition to the proofs of claim, the Trustee had other information concerning the existence of the alleged salary debts. There were two sources of this information.
58 First, as a result of the Trustee's prior involvement as interim receiver of WZG appointed December 6, 2018 and the Proposal proceedings which were ongoing prior to the bankruptcy, the Trustee collected a large volume of information including copies of claims filed in the Proposal proceedings, and a record of PDW's objections made at the Proposal meeting of creditors and Mr Hawley's explanation in response which described verbal arrangements leading up to the promissory notes (described in para 17 above).
59 Second, the Trustee had access to the books and records of WZG including creditor and employee lists. This information included:
(c) Company lists of debts, including the lists delivered under the May 2018 Consent Order. WZG did not disclose the Appellants as a creditor in any of the lists until a second version of the creditor list was sent to Mr Zeviar and Mr Hawley on November 29, 2018. By then, PDW had served its second bankruptcy application on WZG scheduled for hearing December 6, 2018. WZG delivered a Notice of Intention to Make a Proposal seven days after this list.
(d) A set of WZG's monthly reports to PDW from May 2018 through October 2018 under the May 2018 Consent Order. WZG was required under the Order to identify any non-ordinary course business transactions in the monthly reports. The verbal arrangements were not disclosed in these reports. The Trustee concluded that the verbal arrangements would be non-ordinary course business transactions, because the modifications would have resulted in accrual of about $1.5 million 1 of new debt, which was more than /2 of the debt listed by WZG on the date of its Notice of Intention.
(e) A list of consulting companies together with amounts paid to them in the last 12 months, prepared by WZG in June 2018. This list did not disclose any accrued salary or mention the Appellants.
(f) An email from Mr Aronson to Mr Zeviar dated October 22, 2018 attaching a draft form of Letter of Undertaking (eventually executed by Mr Cook) which did not mention any accrual of compensation and stated it superseded "any other previous overtures through email confirmations or verbal conversations". This indicated to the Trustee that as late as October 21, 2018 the earlier proposal from Mr Aronson for accrued compensation was abandoned.
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(g) An email of the company dated December 5, 2018 that showed the amounts of the promissory notes were not determined until late November or early December 2018.
(h) Company records indicating the promissory notes were not executed until December 19, 2018.
(i) An email which the Trustee suggests is evidence that that the Appellants or some of them and WZG attempted to manipulate the outcome of the Proposal proceedings by inflating the Appellants' compensation amounts in the promissory notes and thus increasing their voting power.
(j) A report apparently authored by Mr Hawley in August 2018 stating, among other things, that all the employees/ consultants were working primarily for WZG's shareholding interests. This report did not disclose the existence of the alleged verbal agreement to accrue compensation.
(c) The additional evidence put forward on the appeal
60 The additional evidence that the Appellants put forward on the appeal builds on the theme that WZG made an oral agreement to accrue minimum compensation (or what Mr Hawley called a "safety net" during argument of the appeal) for 2018.
61 This additional information, which was not provided by the Appellants to the Trustee prior to the disallowances, is ambiguous and contradictory in four ways.
62 First, some of the fresh evidence is inconsistent with WZG's records.
63 Some of the fresh evidence says that the oral agreement to accrue fixed salaries was made before Mr Hawley's August 27, 2018 Letter of Undertaking. Yet, as the Trustee points out, the Appellants were not listed as creditors during much of the time under consideration and not even in the formal reports required from WZG under the May 2018 Consent Order.
64 Although a debtor's failure to include disputed claims in its creditors' lists is usually not probative of the absence of a debt, its failure to include debts which were later admitted or documented on the eve of bankruptcy can create a suspicious circumstance that requires additional investigation.
65 The Appellants also tendered an affidavit of Mr Zeviar, WZG's CEO, as fresh evidence on the appeal. He swore that the "accrual amounts for employment between the company and staff were agreed upon long before the [PDW] note was due on Nov 21, 2018". That statement is inconsistent with the actual dates when the amounts were set as reflected in WZG's business records discovered by the Trustee, and with WZG's reporting under the May 2018 Consent Order which failed to disclose the alleged oral agreement or any debts to the Appellants.
66 Second, some of the fresh evidence is internally inconsistent.
67 Mr Zeviar deposed that "All agreements were superseded by this urgently requested and necessary method of accrued compensation . . . " [underlining added]. If the oral agreement for accrued compensation was made no later than the summer 2017 as some of the Appellants state in their fresh evidence, and also superseded the Letters of Undertaking, as Mr Zeviar states, why did WZG continue through the end of October to make Letters of Undertaking which were inconsistent with the oral agreement? Why did some of the Appellants continue to accept the written letters if the parties actually had changed their agreement? These raise issues over the plausibility of the Appellants' assertions. There might be explanations, but they do not appear from the fresh evidence.
68 Mr Aronson provided fresh evidence that there were negotiations that resulted in a new Letter of Undertaking dated October 10, 2018. This Letter was agreed to after Mr Aronson explicitly asked WZG to accrue his compensation and submitted a revised draft proposing such language. Like the other Letters of Undertaking, the October 10, 2018 version did not provide compensation until specified financial milestones were met. The natural inference is that WZG did not agree to his request.
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This strongly suggests that by October 10, 2018, no agreement to accrue fees had been made. Yet, elsewhere in his Affidavit, Mr Aronson states that a binding agreement to accrue salaries was made in April 2018.
69 Mr Cook signed two Letters of Undertaking, and neither of them contained any commitment to accrue compensation in the event the financial milestones were not met. The later letter, dated October 23, 2018, provides that it supersedes "any other previous overtures through email confirmations or verbal conversations." This suggests, again, that the purported oral agreement did not exist at any time before late October 2018. Yet, elsewhere in his Affidavit, Mr Cook states that a binding oral agreement to accrue salaries was made in April 2018.
70 Third, some of the fresh evidence is inconsistent with information in the proofs of claim or there are prior inconsistent statements.
71 Again, Mr Hawley stated in his new affidavit that the oral agreement was made before August 27, 2018:
. . . At the time of executing the New LOU, the oral agreement of Salary Debt of $175,000 and a promise to document and accrue for year-end seemed reasonable and acceptable to me.
72 This statement is directly contrary to the report authored by Mr Hawley and said to be dated August 31, 2018, which failed to disclose this debt. It also appears inconsistent with Mr Hawley's revised proof of claim, which strongly suggests the oral agreement was made after issues were raised in the March through September 2018 time frame.
73 Fourth, some of the evidence is vague. Most of the new affidavits adopt Mr Zeviar's claim that a binding oral agreement was made in April 2018, but lack detail about when the oral agreement to accrue salary was made and based on what discussions, how the claimant relied on it, or why it was not included in any of the Letters of Undertaking.
(d) Do the interests of justice require that the evidence be considered on this appeal?
74 I am not persuaded that I should permit the Appellants to use fresh evidence in the appeal. There are three considerations against admitting the evidence, and one consideration favouring admitting the evidence. On balance, the evidence should not be permitted.
75 First, allowing the evidence would significantly undermine the integrity of the claims process.
(a) There is no apparent reason why the Appellants did not disclose the evidence in their proofs of claim.
(b) The Appellants are experienced business people who would have, or ought to have, understood the need to provide relevant and probative evidence supporting their claims of a verbal agreement which contradicted their written arrangements.
(c) Permitting them to supplement their evidence, without any explanation why they did not disclose full particulars to the Trustee, encourages a careless approach to the claims process and undermines the authority and role of the Trustee in the claims examination and approval process.
76 Second, the Appellants did not assert they were treated unfairly in the sense they were unaware of the Trustee's concerns about their claims or did not have a fair opportunity to address those concerns before submitting their claim forms.
77 Third, the evidence is not needed to understand the record that was available to the Trustee when it disallowed the claims.
(a) Although the Trustee did not provide a formal record on the appeal (nor did the Appellants say they asked for preparation of a record for use in the appeal), the Trustee's Preliminary Report and First Report describe the information on which the Trustee acted with sufficient certainty to understand the evidence on which the Trustee acted.
(b) The Trustee sometimes interspersed its responses to the Appellants' new evidence in its description of the basis of its claims determination. It would have been better for the Trustee to present the basis for its original determination
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separately from commentary or new information put forward in response to an appellant's efforts to provide new evidence. Following the recommendations of Alan Brown in Bankruptcy Claims after Re Galaxy Sports and Re Lin: No Longer a Businessperson's Statute? 2011 Annual Review of Insolvency Law 833 at pp 841-842 would help address the practical problem of defining the "record".
78 On the other hand, the evidence could have affected the outcome. If the Appellants had provided more fulsome explanations to the Trustee, the Trustee may have been persuaded to conduct additional investigation or refer the matter to the Court for determination. This favours admission.
79 Had the evidence been more decisive, or there was unfairness in the process, I would have been inclined to admit it. But that is not this case. The evidence is ambiguous, contradictory, and vague. It raises questions of credibility and reliability of the deponents which cannot be resolved in this summary appeal. Allowing its admission would undermine the claims process, without providing any significant benefit. On balance, it should not be admitted.
V Did the Trustee err in rejecting the claims that WZG and the Appellants verbally modified the written terms of the Appellants' compensation?
80 The Appellants submitted some evidence to the Trustee that could support the existence of an enforceable oral agreement to amend the terms of their compensation. For the reasons set out below, there were many gaps in the evidence of the circumstances and object of the alleged agreement and serious issues over the credibility and reliability of the Appellants' assertions. In these circumstances it was unreasonable to conclude that no oral agreement was made. Rather, more investigation or a different process to resolve the claims was required. The Trustee also incorrectly reasoned that the Appellants had to prove an agreement existed immediately prior to December 6, 2018.
81 A bankruptcy trustee may reject a proof of claim where the creditor fails to adduce relevant and probative evidence from which a valid claim can reasonably be inferred (Mamczasz Electrical Ltd. v. South Beach Homes Ltd., 2010 SKQB 182 (Sask. Q.B.) at paras 46-47). The BIA is a business person's statute. Claims might be prepared without legal assistance and in some cases it is reasonable to ask for further information before determining a claim. A bankruptcy trustee may ask for additional information from a claimant. It may examine the bankrupt and others under section 163 of the BIA to obtain additional information, and it may seek directions from the Court in cases of doubtful claims. Of course, the Trustee was not bound by the assertions in the promissory notes, and may go behind them and gather evidence to determine the true basis for the claim.
82 Mr Hawley's representations in his proof of claim could be construed to mean that the company offered to modify its United States executive compensation arrangements to induce them to forebear exercising their legal rights to terminate the employment or consulting arrangements. The Trustee also had information, from the minutes of the January 4, 2019 Proposal creditors' meeting, that the oral agreement applied to each of the United States executives.
83 I do not see any objection in principle to the parties' modifying the terms of compensation for past services in exchange for an agreement to continue the consulting relationship. An enforceable modification of an employment agreement may arise from "an implied "tacit agreement" to forbear from exercising the right to terminate the contract . . . " (Globex Foreign Exchange Corp. v. Kelcher, 2011 ABCA 240 (Alta. C.A.) at para 128). Further, the requirement of contractual consideration "should not be used to undermine the legitimate commercial expectations of the parties as to the enforceability of their obligations" and "the courts should refrain, if possible, from relieving the parties of covenants freely entered into, absent some overriding public policy consideration ... (ibid at para 135). The same considerations apply to contracts for consulting services.
84 As WZG approached late 2018 and was contemplating strategies to remain in business, it may well have required the services of its United States executives. In those circumstances, it is plausible that WZG may have had a business reason to amend the written agreements to induce the consultants to remain. Although I find it unusual in the circumstances of this case that the Appellants were so vague in their claim forms, it is also plausible that WZG may have honestly sought to retain its staff with enhanced compensation arrangements.
85 The Trustee stated that it was unable to find evidence of an agreement. This is concerning for two reasons.
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86 First, there was some evidence of an oral agreement and there were further investigative options which were easily available to the Trustee.
87 Mr Hawley's assertions were some evidence of an oral agreement. It would be reasonable, when seeking to determine whether such allegations were true, to check the corporate records, ask for details of the discussions, and check with the other party with whom the discussions were allegedly held.
88 The Trustee checked corporate records. These were contradictory. A creditors list prepared in late November did not include the Appellants until revised with Mr Hawley's input. In contrast, the promissory notes are potential evidence of an agreement after October 31, 2018. They acknowledge a debt for services rendered, and contain entire agreement clauses. They might be construed as terminating and substituting the compensation provisions of the Letters of Undertaking, as of their effective dates (October 30 or 31, 2018).
89 The Trustee did not ask Mr Hawley or other Appellants for details of the discussions with WZG or the executives, although it was apparent from Mr Hawley's proof of claim form that more information was available from him about what was discussed.
90 I also find that the Trustee also did not inquire of Mr Zeviar, the alleged counter-party in the discussions, to explain the discrepancies in corporate records or why he signed these notes. Its counsel advised during the appeal hearing that she did not believe the Trustee asked Mr Zeviar about these notes, and there is nothing in the record to indicate the Trustee reviewed Mr Zeviar's affidavit, although its counsel was present during the February 28, 2019 bankruptcy hearing where that affidavit was relied on by WZG.
91 There was compelling evidence that no oral agreements existed before the end of October 2018. WZG signed a large number of Letters of Undertaking without any mention of an oral agreement. WZG did not report the oral agreements under the May 2018 Consent Order. None of the claimants explained these unusual features. However, the evidence contradicting the existence of a purported oral agreement for the period after October 2018 is less compelling. The last Letter of Undertaking was signed October 31, 2018. The last report under the May 2018 Consent Order was for the period ending October 2018. The Trustee relied heavily on these pieces of evidence, but they do not address the facts after the end of October.
92 The claims turned heavily on credibility considerations. Given the limitations of the process, where the bankruptcy trustee is essentially an adjudicator but does not in practice hold oral hearings and hear opposing sides, caution is required. The Trustee ought to have made further inquiries of the actual discussions among the claimants and WZG before disallowing the claims or perhaps referred them to the Court for determination in an adversarial process.
93 Second, the Trustee reasoned that the evidence must show that the agreement was made before the Notice of Intention date.
94 That proposition is incorrect. The Notice of Intention did not freeze WZG's operations. Management remained in place after the Notice of Intention was delivered, and the Interim Receivership Order made the same day contemplated that WZG retained "full management and control of the business and affairs of WZG and is responsible for identifying and paying all normal course business expenses".
95 Therefore, I conclude that disallowance on the basis of lack of an agreement or lack of consideration was not reasonable.
96 I am mindful that another judge of this Court summarily rejected the existence of the claims in the Proposal proceedings. That application involved different parties and likely a different record of evidence.
97 There is no evidence supporting Mr Aronson's claim to a franchise advance because he did not state to whom the advance was made or whether or when it was repayable. Mr Hawley stated during argument that the Trustee's decision relating to that claim was not being pursued. There is no basis to set aside this aspect of the Trustee's decision.
VI Did the Trustee err in concluding that the alleged verbal modifications to the written contracts were not enforceable under insolvency laws?
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98 The Trustee found the promissory notes were void because they were preferences under section 95 of the BIA, transfers under section 96 of the BIA (transfer at undervalue), or fraudulent conveyances under the Statute of Fraudulent Conveyances, 1571, 13 Eliz. 1, c. 5 or section 1 of the Fraudulent Preferences Act, RSA 2000, c F-24.
99 For the reasons set out below, the errors in the Trustee's assessment of the existence of an enforceable oral agreement (discussed above), and the gaps in the evidence whether the Appellants were dealing with WZG "at arm's length", lead me to conclude that the determinations on these points were unreasonable.
100 The Trustee relied primarily on section 95 of the BIA:
95 (1) A transfer of property made, a provision of services made, a charge on property made, a payment made, an obligation incurred or a judicial proceeding taken or suffered by an insolvent person
(a) in favour of a creditor who is dealing at arm's length with the insolvent person, or a person in trust for that creditor, with a view to giving that creditor a preference over another creditor is void as against — or, in Quebec, may not be set up against — the trustee if it is made, incurred, taken or suffered, as the case may be, during the period beginning on the day that is three months before the date of the initial bankruptcy event and ending on the date of the bankruptcy; and
(b) in favour of a creditor who is not dealing at arm's length with the insolvent person, or a person in trust for that creditor, that has the effect of giving that creditor a preference over another creditor is void as against — or, in Quebec, may not be set up against — the trustee if it is made, incurred, taken or suffered, as the case may be, during the period beginning on the day that is 12 months before the date of the initial bankruptcy event and ending on the date of the bankruptcy.
[Underlining added].
101 The issue for the Trustee was whether the promissory notes were given with a view to giving each Appellant (other than Ms Foote) a preference over other creditors (section 95(a)), or were given to a person not dealing at arm's length with WZG and having the effect of giving each Appellant a preference over other creditors (section 95(b)).
102 The evidence reasonably supports the Trustee's conclusion that the amounts in the promissory notes were agreed to sometime between late November 2018 and December 19, 2018. However, the Trustee's disallowances must be set aside.
(a) The question whether each promissory note was made with a view to giving a preference under section 95(a) and whether the presumption is rebutted under subsection 95(2) partly depends on the circumstances in which the notes were issued, including issues whether the parties actually made an oral agreement for valuable consideration. As discussed earlier, the Trustee's assessment of these issues was incomplete.
(b) The question whether each promissory note had the effect of a preference depends in part on the relationship between the amount of the obligation and the value exchanged for it. This also depends on the circumstances in which the notes were made, and again, the Trustee's assessment of these issues was incomplete.
(c) The question whether each promissory note had the effect of a preference also depends in part on whether each recipient was a related party. The general concern in non-arm's length transactions is that "there is 'no assurance that the transaction will reflect ordinary commercial dealing between parties acting in their separate interests'" (McLarty v. R., 2008 SCC 26 (S.C.C.) at para 4). A corporate director or officer may be at arm's length to his or her corporation. So long as the corporation is represented by independent individuals, an individual who is a corporate director and key employee would likely be acting at arm's length in compensation or severance negotiations (Piikani Nation v. Piikani Energy Corp., 2013 ABCA 293 (Alta. C.A.) at paras 31-36, 39).
(d) The evidentiary record before the Trustee did not reasonably address whether the Appellants were dealing at arm's length with WZG under section 95(b). Mr Hawley was the Chief Financial Officer and appears to have been intimately
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involved, but he appears to have acted as representative of the United States executives. There is no evidence to suggest WZG's CEO or Board were not acting independently of the United States executives in dealing with the alleged issue of inducing them to remain with WZG. The Trustee submits that each Appellant said in their new affidavits that they were asked by WZG to opine on the reasonableness of the compensation proposed for each other Appellant. If I had admitted this evidence, it would not have cured the gaps. The Appellants seem to have acted as a group. WZG's asking for their positions on compensation of the group members does not necessary indicate WZG was not acting independently.
(e) Section 95 applies where a creditor is given a preference. The Trustee's position implies that before the promissory notes were issued, the claimants had no right to compensation. If so, they arguably were not existing creditors at the time the alleged preference was made. The record does not indicate that the Appellants asserted quantum meruit or other claims before they purported to persuade WZG to amend their compensation arrangements.
103 The Trustee further found the transactions to be transfers at undervalue. Section 96 allows a bankruptcy trustee to apply to the Court for a declaration that such a transfer is void:
96 (1) On application by the trustee, a court may declare that a transfer at undervalue is void as against, or, in Quebec, may not be set up against, the trustee — or order that a party to the transfer or any other person who is privy to the transfer, or all of those persons, pay to the estate the difference between the value of the consideration received by the debtor and the value of the consideration given by the debtor — if
(a) the party was dealing at arm's length with the debtor and
(i) the transfer occurred during the period that begins on the day that is one year before the date of the initial bankruptcy event and that ends on the date of the bankruptcy,
(ii) the debtor was insolvent at the time of the transfer or was rendered insolvent by it, and
(iii) the debtor intended to defraud, defeat or delay a creditor; or
(b) the party was not dealing at arm's length with the debtor and
(i) the transfer occurred during the period that begins on the day that is one year before the date of the initial bankruptcy event and ends on the date of the bankruptcy, or
(ii) the transfer occurred during the period that begins on the day that is five years before the date of the initial bankruptcy event and ends on the day before the day on which the period referred to in subparagraph (i) begins and
(A) the debtor was insolvent at the time of the transfer or was rendered insolvent by it, or
(B) the debtor intended to defraud, defeat or delay a creditor.
[Underlining added].
104 Assuming a bankruptcy trustee may disallow a claim under section 96 on the same factual grounds as a Court can set aside a transaction under section 96 (a point which was not argued and on which I make no determination), the Trustee's determinations must include whether:
(a) The transaction was at undervalue (BIA, section 1: "the consideration received by the debtor is conspicuously less than the fair market value of the consideration given by the debtor").
(b) The recipient was dealing at arm's length.
(c) Whether the debtor intended to defraud, defeat or delay a creditor, if the dealings were at arm's length.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 15 Aronson v. Whozagood Inc., 2019 ABQB 656, 2019 CarswellAlta 1800 2019 ABQB 656, 2019 CarswellAlta 1800, [2019] A.W.L.D. 3443, [2019] A.W.L.D. 3444...
105 The question whether the transaction was at undervalue, or with a fraudulent or other improper intention under insolvency laws, depends in part on the circumstances under which the alleged oral agreement was made and its object. For example, was the transaction a fair and reasonable exchange to secure the services of the consultants to permit WZG to continue operations and make a proposal? Again, I have found the Trustee's consideration of the circumstances and object of the transactions was incomplete. Further, there was no evidence that WZG was not acting independently in the alleged compensation negotiations.
106 Similar considerations apply to fraudulent conveyances, whether under the Statute of Fraudulent Conveyances, 1571, 13 Eliz. 1, c. 5 or Section 1 of the Fraudulent Preferences Act, RSA 2000, c F-24 and to the Trustee's findings that some of the transactions were a sham. The circumstances surrounding the transactions and their object are key considerations in deciding whether the transfers are void or sham transactions.
107 All these issues are closely related to whether there actually was an agreement. Therefore, the disallowances on these grounds must also be set aside.
108 I wish to observe that if I had allowed the fresh evidence, I would have come to the same conclusions concerning the Trustee's decisions as set out in Parts V and VI of this Decision. The fresh evidence is not definitive in favour of the Appellants' claims, and raises further issues whether the claims are plausible and the evidence in support of them is credible or reliable. The same applies to Exhibits "Z" and "AA" to Mr Weber's affidavit sworn November 21, 2018, which PDW sought to put forward in response to the Appellants' evidence.
VII Was the Trustee biased against the Appellants?
109 The Appellants submitted during the oral hearing of the appeal that the Trustee was biased or had a conflict of interest because it was involved under the May 2018 Consent Order or as interim receiver, or the Trustee provided notices of disallowance to the Appellants shortly before the first meeting of creditors in the bankruptcy on March 21, 2019.
110 The law recognizes both disqualification through bias or reasonable apprehension of bias. The Appellants did not recognize this distinction, but I have considered both types.
111 I have concluded that the bias and conflict of interest allegations have no merit.
(a) Bias issues must be raised in a timely way. The Trustee's prior involvement was disclosed to Justice Horner before she appointed the Trustee as interim receiver and, later, bankruptcy trustee. The Trustee again disclosed its prior involvement in its preliminary report and at the First Meeting of Creditors, where three of the Appellants took exception to the Trustee on the ground of conflict of interest. Notwithstanding that, the Appellants did not include bias or conflict of interest among the grounds of their notice of appeal (or mention it in their lengthy affidavits) or apply to remove the Trustee.
(b) A bankruptcy trustee's prior involvement in a monitoring and reviewing role does not necessarily indicate bias or reasonable apprehension of bias. There is almost no evidence of the Trustee's mandate or retainer under the May 2018 Consent Order other than to assist in reviewing WZG's books and records under the Consent Order. There is no evidence the Trustee took an adversarial role or made conclusions about the Appellants in its earlier mandates.
(c) The timing of delivery of the notices of disallowance does not show bias or create any reasonable apprehension of bias. There is no evidence that the Trustee delayed matters to embarrass, inconvenience or harm the Appellants. A reasonable person, having considered the matter, would not perceive bias. Instead, they would think the Trustee acted responsibly in trying to determine the Appellants' status before the first meeting of creditors so that meeting participants could proceed knowing who had status and who did not. The proofs of claim were submitted shortly before the first meeting of creditors, so it is not concerning that the Trustee provided its decisions shortly before the meeting.
112 The fresh evidence does not change my conclusions concerning bias issues.
VIII Remedy
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113 I do not accept the Appellants' submissions that the facts are basic, simple and well-supported. These claims cannot be summarily allowed in substitution for the Trustee's decision.
114 A dispute "depending on issues of credibility, can leave genuine issues requiring a trial" (Weir-Jones Technical Services Incorporated v. Purolator Courier Ltd., 2019 ABCA 49 (Alta. C.A.) at para 35; Stankovic v. 1536679 Alberta Ltd., 2019 ABCA 187 (Alta. C.A.) at para 45).
115 The evidence before the Trustee was far from conclusive in the Appellants' favour, and raised serious issues over the credibility and reliability of evidence that there actually was an agreement and serious issues that the promissory notes were transactions which should be set aside under insolvency laws or as sham transactions. The record on this summary appeal is not sufficient to permit a fair and just adjudication of these issues.
116 Again, I would have come to the same conclusion had I considered the Appellants' fresh evidence on this appeal, or Exhibits "Z" or "AA" to Mr Weber's affidavit. All this evidence magnifies the questions over the credibility and reliability of the evidence offered to prove the claims. Again, these questions are not suitable for summary determination.
117 A trial of the issues is required, where the Appellants' evidence can be tested by cross-examination before a trial judge. At the trial, the grounds for the claims are limited to those set out in the proofs of claims. Although I rejected fresh evidence on the appeal, the evidence at the trial cannot be limited to the Trustee's record, because I have found the claims required further investigation. Further, it is not feasible to limit the evidence because that might unduly limit cross-examination. Therefore, my decision does not prevent a party from using the Appellants' affidavits for cross-examination purposes, the Appellants from relying on any relevant and admissible evidence to bolster their claim, or any respondent from adducing any properly admissible evidence in response.
118 The burdens of proof depend on the issue under consideration. My conclusions do not decide who bears the onus on any given issue. That is a matter for the trial.
IX Conclusion
119 The Trustee's counsel will prepare the formal Order, that will provide the necessary recitals identifying the appeal proceedings, and the following directions and determinations:
1. The Trustee's disallowances are set aside, except the disallowance of Mr Aronson's claim to a franchise advance. The claims will be determined by trial of the issues before a justice of this Court in accordance with this Order.
2. If the Appellants wish to further pursue their claims by proceeding to a trial, they must serve written notice of their intention to do so on the lawyers for the Trustee and PDW not later than September 19, 2019. If the notice is not served as required, the Appellants' claims are barred.
3. At any trial of the claims:
(a) The grounds for the claims are limited to those set out in the Appellants' bankruptcy proofs of claims, which shall serve as the statement of their claims.
(b) The evidence will not be limited to the evidence before the Trustee.
(c) This Order does not determine that the Appellants' affidavits are properly admissible, nor prevent a party from using the Appellants' affidavits for cross-examination purposes.
4. Any party may apply for further directions, with respect to:
(a) The nature of participation by the Trustee or PDW, and the time for filing and service of any statement of their objections to the claims.
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(b) A litigation plan setting out required pre-trial steps and the time in which they must be completed, including pretrial examinations or records disclosure under the BIA or the Alberta Rules of Court.
(c) Security for costs.
(d) Any other matter required for the economical and efficient determination of the claims.
5. Costs of the appeal are reserved. The parties may make written submissions concerning costs of the appeal within 60 days.
6. Rule 9.4(2)(c) is invoked. Appeals allowed on terms.
End of Document Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 18
TAB 6
6 Galaxy Sports Inc., Re, 2004 BCCA 284, 2004 CarswellBC 1112 2004 BCCA 284, 2004 CarswellBC 1112, [2004] B.C.W.L.D. 871, [2004] B.C.J. No. 1008...
2004 BCCA 284 British Columbia Court of Appeal
Galaxy Sports Inc., Re
2004 CarswellBC 1112, 2004 BCCA 284, [2004] B.C.W.L.D. 871, [2004] B.C.J. No. 1008, 131 A.C.W.S. (3d) 214, 1 C.B.R. (5th) 20, 200 B.C.A.C. 184, 20 R.P.R. (4th) 1, 240 D.L.R. (4th) 301, 29 B.C.L.R. (4th) 362, 327 W.A.C. 184
Galaxy Sports Inc. (Appellant/Debtor) And Abakhan & Associates Inc., Trustee in the Proposal of Galaxy Sports Inc., Umbro Worldwide Limited, and Umbro International Limited (Respondents)
Rowles, Newbury, Hall JJ.A.
Heard: January 27, 2004 Judgment: May 20, 2004 * Docket: Vancouver CA030731
Counsel: J.P. Sullivan, D.A. Gagnon for Appellant K.R. Doyle, M.B. Morgan for Respondents, Umbro Worldwide Ltd., Umbro International Ltd. J.R. Sandrelli for Respondent, Abakhan & Associates, Trustee
Subject: Insolvency; Property; Civil Practice and Procedure Headnote Bankruptcy and insolvency --- Proposal — Practice and procedure Appeal from trustee's ruling to chambers judge is not trial de novo in which fresh evidence can be considered as matter of course. Bankruptcy and insolvency --- Priorities of claims — Claims by landlord — Disclaimer and surrender of lease Termination of leases because of insolvency contravenes s. 65.1 of Bankruptcy and Insolvency Act even where insolvent tenant itself sought termination — In absence of disclaimer by insolvent tenant, landlords' claims were limited to past arrears and rent as it became due monthly post-proposal. Bankruptcy and insolvency --- Priorities of claims — Restricted and postponed claims — Officers, directors, and stockholders Directors' claims for severance pay where there was no evidence of termination were expunged. Bankruptcy and insolvency --- Proving claim — Provable debts — General principles U Worldwide Ltd.'s proof of claim was valid for voting purposes notwithstanding that invoices attached were prepared by U International Ltd. — Insolvent company could not allege failure to comply with requirements of s. 124 of Bankruptcy and Insolvency Act where it knew that licence agreement had been assigned by U International Ltd. to U Worldwide Ltd. years previously. G Inc. was the exclusive distributor of U Co.'s (comprising U International Ltd. ["UIL"] and U Worldwide Ltd. ["UWL"]) sports clothing and products. G Inc. alleged that it turned down alternative financing in reliance on U Co.'s representations that it would grant G Inc. a licence for the American big box market, and possibly acquire control of G Inc. When G Inc. determined it could not remedy defaults alleged by U Co. and that it would be unable to continue in business when cancellation of its licence took effect, it filed a notice of intention to make a proposal under the Bankruptcy and Insolvency Act. G Inc. brought an action against U Co. alleging breaches of fiduciary duty, fraudulent and negligent misrepresentation, and bad faith conduct leading to unjust enrichment. G Inc. proposed to sell as much inventory and operating assets as would be necessary to pay liquidation costs, its only secured creditor (a bank) in full, and $420,000 to the trustee for distribution to unsecured creditors. G Inc. proposed to pursue its lawsuit and to pay the trustee 50 percent of the net recovery after payment of legal costs. The trustee determined that ordinary unsecured creditors had claims of $3,600,000, the bank was owed $5,000,000, and assets included $3,200,000 in inventory, $2,470,000 in accounts receivable, and $804,446 in bank deposits (which was to be applied against the bank's secured claim). The trustee
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 1 Galaxy Sports Inc., Re, 2004 BCCA 284, 2004 CarswellBC 1112 2004 BCCA 284, 2004 CarswellBC 1112, [2004] B.C.W.L.D. 871, [2004] B.C.J. No. 1008... determined that if the proposal proceeded, the estate would have $584,000 apart from litigation proceeds, and if the litigation succeeded, there would be adequate funds to pay the unsecured creditors in full. However, in the event of bankruptcy, the estate would have $62,000 available to it. The trustee recommended acceptance of the proposal. At the creditors' meetings, three objections were raised. Firstly, questions were raised regarding the proofs of claim filed by G Inc.'s two landlords. S Ltd. and C Ltd. filed claims of $1,445,656.68 and $311,798.16 respectively, consisting of arrears of rent of $12,051.25 and $16,737.90 respectively, plus the aggregate amount of rent and operating costs that would, had the lease continued, have been payable by the tenant over the unexpired term of the lease. The disclaimer procedure under s. 65.2 of the Act was not invoked. G Inc. and S Ltd. reached an understanding that G Inc. would vacate the leased premises by December 31, 2002 and pay rent up to that date and acknowledged that S Ltd. had a preferred claim for three months' rent owed prior to August 23, 2002. C Ltd. also reached an agreement in which the disclaimer procedure was expressly not invoked, and in which it would surrender its lease by delivering vacant possession by November 1, leaving C Ltd.'s right to prove actual losses unaffected. Secondly, two of G Inc.'s directors claimed severance pay and a third claimed reimbursement of business expenses. The chair ruled that their votes would be counted at the full amounts of their claims. Thirdly, U Worldwide Ltd. claimed $1,208,016.45 but attached invoices prepared by U International Ltd. The chair ruled that the proof of claim was valid for voting purposes and the trustee advised that it valued U Worldwide Ltd.'s claim at $640,000. The proposal was ultimately accepted by the creditors. A Supreme Court judge dealt with four motions. The Trustee applied for court approval of the proposal. U Worldwide Ltd. applied for an order permitting it to examine the landlords and for orders for production of records, and it appealed the trustee's ruling in respect of the three directors' voting entitlement. In return for U Worldwide Ltd.'s not proceeding with its application, S Ltd. agreed to reduce its claim to $12,051.25 for voting purposes only. G Inc. moved for declarations that both U defendants were disentitled by s. 109(6) of the Act from voting at creditors' meetings for failing to deal at arm's length. Having found that the three directors were not "passive directors", and that there was no evidence that two of the directors whose claims were predicated on their loss of employment were terminated, the chambers judge ruled that none of their votes could be counted and expunged their proofs of claim. The chambers judge ruled that the landlords' claims must be reduced for voting purposes to reflect the likely recovery on re-letting, declared the parties were at liberty to schedule another hearing regarding valuation, and adjourned that aspect of the motion. The chambers judge found that without a sworn statement from G Inc., she could not conclude that U Co. was not acting at arm's length. The chambers judge concluded it would be inappropriate to deal with the trustee's application for approval of G Inc.'s proposal. G Inc. appealed. Held: The appeal was allowed in part. Per Newbury J.A. (Hall and Rowles JJ.A. concurring): The appeal was allowed to the extent of allowing the claim of the director who sought reimbursement of business expenses to be voted at the meeting. The order directing that new evidence be adduced concerning the valuation of the landlords' claims was set aside. Those claims were remitted back to the trustee for determination of the amounts of rent that became due since the purported terminations, in respect of which s. 65.1 did not bar the claims, but damages for loss of future rent were to be disallowed. Following the re-taking of the creditors' vote on the proposal, the motion for approval of the proposal was to be remitted back to the Supreme Court. To the extent the chambers judge proceeded on the basis that the appeal was a trial de novo in which fresh evidence was considered as a matter of course, she fell into error. As unsatisfactory as the state of evidence might have been, the chambers judge should have considered whether the trustee had made a reviewable error in its treatment of the landlords' claims on the evidence before it. With respect to the landlords' claims, the chambers judge proceeded not on the basis that their claims were contingent, but on the basis that they were unliquidated, and she was correct on that point. A recent case of the Supreme Court of Canada made it clear that where (as here) a commercial lease is repudiated by the tenant prior to the expiration of its term, the "full armoury of remedies ordinarily available to redress repudiation of covenants" is available to the landlord, including "prospective remedial relief in damages." S Ltd.'s claim beyond the $12,051.25 represented an unliquidated claim for damages which the trustee would have been required to evaluate in accordance with s. 135(1.1) of the Act. While valuation is a matter of discretion and would be scrutinized on a reasonableness standard, the trustee did not exercise its discretion. The trustee would have been required to consider whether the valuation of the claims at their full amounts was appropriate. When a debtor disclaims a lease under s. 65.2 of the Act, the landlord has no claim for accelerated rent and may file a proof of claim only in pretext of its "actual losses resulting from the disclaimer", or the formula amount set out in s. 65.2(4). G Inc. did not invoke s. 65.2 because it wanted to
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 2 Galaxy Sports Inc., Re, 2004 BCCA 284, 2004 CarswellBC 1112 2004 BCCA 284, 2004 CarswellBC 1112, [2004] B.C.W.L.D. 871, [2004] B.C.J. No. 1008... continue occupying the premises to sell its inventory for a longer period than s. 65.2 permitted. Because G Inc. wanted to avoid any action that could be taken as affirming the leases, since it wished to continue in occupation only for two or three months post-proposal, it reached the understandings with the landlords. The leases were terminated and appeared to have contravened s. 65.1, as the leases were terminated because of the insolvency. The section was intended to apply even where the insolvent tenant itself sought termination of the lease. The landlords' claims to the "actual losses" over the unexpired terms of their leases were prohibited by s. 65.1(1) and the trustee was bound to reject their claims except insofar as they related to past arrears and rent as it became due monthly post-proposal. In the absence of a disclaimer by G Inc., the landlords' claims must be so limited. The chambers judge erred in respect of the three directors' claims. The Act did not intend that a distinction be drawn between active and passive directors. The three directors were not prohibited from filing proofs of claim and voting the dollar amount thereof by reason of the fact they were directors, or "active" directors. The chambers judge was correct in expunging the two directors' claims for severance pay. Any claims for severance they might have had would be claims for damages for wrongful dismissal, which would be unliquidated claims subject to valuation by the trustee. Since there was no evidence of termination, the chambers judge was correct in expunging their claims. The chambers judge did not err in affirming the trustee's decision to permit UWL to vote on the proposal. At the creditors' meeting, UWL stated that UIL did the invoicing for UWL and both companies were subsidiaries of U Holdings. There was evidence before the chair that the licence agreement had been assigned by UIL to UWL in 1999, and this fact had been asserted in G Inc.'s statement of claim. Therefore, G Inc. could not submit that UWL failed to comply with the requirements of s. 124 of the Act regarding the filing of proofs of claim or that the trustee erred in ruling that UWL had a provable claim entitling it to vote at the creditors' meeting.
APPEAL by insolvent company from several rulings made by chambers judge in respect of its proposal to creditors under Bankruptcy and Insolvency Act, reported at Galaxy Sports Inc., Re (2003), 2003 BCSC 493, 2003 CarswellBC 734, 42 C.B.R. (4th) 211 (B.C. S.C.).
Newbury J.A.:
1 Galaxy Sports Inc. ("Galaxy") appeals several rulings made by the Chambers judge below in connection with its proposal to creditors under the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 as amended (the "BIA"). For the most part, the questions raised by the appeal are very concrete and discrete; but some matters of principle that have apparently not been considered at the appellate court level in Canada also arise.
The Factual Background
2 I turn first, however, to the facts of the case. Galaxy is a Canadian corporation, the shares of which are publicly listed. Until its insolvency, it was the exclusive distributor in Canada of "Umbro" sports clothing and related products. As such, Galaxy had a close working relationship with the Umbro companies, which I will refer to collectively as "Umbro". At some point, it is alleged that Galaxy and Umbro discussed Umbro's granting to Galaxy, or an American subsidiary thereof, a licence for the "big box" market in the United States. Allegedly, the parties even talked about Umbro's acquiring control of Galaxy. In reliance on representations made by Umbro, Galaxy says it turned down financing available to it from other sources.
3 In early 2002, however, the negotiations came to a sudden halt. Umbro threatened to cancel Galaxy's licence, effective September 2002, unless certain alleged defaults were remedied. According to the Trustee's report, Galaxy could not remedy the defaults and foresaw that it would be unable to continue in business once the cancellation of its licence took effect. On August 23, 2002, Galaxy therefore filed a Notice of Intention to Make a Proposal under the BIA. The proposal was forwarded to Galaxy's creditors on September 20, 2002. Galaxy also began an action for damages against, inter alia, Umbro Worldwide Limited ("Umbro Worldwide") and Umbro International Limited ("Umbro International"), both of which are respondents in this appeal, alleging breaches of fiduciary duty, fraudulent and negligent misrepresentation, and "bad faith conduct" leading to the unjust enrichment of the defendants. As well, Galaxy's American subsidiary sought protection under Chapter 11 of the U.S. Bankruptcy Act in Seattle, Washington.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 3 Galaxy Sports Inc., Re, 2004 BCCA 284, 2004 CarswellBC 1112 2004 BCCA 284, 2004 CarswellBC 1112, [2004] B.C.W.L.D. 871, [2004] B.C.J. No. 1008...
4 Galaxy's proposal in Canada was unusual in that it did not appear to contemplate the debtor's complete cessation of business or the sale of all its inventory and operating assets. Instead, Galaxy proposed to sell "so much of its inventory and operating assets as [would be] necessary" to pay liquidation costs, to pay its only secured creditor in full, and to pay the sum of $420,000 to the Trustee, the respondent Abakhan & Associates, for distribution to unsecured creditors. Galaxy also proposed to pursue diligently its lawsuit against the Umbro defendants to a conclusion and then to pay the Trustee 50 percent of the net recovery after payment of legal costs. By accepting the proposal, then, the unsecured creditors would be deemed to have agreed to accept the $420,000 and half of the net amount recovered in the lawsuit, in full settlement and satisfaction of their provable claims. If the lawsuit yielded nothing, they would receive approximately five cents on each dollar of their claims.
5 As required, the Trustee carried out an investigation of Galaxy's affairs and prepared a report to creditors concerning the proposal. It stated that based on Galaxy's statement of affairs, ordinary unsecured creditors had claims totalling approximately $3,600,000; that there was only one registered secured creditor, a bank, to which Galaxy owed approximately $5,000,000; and that Galaxy's assets included inventory of some $3,200,000, accounts receivable of some $2,470,000 and bank deposits of some $804,446, the latter to be applied against the bank's secured claim. As well, the Trustee reported:
Galaxy invested approximately $1.2 mil into the US operation by way of shareholders loan. The main asset available for liquidation is UMBRO brand inventory with an approximate value of $1.6 mil., which is being claimed by UMBRO International. The determination of the value of the amount due to Galaxy from the US Corp is dependent on the outcome of the UMBRO Litigation.
UMBRO Litigation
Management's current assessment is that there will be adequate funds from the litigation such that 50% of the net recovery will be adequate to pay the unsecured creditors 100% of their claims.
The Trustee estimated that if the proposal were to proceed, the estate would have available to it approximately $584,000, apart from any proceeds of the Umbro litigation. On the other hand, if Galaxy were to go bankrupt, the funds available to the estate would be approximately $62,000. Accordingly, the Trustee concluded:
Should Galaxy be Bankrupt it would be up to the creditors to decide whether the Estate should pursue the UMBRO litigation. If the litigation were not pursued the creditors could recover approximately $260,000 of the asset liquidation proceeds which are currently slated to be paid to the litigation effort as legal fees . . . . This potential recovery would not offset the projected reduction in liquidation proceeds should management not participate.
Based on this analysis, allowing management to proceed by approving Galaxy's proposal will likely result in more funds being available to the unsecured creditors than would be the case if Galaxy were to be Bankrupt.
Recommendation and Conclusion
The Proposal of Galaxy allows management to realize on the existing operational assets and to pursue the litigation against UMBRO International. The quantum of funds projected to be available to the unsecured creditors is dependent on participation of management in those efforts. It is likely that should management not participate in the realization of assets and in the litigation that there will be less funds available to the unsecured creditors, perhaps NIL. Accordingly, the creditors will realize more in the proposal than they would in a Bankruptcy and that realization will be enhanced should the UMBRO litigation be successful.
The Trustee recommends that the creditors accept the Proposal as they will likely realize more than would be the case should Galaxy be bankrupt.
6 The first meeting of creditors was held on October 15 and continued after an adjournment on October 29, 2002. Mr. Nayer, an official receiver, chaired the meeting and received various objections from various parties regarding the proofs of claim filed by various creditors. For purposes of this appeal, I need note only three groups of such objections.
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7 First, Umbro Worldwide raised questions about the proofs of claim filed by Galaxy's two landlords (in respect of separate premises), Sun Life Assurance Company of Canada Ltd. ("Sun Life") and Cookstown Holdings Ltd. ("Cookstown"). Sun Life's claim (filed after the first meeting but before the second) was for $1,445,656.68, consisting of arrears of rent of $12,051.25, plus the aggregate amount (not discounted) of rent and operating costs that would, had the lease continued, have been payable by the tenant over the unexpired term ending September 30, 2007. Although this was referred to in Sun Life's statement of account as the "lease disclaimer", the disclaimer procedure provided by s. 65.2 of the BIA was not invoked in this case, since Galaxy required more time — two or three months — in occupation of the premises than what s. 65.2 would have permitted. Galaxy and Sun Life reached an understanding under which Galaxy agreed to vacate the leased premises by December 31, 2002 and to pay rent up to that date and acknowledged that Sun Life had "a preferred claim in the proposal or any further bankruptcy for the three months rent owed prior to August 23, 2002."
8 With respect to Cookstown, an agreement was also reached in which the disclaimer procedure was expressly not invoked. Galaxy proposed in a letter of October 9 to Cookstown that it would "surrender" its lease by delivering vacant possession by November 1 at the latest, leaving Cookstown's "right to prove . . . actual losses" unaffected — a proposal the lessor apparently accepted. Accordingly, Cookstown claimed arrears of rent of $16,737.90 up to December 31, 2002, and again, the aggregate of anticipated rental and other amounts that would have been payable by the tenant over the unexpired term of the lease to December 31, 2005, or $311,798.16. The amount of Galaxy's original deposit and another minor amount were deducted, resulting in the final claim of $320,167.11.
9 The amount of Sun Life's claim was the subject of considerable discussion at the meeting. On October 15, Galaxy's representative advised that the company expected to vacate the premises on or about December 15, 2002; that (in accordance with s. 136(1)(f) of the BIA) rental arrears for the three months prior to the proposal would be a preferred claim; and that subject to mitigation, Sun Life's remaining loss would be an unsecured claim. Although the solicitor for Galaxy, Mr. Gagnon, expressed the hope that the premises "should not be vacant for too long", so that Sun Life's claim "should be minimized", Sun Life's representative stated that it had been offering the premises for rent, and that a similar "unit" on Annacis Island had been on the market for a year.
10 By the time the meeting continued on October 29, Sun Life's proof of claim had been filed. Various creditors who objected to the claim being allowed in full contended that the landlord's position seemed similar to that of various suppliers of goods shipped to Galaxy but not received by it at the time of its proposal. Most of these had been assigned a "zero" value by the Trustee. Similarly, it was said, Sun Life's claim should not be allowed as a liquidated claim or at full value, since like the suppliers, Sun Life could mitigate its future losses over the course of the tenancy by re-letting the premises. Mr. Abakhan, the Trustee's representative, told the meeting that he did "not know how to value the claim other than how it is presented. Creditors can go to Court and appeal the Trustee's decisions." When pressed further, he added:
. . . that the courts make a distinction between landlord's claims and unliquidated claims such that landlords are permitted to file their entire claim for the total unexpired term of the lease, regardless of potential mitigation, while creditors such as King's Fashion have no claim until they liquidate the asset in their possession.
11 In the result, Sun Life's claim was allowed "for voting purposes in full". The Chair requested that if the proposal were accepted by the creditors, the Trustee would give "notice to everyone who voted of SunLife's claim and of the fact that any creditor with a concern could make submissions to the Court. This would ensure that creditors who sent in voting letters but did not attend the meeting would be aware of Sun Life's claim and the possible dilution of dividends." Later in the meeting, the Trustee ruled that Cookstown was "in the same position as SunLife", and allowed its claim at the full amount.
12 The second set of claims relevant to this appeal were those made by three of Galaxy's directors, Messrs. Dewar and Watson, who were also the President and the Chief Executive Officer respectively, and Mr. Gill, the chairman of the board. Mr. Dewar's claim was for $120,000. Attached as a schedule to his proof of claim was the statement "6 Months Severance Pay As Per Employment Contract — $120,000." Similarly, Mr. Watson, who claimed a total of $257,969.28 simply noted that his claim represented "15 Months Severance Pay Per Employment Contract." Mr. Gill's claim was for the reimbursement of some
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$4,600 of expenses apparently incurred on company business. Various creditors objected that these claimants were prohibited from voting by s. 109(6) of the BIA, which is reproduced later in these Reasons. After discussion of that provision and s. 113(3) (c), however, the Chair ruled that the votes of all three directors would be counted at the full amounts of their claims and that "these decisions could be appealed to the Court."
13 The third contentious issue was a claim filed by Umbro Worldwide in the amount of $1,208,016.45. The proof of claim had attached to it various invoices apparently prepared by Umbro International, rather than Umbro Worldwide, for royalties and other amounts due under the licence agreement. A lengthy colloquy took place at the creditors' meeting among the Chair, counsel for Umbro Worldwide and Galaxy's representative, focussing on a secured debt apparently owing to Galaxy by its U.S. subsidiary. Then, the following discussion ensued:
Mr. Gagnon then advised the Chair that he takes the position that UMBRO does not have a valid claim. He had only just been made aware of the fact that the UMBRO Proof of Claim filed in the Proposal had been made and signed by UMBRO Worldwide Limited, however, all of the support for the claim (the Schedule "A"), including invoices and statements were to the account of UMBRO International, a separate and distinct legal entity. Accordingly, in his opinion the claim was invalid as filed, for voting purposes.
There followed discussion on the issue of the validity of the UMBRO claim as filed. Mr. Doyle [counsel for Umbro] indicated that UMBRO International did the invoicing for UMBRO Worldwide and both companies were subsidiaries of UMBRO Holdings.
The Chair ruled that the Proof of Claim filed by UMBRO was valid for voting purposes.
Shortly thereafter, the Trustee advised the meeting that it was valuing Umbro Worldwide's claim at approximately $640,000.
14 At the close of the meeting, the Trustee advised that 79 votes representing 75.93 percent of the claims had been cast in favour of the proposal and that eight votes representing 24.07 percent of the claims had been cast against. The Chair declared that the proposal had been accepted by the creditors.
The Proceedings Below
15 Four motions came before the Supreme Court judge in Chambers. First, the Trustee applied under s. 58(a) of the BIA for court approval of the proposal. Second, Umbro Worldwide applied under s. 163(2) for an order permitting it to examine representatives of Sun Life and Galaxy under oath; an order for the lessor's production of books and records relating to its claim; and an order that Galaxy produce all books and records in its possession "relating to the administration of the estate of Galaxy". In that motion, Umbro Worldwide also appealed the Trustee's ruling in respect of the voting entitlement of the three directors.
16 Apparently in response to Umbro Worldwide's application to examine, Sun Life thereafter reached an understanding with Umbro Worldwide that the latter would not proceed with the application, in return for Sun Life's agreement that its claim would be reduced to $12,051.25 "for voting purposes only". This understanding was confirmed in a letter dated January 21, 2003 prepared by Sun Life's solicitors, which stated:
We confirm that Umbro [Worldwide] will not take issue with Sun Life's Proof of Claim for the purposes of distribution from the Estate of Galaxy Sports Inc. Sun Life will, of course, revise its Proof of Claim downward if it is able to mitigate its losses prior to any eventual distribution from the Estate of Galaxy Sports Inc.
17 By the time of the foregoing correspondence, Umbro Worldwide had filed another notice of motion in Supreme Court seeking orders that:
1. the Proofs of Claim filed by Sun Life Assurance Company of Canada and of Cookstown Holdings Ltd. are to be reduced to $12,051.25 and zero dollars respectively, solely for the purpose of the vote by Galaxy's creditors on its Proposal and the votes of these creditors on the Proposal are to be correspondingly reduced in the calculation of the vote by Galaxy's creditors on its Proposal;
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2. the Proofs of Claim filed by the Officers and Directors be expunged and the votes of the Officers and Directors are not to be counted in the vote by Galaxy's creditors on its proposal;
3. there be a declaration that Galaxy's creditors refused to accept the Proposal;
pursuant to s. 135(5) of the Bankruptcy and Insolvency Act and Rules 6 and 11 of the Bankruptcy and Insolvency General Rules.
In support of this motion and its earlier motion, Umbro Worldwide filed and adduced affidavit material referring to or having appended to it documents that had not been before the Chair of the creditors' meeting in October 2002.
18 The fourth motion before the Chambers judge was filed by Galaxy. It sought declarations that both Umbro defendants were disentitled by s. 109(6) of the BIA from voting at any creditors' meetings "as they did not, at all times in the year preceding commencement of this proceeding, deal with [Galaxy] at arm's length"; and in the alternative, that Umbro Worldwide was not entitled to vote "as a result of its failure to duly prove its claim by annexing a statement of account that evidenced a debt owing to it that is provable under the Act".
The Judgment Appealed From
19 The motions came on for hearing in January 30 and 31, 2003 (although I note the date of hearing on the face page of the Reasons refers to a hearing on December 2, 2002). The Chambers judge's Reasons were released on March 31, 2003 and are reproduced at 2003 BCSC 493 (B.C. S.C.). It does not appear from the judgment that counsel made any objection to her consideration of what I shall refer to as "fresh evidence" — i.e., documents and other materials that were not before the Trustee or the Chair of the meeting of creditors — nor that any specific application was made to adduce the "fresh evidence" at the hearing. It was simply filed and admitted without objection or argument.
20 The Chambers judge began by dealing with the voting entitlement of Messrs. Watson, Dewar and Gill. She first addressed the question of whether they were prohibited from voting by s. 109(6) of the BIA, which provides:
(6) Except as otherwise provided by this Act, a creditor is not entitled to vote at any meeting of creditors if the creditor did not, at all times within the period beginning on the day that is one year before the date of the initial bankruptcy event in respect of the debtor and ending on the date of the bankruptcy, both dates included, deal with the debtor at arm's length.
Also relevant is s. 113(3)(b), which provides:
(3) The following persons are not entitled to vote on the appointment of a trustee or inspectors: . . .
(b) where the bankrupt is a corporation, any officer, director, or employee thereof; . . .
21 The Chambers judge noted that whether parties are dealing at arm's length for purposes of s. 109(6) is a question of fact, citing Skalbania (Trustee of) v. Wedgewood Village Estates Ltd. (1989), 74 C.B.R. (N.S.) 97 (B.C. C.A.). She found that the three men were not "passive directors" in that Messrs. Watson and Dewar had signed various agreements and dealt with Umbro and that Mr. Watson had even executed the Chapter 11 proceedings in the United States for Galaxy's U.S. subsidiary. Each of these men, she said, "could influence the direction of Galaxy." As well, she noted, the claims of Messrs. Watson and Dewar were predicated on the assumption that their employment contracts had been terminated, whereas there was no evidence of termination. Indeed, the Trustee's report suggested that Galaxy had ongoing operations and that the continued services of management would be required at least in connection with the Umbro lawsuit. Based on these facts, the Chambers judge ruled that the votes of none of the three directors could be counted, and that the proofs of claim of Messrs. Watson and Dewar should be expunged pursuant to s. 135(5).
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 7 Galaxy Sports Inc., Re, 2004 BCCA 284, 2004 CarswellBC 1112 2004 BCCA 284, 2004 CarswellBC 1112, [2004] B.C.W.L.D. 871, [2004] B.C.J. No. 1008...
22 The Chambers judge then moved to the question of the landlords' entitlement to vote the full amounts of their claims under Galaxy's leases. Cookstown did not appear in the court below. Sun Life, in accordance with the understanding it had reached with Umbro, did not oppose Umbro Worldwide's motion to reduce its claim to $12,051.25.
23 The Chambers judge drew a strong analogy between the claims of the landlords and those of various suppliers whose proofs of claim had been disallowed in their entirety. (The only exception was King's Fashion, whose representative had advised the meeting that the product it had shipped to Galaxy would be difficult to sell elsewhere because of its "custom" nature. King's Fashion had a claim in excess of $1,318,000 but the Trustee valued it at $544,837 for voting purposes.) The Chambers judge stated:
The cases of the landlords and the suppliers are alike. In each of these cases the creditor has retained an asset and by re- leasing or selling that asset, will be able to mitigate its losses. There has not been sufficient time for the landlords to have re-let the premises or for the suppliers to have sold the manufactured goods.
Section 135 provides that the trustee shall determine if an unliquidated claim is a provable claim and, if so, the value of the claim. The trustee may require further evidence in support of a claim. A creditor with an unliquidated claim has no right to vote until his claim has been valued and has a provable claim only for the amount at which the trustee values the claim. In valuing the claim, the trustee should look at what is reasonable in the circumstances and apply an appropriate contingency in determining the amount at which to value the claim, as the court did in Re Wiebe (1995), 30 C.B.R. (3d) 109 (Ont. Gen. Div.). [paras. 17-18]
The Chambers judge noted the statement made by Mr. Gagnon on behalf of Galaxy at the first creditors' meeting that "[t]he actual losses incurred by Sun Life would be unsecured and will be subject to mitigation, and it is the understanding of Galaxy that this space should not be vacant for too long and the claim should be minimized." She agreed, noting that in valuing Sun Life's claim for voting purposes, the likelihood of re-letting the premises must be considered. She continued:
The landlords and Galaxy could provide the trustee with information respecting re-letting the property as could real estate agents. To simply allow the claim for the unexpired term inflates the claim and accords it inappropriate voting power. A claim allowed for voting purposes at far more than its true value may well be sufficient to approve or defeat a proposal over the views of other creditors. It is given disproportionate weight.
The claims of the landlords must be discounted to reflect the likely loss, and consider the likely recovery on re-letting. The evidence before me does not allow me to determine an appropriate reduction as contemplated by s. 135(5). The parties may adduce further evidence on this point, if necessary. [paras. 22-23]
Accordingly, the Court adjourned this aspect of the motion, declaring that the parties were at liberty to schedule another hearing regarding the valuation of the landlords' claims.
24 The Court next turned to the claim filed by Umbro Worldwide. Appended to its proof of claim were invoices from Umbro International. There was evidence from Mr. Watson that Galaxy was normally invoiced by and made payment to Umbro International for goods shipped under the licence agreement. With respect to Galaxy's objection that "the wrong company" had filed the claim, the Chambers judge concluded on the evidence before her that Umbro International had assigned its licence agreement with Galaxy, to Umbro Worldwide in 1999, and had given notice of the assignment to Galaxy. Thus, she said, it was "appropriate that [Umbro Worldwide] file the proof of claim." (Para. 27.) As to the objection based on s. 109(6), the Chambers judge reviewed affidavit evidence filed by Mr. Watson concerning Galaxy's court action against the Umbro companies, the Statement of Claim, and various e-mails between Galaxy and Umbro discussing their possible merger back in 2001-2002, Umbro's financial assistance to Galaxy, and extensions of the time for Galaxy's payment of royalties. However, the Chambers judge found:
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Without a clear sworn statement from Mr. Watson or another Galaxy representative detailing the manner in which Galaxy says that Umbro was not dealing at arm's length and setting out facts in support, I cannot conclude that Umbro was not acting at arm's length.
The statement of claim is merely an unsworn pleading. It is not a sworn statement of the facts which Galaxy says lead to the conclusion that Umbro was not acting at arm's length.
The e-mails do not demonstrate a non-arm's length relationship, even if the court could speculate as to the nature of the relationship, negotiations, etc. without further evidence from the parties involved.
I will not set aside the chairman's rulings on these issues, Galaxy's motion is dismissed. [paras. 31-34; emphasis added.]
25 In light of her rulings on the voting entitlements of Galaxy's directors and the adjournment of the motion concerning the landlords' claims, the Chambers judge concluded that it would be inappropriate to deal with the Trustee's application for approval of Galaxy's proposal by the Court. Obviously, this appeal has suspended further proceedings below and the matter has unfortunately sat unresolved for several more months.
ON APPEAL
26 The first ground of appeal advanced by Galaxy is that the Chambers judge erred in ordering that the landlords' respective claims must be reduced for purposes of the creditors' vote on the proposal. Galaxy contends that in so concluding, the Chambers judge erred in three respects. The latter two grounds — that she should not have directed that additional evidence be adduced regarding the leases, and that she failed to show "proper deference" to the Trustee's decision — may conveniently be dealt with first, and together, since the questions of what evidence is properly adduced on an appeal under s. 135, and what standard of review is to be applied on such an appeal, are obviously related.
First Evidence and Standard of Review
27 Galaxy submits that the Chambers judge erred in making an order "that would involve evidence on the question of mitigation, and a further hearing." In this regard, counsel commends to us the comments of Farley J. in Canadian Triton International Ltd., Re (1997), 49 C.B.R. (3d) 192 (Ont. Bktcy.), where he observed:
It would seem to me to be reasonably obvious that the determination as to who is allowed to vote at a particular meeting has to be decided on the basis of what information (i.e., the appropriate material) was available to the Chair of the meeting (in this case the Official Receiver) at the time the vote was conducted. See In Re Andrew Motherwell of Canada Limited (1923), 4 C.B.R. 265 (Ont. S.C.) at p. 268: "Again I do not see how I can allow any new material to go in at this stage. We must deal with the proxies as of the date the votes were cast under them." In other words, it would be inappropriate to go back after the meeting and attempt to cooper up any observed deficiency with the material filed for the purpose of voting. That is not to be confused with material then available to the Chair. If it were otherwise, then there could be a (never ending) string of attempts at bolstering the material so that it was objectively satisfactory and that the estate would continue to be in a state of uncertainty as to any vote taken. Any appeal from the Chair's decision should be in accord with the appeal provision and be on a single appeal basis. That is not to imply that the material could not be coopered up for any future vote or for the purpose of entitlement to any future distribution. The time for lodging the proxy according to Houlden and Morawetz, "The 1997 Annotated Bankruptcy and Insolvency Act" . . . at p. 335 "must, however, be filed with the Chair before the taking of the vote, not afterwards: Re Britannia Canning Co. (1938), 19 C.B.R. 250 (Ont. S.C.)." [para. 5; emphasis added.]
28 Farley J.'s comments strike a pragmatic note, but one that would appear to be in keeping with the general scheme, or "purpose", of the BIA provisions relating to debtors' proposals and creditors' meetings. That scheme operates on fairly tight time lines: within five days of its appointment, the trustee is required to send to every known creditor a notice of the first meeting, to be held within 21 days of that appointment (s. 102(1)). Notice must be published in the local newspaper not later than five
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 9 Galaxy Sports Inc., Re, 2004 BCCA 284, 2004 CarswellBC 1112 2004 BCCA 284, 2004 CarswellBC 1112, [2004] B.C.W.L.D. 871, [2004] B.C.J. No. 1008... days prior to the first meeting of creditors (s. 102(4)), and after the first meeting, notice of meetings need not be given to any creditors other than those who have proven their claims (s. 104(2)).
29 Sections 105-115 provide for the procedure to be followed at creditors' meetings generally. Section 105(1) states that the official receiver or his nominee shall chair the first meeting of creditors and "shall decide any questions or disputes arising at the meeting". A creditor may appeal any such decision to the court. (All subsequent meetings are required to be chaired by the trustee unless some other person is appointed by resolution at the meeting.) Section 107 requires that every class of creditors be permitted to express its views and wishes separately from every other class. Subject to the BIA, the question of what effect is to be given to those views and wishes in the event of any dispute lies "in the discretion of the court." The chair is given the authority under s. 108 to reject or admit a proof of claim "for the purpose of voting", but his decision is subject to appeal to the court. Section 108(3) also states:
Where the chairman is in doubt as to whether a proof of claim should be admitted or rejected, he shall mark the proof as objected to and allow the creditor to vote, subject to the vote being declared invalid in the event of the objection being sustained.
30 At the same time, a person may not vote as a creditor unless he has duly proved a claim which has been duly lodged with the trustee prior to the meeting: s. 109(1). The formal requirements for proofs of claim are set forth in s. 124. Under s. 135, the trustee may disallow, in whole or in part, any claim or security. Further, where the claim is contingent or unliquidated, the trustee must decide whether it is a provable claim, and if it is, he or she must value it. Only when that has occurred is the claim "deemed to be a proved claim to the amount of its valuation": s. 135(1.1). This represents a change from earlier versions of the BIA, which required that the court determine, on application by the trustee, whether any contingent or unliquidated claim was provable. If so, the court was also required to value the claim: see R.S.C. 1985, c. B-3, s. 121; R.S.C. 1970, c. B-3, s. 95; R.S.C. 1952, c. 14, s. 83; and S.C. 1949 (2nd Sess.), c. 7, s. 83.
31 Under s. 135(1), the trustee in examining a proof of claim may require further evidence in support of the claim. Section 135(4) provides that the trustee's decision as to the value of a contingent or unliquidated claim or the disallowance of any claim under s. 135(2) is "final and conclusive" unless it is appealed within 30 days of service of the notice referred to in s. 135(3).
32 The interrelationship of the chair and the trustee has not been the subject of much judicial comment, presumably because the trustee normally becomes the chair after the first meeting, and the two generally co-operate in the treatment of creditors' claims. I do note one case in which the two disagreed: in Northstone Power Corp. v. R.J.K. Power Systems Ltd. (2002), 33 C.B.R. (4th) 261 (Alta. Q.B.), a trustee had disallowed a creditor's claim but the official receiver, acting as chair of a subsequent creditors' meeting, decided to allow the creditor to vote on the debtor's proposal, relying on ss. 108(1) and (3). Forsyth J. ruled on the appeal that the official receiver had erred in doing so, and that upon a clear reading of those provisions together with ss. 109(1) and 135, "Section 108 would only come into play when the Trustee had not yet ruled on the validity or otherwise of a proof of claim." (para. 15.) Further, he said:
I referred earlier in this judgment to the Notice of Disallowance served by the Trustee on R.J.K. and the language set out therein. At this point in time, and subject to appeal, which had not yet been launched as of the April 2nd voting date, or an application for a stay which again had not been applied for, the claim had been disallowed in total and therefore R.J.K. was not entitled to vote at the meeting of April 2nd. I cannot read into Section 108 that where there has been a ruling on the validity of the claim, the Chairperson (Official Receiver) can override that decision of the Trustee and purport to allow a vote to take place even on the limited basis that it is subject to Court subsequently validating the vote or disallowing the claim of R.J.K. . . .
. . . I would note, however, that the Trustee did not make his decision absent any evidence whatsoever as to the debt claimed, but had the benefit of the investigation carried out by the party proposed under the contract entered into by both parties to be the person who would make the initial determination of the validities of various claims arising under the contract. The point is, that at the date of taking of the vote on April 2nd, the Trustee had clearly disallowed the claim in its entirety and I am satisfied that Section 108, as noted, does not give the Official Receiver, the Chairperson of the meeting, the right to
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override that decision and find that there was validity to the extent of allowing the vote to be taken and recorded. [paras. 17 and 18; emphasis added.]
33 In any event, the foregoing provisions seem designed to encourage creditors to take the first meeting seriously (by requiring that they file complete proofs of claim) and to facilitate the prompt airing of the "views and wishes" of the various classes of creditors. Trustees at least are given a considerable degree of authority and have the benefit of the privative clause in s. 135(4). Presumably, this is because they possess specialized expertise in the areas of business financing, restructurings and insolvency, and are decision-makers to whom some deference is owed by a reviewing court. Expertise, of course, has been said to be the most important of the well-known factors to be considered in determining the standard of review applicable by a court of law to the decisions of administrative tribunals in accordance with the "pragmatic and functional" approach mandated by the Supreme Court of Canada. In Canada (Director of Investigation & Research) v. Southam Inc., [1997] 1 S.C.R. 748 (S.C.C.), for example, the Court quoted at 773 the following passage from C.J.A., Local 579 v. Bradco Construction Ltd., [1993] 2 S.C.R. 316 (S.C.C.):
. . . the expertise of the tribunal is of the utmost importance in determining the intention of the legislator with respect to the degree of deference to be shown to a tribunal's decision in the absence of a full privative clause. Even where the tribunal's enabling statute provides explicitly for appellate review, as was the case in [Bell Canada v. Canada (Canadian Radio- Television and Telecommunications Commission), [1989] 1 S.C.R. 1722], it has been stressed that deference should be shown by the appellate tribunal to the opinions of the specialized lower tribunal on matters squarely within its jurisdiction. [at 335]
(See also Pezim v. British Columbia (Superintendent of Brokers), [1994] 2 S.C.R. 557 (S.C.C.), Pushpanathan v. Canada (Minister of Employment & Immigration), [1998] 1 S.C.R. 982 (S.C.C.), Baker v. Canada (Minister of Citizenship & Immigration), [1999] 2 S.C.R. 817 (S.C.C.), Q. v. College of Physicians & Surgeons (British Columbia), [2003] 1 S.C.R. 226 (S.C.C.), Ryan v. Law Society (New Brunswick), [2003] 1 S.C.R. 247 (S.C.C.), and the decision of this court in Aquasource Ltd. v. British Columbia (Information & Privacy Commissioner) (1998), 58 B.C.L.R. (3d) 61 (B.C. C.A.).)
34 It is arguable that slightly different considerations apply to the decision of the chair when accepting or rejecting proofs of claim at the initial meeting of creditors. As earlier mentioned, he or she does not have the benefit of a privative clause. Instead, where a dispute arises concerning the effect to be given to the "views and wishes" of different classes of creditors, the matter is said to be "in the discretion of the court" (s. 107), and where the chair is in doubt as to whether a claim should be rejected, he or she must mark the proof as "objected to" and allow the creditor to vote, subject to the vote being invalidated if the objection is sustained — presumably, by the court (or the trustee if Northstone, supra, is correct).
35 However, counsel before us did not differentiate between official receivers and trustees in this regard. Galaxy contends that in the bankruptcy area, the law has "long been clear" that in reviewing proofs of claim and determining voting rights at creditors' meetings, the chair (and presumably, the trustee where applicable) has a discretion which, if reasonably exercised, should not be interfered with unless the decision relates to a "mandatory" provision of the BIA. The source generally cited for this well-known proposition is the judgment of Tweedie J. in McCoubrey, Re (1924), 5 C.B.R. 248 (Alta. T.D.):
Coming now to the various objections in regard to proofs of claim and proxies: In considering the objections, regard must be had to the provisions of the statutes and Rules in connection with which the objections are raised. If they are mandatory, it is the duty of the chairman to require strict compliance with them; if they are merely directory, he is entitled to exercise his discretion concerning them and if there are reasonable grounds for his exercising such discretion in the manner in which he does, his decision will not be interfered with. [at 252]
36 The Umbro respondents take issue both with the applicability of the Court's remarks in Triton (which they characterize as obiter in any event) and the proposition that where the chair or trustee has a discretion to exercise, a court of law should not interfere if there were reasonable grounds for the decision. In their submission, the hearing before the Chambers judge below was a trial de novo in which the Court was entitled to hear evidence regarding the valuation of the landlords' claims that was "not necessarily before the trustee." On this point, they cite Eskasoni Fisheries Ltd., Re (2000), 16 C.B.R. (4th) 173 (N.S. S.C.), a decision of the Registrar of the Nova Scotia Supreme Court dealing with a trustee's disallowance of a claim. The Registrar stated:
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Where a creditor appeals to the court from the decision of a trustee to disallow a claim that appeal will proceed by way of trial de novo. While I have found no specific case or commentary that makes this point clear, it is clear from a review of the cases generally that a Judge or Registrar hearing an appeal from a trustee's decision is not required simply to proceed upon the information before the trustee. In other words, on such appeals the court is entitled to accept and consider all evidence relevant to the claim. [para. 17]
(See also MacDonald, Re, [2002] O.J. No. 2744 (Ont. S.C.J. [Commercial List]) at para. 19, Exner, Re (2003), 41 C.B.R. (4th) 49 (B.C. S.C.) at para. 22, and Beetown Honey Products Inc., Re, [2003] O.J. No. 3853 (Ont. S.C.J.) at para. 16, all of which followed Eskasoni Fisheries Ltd. In Port Chevrolet Oldsmobile Ltd., Re, 2004 BCCA 37 (B.C. C.A.), a recent decision of this court, counsel did not challenge the "trial de novo" approach taken in Eskasoni Fisheries Ltd. The Court therefore proceeded on the assumption for purposes of that appeal that the Chambers judge below was entitled to consider material that had not been before the trustee in deciding whether a proof of claim had complied with s. 124 of the BIA.)
37 The respondents also argue that the chair or trustee is not a "specialized tribunal" of the kind discussed in Southam and that there was neither a "hearing" before them in this case nor any meaningful opportunity afforded at the creditors' meeting to adduce evidence to contradict the position taken by the debtor. Yet the BIA obviously intends that a meaningful opportunity be accorded to all creditors at their meeting to raise objections and arguments for consideration by the chair or the trustee in making their determinations under ss. 108 and 135 respectively. At this point, the decision-maker has a 'gatekeeping' role with respect to creditors' voting entitlement, which in turn may decide the fate of the debtor's proposal. The fact that many of the formalities of a hearing in a court of law may be lacking is a necessary feature of the bankruptcy provisions relating to debtors' proposals as I have described them above, but in my view it is not conclusive of the issue of standard of review. Further, I know of no binding authority to the effect that such a hearing must take place before the relevant decision-maker will be regarded as a "specialized tribunal" with expertise that commands some deference. Many statutory decision-makers whose roles are not strictly "adjudicative" have been subjected to the standard of review analysis described in Southam and the cases following it. Thus in Brown and Evans, Judicial Review of Administrative Action in Canada (loose-leaf, 1998) the authors observe:
Until recently, the extension of the pragmatic or functional analysis to determine the appropriate standard of review to be applied to administrative action outside the adjudicative context has been sporadic. For the most part, courts have assumed that the interpretation of statutory provisions conferring legislative or administrative powers on non-adjudicative agencies or officials is subject to de novo determination by the courts. Judicial deference was typically not afforded to the decision- maker's view of what considerations are legally relevant to, or what purposes may legitimately be pursued by, the exercise of discretion. However, in a recent decision of the Supreme Court of Canada [Baker v. Canada, supra] a pragmatic or functional analysis was applied to the review of a refusal by an immigration officer to grant permanent residence status on humanitarian and compassionate grounds to a woman who had been living in Canada illegally.
Baker makes two important changes to the review of the exercise of administrative discretion. First, it extends the doctrine of judicial deference to areas of administrative decision-making where it had previously been assumed that, as a general rule, any legal issue decided by the decision-maker was subject to review on a standard of correctness. Second, Baker firmly establishes the principle that, even if the decision-maker has committed none of the errors traditionally associated with the ultra vires doctrine, a reviewing court may still set the decision aside or declare it to be unlawful if the exercise of discretion fails to meet a basic standard of rationality. [at 15-95 to 15-96]
(See also Chamberlain v. Surrey School District No. 36, [2002] 4 S.C.R. 710 (S.C.C.) at para. 4.)
38 Proceeding on the basis that the "pragmatic and functional" approach can be applied to the decisions at issue here, the nature of the question being decided — whether it is one of fact, or mixed fact and law, and whether it involves consideration of "polycentric" factors — is another important factor in deciding where on the (three-point) "continuum" the decision falls. Indeed, it was said by Donald J.A. in Aquasource, supra, that "whether an administrative tribunal's decision will attract curial deference largely depends on the question involved. It is no longer appropriate to grant blanket deference to the tribunal . . . " (Para. 16.) It cannot be said that any of the decisions at issue here involves the balancing of polycentric interests. On the other
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 12 Galaxy Sports Inc., Re, 2004 BCCA 284, 2004 CarswellBC 1112 2004 BCCA 284, 2004 CarswellBC 1112, [2004] B.C.W.L.D. 871, [2004] B.C.J. No. 1008... hand, the chair's determination as to "what effect" to give to creditors' "views and wishes" and the trustee's power to allow or disallow a claim (for which the trustee must give written reasons) under s. 135 (which in turn also involves the requirements of s. 124) seem to be decisions more of law than fact. On these matters, a judge of the Supreme Court may be assumed to have equal expertise. Further, these questions have important legal consequences, in that a person whose proof of claim is disallowed or rejected may not participate as a creditor in the bankruptcy generally or in the distribution of the bankrupt's estate.
39 On a consideration of all the "contextual" factors mandated by the "pragmatic and functional" approach, I see no reason to disagree with the long-standing principle enunciated in McCoubrey, Re, supra, which requires the application of a "correctness" standard where compliance with a "mandatory" provision (which I would equate to a question of law or statutory compliance) is involved, and the application of a "reasonableness" standard where the determination of a factual matter or an exercise of true discretion is called for. In the former category, I would place the chair's decision under s. 108 rejecting a proof of claim for voting purposes and the trustee's decision disallowing a proof of claim under ss. 124 and 135(2). In the latter category, I would place the trustee's role in valuing contingent and unliquidated claims under s. 135(1.1). This general approach conforms with the objective, which I see as implicit in the BIA, of enabling debtors to have their proposals voted upon expeditiously and permitting creditors to have their rights and claims determined in a business-like manner, while at the same time providing a meaningful appeal to a court of law on questions that clearly affect legal rights, engage the relative expertise of judges, and set precedents for other cases.
40 I am also of the view that the Supreme Court's hearing of an appeal under s. 135(4) of the BIA is not intended to be a trial de novo but a true appeal. With all due respect to Eskasoni Fisheries Ltd., supra, the law in British Columbia is clear that unless the statute that provides an appeal also states that it is to take the form of a trial de novo (as do, for example, s. 119(4.1) of the Social Service Tax Act, R.S.B.C. 1996, c. 431 and s. 822(4) of the Criminal Code, R.S.C. 1985, c. C-46), the appeal will be an ordinary appeal. Thus in McKenzie v. Mason (1992), 72 B.C.L.R. (2d) 53 (B.C. C.A.), this court held that a statutory appeal to the Chief Gold Commissioner provided by s. 35 of the Mineral Tenure Act did not envisage a trial de novo. In the course of his reasons for the Court, Toy J.A. cited a passage from R. v. Dennis, [1960] S.C.R. 286 (S.C.C.), where Ritchie J. wrote:
. . . the distinction between "an appeal by holding a trial de novo" and an appeal to the provincial Court of Appeal is that although the object of both is to determine whether the decision appealed from was right or wrong, in the latter case the question is whether it was right or wrong having regard to the evidence upon which it was based, whereas in the former the issue is to be determined without any reference, except for purposes of cross-examination, to the evidence called in the Court appealed from and upon a fresh determination based upon evidence called anew and perhaps accompanied by entirely new evidence. [at 290-91]
McKenzie v. Mason was confirmed by a five-judge panel of this court in Dupras v. Mason (1994), 120 D.L.R. (4th) 127 (B.C. C.A.). There, Mr. Justice Lambert, speaking for the Court, reviewed the complaint procedure provided in the Mineral Tenure Act and said:
Running through the consideration of s. 35 must be an understanding of the function and expertise of the chief gold commissioner. He or she may be expected to have had many years of experience with respect to the mining industry in general and the locating and recording of mineral claims in particular. That expertise will imbue the carrying out of his or her functions under s. 35. It will also make his or her decision under s. 34 about good faith non-compliance a decision which is well informed by practical experience of what constitutes a good faith attempt to comply with the Act and Regulations, and about whether a failure to comply was calculated to mislead other free miners.
If an appeal were to be taken by trial de novo the chief gold commissioner's expertise would no longer be available in the process of decision-making under ss. 35 and 34. For that reason and for the other reasons set out by Mr. Justice Toy for this court in McKenzie v. Mason, including particularly the fact that the appeal is not specified in the statute to be by trial de novo, I conclude that s. 35(10) of the Mineral Tenure Act does not contemplate or permit an appeal to a Supreme Court judge by trial de novo.
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Having reached that conclusion, it follows that the appeal to the Supreme Court must be a true appeal confined to whether the chief gold commissioner made a reviewable error of fact, of law, or of procedure. [at 134-35; emphasis added.]
41 In my opinion, similar considerations apply in this case with respect to the expertise of trustees in bankruptcy. As I have already mentioned, they can be expected to have considerable experience and expertise in the area of business financing, restructurings and insolvency. If "fresh evidence" — i.e., evidence not before the trustee or chair at the time of his or her decision — were to be adduced in Supreme Court on appeal as a matter of course, it seems to me that much would be lost in the way of efficiency in the operation of the bankruptcy scheme generally. Creditors who neglected to file proofs of claim in compliance with the requirements of s. 124 would suffer no practical consequences if, in Farley J.'s phrase, they could expect to "cooper up" their proofs at a later date in court; and the business now conducted at creditors' meetings by trustees (who are generally supervised by inspectors under the BIA) would be largely co-opted to courts of law, with all the attendant expense, delay and formality.
42 With respect to decisions of the chair under s. 108, again it is arguable that a less restrictive approach to "fresh evidence" is intended. However, since counsel were content to "lump together" the two decision-makers for purposes of this appeal, I will not pursue or decide this rather fine point on this occasion. It will be sufficient, I believe, to state my view that to the extent the Chambers judge below proceeded on the basis that the appeal was a trial de novo in which "fresh evidence" was considered as a matter of course, she fell into error. As unsatisfactory as the state of the evidence may have been, she should have proceeded to consider whether the Trustee had made a reviewable error in its treatment of the landlords' claims on the evidence before it. If counsel applied to adduce "fresh evidence", she would then have been obliged to decide whether its admissibility was justified in the interests of justice or on some other principled basis. Since counsel before us did not make submissions as to what the appropriate criteria would be in this regard, I will leave that point as well for another day. But before counsel on appeals under the BIA file large volumes of affidavits and exhibits in the Supreme Court bearing no resemblance to what was actually before the decision-maker whose decision is being appealed, consideration should be given to that question.
Landlords' Claims
43 This brings me to Galaxy's remaining ground of appeal under this rubric, which is that the Chambers judge erred in applying the reasoning in Wiebe, Re (1995), 30 C.B.R. (3d) 109 (Ont. Bktcy.), to the landlords' claims. (Another point of law which this court raised, and on which we received written argument — the effect, if any, of s. 65.1 on these claims — will be addressed below.) Galaxy says that the landlords' claims are, by virtue of Highway Properties Ltd. v. Kelly, Douglas & Co., [1971] S.C.R. 562 (S.C.C.), "entirely uncontingent". With respect, however, the Chambers judge proceeded not on the basis that these claims were contingent, but on the basis that they were unliquidated. Although she did not cite Highway Properties, she was correct on this point. Highway Properties made it clear that where (as here) a commercial lease is repudiated by the tenant prior to the expiration of its term, the "full armoury of remedies ordinarily available to redress repudiation of covenants" is available to the landlord, including "prospective remedial relief in damages." (At 576 and 573.) In Langille v. Keneric Tractor Sales Ltd., [1987] 2 S.C.R. 440 (S.C.C.), the Supreme Court of Canada applied similar reasoning to chattel leases and clarified that a repudiation of a lease "may be triggered by either the inability or the unwillingness of a party to perform his contractual obligations." (At 454.) The lessor's remedy was again to sue for damages as compensation for its "prospective loss." (See 32262 B.C. Ltd. v. See-Rite Optical Ltd., [1998] 9 W.W.R. 442 (Alta. C.A.), at paras. 20-22.) The reasoning in these cases, and various judgments delivered by various courts since then, leave little doubt that Sun Life's claim above and beyond the $12,051.25 represented an unliquidated claim for damages which, leaving aside for the moment s. 65.1 of the BIA, the Trustee would have been required to evaluate in accordance with s. 135(1.1). Obviously, valuation is a matter of discretion in the sense that the Trustee could bring many factors, unspecified in the BIA, to bear on it, and in the sense that there is no one "correct" answer. (See S. Waddams, "Judicial Discretion", (2001) 1 Cwth. L.J. 59.) Obviously, such a determination would call upon the Trustee's expertise in commercial insolvency matters. For these reasons and the reasons given above at paras. 27-39, the Trustee's decision in this regard would normally be scrutinized on a "reasonableness" standard.
44 I am doubtful, however, that the Trustee can be said to have exercised its discretion at all in this instance. Mr. Abakhan stated at the meeting that he did not know how to value the claim "other than how it is presented." Moreover, his observation
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 14 Galaxy Sports Inc., Re, 2004 BCCA 284, 2004 CarswellBC 1112 2004 BCCA 284, 2004 CarswellBC 1112, [2004] B.C.W.L.D. 871, [2004] B.C.J. No. 1008... that "landlords are permitted to file their entire claim for the total unexpired term of the lease, regardless of potential mitigation" begged the question of what effect "potential mitigation" should have had on the valuation of Sun Life's claim. Although as counsel for Galaxy argues, the Trustee did not have specific "evidence" as to the probability that Sun Life or Cookstown could successfully mitigate their damages, this was not a hearing in a court of law, where fine distinctions are drawn on the basis of where an onus of proof may lie. Again setting aside for the moment s. 65.1, the Trustee, using its knowledge and expertise, would have been required to consider whether as a factual matter, the valuation of the claims at their full amounts was appropriate — just as it did in connection with the suppliers' claims. (See, e.g., Eftaxias, Re (1962), 3 C.B.R. (N.S.) 152 (C.S. Que.).)
45 Following the hearing of this appeal, however, counsel were asked to consider and make submissions to the Court on the effect, if any, of s. 65.1 of the BIA on the landlords' claims. Section 65.1 provides in material part:
65.1 (1) Where a notice of intention or a proposal has been filed in respect of an insolvent person, no person may terminate or amend any agreement with the insolvent person, or claim an accelerated payment under any agreement with the insolvent person, by reason only that
(a) the insolvent person is insolvent; or
(b) a notice of intention or a proposal has been filed in respect of the insolvent person.
(2) Where the agreement referred to in subsection (1) is a lease or a licensing agreement, subsection (1) shall be read as including the following paragraph:
(c) the insolvent person has not paid rent or royalties, as the case may be, or other payments of a similar nature, in respect of a period preceding the filing of
(i) the notice of intention, if one was filed, or
(ii) the proposal, if no notice of intention was filed.
. . .
(5) Any provision in an agreement that has the effect of providing for, or permitting, anything that, in substance, is contrary to subsections (1) to (3) is of no force or effect.
46 Section 65.1 was enacted at the same time as s. 65.2, the "disclaimer" provision which permits the debtor to disclaim a lease on giving 30 days' written notice to the landlord. Where this occurs, the landlord has no claim for accelerated rent and may file a proof of claim only in respect of its "actual losses resulting from the disclaimer", or the formula amount set out in s. 65.2(4). Section 65.2 was not invoked by Galaxy in this case, since it wished to continue occupying the Sun Life and Cookstown premises, in order to sell its large inventory of clothing for a longer period than s. 65.2 would have permitted. At the same time, counsel for Galaxy informed the Court that his client wanted to avoid any action which could be taken as affirming the leases, since it wished to continue in occupation only for two or three months post-proposal. Galaxy therefore reached the understandings with the landlords described above at paras. 7 and 8.
47 Our specific question to counsel was whether these arrangements contravened s. 65.1. Galaxy argued that the arrangements constituted a consensual "surrender" of the leases that fell outside both ss. 65.1 and 65.2. It submitted that Galaxy negotiated "terms of surrender" with the landlords and did so in a manner that did not prejudice the estate in bankruptcy in any way, since both agreements were premised upon the landlords' ability to claim actual losses, subject to mitigation. ("Actual losses" are, Galaxy emphasizes, one of the two options that the debtor may choose when a lease is disclaimed under s. 65.2.) Thus if Galaxy had invoked the disclaimer procedure, the landlords would be in exactly the same position, except that Galaxy (and thus the estate) would not have had the benefit of the extra time in the leased premises. In Galaxy's view, nothing in the BIA precludes it from "surrendering" its leases in this manner, and indeed ss. 30(1)(k) and 65.2(1) of the BIA both refer to the "surrender" of a lease as something different from a disclaimer.
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48 With respect to the specific terms of s. 65.1, Galaxy also submitted that the claim for damages by a landlord in accordance with Highway Properties does not constitute a claim for an accelerated payment, but simply the "present recovery of damages for [the landlord's] losing the benefit of the lease over its unexpired term." (At 570.) Thus it says the landlords' respective claims for damages upon Galaxy's "repudiation" of the leases and the landlords' agreements to "terms of surrender" leave the Trustee with claims provable like other claims under s. 121 of the BIA. By reference, s. 121 leads back to the question of whether the claims are contingent or unliquidated for purposes of s. 135.
49 In response, Umbro submitted that ss. 65.1 and 65.2 of the BIA constitute a complete statutory code intended to govern all aspects of the contractual relationship between a lessor and an insolvent lessee. In this regard, Umbro cites this court's decision in British Columbia Boat Sales Ltd., Re (1962), 4 C.B.R. (N.S.) 168 (B.C. C.A.), as well as Vanwood Forest Products, Re (1983), 45 C.B.R. (N.S.) 254 (B.C. S.C.) and KPMG Inc. v. Dental Assn. (Alberta) (2003), 44 C.B.R. (4th) 236 (Alta. Q.B.). All of these refer to the BIA as providing a comprehensive code for certain purposes, but none deals specifically with ss. 65.1 and 65.2 or with lessors/lessee relationships generally. (See, however, Cosgrove-Moore Bindery Services Ltd., Re (2000), 48 O.R. (3d) 540 (Ont. S.C.J. [Commercial List]) at para. 2.)
50 The real question for us is whether the arrangements agreed upon between Galaxy and its landlords constituted the "termination" of an agreement or resulted in the claiming of an "accelerated payment" under an agreement by reason only of the facts described in subparagraphs (a) and (b) of s. 65.1(1) or in s. 65.1(2). On the first point, Umbro notes that the "surrender" of a lease is not the same as a "termination" and that where a lease is surrendered at law, any claim by the landlord to damages ceases. Thus in Anger and Honsberger's Law of Real Property (2nd ed., 1985), the authors note that "the surrender of a lease stops rent accruing", since the effect of a surrender is "to extinguish the interest created by the lease by means of the term merging in the reversion." (At §811.1.) Similarly, H.M. Haber in Landlord's Rights and Remedies in a Commercial Lease (1996) writes that "If the landlord accepts the tenant's surrender of its lease, although not strictly a waiver of the landlord's right to re-enter, such acceptance negates any claim for damages the landlord may make after the surrender." (At 80.) Accordingly, Umbro contends that the leases were not surrendered but were terminated, in contravention of s. 65.1(1).
51 I agree that the leases were indeed terminated and that subject to Galaxy's argument concerning the purpose of s. 65.1, the terminations appear to have contravened that provision. However, the effect of this fact on the landlords' claims, for both voting and other purposes, would seem to depend upon whether damages under the rubric of Highway Properties constitute an "accelerated payment", in which event the claim is prohibited. That a broad meaning should be given to the phrase "accelerated payment" is indicated by s. 65.1(5), which states that any provision in an agreement that has the effect of providing for or permitting anything that "in substance" is contrary to subsection (1) is of no force or effect. Although a technical argument might be mounted to the effect that damages for the repudiation of a lease should not be equated with the phrase "accelerated payment under any agreement", I am of the view that invoking an acceleration clause in a lease may "in substance" be equated to suing for damages under the Highway Properties principle. Suing for damages is the "fourth alternative" referred to by Laskin J. in that case — "namely, that the landlord may elect to terminate the lease but with notice to the defaulting tenant that damages will be claimed on the footing of a present recovery of damages for losing the benefit of the lease over its unexpired term." (At 570.) At 573, the Court held that the landlord's termination of the leasehold estate in Highway Properties as a result of the tenant's repudiation of the lease did not mean an end "to all covenants therein to the point of denying prospective remedial relief in damages." In practical terms, such a damage claim seems indistinguishable from a claim for an "accelerated payment" under the lease or any other agreement between debtor and landlord.
52 The next question is whether the leases were terminated "by reason only" of Galaxy's failure to pay rent in respect of the period prior to the filing of the notice of intention, or by reason of its insolvency. Galaxy did not make any specific argument in respect to this question, although it might have contended that the landlords' respective claims arose out of their agreements with Galaxy rather than Galaxy's insolvency per se. Again, however, I would not give effect to such an argument, since on the evidence that is available to us, there is no suggestion that anything other than Galaxy's insolvency led to its proposal to the landlords and ultimately to the landlords' agreements. In the result, I do not think one can conclude that the leases were terminated for any reason other than the insolvency.
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53 I return, then, to Galaxy's broader submission that s. 65.1 was not intended to apply where the insolvent tenant itself seeks the termination of the lease, since the apparent purpose of s. 65.1 is to "permit commercial businesses to avoid being dismantled in a bankruptcy and to survive in the hope of future viability". (Crystalline Investments Ltd. v. Domgroup Ltd. (2002), 58 O.R. (3d) 549 (Ont. C.A.) at para. 8, aff'd 2004 SCC 3 (S.C.C.).) In this case, the arrangements reached between the parties were intended to assist, and presumably did assist, sales of inventory — an important aspect of Galaxy's proposal. Nevertheless, the interests of other creditors must be borne in mind. Very arguably, s. 65.1 is intended not only to prevent landlords from presenting burdensome proofs of claim that inhibit insolvents from regaining viability, but also to avoid prejudice to unsecured creditors whose ability to recover is dependent on the continued operation of the debtor. To that extent, s. 65 may be intended to prohibit the sort of arrangements that occurred in this case, notwithstanding Galaxy's willing promotion of those arrangements.
54 Based on the foregoing, I am of the view that the landlords' claims to the "actual losses" over the unexpired terms of their leases were prohibited by s. 65.1(1) and that the Trustee was bound to reject their claims except insofar as they related to past arrears and rent as it became due monthly post-proposal. It follows that in the absence of a disclaimer by Galaxy, the claims of Sun Life and Cookstown for purposes of the creditors' meeting and other purposes must be so limited.
55 I would allow the appeal insofar as the landlords' claims are concerned.
The Directors' Claims
56 The Chambers judge disagreed with the Trustee's ruling which allowed Messrs. Watson, Dewar and Gill to vote as claimants at the creditors' meeting. The information available at that time was that Galaxy had over 300 shareholders, that it had five directors, and that the three individuals in question did not control, either through a related corporation or with a related group, more than 50 percent of the issued shares. The Chambers judge noted, correctly, that "arm's length" has generally been defined to mean that there are no bonds of dependence, control or influence, between the corporation and the person in question. She drew a distinction, however, between "passive" and "active" directors, finding that Messrs. Watson and Dewar were active managers and that "Each could influence the direction of Galaxy." With respect, I doubt that the BIA intended that a distinction be drawn between individual directors on that basis. All directors are required to devote their best efforts to the company's affairs, and every director can by the very nature of his or her office "influence" those affairs. (Presumably, each director had one vote of five on the board.) This does not mean, without more, that each was able to control the company or that the company was dependent on him.
57 Thus while the three men were prohibited by s. 113(3)(b) from voting on the appointment of a trustee or inspectors, they were not in my view prohibited from filing proofs of claim and voting the dollar amount thereof by reason of the fact that they were directors, or even "active" directors. In this regard, I believe the Chambers judge erred.
58 On the other hand, the Chambers judge was correct in concluding that the claims made by Messrs. Watson and Dewar assumed that their employment contracts had been terminated when there was no evidence of that fact, and indeed there was evidence to the contrary, before the Trustee. Moreover, any claims for severance they may have had would, unless their employment agreements provided otherwise, be claims for damages for wrongful dismissal, which would again be unliquidated claims subject to valuation by the Trustee. As it was, since there was no evidence of termination, the Chambers judge was correct in expunging the claims of Messrs. Watson and Dewar.
Umbro Worldwide and Umbro International
59 Last, Galaxy contends that the Chambers judge erred in affirming the Trustee's decision to permit Umbro Worldwide to vote on the proposal. On this point, Galaxy relies on the fact that Umbro Worldwide's proof of claim had attached to it various invoices bearing the name "Umbro International" or "Umbro International Ltd." At the creditors' meeting, Mr. Doyle on behalf of Umbro Worldwide had stated that "Umbro International did the invoicing for Umbro Worldwide and both companies were subsidiaries of Umbro Holdings." More importantly, there was evidence before the Chair that the Umbro licence agreement had been assigned by Umbro International to Umbro Worldwide in 1999. This fact had even been asserted at para. 13 of Galaxy's Statement of Claim in the legal action against Umbro, which was circulated and discussed at the meeting. Given this, I cannot
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 17 Galaxy Sports Inc., Re, 2004 BCCA 284, 2004 CarswellBC 1112 2004 BCCA 284, 2004 CarswellBC 1112, [2004] B.C.W.L.D. 871, [2004] B.C.J. No. 1008... accede to Galaxy's submission that Umbro Worldwide failed to comply with the requirements of s. 124 regarding the filing of proofs of claim, or that the Trustee erred in ruling that Umbro Worldwide had a provable claim entitling it to vote at the creditors' meeting. It simply does not lie in Galaxy's mouth to deny the connection, by way of assignment, between Umbro International and Umbro Worldwide, and it cannot be said that the proof of claim filed by the latter did not contain or refer to adequate statements of account showing particulars of its claim for purposes of s. 124 of the BIA.
60 It is also contended on appeal that the Chambers judge erred in declining to find on the evidence before her that Umbro Worldwide was not at arm's length to Galaxy in the year prior to the insolvency. Galaxy submits that the "arm's length" determination to be made pursuant to s. 109(6) of the BIA is less onerous than that required to be made under s. 3(1) in that it is "not transaction-specific and therefore must relate to the way the debtor and creditor conducted their business affairs in the subject period." In this regard, counsel notes the observations of the Court in Irving Oil Ltd. v. Noseworthy (1982), 42 C.B.R. (N.S.) 302 (Nfld. T.D.) that:
Whether or not the dealings were at arm's length is a question of fact which cannot be decided by a finding that the companies concerned had a common director. There must be evidence of the existence of an unbusiness-like advantage.
The agreement was in the ordinary course of business, and neither Peter Cook nor Roger Crosbie had control of the companies concerned, and there is no evidence to indicate that the dealings were not at arm's length. It can be said that, between all the parties concerned, each of them was selfishly seeking the best economic advantage and none had any reasons to expect from the others, nor would any party have been prepared to accord to another, any favours or concessions. [at 306]
Galaxy relies on the (fresh) affidavit evidence filed by Mr. Watson to which was appended various e-mails between him and the Umbro defendants concerning various dealings under the licence agreement. Even if this evidence were properly accepted, however, it does not show a relationship of dependence or control (which might lead to the existence of an "unbusiness-like advantage") between them. The parties may have been attempting to find common ground and to reach an understanding that would be of benefit to both sides, but the material falls short of proving that either had such influence that the other was sacrificing its own self-interest. I would therefore dismiss this aspect of the appeal.
Disposition
61 I would allow the appeal to the extent of allowing Mr. Gill's claim to be voted at the meeting, and setting aside the Chambers judge's order directing that new evidence be adduced concerning the valuation of the landlords' claims. I would remit those claims to the Trustee for determination of the amounts of rent that have become due since the purported terminations, in respect of which s. 65.1 does not bar the claims, but damages under Highway Properties for loss of future rent are to be disallowed. Following the re-taking of the creditors' vote on the proposal, I would remit the motion for approval of the proposal back to the Supreme Court.
62 We are indebted to counsel for their helpful submissions, oral and written.
Rowles J.A.:
I Agree:
Hall J.A.:
I Agree: Appeal allowed in part.
Footnotes * Additional reasons at (2004), 2004 BCCA 406, 2004 CarswellBC 1708 (B.C. C.A.).
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 18 Galaxy Sports Inc., Re, 2004 BCCA 284, 2004 CarswellBC 1112 2004 BCCA 284, 2004 CarswellBC 1112, [2004] B.C.W.L.D. 871, [2004] B.C.J. No. 1008...
End of Document Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 19
TAB 7
7 San Juan Resources Inc., Re, 2009 ABQB 55, 2009 CarswellAlta 98 2009 ABQB 55, 2009 CarswellAlta 98, [2009] A.W.L.D. 1082, [2009] A.J. No. 79...
2009 ABQB 55 Alberta Court of Queen's Bench
San Juan Resources Inc., Re
2009 CarswellAlta 98, 2009 ABQB 55, [2009] A.W.L.D. 1082, [2009] A.J. No. 79, 174 A.C.W.S. (3d) 615, 1 Alta. L.R. (5th) 303, 467 A.R. 391, 52 C.B.R. (5th) 97
In the Matter of the Bankruptcy of San Juan Resources Inc.
Reg. J.T. Prowse
Heard: January 14, 2009 Judgment: January 27, 2009 Docket: Calgary BE01-1080991
Counsel: Chris Simard, Steven T. Robertson for Hampstead Trust Corporation Jeffrey N. Thom, Q.C. for San Juan Resources Inc. Trevor Batty, Doug S. Nishimura for KPMG Inc.
Subject: Insolvency Headnote Bankruptcy and insolvency --- Proposal — Practice and procedure S Inc. filed notice of intention to make proposal under s. 50.4(1) of Bankruptcy and Insolvency Act — K Inc. was named trustee under proposal — H Corp. was signficant creditor of S Inc. — K Inc. disallowed various claims or portions of claims contained in three proofs of claim filed by H Corp. — H Corp. appealed disallowances pursuant to s. 135(4) of Act — K Inc. submitted that appeals should be heard on record and not de novo — K Inc. brought application for direction on procedure to be followed on appeal from trustee's disallowance of proofs of claim filed pursuant to Act — De novo process advocated by H Corp. should be followed — Appeal from disallowance should not be heard de novo as matter of right, but may be heard de novo where circumstances of case at hand are such that hearing restricted to record might result in injustice.
APPLICATION by trustee in bankruptcy for direction on procedure to be followed on appeal from trustee's disallowance of proofs of claim filed.
Reg. J.T. Prowse:
Nature of Application
1 This application is for the court's direction as to the procedure to be followed on an appeal from a trustee's disallowance of Proofs of Claim filed pursuant to the Bankruptcy and Insolvency Act R.S.C. 1985, c. B-3, as amended ("BIA").
2 San Juan Resources Inc. ("San Juan") filed a Notice of Intention to make a proposal under Section 50.4(1) of the BIA on June 18, 2008. KPMG Inc. was named trustee under the proposal. Hampstead Trust Corporation ("Hampstead") is a significant creditor of San Juan.
3 KPMG disallowed various claims or portions of claims contained in three proofs of claim filed by Hampstead. Hampstead has appealed the disallowances pursuant to Section 135(4) of the BIA.
4 The BIA does not specify the process for the hearing of these appeals. It does not say whether the appeals are de novo or on the record.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 1 San Juan Resources Inc., Re, 2009 ABQB 55, 2009 CarswellAlta 98 2009 ABQB 55, 2009 CarswellAlta 98, [2009] A.W.L.D. 1082, [2009] A.J. No. 79...
5 KPMG submits that the appeals should be heard on the record and not de novo. KPMG agrees to provide Hampstead and the court with copies of the written materials considered by it in making its decisions. This record would be utilized in a one day special chambers application.
6 Hampstead submits that the appeals should be set down for a four day summary trial hearing during which evidence can be submitted de novo (primarily by way of affidavit) with viva voce cross-examination of experts. Prior to the hearing Hampstead would be provided with access to banking, production, and joint venture accounting records of San Juan.
Summary of Conclusion
7 An appeal from a disallowance should not be heard de novo as a matter of right, but may be heard de novo where the circumstances of the case at hand are such that a hearing restricted to the record might result in an injustice.
8 Given the specific facts presented in this case, the de novo process advocated by Hampstead should be followed.
Events Prior to San Juan Proposal
9 San Juan is a small one-person corporation with one full-time and several contract employees. San Juan's primary assets are two oil and gas wells. It owns a 75% working interest in those wells. The other 25% working interest in the wells was owned by Safeway Holdings Ltd. ("Safeway"). Safeway sold that 25% interest to Hampstead in 1996.
10 San Juan was the operator of the two oil and gas wells. It had a duty to account to Hampstead for the revenue attributable to Hampstead's 25% share. San Juan repeatedly failed to do so.
11 Difficulties first arose when Hampstead purchased Safeway's 25% interest in 1996. In December of 2008, despite the fact that over two years had elapsed since Hampstead paid for the 25% interest, San Juan had still not conveyed the interest to Hampstead. Hampstead was forced to commence an action seeking, amongst other things, a transfer of the 25% interest. On April 4, 2000 San Juan was ordered to transfer the 25% interest to Hampstead. San Juan did not make the conveyance, and Hampstead was forced to apply for a further order in October of 2000 before San Juan made the conveyance.
12 San Juan first made a payment to Hampstead with respect to Hampstead's share of income from the wells in May of 2000, pursuant to a court order which Hampstead obtained in April of 2000. San Juan failed to make regular monthly payments thereafter until it was again ordered to do so in October of 2000.
13 In February of 2002 Hampstead commenced a new action against San Juan seeking, amongst other things, a full accounting of the 25% of revenues to which it was entitled. Commencing in April of 2002 San Juan again stopped making monthly payments to Hampstead (despite the outstanding order directing it to do so) until Hampstead filed an application to court in that regard in January of 2004. Payments began to flow, but then San Juan again stopped paying monthly revenues. Hampstead was forced to again bring a contempt application in April of 2006. In the face of that application, San Juan reinstituted payments to Hampstead. Eight months later, in December of 2006, San Juan again ceased paying Hampstead its share of the revenue from the two wells.
14 In January of 2008, Hampstead brought another contempt application against San Juan for failure to remit monthly revenue. On the eve of that application, San Juan reinstituted monthly statements and payments to Hampstead. The amount remitted was only a fraction of what Hampstead was expecting. Hampstead's contempt application was scheduled to be heard at a special chambers application on June 20, 2008.
15 Without detailing all of Hampstead's complaints with respect to the accounting provided by San Juan, it is illustrative to look at the situation involving solution gas. Hampstead was expecting to receive from San Juan proceeds relating to solution gas. When San Juan provided monthly statements and a remittance in January of 2008, there were no proceeds from solution gas. As between San Juan and Hampstead, it was never disputed that Hampstead was entitled to a share of any solution gas proceeds which San Juan received from third parties. The payor of funds with respect to solution gas, ConocoPhillips, had for some time held these solution gas funds in trust pending resolution of entitlement between San Juan and the third parties. The
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 2 San Juan Resources Inc., Re, 2009 ABQB 55, 2009 CarswellAlta 98 2009 ABQB 55, 2009 CarswellAlta 98, [2009] A.W.L.D. 1082, [2009] A.J. No. 79... principal of San Juan filed an affidavit on June 3, 2008 stating that these solution gas funds were accumulating in trust with ConocoPhillips. However, in early June of 2008 Hampstead learned that the affidavit in question was false, and that in fact San Juan had been taking the solution gas in kind from ConocoPhillips since 2006. The receipt of sale proceeds from this solution gas taken in kind was not reflected in the statements which San Juan had been providing to Hampstead.
16 Hampstead responded to the above revelation by bringing an application to have a receiver appointed over San Juan's assets. This receivership application was adjourned, to be heard along with the outstanding contempt application at the special chambers application on June 20, 2008. In granting the adjournment until June 20, 2008 the learned Chambers Justice made the following observation:
Essentially. . . I am ordering a standstill on San Juan until the interpleader application before me on June 20, 2008. Should San Juan disregard this order, I will have no hesitation in bringing the full authority of this Court, including contempt proceedings against San Juan and its principal, Dublonko, including incarceration.
I am very concerned with what I consider to be San Juan's continued delay, obfuscation and wilful breach of its contractual obligations. . . I only defer the receivership applications today in the hope of saving other parties costs and inconvenience.
17 The special chambers application of June 20, 2008 never proceeded. Two days prior to the hearing, on June 18, 2008, San Juan filed a Notice of Intention to make a proposal under section 50.4(1) of the BIA on June 18, 2008. Pursuant to Section 69(1) of the BIA this resulted in an automatic stay of the Hampstead's litigation against San Juan, including the special chambers application scheduled for June 20, 2008.
Disallowance of Hampstead's Proofs of Claim
18 Hampstead filed the largest proofs of claim in the proposal. The three proofs of claim were an unsecured proof of claim for $741,312.81; a property proof of claim for $525,000; and a contingent unsecured proof of claim for $525,000 (in case the property proof of claim was rejected).
19 The other proofs of claim filed by the time of the first meeting of creditors (including a $67,000 claim by Murray Dublonko, the principal of San Juan) totaled approximately $400,000. In addition, one of San Juan's previous lawyers, Michael Mudie, was recognized as a secured creditor in the amount of $342,000.
20 On September 26, 2008 KPMG responded to Hampstead's property proof of claim. KPMG indicated that it believed Hampstead had a valid claim of $95,669.27 for its share of the solution gas proceeds recently paid into court by ConocoPhillips, but rejected the balance of Hampstead's property proof of claim.
21 On November 14, 2008 KPMG responded to Hampstead's unsecured and contingent proofs of claim. In addition to recognizing the above referenced solution gas property claim for $95,669.27, KPMG also recognized Hampstead's:
(i) audit exception claims totaling $34,835.51,
(ii) other solution gas claims totaling $20,512.91,
(iii) interest claims in an amount to be determined.
In total Hampstead's claims were recognized in the amount of $151,047.69 plus interest.
22 KPMG set out its grounds for rejecting the balance of Hampstead's unsecured and contingent claims in its Notice of Disallowance dated November 14, 2008.
Case Law Concerning the Process to Follow on an Appeal From a Disallowance
23 In Eskasoni Fisheries Ltd., Re (2000), 16 C.B.R. (4th) 173, 187 N.S.R. (2d) 363, 585 A.P.R. 363, 2000 CarswellNS 116 (N.S. S.C.), Registrar Hill concluded that where a creditor appeals to the court from a decision of a trustee disallowing
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 3 San Juan Resources Inc., Re, 2009 ABQB 55, 2009 CarswellAlta 98 2009 ABQB 55, 2009 CarswellAlta 98, [2009] A.W.L.D. 1082, [2009] A.J. No. 79... its claim then the appeal should proceed by way of trial de novo, and the proof of claim and Notice of Disallowance would perform the function of pleadings.
24 A contrary view was expressed by the British Columbia Court of Appeal in Galaxy Sports Inc., Re, 240 D.L.R. (4th) 301, 1 C.B.R. (5th) 20, 2004 CarswellBC 1112 (B.C. C.A.). That court concluded that fresh evidence should not be admitted as a matter of course, but if appellants wished to adduce fresh evidence, they would be obliged to justify its admission in the interests of justice or on some other principled basis [see para 42 of the Galaxy Sports Inc., Re decision]. In a case comment on Galaxy Sports Inc., Re provided by Carole Hunter in The Lawyers Weekly Vo.27, No. 27 (November 16, 2007), the author concluded:
Practitioners should be aware of the decision in Galaxy Sports and recognize that the Court of Appeal's broad statement that an appeal from a notice of disallowance should be a true appeal has been taken out of context and applied in a manner which was not intended by a number of subsequent courts.
A thorough review of the decision in Galaxy Sports and a careful presentation of the context of that decision to a court hearing an appeal from a notice of disallowance should convince the court that it still has the flexibility to conduct the appeal as a hearing de novo in the appropriate circumstances.
25 Registrar Herauf considered this issue in Johnson v. Erdman, 2005 CarswellSask 857, 18 C.B.R. (5th) 97, 276 Sask. R. 10 (Sask. Q.B.), and preferred the decision in Galaxy Sports Inc., Re to that in Eskasoni Fisheries Ltd., Re.
26 The nature of an appeal from a disallowance was recently considered by the Newfoundland and Labrador Supreme Court (Trial Division) in Lloyd's Non-Marine Underwriters v. J.J. Lacey Insurance Ltd., 2008 NLTD 9, 41 C.B.R. (5th) 137, 837 A.P.R. 314, 274 Nfld. & P.E.I.R. 314 (N.L. T.D.). The conflicting decisions in Eskasoni Fisheries Ltd., Re and Galaxy Sports Inc., Re were cited, and the court made the following observation:
There is certainly merit to the suggestion that efficacy and expedition ought to be brought to the claims determination and disallowance procedure. It is undoubtedly true that the entry of fresh evidence at the appeal level may result in the loss of efficacy in the bankruptcy process in that the business at creditors' meetings would be co-opted and extra expense, delay and formality would be imposed upon the process.
However, in my view efficacy, expedition, concerns over extra expense and delay or increased formality should not be permitted to trump fairness and should certainly not allow the claims determination process to constitute a de facto "good housekeeping seal of approval" upon activities surrounding which there is a serious allegation of criminality. Whether such criminality or unfairness in fact exists is a question to be determined upon the hearing of appropriate evidence. In my view however the Court should not be denied the opportunity to hear such evidence simply because doing so would be disruptive to the efficacy of the claims determination process.
KPMG's Grounds for Rejecting Hampstead's Proofs of Claim
27 KPMG had different grounds for rejecting various portions of Hampstead's claims.
28 A number of Hampstead's claims were subject to conflicting opinions from oil and gas experts arising from the pre- proposal litigation between San Juan and Hampstead. The trustee preferred the opinion of San Juan's experts. It is difficult to see how a meaningful appeal could be held regarding KPMG's determination of these issues without having a de novo hearing where the disagreeing experts could be cross-examined before the court.
29 KPMG noted in its rejection of the balance of Hampstead's claim regarding solution gas that Hampstead had not provided any documents to support Hampstead's calculation of their $200,000 solution gas claim. Hampstead had been advancing this claim via civil litigation prior to the proposal. San Juan withheld relevant information in that regard, notwithstanding court orders to provide monthly reports to Hampstead. It is likely that the civil action would have ultimately uncovered the withheld information. Instead of that litigation proceeding, it was stayed by San Juan's proposal. Part of Hampstead's proof of claim for solution gas was rejected by the trustee for lack of proof. This lack of proof resulted from San Juan not producing the relevant
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 4 San Juan Resources Inc., Re, 2009 ABQB 55, 2009 CarswellAlta 98 2009 ABQB 55, 2009 CarswellAlta 98, [2009] A.W.L.D. 1082, [2009] A.J. No. 79... documents in the pre-proposal litigation. This is not a case where a claimant has neglected to submit with its proof of claim the materials in its possession, and now seeks to submit those materials by way of an appeal de novo. In this case, the documents concerning the solution gas claim are in the possession of the party making the proposal. KPMG needs to provide Hampstead with access to San Juan's documentation in order that Hampstead may have a fair chance of advancing the solution gas claim. Hampstead's request that it be allowed access to this documentation prior to the appeal is warranted. These comments are equally applicable to Hampstead's claims for oil and gas revenues and the deductions made by San Juan from those revenues.
Conclusion
30 The BIA needs to be interpreted in a commercially reasonable manner and having regard to the need to proceed in an expedited fashion. The rights which are afforded to litigants in non-insolvency situations are not automatically available to claimants under the BIA. This was recognized in the Galaxy Sports Inc., Re decision, where claimants were precluded from appealing a disallowance de novo as of right. However, the Galaxy Sports Inc., Re and Lloyd's Non-Marine Underwriters cases both recognize that there are situations where an appeal de novo would be appropriate. For the reasons given above, this is such a situation.
31 It is true that allowing Hampstead access to relevant records, prior to the hearing of Hampstead's appeal, will result in time and expense. However, the additional time and expense is caused by San Juan not producing these documents when it was obliged to do so in the pre-proposal litigation. There is nothing stopping San Juan from ameliorating this situation by assisting the trustee to locate the relevant documents and make them available to Hampstead as quickly as possible.
32 I therefore direct that:
(i) Hampstead's appeals from the disallowances are to be determined by a summary hearing (following the process used for summary trials in Alberta) to be set down for four days commencing the first available and mutually convenient dates following March 15, 2009;
(ii) The evidence of any expert or other witness may be provided by way of affidavit, but any witness on whose affidavit a party wishes to rely shall be made available for cross-examination before the presiding Justice;
(iii) KPMG will first meet with Hampstead's representatives and disclose the documents which it utilized in reviewing Hampstead's claims. Hampstead can then determine and request further documents reasonable required to make its claim. KPMG will then make those documents available to Hampstead, without the necessity of listing them as is typically done in an Affidavit of Records. The court expects KPMG and Hampstead to cooperate in having this access to documents accomplished in as simple and efficient a manner as possible. The parties may apply for further directions if there is disagreement as to the scope and nature of access required.
33 Given the result set out above, I need not deal with Hampstead's alternative request to be allowed to examine the trustee under oath pursuant to section 163 of the BIA. Order accordingly.
End of Document Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 5
TAB 8
8 Transglobal Communications Group Inc., Re, 2009 ABQB 195, 2009 CarswellAlta 464 2009 ABQB 195, 2009 CarswellAlta 464, [2009] 9 W.W.R. 165, [2009] A.W.L.D. 2005...
2009 ABQB 195 Alberta Court of Queen's Bench
Transglobal Communications Group Inc., Re
2009 CarswellAlta 464, 2009 ABQB 195, [2009] 9 W.W.R. 165, [2009] A.W.L.D. 2005, [2009] A.J. No. 352, 177 A.C.W.S. (3d) 304, 473 A.R. 167, 4 Alta. L.R. (5th) 157, 53 C.B.R. (5th) 122
In the Matter of the Proposal of Transglobal Communications Group Inc.
K.D. Yamauchi J.
Heard: March 20, 2009 Judgment: March 30, 2009 * Docket: Edmonton BE03-1071018
Counsel: Cherisse Killick-Dzenick, for Transglobal Communications Group Inc. Kenneth W. Fitz for Stone Sapphire Ltd. Jeremy H. Hockin for Meyers Norris Penny Limited Michael D. Mysak for Joshua and Julia Kulbaba
Subject: Insolvency Headnote Bankruptcy and insolvency --- Proposal — Practice and procedure T Inc. filed proposal under Bankruptcy and Insolvency Act — S Ltd. submitted proof of claim in amount of $2,005,722.30, $1,710,345.58 of which represented amount obtained in partial summary judgment against T Inc., accrued interest and costs — T Inc.'s appeals from summary judgment and unsuccessful application to have summary judgment reopened on fresh evidence not yet heard — Individual creditors ("creditors") submitted proof of claim, outlining history of litigation with T Inc., which included order that T Inc. post $75,000 as security for costs — Trustee determined S Ltd.'s claim was worth $1 and disallowed creditors' claim for voting purposes — S Ltd. and creditors appealed — Trustee brought application for advice and directions — Appeals were on record — Act contained no reference to appeals on merits, rehearing or de novo — Not shown it was in interests of justice or some other principled basis on which appeal de novo should be directed — S Ltd.'s appeal raised extricable question of law, whether trustee bound by summary judgment and rehearing judgment in valuing S Ltd.'s claim, reviewable on standard of correctness — Valuation of S Ltd.'s claim was matter of fact and discretion and so subject to appeal on standard of reasonableness — Rejection of creditors' claim attracted correctness standard — Trustee incorrect when it did not give recognition to judgments on S Ltd.'s claim — Trustee could look behind judgment only if good reason to conclude there should not have been judgment — Judge on judgments in question had concluded new evidence would have little or no impact on outcome — While appeals extant, there was no principle that said decision of trial court had no effect or was presumed wrong until Court of Appeal disposed of it.
APPLICATION by proposal trustee for advice and directions in respect to its decisions under Bankruptcy and Insolvency Act.
K.D. Yamauchi J.:
I. Nature of the Application
1 This case relates to appeals of two decisions that a proposal trustee made under the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 ("BIA"). One involves the proposal trustee's valuation of a creditor's claim. The other involves the proposal trustee's disallowance of a creditor's claim for voting purposes.
II. Facts
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 1 Transglobal Communications Group Inc., Re, 2009 ABQB 195, 2009 CarswellAlta 464 2009 ABQB 195, 2009 CarswellAlta 464, [2009] 9 W.W.R. 165, [2009] A.W.L.D. 2005...
A. Stone Sapphire Appeal
2 Transglobal Communications Group Inc. ("Transglobal") was in the business of selling imported goods to North American retailers. It became embroiled in litigation with an overseas supplier, Stone Sapphire Ltd. ("Stone Sapphire"). Stone Sapphire claimed that Transglobal had failed to pay invoices totalling USD $2,280,828.57. Transglobal defended and counterclaimed for an amount exceeding Stone Sapphire's claim.
3 On April 12, 2007, Justice Lee granted Stone Sapphire a partial summary judgment, reported at 2007 ABQB 236 (Alta. Q.B.) ("Summary Judgment"), in the amount of USD $1,533,352.62 in relation to what Justice Lee defined as "undisputed invoices." The undisputed invoices related to items that Transglobal had "ordered, inspected, delivered and sold ... at a profit to its retail customers," Summary Judgment at para. 10. Justice Lee concluded that Transglobal was not entitled legally or equitably to set- off its counterclaim amounts against the amounts that Stone Sapphire claimed in its summary judgment application, Summary Judgment at paras. 62-80. Finally, he stayed Stone Sapphire's enforcement on the Summary Judgment, provided Transglobal paid into court the full amount of the Summary Judgment to permit litigation on the counterclaim (the "Stay"). Transglobal filed a notice of appeal with respect to the Summary Judgment. The Alberta Court of Appeal has not yet heard that appeal.
4 Transglobal subsequently applied, unsuccessfully, for other relief, including:
(a) to have the Summary Judgment reopened on fresh evidence ("Rehearing Application"). The fresh evidence included allegations that the plaintiff in this case was not the entity with which Transglobal had contracted and that Stone Sapphire was overcharging Transglobal; and
(b) to amend its counterclaim to include the fresh evidence.
5 Justice Lee denied Transglobal's application to amend its counterclaim on April 3, 2007. Transglobal did not appeal this decision. It later filed, but did not pursue, another motion seeking the same relief.
6 On June 27, 2008, Justice Lee rendered his decision in which he dismissed the Rehearing Application, reported at 2008 ABQB 397 (Alta. Q.B.) (the "Fresh Evidence Judgment"). Transglobal has appealed the Fresh Evidence Judgment, as well.
7 Before the Court released the Fresh Evidence Judgment, Transglobal's primary lender called in its loans. Transglobal responded on May 20, 2008, by filing a notice of intention to make a proposal pursuant to BIA s. 50.4(1). Transglobal named Meyers Norris Penny Limited ("MNP") as the proposal trustee.
8 Stone Sapphire applied for an order declaring that it was the owner of the monies Transglobal paid into court to obtain the stay. HSBC Bank Canada opposed that application on the basis that it held a security interest in those funds. Justice Topolniski rendered a judgment on September 19, 2008, reported at 2008 ABQB 575 (Alta. Q.B.), dismissing Stone Sapphire's application (the "Property Order").
9 Transglobal filed its BIA proposal. MNP held an initial meeting of Transglobal's creditors. That meeting was adjourned at the creditors' request to permit them to make inquiries into the value to be assigned to Stone Sapphire's claim for voting purposes.
10 On October 27, 2008, Stone Sapphire submitted a proof of claim in the amount of $2,005,722.30, $1,710,345.58 of which represented the amount of the Summary Judgment, accrued interest and costs arising from the Summary Judgment.
11 Apparently, satisfied that it was not bound by the Summary Judgment, the court's dismissal of the Rehearing Application or its dismissal of the application to amend Transglobal's counterclaim, MNP undertook an independent valuation and determined that Stone Sapphire's claim was worth $1 for voting purposes. It noted that the following issues were relevant to its determination of Stone Sapphire's voting status:
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 2 Transglobal Communications Group Inc., Re, 2009 ABQB 195, 2009 CarswellAlta 464 2009 ABQB 195, 2009 CarswellAlta 464, [2009] 9 W.W.R. 165, [2009] A.W.L.D. 2005...
1. With respect to Stone Sapphire's claim to be a secured creditor in the amount of $200,000, the Property Order expressly decided against Stone Sapphire, which arose from Justice Lee's decisions. However, Stone Sapphire appealed the Property Order and, accordingly, the matter is not yet finally resolved.
2. With respect to the unsecured portion of its claim, Stone Sapphire's right to enforce the Summary Judgment was stayed as a result of its payment into court of the Summary Judgment amount. Stone Sapphire's efforts to lift the Stay were unsuccessful. Accordingly, while Stone Sapphire has established a claim (subject to Transglobal's "plausible" counterclaim and Transglobal's appeal), its claim is not presently enforceable.
12 The adjourned creditors' meeting was reconvened on December 15, 2008. Grant Bazian, a licensed bankruptcy trustee, acted as chair of that meeting. He advised those attending the meeting that MNP had assigned a $1 value to Stone Sapphire's claim, for voting purposes. Supported by MNP's recommendation, the unsecured creditors voted in favour of the proposal.
13 Stone Sapphire appealed MNP's valuation pursuant to BIA s. 135(4), observing that the valuation of its claim at the amount of Summary Judgment award would have allowed it to successfully defeat the proposal. That is because BIA s. 115 provides that the votes of creditors are to be calculated by counting one vote for every dollar of every claim of the creditor that is not disallowed.
14 Transglobal made an application on January 29, 2009, to sanction the proposal. That application was adjourned to allow the hearing of Stone Sapphire's appeal of the Property Order. On March 5, 2009, the Court of Appeal upheld the Property Order.
B. The Kulbabas' Appeal
15 The second appeal is by Joshua and Julia Kulbaba. Joshua Kulbaba was Transglobal's controller. On April 29, 2008, Transglobal commenced an action against the Kulbabas, claiming that they had stolen approximately $300,000 from it. Transglobal obtained an ex parte attachment order from Justice Clark, freezing all of the Kulbabas' worldwide assets.
16 The Kulbabas filed a defence to the action and a counterclaim against Transglobal and its president, Steven Prescott, for defamation. They also applied to set aside the attachment order. Their motion was heard on July 10, 2008, by Justice Clark, who set aside his attachment order and ordered Mr. Prescott personally to pay the Kulbabas' costs of the application on a solicitor- client basis, which amounted to $95,000. He directed Transglobal to post $75,000 as security for costs and granted the Kulbabas an injunction forbidding Transglobal or anyone associated with it from further defaming them by suggesting that they were responsible for Transglobal's insolvency.
17 The Kulbabas submitted a proof of claim to MNP on October 23, 2008. The proof of claim outlined the history of their litigation with Transglobal.
18 The chair of the creditors' meeting advised the Kulbabas that MNP had disallowed their claim for voting purposes as it was "an unliquidated contingent claim." They now appeal that decision pursuant to BIA s. 108(1) and s. 135(4).
C. Schedule of Proceedings
19 Stone Sapphire appeals MNP's valuation of its claim. Because the result of Stone Sapphire's appeal could determine the fate of Transglobal's proposal, Justice Topolniski ruled on January 29, 2009, that Stone Sapphire's appeal would be heard before the court would consider the MNP's application for court sanction of Transglobal's proposal.
20 Justice Topolniski further set the following schedule for resolution of the various issues which have arisen:
1. March 20, 2009 - MNP's application for advice and directions as to the process and/or standard of review for MNP's valuations.
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2. April 17, 2009 - If the appeals are on the record, review of the materials considered by MNP in making the valuations and determination of the matter on the basis of the ascertained standard of review.
3. April 14-17, 2009 - If the appeals are de novo, trial of the issues on the valuations and Transglobal's counterclaim, as filed.
III. Issues
21 These reasons address the following issues:
(a) Whether the appeals are on the record or de novo.
(b) What is the appropriate standard of review?
(c) Whether MNP erred in determining that it was not bound by the court's various judgments in valuing Stone Sapphire's claim.
IV. Preliminary Matter
22 The wording of the BIA as to the respective roles of the trustee and chair of the first meeting of creditors is unclear. BIA s. 51(3) says that the official receiver or the official receiver's nominee acts as chair of the first meeting of creditors. As well, that section says that the chair decides any questions or disputes arising at the meeting and any creditor may appeal any such decision to the court.
23 BIA s. 66(1) then says that, "All provisions of this Act ... in so far as they are applicable, apply, with such modifications as the circumstances require, to proposals made under this Division." BIA s. 135 is the section that deals with the allowance or disallowance of proofs of claim. It requires the trustee to examine the proofs of claim, to determine whether a contingent or unliquidated claim is provable and, with respect to any provable claim, to value that claim. BIA s. 135(2) permits the trustee to disallow any claim.
24 BIA s. 108(1) says that the chair of any meeting of creditors "has power to admit or reject a proof of claim for the purpose of voting but his decision is subject to appeal to the court."
25 From the foregoing, one can see that the official receiver (or its nominee) or the trustee has the power to question and, ultimately disallow the creditor's claim, its right to vote or both. These rulings are subject to appeal. In this case, it was MNP who concluded that Stone Sapphire's claim for voting purposes is $1. In the case of the Kulbabas, it was MNP who rejected their claim for voting purposes. The chair at the creditors' meeting was the official receiver's nominee, one of MNP's bankruptcy trustees, and he advised the meeting of MNP's ruling.
26 Why is this important for the purposes of the following discussion? The BIA provides that decisions of the chair of the meeting are subject to appeal to a court, BIA ss. 51(3) and 108(1). BIA s. 135(3) says that the trustee's decision is "final and conclusive" unless the aggrieved person appeals. Thus, in the case of the chair's ruling, this Court need not provide any deference, whereas in the case of a trustee, this Court should accord some deference, based on this partial privative clause, see Stubicar v. Alberta (Information & Privacy Commissioner), 2008 ABCA 357 (Alta. C.A.) at para. 22. This Court will address this issue in more detail later in these reasons. For now, it is worthwhile noting that MNP fulfilled its duties under BIA s. 135 and the chair of the meeting appeared to accept the trustee's findings when he made his rulings at the first meeting of creditors, rather than undertaking an independent valuation or finding. Thus, for the purposes of this decision, this Court will deal only with the decisions of the trustee pursuant to BIA s. 135.
V. Positions of the Parties
A. Stone Sapphire Appeal
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27 MNP argued that the powers of the trustee are administrative or quasi-judicial in nature and, therefore, a "standard of review" analysis under New Brunswick (Board of Management) v. Dunsmuir, 2008 SCC 9, [2008] 1 S.C.R. 190 (S.C.C.) must be performed in connection with any appeal from a trustee's decision under BIA s. 135, citing Q. v. College of Physicians & Surgeons (British Columbia), 2003 SCC 19 at para. 21, [2003] 1 S.C.R. 226 (S.C.C.); Ryan v. Law Society (New Brunswick), 2003 SCC 20 at para. 21, [2003] 1 S.C.R. 247 (S.C.C.); Imperial Oil Resources Ltd. v. 826167 Alberta Inc., 2007 ABCA 131 (Alta. C.A.) at paras. 8-9. MNP submits that while there is judicial authority that an appeal from a trustee's decision on the valuation of a claim should attract the reasonableness standard of review, which suggests the appeal should be on the record, the circumstances of this case merit a de novo hearing based on San Juan Resources Inc., Re, 2009 ABQB 55 (Alta. Q.B.).
28 MNP maintains that it was not bound by the finality of the Summary Judgment decision in assessing Stone Sapphire's proof of claim. It cites Van Laun, Re, [1904-1907] All E.R. 157 (Eng. C.A.) at 160; Lupkovics, Re, [1954] 2 All E.R. 125 (Eng. Ch.) at 130; Canadian Imperial Bank of Commerce v. 433616 Ontario Inc., 1993 CarswellOnt 193 (Ont. Gen. Div.) at paras. 12 and 16 in support of that proposition. It acknowledged that Canada Asian Centre Developments Inc., Re, 2003 BCSC 41 (B.C. S.C. [In Chambers]) at paras. 29-31, (2003), 39 C.B.R. (4th) 35 (B.C. S.C. [In Chambers]) indicates that a proposal trustee should not go behind a judgment unless there is an allegation of fraud, collusion or miscarriage of justice. As well, it acknowledged that the Fresh Evidence Judgment ruled against the admissibility of the fresh evidence on which, presumably, MNP based its ruling.
29 MNP takes the position that it was justified in looking behind the Summary Judgment given the extant appeals and the significant amount of evidence that was available for it to consider that was not before Justice Lee when he made the Fresh Evidence Judgment. It argued that if this Court determines that a hearing de novo is appropriate, it should allow evidence to be led and argument presented on the merits of Stone Sapphire's claim, rather than restricting the hearing to Transglobal's counterclaim.
30 Stone Sapphire argued that the Dunsmuir standard of review analysis does not apply to this case. It argued that, in the absence of exceptional circumstances, an appeal from a trustee's decision is not a hearing de novo with new evidence, but a review "on the record" without deference to the trustee. Stone Sapphire contends that no injustice will result if the MNP's decision is restricted to a review of the record that Stone Sapphire placed before MNP. Even if one were to undertake a Dunsmuir- type analysis, the standard of review would be reasonableness and also a pragmatic approach requires this Court to recognize that bankruptcy proceedings call for an expedited process. It does not dismiss the possibility that in extreme or exceptional circumstances, a court could conduct a de novo hearing, but argues that this is not one of those cases.
31 Stone Sapphire notes as well that the new evidence that MNP seeks to introduce formed the basis for Rehearing Judgment and that Justice Lee concluded at para. 77, that even if the evidence were admitted, "it would have little or no impact on the outcome in any event."
32 Stone Sapphire maintains that the record should consist of:
(a) its proof of claim;
(b) MNP's "Review of Claim by Stone Sapphire Ltd. in the Proposal Proceedings of Transglobal Communications Group Inc." (the "Trustee's Reasons"); and
(c) the judgments referred to in the Trustee's Reasons.
33 Stone Sapphire argued that MNP, in valuing its claim, improperly considered information which was found inadmissible by Justice Lee. It further argued that MNP had no basis for going behind the Summary Judgment as there were no allegations of fraud or collusion and the identity issue had been expressly considered and rejected, as reflected in the Rehearing Judgment. It argued that, in essence, MNP usurped the role of the Court of Appeal.
B. The Kulbabas' Appeal
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34 The Kulbabas argued that a proposal trustee's decision is not subject to judicial review, as a proposal trustee acts as an officer of the court in a court proceeding, viz., Bankruptcy No. 24-1071018. They maintain that appeals from a proposal trustee's decisions are heard on a de novo basis, citing Eskasoni Fisheries Ltd., Re (2000), 187 N.S.R. (2d) 363, 16 C.B.R. (4th) 173 (N.S. S.C.) at para. 16; Dunham, Re, 2005 NSSC 57, 231 N.S.R. (2d) 235 (N.S. S.C.); Lloyd's Non-Marine Underwriters v. J.J. Lacey Insurance Ltd., 2008 NLTD 9 (N.L. T.D.); and Johnson v. Erdman, 2005 SKQB 515 (Sask. Q.B.).
35 If this Court determines that a standard of review analysis is required, the Kulbabas argued that the appropriate standard of review is correctness. While they conceded that one could establish that the starting point for reviewing proposal trustees' decisions would be a standard of reasonableness, they argued that a fulsome review of the factors outlined in Pushpanathan v. Canada (Minister of Employment & Immigration), [1998] 1 S.C.R. 982 (S.C.C.), would lead one to the conclusion that the correctness standard applies in this case, citing Galaxy Sports Inc., Re, 2004 BCCA 284 (B.C. C.A.) at para. 39; Lloyd's Non- Marine at paras. 13-18. They argued that the findings required to assess their claim involve questions of law or mixed fact and law and argue that MNP has no experience in assessing such claims
VI. Analysis
A. Whether the Appeals are on the Record or De Novo.
36 Other than the fact that a disgruntled creditor may appeal a proposal trustee's decisions of disallowances or valuations for voting purposes, the BIA is silent as to the process to be followed for appeals. BIA s. 135(4) says that the appeal must be in accordance with the Bankruptcy and Insolvency General Rules, C.R.C. 1978, c. 368. Rule 11 states that: ASubject to these Rules, every application to the court must be made by motion unless the court orders otherwise. Rule 3 provides that:
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.
Ordinarily, an appeal is on the record, see e.g. Reform Party of Canada v. Canada (Attorney General) (1995), 27 Alta. L.R. (3d) 153 (Alta. C.A.) at 185-86.
37 It is important, at the outset, for this Court to provide a guidepost in its use of the phrase appeal "de novo." Courts have described appeals de novo in many different ways, including:
(a) new evidence or cross-examination is possible, Ross v. McRoberts (1999), 237 A.R. 344 (Alta. C.A.); Taylor v. Alberta (Workers' Compensation Board), [2005] A.J. No. 968 (Alta. Q.B.); Dickey v. Pep Homes Ltd., 2006 ABCA 402 (Alta. C.A.)
(b) new grounds may be raised, 679667 Alberta Ltd. v. Allendale Bingo Corp., [2001] A.J. No. 1303 (Alta. Q.B.)
(c) consideration by the reviewing judge afresh in which the court may substitute its opinion, judicially reasoned, for that of the lower court, Primrose Drilling Ventures Ltd. v. Carter, 2008 ABQB 605 (Alta. Q.B.) at para. 14
(d) an entirely new case is presented, independent of the original case, Canada (Ministre du Développement des Ressources Humaines) c. Landry (2005), 31 Admin. L.R. (4th) 13 (F.C.A.) at para. 10
(e) an appeal heard on the basis of the case originally presented to the tribunal, with the addition of new facts that the tribunal accepted when it revised its decision, Landry at para. 10
38 In Newterm Ltd. v. St. John's (City) (1991), 93 Nfld. & P.E.I.R. 49 (Nfld. T.D.) at para. 13, the court made the very important statement that:
The appeal before this Court is a civil proceeding and one must look to the particular statute giving the appeal (de novo) to determine the procedure, powers and jurisdiction to be exercised by the appellate court.
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In other words, one cannot ignore the foundational statute on which the appeal is based to determine the type of appeal de novo with which one is dealing.
39 In Alberta (Superintendent of Real Estate) v. Harder (1980), 28 A.R. 210 (Alta. Q.B.), Justice Miller heard an appeal by the Superintendent of Real Estate from a decision of an Appeal Board appointed under the Real Estate Agents Licensing Act. The Act provided that such an appeal was to be brought by filing an originating notice but did not specify whether the appeal was de novo or on the record. An application for advice and directions previously had been made to Justice Dea, who ordered that the appeal be on the record and that on default of agreement between the parties as to what would constitute the record, viva voce evidence would be heard to determine whether the disputed items should properly form part of the record.
40 When the matter came before Justice Miller, the Superintendent questioned the procedure that had been ordered. Justice Miller noted that the appeal procedure provided for in the Act was by way of originating notice, a process frequently employed when it is unlikely there will be serious factual disputes. He observed that the Act did not use terms such as "on the merits", "rehearing" or "de novo." Justice Miller also commented that it would be illogical and unnecessarily expensive to conclude that the parties should be entitled under the Act to two separate and new appeal hearings. He cited the following statement by Clement J.A. from Haugen v. Camrose (County) (1979), 15 A.R. 451 (Alta. C.A.), at 453:
... An appeal court, whether this Division or another tribunal appointed for the purpose, does not conduct a new trial in order to exercise its appellate jurisdiction unless such is prescribed or permitted by the statute granting the right of appeal. An instance of such is found in the provisions of the Criminal Code relating to appeals from summary convictions, where formerly the appeal was specifically a trial de novo and now may be on the record in the summary conviction court or by a trial de novo. Further examples may be found in provincial statutes: The Right of Entry Act, R.S.A. 1970, c. 322, provides by s. 21 that an appeal to the district court shall be in the form a new hearing; s. 38 of The Surface Reclamation Act, R.S.A. 1970. c. 356, directs that an appeal to the district court shall be heard and determined as a trial de novo s. 53 of The Expropriation Act, R.S.A. 1970, c. 130, directs that an appeal to the district court shall be in the form of a new hearing. In such cases the scope of appeal is limited to prescribed issues. There are no such provisions here. The right of appeal given by s. 19.2(1) is in stark terms and evidence may well have had to be adduced to show what was in fact before Council when it held the prescribed hearing and then enacted its bylaws; but this would be in order to constitute the record for the purposes of appeal. Such a necessity gives no warrant for the exercise of a trial jurisdiction which would result, presumably, in the trial judge determining on such evidence as might be adduced before him, whether or not the bylaw should be enacted, instead of the body to whose consideration the Legislature left it.
41 Justice Miller agreed with Justice Dea that the appeal should be on the record. He stated that because the Appeal Board was not bound to make a record of its hearing, the judge hearing the appeal should have the discretion to hear evidence to clarify any issues of fact, Harder at para. 42, see also SKK Investments Ltd. v. Alberta (Director of Social Care Facilities Licensing) (1994), 150 A.R. 351 (Alta. Q.B.), which followed Harder in reaching a similar conclusion.
42 In Eskasoni Fisheries at paras 17-20, Registrar Hill observed that appellate deference is largely based on the trier having heard the evidence and arguments firsthand. As a trustee's valuation under the BIA does not involve preparation of a record and there is no hearing, he concluded that an appeal must be de novo for justice to be done.
43 Other courts have followed Eskasoni Fisheries, see e.g. MacDonald, Re, [2002] O.J. No. 2744 (Ont. S.C.J. [Commercial List]) at para. 19; Port Chevrolet Oldsmobile Ltd., Re (2002), 49 C.B.R. (4th) 127 (B.C. S.C. [In Chambers]), aff'd (2004), 49 C.B.R. (4th) 146 (B.C. C.A.); Exner, Re, 2003 BCSC 260, 41 C.B.R. (4th) 49 (B.C. S.C.); Beetown Honey Products Inc., Re (2003), 46 C.B.R. (4th) 195 (Ont. S.C.J.); Dunham.
44 The British Columbia Court of Appeal in Galaxy Sports, declined to follow Eskasoni Fisheries. The Galaxy Sports court noted at para. 36, that in Port Chevrolet Oldsmobile, "counsel did not challenge the 'trial de novo' approach taken in Eskasoni." It ruled at para. 42, that fresh evidence should not be admitted as a matter of course on an appeal and that exceptions must be established by showing that it is in the interests of justice or on some other principled basis. If courts were to permit the parties
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45 As well, the Galaxy Sports court at para. 30, observed that Parliament had assigned trustees the authority to value a contingent or unliquidated claim, a function previously undertaken by the court on application by a trustee. It also noted at para. 33, the (partial) privative clause protecting the trustee's decision in that regard and commented that presumably Parliament was of the view that trustees are suited to make the determination "because they possess specialized expertise in the areas of business financing, restructurings and insolvency, and are decision-makers to whom some deference is owed by a reviewing court," see also Johnson at para. 10.
46 In Lloyd's Non-Marine, a creditor alleged that the trustee did not duly investigate a particular claim. The creditor made serious allegations of criminality and unfairness with respect to that claim. Justice Hall referred to Eskasoni Fisheries and Galaxy Sports, and said at para. 18:
...efficacy, expedition, concerns over extra expense and delay or increased formality should not be permitted to trump fairness and should certainly not allow the claims determination process to constitute a de facto "good housekeeping seal of approval" upon activities surrounding which there is a serious allegation of criminality. Whether such criminality or unfairness in fact exists is a question to be determined upon the hearing of appropriate evidence. In my view however the Court should not be denied the opportunity to hear such evidence simply because doing so would be disruptive to the efficacy of the claims determination process.
47 After reviewing the two lines of authority on the issue represented by Eskasoni Fisheries and Galaxy Sports, Registrar Prowse in San Juan Resources Inc., Re, 2009 ABQB 55 (Alta. Q.B.), ruled that an appeal from a trustee's disallowance of a claim should not be heard de novo as a matter of right, but may be heard de novo where the circumstances of the case are such that a hearing restricted to the record might result in an injustice. On the specific facts before him, in particular the trustee's preference for the opinion of the debtor's oil and gas expert given in pre-proposal litigation as opposed to the opinion of the claimant's expert, he ruled that the case warranted a de novo hearing. He said at para. 30:
The BIA needs to be interpreted in a commercially reasonable manner and having regard to the need to proceed in an expedited fashion. The rights which are afforded to litigants in non-insolvency situations are not automatically available to claimants under the BIA. This was recognized in the Galaxy decision, where claimants were precluded from appealing a disallowance de novo as of right. However, the Galaxy and Lloyd's Non-Marine cases both recognize that there are situations where an appeal de novo would be appropriate. For the reasons given above, this is such a situation.
He ordered that the appeals from the disallowances before him should be determined by a summary hearing following the process used for summary trials in Alberta and that the evidence of any expert or other witness could be provided by way of affidavit.
48 Proceedings under the Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36, have come to be known as "real-time litigation" because, as the Ontario Court of Appeal noted in Androscoggin Energy LLC, Re, 2005 CarswellOnt 589, 8 C.B.R. (5th) 11 (Ont. C.A.) at para. 1, "Parties depend on the court system to be able to respond, as it has here, despite the inevitable time pressures." Bankruptcy liquidation proceedings have come to be known as "autopsy litigation." Proposal proceedings under the BIA are no less real-time litigation than proceedings under the CCAA. As Justice Farley, who was the individual who coined the phrase in the first instance, said in Royal Oak Mines Inc., Re, 1999 CarswellOnt 792, 7 C.B.R. (4th) 293 (Ont. Gen. Div. [Commercial List]) at para. 5:
Frequently those who do not have familiarity with real time litigation have difficulty appreciating that, in order to preserve value for everyone involved, Herculean tasks have to be successfully completed in head spinning short times. All the same everyone is entitled the opportunity to advance their interests.
49 Like Harder and Haugen, the BIA, which is the foundational statute with which we are dealing, contains no reference to appeals on the merits, rehearing or de novo. The proposal provisions of the BIA were foundational provisions on which the San
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Juan court grounded its reasons. The San Juan court's reasoning is compelling, as it recognized the concern raised by Lloyd's Non-Marine court in the case with which it was dealing.
50 In this case, however, as the Galaxy Court stated, no one has shown that it is in the interests of justice or some other principled basis on which this Court should direct an appeal de novo. Accordingly, the appeals from MNP's decisions will be on the record.
B. What is the Appropriate Standard of Review?
51 The Supreme Court of Canada has indicated that on a statutory appeal from a decision of an administrative tribunal, courts must follow the same process as on a judicial review, Pezim v. British Columbia (Superintendent of Brokers), [1994] 2 S.C.R. 557 (S.C.C.) at para. 1; Canada (Director of Investigation & Research) v. Southam Inc., [1997] 1 S.C.R. 748 (S.C.C.) at para. 28; Q. v. College of Physicians & Surgeons (British Columbia), 2003 SCC 19 (S.C.C.) at para. 21, [2003] 1 S.C.R. 226 (S.C.C.); Ryan v. Law Society (New Brunswick), 2003 SCC 20 (S.C.C.) at para. 21, [2003] 1 S.C.R. 247 (S.C.C.).
52 New Brunswick (Board of Management) v. Dunsmuir, 2008 SCC 9, [2008] 1 S.C.R. 190 (S.C.C.) is the court's most recent pronouncement on that process. There is a more recent decision emanating from the Supreme Court of Canada which deals with standards of review, but it dealt with a specific tribunal which was addressing a specific issue not applicable to this case, Khosa v. Canada (Minister of Citizenship & Immigration), 2009 SCC 12 (S.C.C.). However, Khosa provides further refinement of the Dunsmuir reasoning, so it deserves some comment in these reasons.
53 Dunsmuir reduced the former three standards of review to two standards of review, comprised of the correctness standard and a reasonableness standard. The aim of this revision was to make the system simpler and more workable, Dunsmuir at para. 45.
54 The Dunsmuir court at para. 62, stated that reviewing courts must undertake a two-step analysis to determine the appropriate standard of review. First, the reviewing court must ascertain whether there is satisfactory judicial authority that addresses the degree of deference that reviewing courts will accord the tribunal concerning a particular category of question. If that inquiry proves unsuccessful, the court must proceed to an analysis of the factors that will help it identify the proper standard of review. Dunsmuir at para. 64, provides reviewing courts with those factors when it said:
The analysis must be contextual. As mentioned above, it is dependent on the application of a number of relevant factors, including: (1) the presence or absence of a privative clause; (2) the purpose of the tribunal as determined by interpretation of enabling legislation; (3) the nature of the question at issue, and; (4) the expertise of the tribunal. In many cases, it will not be necessary to consider all of the factors, as some of them may be determinative in the application of the reasonableness standard in a specific case.
55 Before going any further in this discussion, this Court must first ascertain whether Dunsmuir applies to the decisions of bankruptcy or proposal trustee's decisions at all. The Galaxy Sports court placed an administrative law gloss on its decision without discussing this aspect.
56 The Constitution Act, 1867, s. 91(21) allows the Parliament of Canada to enact laws in relation to "bankruptcy and insolvency." Thus, it enacted the current BIA. The BIA sets out the structure of administrative officials in the bankruptcy regime. BIA s. 5 allows the Governor in Council to appoint a superintendent of bankruptcy who, among other things, supervises the administration of bankrupt (and insolvent, in certain cases) estates and issues bankruptcy trustee licenses, BIA s. 5(2) and 5(3). Each province constitutes a bankruptcy district and the Governor in Council is required to appoint one or more official receivers in each bankruptcy district, BIA s. 12. The official receivers are "deemed officers of the court," BIA s. 12(2). Trustees are, as well, officers of the court, see e.g. Beetown Honey Products Inc., Re (2003), 46 C.B.R. (4th) 195 (Ont. S.C.J.); Reed, Re (1980), 34 C.B.R. (N.S.) 83 (Ont. C.A.), at 86; Confederation Treasury Services Ltd., Re (1995), 37 C.B.R. (3d) 237 (Ont. Bktcy.); Page, Re (2002), 38 C.B.R. (4th) 241 (Ont. S.C.J. [Commercial List]).
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57 What is an "officer of the court"? The court in N.A.P.E. v. Newfoundland & Labrador (Minister of Justice), 2004 NLSCTD 54 (N.L. T.D.) at paras. 114 and 115, provides us with a list of the basic characteristics of an officer of the court, when it said [emphasis original]:
From the foregoing, it can be determined that an officer of the court has at least the following characteristics:
1. His duties and functions in the court process are necessary to enable the system to function properly;
2. In the performance of her duties, her role is to facilitate the functioning of the court system either directly or by assisting other officers of the court to perform their functions effectively;
3. In performing his functions he owes a duty of loyalty and fidelity to the court as an institution and to the rule of law, a duty which transcends other interests;
4. In acting as an officer of the court, she is the personification of the court; her acts are the acts of the court;
5. His duties, insofar as they impact on the effective functioning of the court, are subject to the supervisory control and judicial direction of the court;
6. Her role includes the duty to carry out and comply with orders of the court so as to ensure they are given practical effect;
7. His failure to comply with judicial directions or orders make him subject to sanction, including punishment for contempt.
In essence, then, an officer of the court is a person whose function is so integral to the functioning of an aspect of the court system that the court could not function effectively in that regard without being able to exercise control, by way of court order if necessary, over what is done and how the officer does it.
58 To this we may add other characteristics that the cases have added to the trustee's role in a bankruptcy situation, which are referred to in Lloyd W. Houlden, Geoffrey B. Morawetz & Janis P. Sarra, The 2008 Annotated Bankruptcy and Insolvency Act (Toronto: Carswell Thomson, 2007) at C'10:
(a) the trustee must impartially represent the interests of creditors, Roy, Re (1963) 4 C.B.R. (N.S.) 275;
(b) the trustee should act equitably and, as far as possible, hold an even hand between competing interests of various classes of creditors. In bringing proceedings the trustee should not adopt an adversarial or hostile role, Touche Ross Ltd. v. Weldwood of Canada Sales Ltd. (1983) 48 C.B.R. (N.S.) 83;
(c) the trustee should present the relevant facts to the court in a dispassionate, non-adversarial manner, and leave the matter to the court for decision;
(d) the trustee's actions should be measured by the reasonableness of the business approach taken at the time of the action, and not necessarily by whether the actions attain satisfactory results, Re Brown (2003), 48 C.B.R. (4 th ) 38 (Alta. Q.B.);
(e) the trustee must realize as much as possible from the estate for the benefit of creditors, Re Coffey (2004), 2 C.B.R. (5 th ) 121 (N.L.T.D.).
This Court notes that MNP's counsel, during argument in this case, reinforced the trustee's role and took the dispassionate approach that the cases have suggested.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 10 Transglobal Communications Group Inc., Re, 2009 ABQB 195, 2009 CarswellAlta 464 2009 ABQB 195, 2009 CarswellAlta 464, [2009] 9 W.W.R. 165, [2009] A.W.L.D. 2005...
59 The fact that the trustee is an officer of the court does not mean that its decisions are not subject to review by the court. The BIA makes provision for appeals of trustees' decisions. As well, even official receivers are not immune from curial review, even though the BIA makes no provision for appeals of official receivers' decisions. In Webber, Re (1931), 12 C.B.R. 274 (N.S. C.A.) at para. 25, the court said that it "has inherent power to superintend the conduct of officers of the Court and the learned Judge in Chambers therefore had power to inquire by what authority the Official Receiver acted, and to set aside an order made without authority."
60 But is this "superintending power" a judicial review or an appeal? We will be able to answer this question through the limitations placed on the concept of judicial review. In David Phillip Jones & Anne S. de Villars, "Principles of Administrative Law" 4 th ed. (Scarborough: Thomson Carswell, 2004) at 6-8, the authors say:
Judicial review ... is generally limited to the power of the superior courts to determine whether the administrator has acted strictly within the powers which have been statutorily delegated to it. Judicial review concentrates almost completely on jurisdictional questions, and on the application of the ultra vires doctrine to the particular fact pattern surrounding the impugned administrative action.
. . .
Judicial review of administrative action can occur for the following jurisdictional defects:
(a) substantive ultra vires ...;
(b) exercising a discretion for an improper purpose, with malice, in bad faith, or by reference to irrelevant considerations ...;
c) not considering relevant matters;
(d) making serious procedural errors;
(e) making an error in law, in certain circumstances.
Thus, it seems, we are not in the realm of judicial review in this case, as no one is impugning MNP's jurisdiction to make the decisions it did. Arguably, the only "error in law" that MNP made and which could go to its jurisdiction concerns its dealing with the substantive issues involved in both appeals. At this stage, this Court cannot comment on those issues.
61 Earlier in the reasons, this Court said that Galaxy Sports added an "administrative law gloss" to its decision. The Galaxy Sports court did not say specifically that it was conducting a judicial review of the trustee's decision. There is good reason for this; it was not undertaking a judicial review. Rather, it seems that the Galaxy Sports court used the administrative law gloss to focus on and assist it in examining the issues before it. Registrar Herauf, as he then was, in Johnson, agreed when he applied the Galaxy Sports approach even in the face of his comment at para. 11, that, "it is not particularly easy to fit a trustee's decision into the continuum of administrative law."
62 Like the Johnson court, this Court finds the Galaxy Sports approach compelling and it "makes sense." This Court will take a similar approach, recognizing the concern that the Johnson court expressed. As well, we must remember that, even though the Galaxy Sports court's analysis had an administrative law gloss, it found that the appeal, as sanctioned by the BIA, was a true appeal and not a judicial review.
63 The Galaxy Sports court held that the standard of review for compliance with a "mandatory" provision, which it equated to a question of law or statutory compliance, such as the decision to allow or disallow a proof of claim, was one of correctness and that a reasonableness standard applied to trustees' decisions of a factual nature, such as the valuation of a contingent or unliquidated claim.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 11 Transglobal Communications Group Inc., Re, 2009 ABQB 195, 2009 CarswellAlta 464 2009 ABQB 195, 2009 CarswellAlta 464, [2009] 9 W.W.R. 165, [2009] A.W.L.D. 2005...
64 In determining the standard of review, the Galaxy Sports court considered Parliament's confidence in the expertise of the trustee as demonstrated by its amendment to the legislation to give the trustee authority to value and allow or disallow claims and the privative clause protecting the trustee's decisions in that regard.
65 Dunsmuir at para. 52, found that a privative clause represents a strong indication that Parliament intended that the administrative decision maker should be given greater deference, interference by a reviewing court should be minimized, and that review should be based on the reasonableness standard. The privative clause in the BIA is only a partial one, i.e. it says that the trustee's determination is final and conclusive unless a person on whom the notice is served appeals that decision to a court, BIA s. 135(4). Nevertheless, this court agrees with the Galaxy Sports court when it suggests that trustees' decisions in relation to certain issues they face warrant some deference.
66 Like labour arbitrators in Dunsmuir, this Court recognizes the relative expertise of bankruptcy trustees when they deal with matters, such as the valuation of proofs of claim. Accordingly, like Dunsmuir at para. 68, this favours the standard of reasonableness when reviewing trustees' decisions in this realm. They are presumed to hold relative expertise in the interpretation of their home legislation as well as related legislation that they might often encounter in the course of their functions.
67 The Dunsmuir court considered that the legislative purpose confirmed its view of the regime that the legislature established. The legislation established a time and cost-effective method of resolving disputes and provided an alternative to judicial determination. The provision for timely and binding settlements of disputes implied that a reasonableness review was appropriate.
68 Similarly, the Galaxy Sports court commented that the approach it took aligned with the implicit objective of the BIA to enable debtors to have their proposals voted on expeditiously. As well, the BIA allows creditors to have their rights and claims determined in a business-like manner, "while at the same time providing a meaningful appeal to a court of law on questions that clearly affect legal rights, engage the relative expertise of judges, and set precedents for other cases."
69 In Dunsmuir, the majority advised at para. 53 that:
Where the question is one of fact, discretion or policy, deference will usually apply automatically (Canada (Attorney General) v. Mossop, [1993] 1 S.C.R. 554, at pp. 599-600; Dr. Q, at para. 29; Suresh, at paras. 29-30). We believe that the same standard must apply to the review of questions where the legal and factual issues are intertwined with and cannot be readily separated.
And further at para. 55:
A consideration of the following factors will lead to the conclusion that the decision maker should be given deference and a reasonableness test applied:
• A privative clause: this is a statutory direction from Parliament or a legislature indicating the need for deference.
• A discrete and special administrative regime in which the decision maker has special expertise (labour relations for instance).
• The nature of the question of law. A question of law that is of "central importance to the legal system ... and outside the ... specialized area of expertise" of the administrative decision maker will always attract a correctness standard (Toronto (City) v. C.U.P.E., [2003] 3 S.C.R. 77, at para. 62). On the other hand, a question of law that does not rise to this level may be compatible with a reasonableness standard where the two above factors so indicate.
70 The Galaxy Sports court at para. 38, expressed the view that the trustee's decisions in that case did not involve the balancing of polycentric interests. It characterized the trustee's power to allow or disallow a claim (for which the trustee must give written reasons) under BIA s. 135 as a decision more of law than fact and, therefore, a matter on which the court might be assumed to have equal expertise. The court noted that such questions "have important legal consequences, in that a person
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 12 Transglobal Communications Group Inc., Re, 2009 ABQB 195, 2009 CarswellAlta 464 2009 ABQB 195, 2009 CarswellAlta 464, [2009] 9 W.W.R. 165, [2009] A.W.L.D. 2005... whose proof of claim is disallowed or rejected may not participate as a creditor in the bankruptcy generally or in the distribution of the bankrupt's estate." This would attract a correctness standard.
71 When undertaking a review of these factors it becomes clear that Stone Sapphire's appeal raises an extricable legal question, viz., whether the trustee is bound by the Summary Judgment and the Rehearing Judgment in valuing the Stone Sapphire's claim or at least that portion of the claim to which the judgment relates. Accordingly, this question is subject to appeal on a standard of correctness. Once that question has been answered, the trustee's actual valuation of the claim is a matter of fact and discretion and, therefore, subject to appeal on a standard of reasonableness.
72 Where a court applies a standard of correctness, it shows no deference to the decision of the tribunal. Instead, it undertakes its own analysis and agrees with the tribunal's determination or substitutes its own view of the correct answer.
73 On an appeal based on the standard of reasonableness, the court recognizes that certain questions may give rise to a number of possible, reasonable conclusions. As indicated the Dunsmuir court at para. 47, "reasonableness is concerned mostly with the existence of justification, transparency and intelligibility within the decision-making process. But it is also concerned with whether the decision falls within a range of possible, acceptable outcomes which are defensible in respect of the facts and law."
74 The Kulbabas appeal the disallowance of their claim. The reason given for the disallowance apparently was that it was "an unliquidated contingent claim." Presumably, what MNP meant by this was that the Kulbabas' claim was a contingent or unliquidated claim that was not provable, but it did not say so. BIA s. 121(2) states that, "The determination whether a contingent or unliquidated claim is a provable claim and the valuation of such a claim shall be made in accordance with section 135." This provision applies in a proposal as well as a bankruptcy, F. E. A. Griffiths Corp., Re (1971), 15 C.B.R. (N.S.) 231 (Ont. S.C.). BIA s. 135(1.1) requires that the trustee determine whether any contingent or unliquidated claim is provable and, if it is, the trustee is to value the claim. Galaxy Sports at para. 39, said that this Court should apply a reasonableness standard when considering the trustee's role "in valuing contingent or unliquidated claims." In the case of the Kulbabas, the trustee did not value their claim; it rejected it. Thus, this falls in the "mandatory" category and attracts a correctness standard.
C. Whether MNP was Bound by the Court's Judgment in Valuing the Claim
75 As mentioned earlier in these reasons, this issue is reviewable on the standard of correctness.
76 MNP argued that there is authority that a trustee is not bound by a court judgment when assessing a creditor's proof of claim based on that judgment. It cites Van Laun, Re, [1904-1907] All E.R. 157 (Eng. C.A.) at 160 and Lupkovics, Re, [1954] 2 All E.R. 125 (Eng. Ch.) at 130 in support of that contention. In Van Laun, the court stated:
The Trustee's right and duty when examining a Proof for the purpose of admitting or rejecting it, is to require some satisfactory evidence that the debt on which the Proof is founded is a real debt. No judgment recovered against the bankrupt, no covenant given by or account stated with him, can deprive the Trustee of this right. He is entitled to go behind such forms to get at the truth, and the estoppel to which the bankrupt may have subjected himself will not prevail against him.
77 Justice Burnyeat in Canada Asian Centre Developments Inc., Re, 2003 BCSC 41 (B.C. S.C. [In Chambers]) at paras. 29-31 characterized this statement as obiter dictum. Justice Burnyeat concluded that a trustee can look behind a judgment only if there is "some good reason to conclude that there should not have been a judgment." He offered fraud or collusion as examples of such a good reason. Justice Burnyeat observed that no appeal had been taken of the judgment involved in the Van Laun case. He also remarked at para. 35 that, "a judgment of a Court of competent jurisdiction should almost invariably satisfy a Trustee regarding a debt, the security, or a judgment if it can be said that the Court considered the merits of the entitlement to a creditor to a judgment relating to security claimed."
78 In this case, MNP's reasons for its valuation of Stone Sapphire's claim are sparse, but those reasons do not refer to any fraud or collusion. MNP's reasons also refer to the fact that it considered the reasons of Justice Lee and Justice Topolniski, but it chose to disregard those judgments. Was this correct? MNP's reasons give this Court no basis on which to determine the
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 13 Transglobal Communications Group Inc., Re, 2009 ABQB 195, 2009 CarswellAlta 464 2009 ABQB 195, 2009 CarswellAlta 464, [2009] 9 W.W.R. 165, [2009] A.W.L.D. 2005... correctness or lack of correctness in this decision. It can only surmise that MNP came to this decision because of the extant appeals and the new evidence that Transglobal presented to Justice Lee.
79 It should be noted that Justice Lee considered the new evidence that Transglobal sought to present and he concluded that "it would have little or no impact on the outcome in any event," Rehearing Judgment para. 77. As well, Justice Lee specifically found that any counterclaim that Transglobal claimed did not provide it with a right of legal or equitable set-off from Stone Sapphire's Summary Judgment.
80 While this Court acknowledges that the appeals of Justice Lee's judgments are extant, there is "no principle which says that a decision of the trial court or a chambers judge has no effect or is presumed wrong until the Court of Appeal finally at the end of the appeal disposes of it," Alberta (Minister of Consumer & Corporate Affairs) v. Bennett (1992), 131 A.R. 184 (Alta. C.A. [In Chambers]).
81 McEwan J. in Exner, Re, 2003 BCSC 260, 41 C.B.R. (4th) 49 (B.C. S.C.) expressed the view that the trustee in that case had a duty to scrutinize a certificate of judgment obtained by a creditor. One should not, however, ignore the fact that the court in that case was considering a default judgment.
82 Thus, MNP was incorrect when it did not give recognition to the judgments of Justice Lee and Justice Topolniski.
VI. Summary
83 Stone Sapphire's appeal shall be on the record. There will be no de novo hearing. The record that this Court will review and that the parties will argue on appeal will be comprised of the proof of claim, the trustee's notice of valuation or disallowance and all of the material that the trustee considered in determining that the claim was not provable or in valuing the claim, including the judgments of Justices Lee and Topolniski. If the parties are unable to agree as to what precisely constitutes the record, they may apply to the court for a determination of that issue.
84 With respect to the Kulbabas' claim, the parties will, in the first instance, argue whether the Kulbabas' claim is provable. Thereafter, if this Court finds that it is a provable claim, this Court may order MNP to value it, as MNP is required so to do by BIA s. 135(1.1). Order accordingly.
Footnotes * A corrigendum issued by the court on April 2, 2009 has been incorporated herein.
End of Document Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 14
TAB 9
9 Oil Lift Technology Inc. v. Deloitte & Touche Inc., 2012 ABQB 357, 2012 CarswellAlta 935 2012 ABQB 357, 2012 CarswellAlta 935, [2012] A.W.L.D. 3278, [2012] A.W.L.D. 3279...
2012 ABQB 357 Alberta Court of Queen's Bench
Oil Lift Technology Inc. v. Deloitte & Touche Inc.
2012 CarswellAlta 935, 2012 ABQB 357, [2012] A.W.L.D. 3278, [2012] A.W.L.D. 3279, [2012] A.W.L.D. 3280, [2012] A.W.L.D. 3281, [2012] A.J. No. 548, 217 A.C.W.S. (3d) 528, 98 C.B.R. (5th) 77
In the Matter of the Bankruptcy of Sapient Grid Corp.
Oil Lift Technology Inc. Appellant and Deloitte & Touche Inc. Respondent
Reg. W.S. Schlosser
Heard: October 13, 2011; November 10, 2011; February 9, 2012 Judgment: May 28, 2012 Docket: Edmonton BE03-1502756
Counsel: Karen Fellowes for Appellant B. Beggs — Trustee in Bankruptcy R. Nickerson for Harry Renneberg H. Kobler — Claimant Ken Pawlyna — Office of the Superintendent of Bankruptcy
Subject: Insolvency Headnote Bankruptcy and insolvency --- Proving claim — Practice and procedure — Miscellaneous Registrar has power under s. 192(6) of Bankruptcy and Insolvency Act to direct that matter of valuation of claim proceed to trial. Bankruptcy and insolvency --- Bankruptcy and insolvency jurisdiction — Jurisdiction of courts — Jurisdiction of registrar Registrar has power under s. 192(6) of Bankruptcy and Insolvency Act to direct that matter of valuation of claim proceed to trial. Bankruptcy and insolvency --- Proving claim — Provable debts — Contingent claims Threshold for establishing existence of contingent or unliquidated claim is low — Existence of claim need not be established on balance of probabilities to ordinary civil standard — There must be air of reality to claim and it must not be too remote or speculative. Bankruptcy and insolvency --- Proving claim — Provable debts — Miscellaneous Intellectual property claims — Author of computer program is owner of program unless ownership is displaced by employment or agreement — It is not for claimant to disprove potential exceptions to ownership.
APPEALS by claimants from disallowance of claims by trustee in bankruptcy.
Reg. W.S. Schlosser:
1 These are three appeals of the Trustee's disallowance of property claims.
2 The situation appears complex but, on examination, the basic facts are relatively straightforward and, for the most part, not in dispute. However, there is conflicting evidence on some key issues.
3 Oil Lift Technology Inc. hired the Bankrupt, Sapient Grid Corp. to produce an oilwell site device that would allow remote monitoring and control of well sites (the "AMOS System"). Sapient undertook the project with the assistance of Harold Kobler and Terry Renneberg. Oil Lift advanced funds to Sapient and a prototype was built.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 1 Oil Lift Technology Inc. v. Deloitte & Touche Inc., 2012 ABQB 357, 2012 CarswellAlta 935 2012 ABQB 357, 2012 CarswellAlta 935, [2012] A.W.L.D. 3278, [2012] A.W.L.D. 3279...
4 The prototype went to Australia for testing in the field. It was installed with less than ideal timing or ideal circumstances. The system required input and contribution from a variety of sources, (including Oil Lift) for it to work. Both Kobler and Renneberg wrote some of the computer code for different portions of the application.
5 There is conflicting evidence about the status of the system at the end of the test. But it is clear that the system was not complete. It required work.
6 Oil Lift sued Sapient and Terry Renneberg, March 22, 2011. In general terms, the lawsuit is to recover the amounts Oil Lift paid to Sapient. It also seeks unliquidated damages for, inter alia, breach of warranty. The action against Renneberg is based in misrepresentation, breach of duty and the tort of interference with contractual relations.
7 Sapient filed a voluntary assignment in bankruptcy in late May 2011. The AMOS project was never completed.
8 Oil Lift sought to prove its claim in the bankruptcy. This claim was disallowed by the Trustee. This is the first appeal.
9 The second appeal has primarily to do with the ownership of the intellectual property comprising the AMOS System. Mr. Renneberg has asserted a claim for this together with a claim for some other physical property. This claim was also disallowed by the Trustee. Mr. Renneberg has appealed.
10 The Trustee's first disallowance and the appeal of that disallowance resulted in an explosion of evidence. There were six very detailed Affidavits prepared; variously in support of the disallowance, or the appeal, and two cross-examinations on the Affidavits. The cross-examinations themselves exceed one hundred pages.
11 The Trustee's disallowance of Mr. Renneberg's section 81 property claim prompted two further Affidavits.
12 Mr. Kobler asserted a property claim in January of this year which was also disallowed by the Trustee. The disallowance prompted a further detailed Affidavit on appeal.
13 In the interim, Mr. Kobler sought access to documents in the bankruptcy and the Trustee applied to sell the Bankrupt's hard assets, which was opposed and a qualified Order was granted.
14 The lawsuit underlying the first disallowance has now grown to include a Counterclaim and Third Party proceedings. Given this additional evidence, the three appeals now before me are quite different from the claims initially presented to the Trustee.
15 There are three legal questions arising from the Trustee's disallowances and these late developments:
(1) The standard of review to be applied to a Trustee's disallowance;
(2) Whether an appeal from a Trustee's disallowance is de novo, and whether new materials can be considered;
(3) If the appeals are allowed, the options open to a Registrar to bring these matters to a conclusion.
Standard of Review
16 Subsections 135(1) and (1.1), which deal with proof of claims and provable contingent or unliquidated claims, are mandatory in terms of the Trustee's duties and obligations. The decided cases tell us that the standard of review of a Trustee's rejection of a claim is "correctness". The standard of review of a Trustee's valuation of a contingent or unliquidated claim is "reasonableness". Re Transglobal Communication Group Inc., 2009 ABQB 194 at para. 74, per Yamauchi, J.
17 Here, all of the claims were rejected, so the starting point for the review of the Trustee's disallowance is correctness.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 2 Oil Lift Technology Inc. v. Deloitte & Touche Inc., 2012 ABQB 357, 2012 CarswellAlta 935 2012 ABQB 357, 2012 CarswellAlta 935, [2012] A.W.L.D. 3278, [2012] A.W.L.D. 3279...
18 The threshold for establishing the existence of a contingent or unliquidated claim is low. In general terms, there must be an 'air of reality' to the claim. The claim must not be too remote or speculative. The existence of the claim need not be established on a balance of probabilities to the ordinary civil standard.
Confederation Treasury Services Ltd., Re (1997), 43 C.B.R. (3d) 4 (Ont. C.A.);
Experienced Equipment Sales & Rentals Inc., Re, 2011 ABQB 641 (Alta. Q.B.), per Belzil, J.
National Bank of Canada v. Merit Energy Ltd., 2001 ABQB 583 (Alta. Q.B.), per LoVecchio, J.
19 The Oil Lift Statement of Claim discloses a cause of action. It is not too remote or speculative. It is not necessary to resort to further materials or evidence to see that the claim passes the low initial threshold. Accordingly, the appeal of the disallowance of the Oil Lift's claim is allowed. Valuation, however, is another matter and will be discussed below.
Section 81 Claims
20 Both Kobler and Renneberg have advanced section 81 claims. Section 81 provides that the person claiming property in possession of the Bankrupt should provide a sufficiently particularized Proof of Claim (subsection 81(1), (2)). Section 81(3) puts the onus on the claimant to establish their property claim. (Melnitzer, Re (1991), 9 C.B.R. (3d) 30, 87 D.L.R. (4th) 696 (Ont. Bktcy.)).
21 The starting point for intellectual property claims is the federal Copyright Act, R.S.C. 1985, C-42. The author (of a computer program) is the owner of the program in issue (section 13(1)), unless ownership is displaced by employment, or agreement. Underwriters' Survey Bureau Ltd. v. Massie & Renwick Ltd., [1940] S.C.R. 218 (S.C.C.). (There is a similar provision with respect to author's manuscripts in section 83 of the Bankruptcy and Insolvency Act).
22 In this case, the evidence does not disclose any clear agreement displacing ownership.
23 That leaves employment. Among many decided cases on the topic, 671122 Ontario Ltd. v. Sagaz Industries Canada Inc., 2001 SCC 59 (S.C.C.) and, more recently (for example), Alberta Permit Pro v. Booth, 2007 ABQB 562 (Alta. Q.B.), per Reid, J. at paras. 129-147, set out the considerations for determining whether a person is an employee. The tests in those cases are not satisfied on the evidence before me. The gist of the evidence in the present case is that Renneberg and Kobler were more like joint venturers with the Bankrupt, than employees.
24 It is also not for the claimant to disprove potential exceptions to ownership. On balance, the evidence does not demonstrate that one of the exceptions should apply. Applying the standard of correctness to the section 81 claims, the appeals of the Trustee's disallowances of the property claims are also allowed.
Fresh Evidence on Appeal
25 The uncontroverted evidence is that there was a contract between Oil Lift and the Bankrupt, although the contract was not formalized, and some of the terms are in dispute. There is no doubt that the contract was partly performed.
26 We do not know the value of the existing equipment, or the value of the technology in its present state of development. However, it appears that the primary value, if any, is in the intellectual property rather than the hardware itself.
27 In the simplest terms, the evidence discloses that there was a contract and a breach. If the contract was to provide a workable, saleable product, the Bankrupt's efforts plainly fell short of the mark. However, the technology was to be developed with the participation of the claimant, Oil Lift, and overall responsibility for the deficiencies in the prototype is not entirely clear cut. The division of responsibility remains to be determined.
28 Sapient received a substantial amount of money from Oil Lift for the development of the AMOS system. Exactly how much is in issue and is not clearly demonstrated. There are further issues about whether these contributions were refundable or
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 3 Oil Lift Technology Inc. v. Deloitte & Touche Inc., 2012 ABQB 357, 2012 CarswellAlta 935 2012 ABQB 357, 2012 CarswellAlta 935, [2012] A.W.L.D. 3278, [2012] A.W.L.D. 3279... whether they were investment-type expenses intended to be used for the development of the final product. There are also issues about the extent to which a working final product was warranted by the Bankrupt.
29 The role of a Trustee with respect to the determination of an unliquidated or contingent claim under section 135 of the Bankruptcy and Insolvency Act is, two fold. First of all the Trustee has to decide whether the claim is not too remote or speculative. Once the claim passes this test, the next step is to value it.
30 The authorities determining what evidence should be considered on appeal are mixed. Some cases say that appeals are de novo and fresh evidence can be considered on appeal as a matter of course.
Eskasoni Fisheries Ltd., Re (2000), 16 C.B.R. (4th) 173 (N.S. S.C.);
Alberta Permit Pro Inc., Re, 2011 ABQB 141 (Alta. Q.B.);
Dryco Building Supplies Inc. v. Wasylishyn, 2001 ABQB 641 (Alta. Master).
31 Other cases hold that appeals from a Trustee are 'true appeals'. They are essentially appeals on the record that was before the Trustee.
Galaxy Sports Inc., Re, 2004 BCCA 284 (B.C. C.A.).
32 A hybrid line exists as well:
San Juan Resources Inc., Re, 2009 ABQB 55 (Alta. Q.B.) (Prowse, R.);
Transglobal Communications Group Inc., Re, 2009 ABQB 195 (Alta. Q.B.) (at para. 49-50, per Yamauchi, J.;
Mamczasz Electrical Ltd. v. South Beach Homes Ltd., 2010 SKQB 182 (Sask. Q.B.), per Schwann, R;
33 The hybrid approach is that an appeal is on the record but it can be de novo, involving fresh evidence, where the interests of justice require it. (This was also the fall back position in the Alberta Permit Pro Inc., Re case).
34 The Bankruptcy and Insolvency Act is sometimes said to be a "businessman's statute'. All that means is that the Act should be administered in a practical and accessible way. Rigid formalism should be rejected and a pragmatic approach should be preferred. However, a claimant should be encouraged to put their best foot forward with their proof of claim. Automatically accepting fresh evidence on appeal would encourage a careless approach to initial proofs. It would also have the effect of transferring the obligations imposed upon the Trustee under section 135 of the Act, to the Court. Accordingly, some explanation ought to be given about why the material now before a Registrar was not initially before the Trustee.
35 This case is striking in that only a faction of the materials now before the court were before the Trustee when the claims were initially considered. However, despite the ever expanding evidence, there was enough before the Trustee to demonstrate that Oil Lift's contingent, unliquidated claim was not too remote or speculative. There was also, in my view, not enough to demonstrate that ownership of the intellectual property had been displaced from its authors.
36 The bulk of the evidence now before this court demonstrates, unequivocally, that there are live issues in the underlying lawsuit advanced by Oil Lift. Only one party to that lawsuit is bankrupt. The evidence clearly demonstrates that any damages claimed in the claim (or the counterclaim) are not now capable of assessment on this evidence, or in this forum. Most of the evidence generated after the initial disallowance demonstrates that the claim is in no state to be valued even with the benefit of the additional evidence.
Options
37 A Registrar's powers are determined by section 192 of the Bankruptcy and Insolvency Act. Among the powers set out in section 192 are the powers to hear and determine appeals from the decisions of a Trustee (section 192(1)(n)) and to hear
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 4 Oil Lift Technology Inc. v. Deloitte & Touche Inc., 2012 ABQB 357, 2012 CarswellAlta 935 2012 ABQB 357, 2012 CarswellAlta 935, [2012] A.W.L.D. 3278, [2012] A.W.L.D. 3279... and determine any matter, with the consent of the parties (section 192 (1)(j)). The Registrar may also refer a matter to a Judge for disposition (section 192(6)). (There is a parallel provision in section 13 of the Court of Queen's Bench Act permitting a Master to refer a matter to a Judge).
38 Some of the options open to a Registrar on an appeal from a Trustee's disallowance, in addition to agreeing with the Trustee and upholding the Trustee's determination, would be:
(1) to allow the appeal and assess the claim,
(2) to allow the appeal and refer it back to the Trustee for a determination,
(3) to allow the appeal and permit a revised Proof (Sinnathurai (Trustee of) v. Sabapathipillai (2010), 69 C.B.R. (5th) 287 (Ont. S.C.J.));
All of which would be consistent with the Registrar's consideration of new evidence following a disallowance.
39 Another option would be to allow the appeal and direct a trial. The authorities appear to be divided on this point. A trial was directed in: Masson, Re (1992), 17 C.B.R. (3d) 230, 136 A.R. 349 (Alta. Q.B.) (pursuant to sections 2 and 187(8) of the BIA); Phillips, Re (1994), 27 C.B.R. (3d) 126 (Alta. Q.B.) (Funduk, Registrar); Page, Re, 2006 ABQB 430 (Alta. Q.B.) (Waller, Registrar). Registrar Prowse in the San Juan Resources Inc., Re case directed a Summary Trial.
40 Doubt appears to be cast upon the option of directing a trial by Stuart & Sutterby, Re (1930), 11 C.B.R. 279 (Ont. S.C.) (Aff'd) (1930), 12 C.B.R. 267 (Ont. C.A.). This decision was followed by the Manitoba Court of Queen's Bench in Unger, Re, 2008 MBQB 193 (Man. Q.B.) and Kalinchuk (Trustee of) v. Martinussen (2000), 17 C.B.R. (4th) 238 (Man. Q.B.). In my view, the Ontario Court of Appeal decision may raise an issue about the power of a Registrar to hear a trial but I agree with the decisions of the Alberta Registrars noted above. Even if a Registrar does not have a power to try an issue, directing that a matter go to trial, if not within the Registrar's powers, under section 2 and 187 of the BIA, would certainly be justified by section 192(6), which permits the Registrar to refer a matter to a Judge. I have some difficulty with the idea that a Registrar could only refer a matter to a Judge for a determination about whether a trial should be directed. (Note: The 2012 Annotated Bankruptcy and Insolvency Act, Houlden et al (at I§27, I§53)). An interpretation that favours a more complex and less expedient administration of the Act is not to be preferred
41 Deciding whether something can be decided summarily, or whether it should go to trial is one of the most familiar and natural parts of a Masters jurisdiction. It is only logical here that the Registrar should exercise a similar power.
42 In this case, there is conflicting evidence, issues of credibility, questions of apportionment of responsibility, and there will likely be expert testimony. It appears to be tailormade for a trial. This would not be an appropriate circumstance to send it back to the Trustee, even with the new material, to attempt to value the claim. Accordingly, the valuation of the claim should proceed to trial. It would be appropriate to have the claims and cross claims of the noninsolvent parties determined at the same time. If necessary an Order can be made pursuant to section 69.4, allowing Oil Lift's action to proceed. This may be the most expeditious way of dealing with these issues. Appeals allowed; trial ordered with respect to valuation of claims.
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TAB 10
10 Eskasoni Fisheries Ltd., Re, 2000 CarswellNS 116 2000 CarswellNS 116, [2000] N.S.J. No. 122, 16 C.B.R. (4th) 173, 187 N.S.R. (2d) 363...
2000 CarswellNS 116 Nova Scotia Supreme Court
Eskasoni Fisheries Ltd., Re
2000 CarswellNS 116, [2000] N.S.J. No. 122, 16 C.B.R. (4th) 173, 187 N.S.R. (2d) 363, 585 A.P.R. 363
In the Matter of the Bankruptcy of Eskasoni Fisheries Limited
Registrar Hill
Heard: March 1, 2000 Judgment: April 13, 2000 Docket: 21584, Estate No. 076085
Counsel: Timothy C. Matthews, Q.C., for William H. Richardson. Charles Peter McLellan, Q.C., for George S. Khattar, Q.C., on behalf of Trustee, Connor & Associates Limited.
Subject: Insolvency Headnote Bankruptcy --- Proposal — Practice and procedure Employee was president and CEO of company pursuant to written employment agreement, which was subject to renewal on annual basis — Employee was advised by secretary of board that contract would not be renewed but that company would fulfil contractual obligations until end of calendar year — Company filed proposal under Part III of Bankruptcy and Insolvency Act — Employee filed claim for amount allegedly due under employment contract — Trustee disallowed claim on ground that contract of employment had not been approved by board of directors — Employee appealed trustee's decision — Appeal dismissed — Where creditor appeals to court from decision of trustee to disallow claim, appeal will proceed by way of trial de novo, and proof of claim and notice of disallowance will perform function of pleadings — As Bankruptcy and Insolvency General Rules were silent as to amendment of pleadings, procedure for amendments under Nova Scotia Civil Procedure Rules was applied — Trustee was entitled to adduce new ground for denial of claim not included in notice of disallowance, namely, that no payment was required under terms of contract — Notice of disallowance was amended accordingly — Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, Part III — Bankruptcy and Insolvency General Rules, C.R.C. 1978, c. 368 — Nova Scotia, Civil Procedure Rules. Bankruptcy --- Proposal — Approval by court — Appeal from order approving or rejecting proposal Employee was president and CEO of company pursuant to written employment agreement, which was subject to renewal on annual basis — Agreement contained clause that provided for lump sum payment of six months' salary as damages for wrongful dismissal — Employee was advised by secretary of board that contract would not be renewed but that company would fulfil contractual obligations until end of calendar year — Company filed proposal under Part III of Bankruptcy and Insolvency Act — Employee filed claim for six months' salary allegedly due under employment contract — Trustee disallowed claim on ground that contract of employment had not been approved by board of directors — Employee appealed trustee's decision — Appeal dismissed — Clause providing penalty for wrongful dismissal must be interpreted as having proportional relationship to damages for which it was designed to compensate — As termination of employment occurred just prior to end of calendar year, it was unreasonable to allow employee to benefit from provision — Upon interpretation of contract, there was no factual basis to support claim — Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, Part III.
APPEAL by creditor from decision of trustee disallowing claim filed in bankruptcy proposal.
Registrar Hill:
1 William H. Richardson ("Richardson") appeals from the decision of the trustee, of Eskasoni Fisheries Limited ("Eskasoni") to disallow Richardson's claim filed in Eskasoni's Proposal. This appeal raises an interesting and novel issue. On such an appeal
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 1 Eskasoni Fisheries Ltd., Re, 2000 CarswellNS 116 2000 CarswellNS 116, [2000] N.S.J. No. 122, 16 C.B.R. (4th) 173, 187 N.S.R. (2d) 363... can the trustee rely on grounds to disallow the creditor's claim other than those set out in the Notice of Disallowance provided to the creditor pursuant to section 135(3) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3.
Facts
2 Richardson was employed as President and Chief Executive Officer of Eskasoni from its incorporation in 1993, until the end of 1998. His employment was subject to a written employment contract prepared by Richardson on an annual basis. For 1998, the terms and conditions of employment were as set out in a letter dated January 22, 1998, from Richardson to Chief Allison Bernard ("Chief Bernard") of the Eskasoni First Nation. This agreement is reproduced as schedule "A" to these reasons.
3 On August 26, 1998, Richardson was advised by Blair Francis ("Francis"), Secretary of the Board of Directors of Eskasoni, that Richardson's employment contract, which expired on December 31, 1998, would not be extended.
4 On October 1, 1998, Richardson wrote to Keith Mahar ("Mahar"), a Co-Manager of the Eskasoni Band, acknowledging that his employment contract which expired on December 31, 1998, would not be extended. In addition, that correspondence further acknowledged that if the company was sold prior to the termination of his employment contract he would be paid in accordance with the employment contract up to December 31, 1998.
5 There was further correspondence in October which included a confirmation on the part of Richardson that in the event the company was sold prior to December 31, 1998, he would receive his full salary to the end of the year.
6 Apparently negotiations were underway to sell the operation of Eskasoni to Scotia Rainbow Inc. (Scotia). Scotia did not purchase the operations of Eskasoni prior to the end of the year, but did however enter into an agreement to manage Eskasoni on or about December 7, 1998.
7 There is some dispute in the affidavits filed by Mahar and Richardson as to the contents of a telephone conversation involving those two individuals on December 7, 1998. Mahar states that as a result of Scotia beginning to manage Eskasoni immediately, he advised Richardson that he would not be required to continue with his management duties for the remainder of the employment contract, although Eskasoni would carry out it's contractual obligations under the contract to pay him until the end of the year. Richardson's version of the conversation is simply that he was told that his services would no longer be required as Eskasoni was being taken over by Scotia.
8 Mahar followed up the conversation with a letter to Richardson on December 7, 1998. This letter confirmed the actions Richardson should take. These included signing the regular payroll cheques for the pay period then due, calculating and faxing to Mahar Richardson's salary for the remainder of the year, and not signing any further cheques or entering into any further commitments. The letter also noted that upon receipt of the calculation of Richardson's salary by fax, Mahar would sign the fax and send it back to Richardson as approval for preparation of his cheque. Richardson faxed his salary calculation which was approved by Mahar.
9 On the same day, December 7, the solicitor for Eskasoni wrote to Richardson purporting to acknowledge that Richardson's services on behalf of Eskasoni had been terminated with his agreement. His correspondence had a resignation letter to be signed by Richardson. Richardson declined to sign.
10 Eskasoni subsequently filed a proposal pursuant to Part III of the B.I.A. That proposal was ultimately approved by the Court on April 21, 1999. Richard filed a claim in the amount of $60,000.00. Essentially, Richardson alleged that $60,000.00 was due to him according to the terms of his employment contract with Eskasoni:
On December 23, 1999, the trustee disallowed the claim on the basis that:
The alleged contract of employment had not been approved by the Company and the Board of Directors.
11 An appeal from that disallowance was taken by Richardson pursuant to section 135(4) of the B.I.A.
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Submissions on Appeal
12 Before me the trustee made two submissions:
1. Chief Bernard did not have the authority of Eskasoni to enter into the employment contract with Richardson, and therefore the contract is not enforceable in law;
2. Even if the employment contract was valid, the obligations under the contract were fulfilled and Richardson is not entitled to any compensation in accordance with the contract's terms.
13 The first submission was not seriously argued, and all the evidence before me leads to the inescapable conclusion that Chief Bernard did have the authority to enter into the employment contract with Richardson. The contract is valid and enforceable.
14 That leaves me with the grounds for denial advanced for the first time by the trustee before me: that Richardson is not entitled to any compensation according to the actual terms of the contract.
15 Counsel for Richardson takes exception to the trustee advancing a ground for disallowance not contained in the Notice of Disallowance. Counsel for Richardson also takes the position that Richardson is entitled to compensation according to the terms of the employment contract.
The Nature of an Appeal to the Court from a Notice of Disallowance
16 Where a creditor appeals to the court from the decision of a trustee to disallow a claim that appeal will proceed by way of trial de novo. While I have found no specific case or commentary that makes this point clear, it is clear from a review of the cases generally that a Judge or Registrar hearing an appeal from a trustee's decision is not required simply to proceed upon the information before the trustee. In other words, on such appeals the court is entitled to accept and consider all evidence relevant to the claim.
17 In contrast, an appeal from a Registrar or Judge who has heard and determined an appeal from a decision of a trustee to disallow a claim in first instance is a true appeal, and does not, absent exceptional circumstances, proceed by way of trial de novo: Re MacCulloch Estate (1992), 113 N.S.R. (2d) 367, 309 A.P.R. 367, 13 C.B.R. (3d) 201 (N.S. T.D.); Re Achilles (1993), 83 B.C.L.R. (2d) 116, 23 C.B.R. (3d) 20 (B.C. S.C.); Re Gervais (1993), 21 C.B.R. (3d) 95 (Ont. Bktcy.). Although on appeal from the decision of a Registrar the court will have a broad discretion to authorize the presentation of evidence, it does appear that the decision of a Registrar will not be disturbed unless the Registrar committed errors of a nature likely to justify the interference of a court on appeal.
18 This deference exhibited by appeal courts to decisions of those courts trying a matter at first instance is in large part founded upon the principle that the court of first instance is in a unique position having heard all the evidence and arguments in support of the positions taken by the various parties to the controversy. If a Registrar was restricted simply to dealing with the record of evidence as presented to a trustee when determining an appeal of this nature, there would be no reason for a court on appeal to exhibit such deference. That court would be at least equally capable of reaching it's own conclusion based upon the record, if the record of evidence was restricted to that before the trustee.
19 I note that a trustee in either accepting or rejecting a proof of claim is acting in his or her capacity as administrator of the bankrupt estate. The trustee conducts no hearing when determining whether or not to accept or reject the proof of claim. Thus no record is generated and in order to do justice to the parties it is necessary for a Registrar, or indeed a Judge, to hear the matter de novo in order to render an appropriate decision.
The Nature of the Proof of Claim and Notice of Disallowance
20 In order to properly put an issue before a court or tribunal for determination pleadings of some form are necessary. In my view, on an appeal to a Registrar against the disallowance of a creditor's claim by a trustee the proof of claim and the notice
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 3 Eskasoni Fisheries Ltd., Re, 2000 CarswellNS 116 2000 CarswellNS 116, [2000] N.S.J. No. 122, 16 C.B.R. (4th) 173, 187 N.S.R. (2d) 363... of disallowance perform the function of pleadings. In this case, the creditor argues that as the trustee disallowed his claim on one specific basis, the trustee should not be allowed to advance a separate and distinct basis for disallowing the claim on the appeal. I disagree.
21 I accept and endorse the view of the Manitoba Court of Appeal in Atlas Acceptance Corp. v. Fratkin, [1978] 3 W.W.R. 289, 27 C.B.R. 220 (Man. C.A.), to the affect that the practice in respect to proofs of claim has always been and should be liberal and free from technicalities.
22 The Bankruptcy and Insolvency Rules are silent regarding amendments to pleadings. Bankruptcy and Insolvency Rule 3 provides:
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.
23 As no procedure appears to exist to amend a notice of disallowance it is my view that the Provincial Civil Procedure Rules as they pertain to the amendment of pleadings should be applied: Goertz (Trustee of) v. Goertz, [1994] 8 W.W.R. 250, 26 C.B.R. (3d) 222, 122 Sask. R. 93 (Sask. Q.B.).
24 Nova Scotia Civil Procedure Rule 15 was considered by the Appeal Division of the Nova Scotia Supreme Court in Consolidated Foods Corp. of Canada v. Stacey (1986), 13 C.P.C. (2d) 137, 76 N.S.R. (2d) 182, 189 A.P.R. 182 (N.S. C.A.). The Court noted:
A review of the case law leads us to conclude that the amendment should have been granted unless it was shown to the Judge that the applicant was acting in bad faith or that by allowing the amendment the other party would suffer serious prejudice that could not be compensated by costs. (p.183 N.S.R.)
25 In this particular case the trustee implicitly requested leave to advance the argument that given the specific terms of the contract between Richardson and Eskasoni no payment was called for and that the proof of claim might be rejected on that basis. I note that I granted an adjournment based in part on other reasons and that both parties had ample opportunity to advance evidence and argument on the point at the hearing before me. In these circumstances, I fail to see any serious prejudice occasioned to Mr. Richardson. Nor is there any question of bad faith on the part of the trustee.
26 In summary, it is my view that the notice of disallowance should be considered to be amended to that extent necessary to allow the trustee to advance the argument made at the hearing before me.
The Merits
27 The trustee must succeed on the basis of the amended reasons for disallowance. I have carefully considered the circumstances surrounding the ending of Richardson's employment with Eskasoni. It is clear that as early as August of 1998 Richardson was aware that his employment would cease at the end of the contract period i.e. December 31, 1998, and he would not thereafter continue in the employment of Eskasoni. To accept that Richardson should now receive a very substantial benefit simply because he was not required to perform his duties for the last three weeks of the contract is not, in my view, a construction that the contract will reasonably bear. In my view, there was no termination of employment prior to December 31, 1998, and thus no question of Richardson being able to invoke paragraph 8 of the January 22, 1998 agreement.
28 If I am wrong in this finding of fact, I would as a matter of law find the provisions of paragraph 8 of the agreement, as they pertain to the payment of $60,000.00 on termination, to be unenforceable as a penalty, and not liquidated damages. Insofar as the approach to this question is concerned, it is useful to quote from the judgment of Puddester, J. in Tony Murray & Associates Co. v. Law (1991), 93 Nfld. & P.E.I.R. 292, 292 A.P.R. 292 (Nfld. T.D.), beginning at p.312 where the learned Judge states:
[129] In D.H.O. v. Patino Management Services Ltd. (1984), 5 C.C.E.L. 11 (Ont. H.C.) (The only authority cited dealing with the analysis of the issue in the context of employment), Galligan, J., states at p.19:
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 4 Eskasoni Fisheries Ltd., Re, 2000 CarswellNS 116 2000 CarswellNS 116, [2000] N.S.J. No. 122, 16 C.B.R. (4th) 173, 187 N.S.R. (2d) 363...
The law is concisely set out by Chief Justice Laskin in Thermidaire Corp. v. H.F. Clarke Ltd., [1976] 1 S.C.R. 319; 17 C.P.R.(2d) 1; 54 D.L.R. (3d) 385, 3 N.R. 133 [varied [1976] 1 S.C.R. 340n, 18 C.P.R. (2d) 32, 54 D.L.R. (3d) 399] at pp. 392-393 [D.L.R.]:
The interference of the Courts does not follow because they conclude that no attempt should have been made to predetermine the damages or their measure. It is always open to the parties to make the predetermination, but it must yield to judicial appraisal of its reasonableness in the circumstances.
It is clear that, the determination of whether an amount in such a clause is liquidated damages or a penalty, is a matter to be considered according to the circumstances of each case.
It is clear from the judgment of the House of Lords in Dunlop Pneumatic Tyre v. New Glasgow & Motor Co., [1915] A.C. 79, at 86; [1914-15] All E.R. Rep [sic] 739, that:
The question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of the breach. (The underlining is mine).
[130] In the earlier Canadian case of St. Catherines Improvement Co. v. Rutherford (1914), 31 O.L.R. 574 (Ont. C.A.), Falconbridge, C.J.K.B., held at p. 581:
The rules for determining whether a provision of this kind is a penalty or liquidated damages are laid down from textbooks of authority and with ample quotation of cases in Townsend v. Rumball, 19 O.L.R. 433 and McManus v. Rothschild (1911), 25 O.L.R. 138. In deciding this question, the Judge must take into consideration the intention of the parties, as evidenced by their language, and the circumstances of the case taken as a whole and viewed as at the time the contract was made.
29 Whether the sum stipulated in paragraph eight is a penalty or liquidated damages is a question to be determined by me upon construction of the contract as a whole. In doing so, I should take into account the circumstances surrounding the making of the contract judged at the time the contract was made. The bottom line is that the term should appear reasonable in all the circumstances.
30 Paragraph eight of the agreement is not and was not reasonable at the time of the making of the contract. Paragraph eight provides for the payment of six months salary in a lump sum at the time of termination. It does not matter whether termination takes place on day one of the contract, or day 365. It does not seem to me that there is any real relationship between the specified sum and the damages likely to arise should Richardson have been wrongly dismissed during the term of the agreement. In other words, this clause might be triggered where Richardson actually suffered a very minor loss, as indeed might have been the case had he really been dismissed in December, 1998. In my view, such a clause should have some proportional relationship to the damages for which it is designed to compensate. The clause fails this proportional relationship test.
Disposition
31 The appeal is denied. However, given that the original grounds of disallowance by the trustee were not sustained it is appropriate that there be no costs awarded. Appeal dismissed.
Appendix "A"
Eskasoni Fisheries Limited
HEAD OFFICE: P.O. Box 186, New Waterford, Cape Breton, Nova Scotia B1H 4k4
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 5 Eskasoni Fisheries Ltd., Re, 2000 CarswellNS 116 2000 CarswellNS 116, [2000] N.S.J. No. 122, 16 C.B.R. (4th) 173, 187 N.S.R. (2d) 363...
Phone: (902)862-6481 Fax: (902)862-9251
January 22, 1998
Chief Allison Bernard
Eskasoni First Nation
Eskasoni, N.S
Personal & Confidential
Dear Allison
I propose a new employment agreement for consideration by the Band Council and yourself as follows.
1. My services be retained as President & C.E.O from January 1st, to December 31, 1998.
2. The annual renumeration be $120,000.00.
3. Allowances of $2,500.00 a month for travel and living expenses.
4. The company provide medical insurance benefits including term life insurance of $500,000.
5. Paid eight weeks vacation to be taken during the calendar year. If for any reason vacation is not taken then I would be entitled to pay in lieu of vacation.
6. Profit sharing be paid based on 20% of pre-tax income for fiscal year ending May 31, 1998. Pre-tax income is before any expenses charged by Eskasoni Band Council or Eskasoni Economic Development Corporation.
7. The Eskasoni Band Council shall indemnify and keep me protected against all complaints, actions, demands or suits including legal costs which may be taken against me in my position as President and Chief Executive Officer of Eskasoni Fisheries Limited. The indemnification does not include any illegal acts or fraud that I may commit in my capacity as President and C.E.O of the company.
8. If my employment is terminated by the company, Eskasoni Fisheries Limited or Shareholder; Eskasoni Band Council at any time during my employment other than for just cause; the company shall pay me six months salary in a lump sum at the time of termination. If there is a change in ownership of the company I will receive a lump sum payment of $120,000 at the date of ownership change.
9. If I wish to terminate my employment I will give three months written notice of my intent to leave the company and receive full salary during the three month period.
Yours Sincerely
[signature]
W.H Richardson
Pres. & C.E.O
Accepted on behalf of Eskasoni Band Council
[signature]
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 6 Eskasoni Fisheries Ltd., Re, 2000 CarswellNS 116 2000 CarswellNS 116, [2000] N.S.J. No. 122, 16 C.B.R. (4th) 173, 187 N.S.R. (2d) 363...
Chief Allison Bernard
February 11 1998
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TAB 11
11 Sino-Forest Corp., Re, 2012 ONSC 4377, 2012 CarswellOnt 9430 2012 ONSC 4377, 2012 CarswellOnt 9430, 218 A.C.W.S. (3d) 489, 92 C.B.R. (5th) 99
2012 ONSC 4377 Ontario Superior Court of Justice [Commercial List]
Sino-Forest Corp., Re
2012 CarswellOnt 9430, 2012 ONSC 4377, 218 A.C.W.S. (3d) 489, 92 C.B.R. (5th) 99
In the Matter of the Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36, as Amended
And In the Matter of a Plan of Compromise or Arrangement of Sino-Forest Corporation (Applicant)
Morawetz J.
Heard: June 26, 2012 Judgment: July 27, 2012 Docket: CV-12-9667-00CL
Counsel: Robert W. Staley, Jonathan Bell for Applicant Jennifer Stam for Monitor Kenneth Dekker for BDO Limited Peter Griffin, Peter Osborne for Ernst & Young LLP Benjamin Zarnett, Robert Chadwick, Brendan O'Neill for Ad Hoc Committee of Noteholders James Grout for Ontario Securities Commission Emily Cole, Joseph Marin for Allen Chan Simon Bieber for David Horsley David Bish, John Fabello, Adam Slavens for Underwriters Named in the Class Action Max Starnino, Kirk Baert for Ontario Plaintiffs Larry Lowenstein for Board of Directors
Subject: Insolvency Headnote Bankruptcy and insolvency --- Companies' Creditors Arrangement Act — Miscellaneous Applicant SFC was granted stay under Companies' Creditors Arrangement Act (CCAA) in March 2012 and on same date sales process order was granted — June 20, 2012 was established as claims bar date — SFC support of 72 per cent of noteholders for intended to plan of compromise or arrangement — Class actions had been commenced against SFC in both Ontario, Quebec, Saskatchewan, and New York State for damages resulting to purchase of shares in SFC at inflated prices — Applicant brought application for declaration that claims against it which resulted from ownership, purchase, or sale of equity interest in SFC, and related indemnity claims, were equity claims as defined in s. 2 of CCAA — Application granted — Basis for differentiation flowed from fundamentally different nature of debt and equity investments; shareholders had unlimited upside potential when purchasing shares, while creditors had no corresponding upside potential — Claims advanced in shareholder claims were clearly equity claims — Shareholder claims underlay related indemnity claims — Plain language in definition of equity claim in CCAA did not focus on identity of claimant, rather, it focused on nature of claim — It would be totally inconsistent to arrive at conclusion that would enable either auditors or underwriters, through claim for indemnification, to be treated as creditors when underlying actions of shareholders could not achieve same status.
APPLICATION by insolvent company for declaration that certain claims against it were equity claims pursuant to Companies' Creditors Arrangement Act.
Morawetz J.:
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Overview
1 Sino-Forest Corporation ("SFC" or the "Applicant") seeks an order directing that claims against SFC, which result from the ownership, purchase or sale of an equity interest in SFC, are "equity claims" as defined in section 2 of the Companies' Creditors Arrangement Act ("CCAA") including, without limitation: (i) the claims by or on behalf of current or former shareholders asserted in the proceedings listed in Schedule "A" (collectively, the "Shareholder Claims"); and (ii) any indemnification claims against SFC related to or arising from the Shareholder Claims, including, without limitation, those by or on behalf of any of the other defendants to the proceedings listed in Schedule "A" (the "Related Indemnity Claims").
2 SFC takes the position that the Shareholder Claims are "equity claims" as defined in the CCAA as they are claims in respect of a monetary loss resulting from the ownership, purchase or sale of an equity interest in SFC and, therefore, come within the definition. SFC also takes the position that the Related Indemnity Claims are "equity claims" as defined in the CCAA as they are claims for contribution or indemnity in respect of a claim that is an equity claim and, therefore, also come within the definition.
3 On March 30, 2012, the court granted the Initial Order providing for the CCAA stay against SFC and certain of its subsidiaries. FTI Consulting Canada Inc. was appointed as Monitor.
4 On the same day, the Sales Process Order was granted, approving Sales Process procedures and authorizing and directing SFC, the Monitor and Houlihan Lokey to carry out the Sales Process.
5 On May 14, 2012, the court issued a Claims Procedure Order, which established June 20, 2012 as the Claims Bar Date.
6 The stay of proceedings has since been extended to September 28, 2012.
7 Since the outset of the proceedings, SFC has taken the position that it is important for these proceedings to be completed as soon as possible in order to, among other things, (i) enable the business operated in the Peoples Republic of China ("PRC") to be separated from SFC and put under new ownership; (ii) enable the restructured business to participate in the Q4 sales season in the PRC market; and (iii) maintain the confidence of stakeholders in the PRC (including local and national governmental bodies, PRC lenders and other stakeholders) that the business in the PRC can be successfully separated from SFC and operate in the ordinary course in the near future.
8 SFC has negotiated a Support Agreement with the Ad Hoc Committee of Noteholders and intends to file a plan of compromise or arrangement (the "Plan") under the CCAA by no later than August 27, 2012, based on the deadline set out in the Support Agreement and what they submit is the commercial reality that SFC must complete its restructuring as soon as possible.
9 Noteholders holding in excess of $1.296 billion, or approximately 72% of the approximately $1.8 billion of SFC's noteholders' debt, have executed written support agreements to support the SFC CCAA Plan as of March 30, 2012.
Shareholder Claims Asserted Against SFC
(i) Ontario
10 By Fresh as Amended Statement of Claim dated April 26, 2012 (the "Ontario Statement of Claim"), the Trustees of the Labourers' Pension Fund of Central and Eastern Canada and other plaintiffs asserted various claims in a class proceeding (the "Ontario Class Proceedings") against SFC, certain of its current and former officers and directors, Ernst & Young LLP ("E&Y"), BDO Limited ("BDO"), Poyry (Beijing) Consulting Company Limited ("Poyry") and SFC's underwriters (collectively, the "Underwriters").
11 Section 1(m) of the Ontario Statement of Claim defines "class" and "class members" as:
All persons and entities, wherever they may reside who acquired Sino's Securities during the Class Period by distribution in Canada or on the Toronto Stock Exchange or other secondary market in Canada, which securities include those acquired
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over the counter, and all persons and entities who acquired Sino's Securities during the Class Period who are resident of Canada or were resident of Canada at the time of acquisition and who acquired Sino's Securities outside of Canada, except the Excluded Persons.
12 The term "Securities" is defined as "Sino's common shares, notes and other securities, as defined in the OSA". The term "Class Period" is defined as the period from and including March 19, 2007 up to and including June 2, 2011.
13 The Ontario Class Proceedings seek damages in the amount of approximately $9.2 billion against SFC and the other defendants.
14 The thrust of the complaint in the Ontario Class Proceedings is that the class members are alleged to have purchased securities at "inflated prices during the Class Period" and that absent the alleged misconduct, sales of such securities "would have occurred at prices that reflected the true value" of the securities. It is further alleged that "the price of Sino's Securities was directly affected during the Class Period by the issuance of the Impugned Documents".
(ii) Quebec
15 By action filed in Quebec on June 9, 2011, Guining Liu commenced an action (the "Quebec Class Proceedings") against SFC, certain of its current and former officers and directors, E&Y and Poyry. The Quebec Class Proceedings do not name BDO or the Underwriters as defendants. The Quebec Class Proceedings also do not specify the quantum of damages sought, but rather reference "damages in an amount equal to the losses that it and the other members of the group suffered as a result of purchasing or acquiring securities of Sino at inflated prices during the Class Period".
16 The complaints in the Quebec Class Proceedings centre on the effect of alleged misrepresentations on the share price. The duty allegedly owed to the class members is said to be based in "law and other provisions of the Securities Act", to ensure the prompt dissemination of truthful, complete and accurate statements regarding SFC's business and affairs and to correct any previously-issued materially inaccurate statements.
(iii) Saskatchewan
17 By Statement of Claim dated December 1, 2011 (the "Saskatchewan Statement of Claim"), Mr. Allan Haigh commenced an action (the "Saskatchewan Class Proceedings") against SFC, Allen Chan and David Horsley.
18 The Saskatchewan Statement of Claim does not specify the quantum of damages sought, but instead states in more general terms that the plaintiff seeks "aggravated and compensatory damages against the defendants in an amount to be determined at trial".
19 The Saskatchewan Class Proceedings focus on the effect of the alleged wrongful acts upon the trading price of SFC's securities:
The price of Sino's securities was directly affected during the Class Period by the issuance of the Impugned Documents. The defendants were aware at all material times that the effect of Sino's disclosure documents upon the price of its Sino's [sic] securities.
(iv) New York
20 By Verified Class Action Complaint dated January 27, 2012, (the "New York Complaint"), Mr. David Leapard and IMF Finance SA commenced a class proceeding against SFC, Mr. Allen Chan, Mr. David Horsley, Mr. Kai Kit Poon, a subset of the Underwriters, E&Y, and Ernst & Young Global Limited (the "New York Class Proceedings").
21 SFC contends that the New York Class Proceedings focus on the effect of the alleged wrongful acts upon the trading price of SFC's securities.
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22 The plaintiffs in the various class actions have named parties other than SFC as defendants, notably, the Underwriters and the auditors, E&Y, and BDO, as summarized in the table below. The positions of those parties are detailed later in these reasons.
Ontario Quebec Saskatchewan New York E&Y LLP X X - X E&Y Global - - - X BDO X - - - Poyry X X - - Underwriters 11 - - 2
Legal Framework
23 Even before the 2009 amendments to the CCAA dealing with equity claims, courts recognized that there is a fundamental difference between shareholder equity claims as they relate to an insolvent entity versus creditor claims. Essentially, shareholders cannot reasonably expect to maintain a financial interest in an insolvent company where creditor claims are not being paid in full. Simply put, shareholders have no economic interest in an insolvent enterprise: Blue Range Resource Corp., Re, [2000] 4 W.W.R. 738 (Alta. Q.B.) [Blue Range Resources]; Stelco Inc., Re [2006 CarswellOnt 407 (Ont. S.C.J. [Commercial List])], (2006) CanLII 1773 [Stelco]; Central Capital Corp., Re (1996), 27 O.R. (3d) 494 (Ont. C.A.).
24 The basis for the differentiation flows from the fundamentally different nature of debt and equity investments. Shareholders have unlimited upside potential when purchasing shares. Creditors have no corresponding upside potential: Nelson Financial Group Ltd., Re, 2010 ONSC 6229 (Ont. S.C.J. [Commercial List]) [Nelson Financial].
25 As a result, courts subordinated equity claims and denied such claims a vote in plans of arrangement: Blue Range Resource Corp., Re, supra; Stelco Inc., Re, supra; EarthFirst Canada Inc., Re (2009), 56 C.B.R. (5th) 102 (Alta. Q.B.) [EarthFirst Canada]; and Nelson Financial, supra.
26 In 2009, significant amendments were made to the CCAA. Specific amendments were made with the intention of clarifying that equity claims are subordinated to other claims.
27 The 2009 amendments define an "equity claim" and an "equity interest". Section 2 of the CCAA includes the following definitions:
"Equity Claim" means a claim that is in respect of an equity interest, including a claim for, among others, (...)
(d) a monetary loss resulting from the ownership, purchase or sale of an equity interest or from the rescission, or, in Quebec, the annulment, of a purchase or sale of an equity interest, or
(e) contribution or indemnity in respect of a claim referred to in any of paragraphs (a) to (d);
"Equity Interest" means
(a) in the case of a company other than an income trust, a share in the company — or a warrant or option or another right to acquire a share in the company — other than one that is derived from a convertible debt,
28 Section 6(8) of the CCAA prohibits a distribution to equity claimants prior to payment in full of all non-equity claims.
29 Section 22(1) of the CCAA provides that equity claimants are prohibited from voting on a plan unless the court orders otherwise.
Position of Ernst & Young
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30 E&Y opposes the relief sought, at least as against E&Y, since the E&Y proof of claim evidence demonstrates in its view that E&Y's claim:
(a) is not an equity claim;
(b) does not derive from or depend upon an equity claim (in whole or in part);
(c) represents discreet and independent causes of action as against SFC and its directors and officers arising from E&Y's direct contractual relationship with such parties (or certain of such parties) and/or the tortious conduct of SFC and/or its directors and officers for which they are in law responsible to E&Y; and
(d) can succeed independently of whether or not the claims of the plaintiffs in the class actions succeed.
31 In its factum, counsel to E&Y acknowledges that during the periods relevant to the Class Action Proceedings, E&Y was retained as SFC's auditor and acted as such from 2007 until it resigned on April 5, 2012.
32 On June 2, 2011, Muddy Waters LLC ("Muddy Waters") issued a report which purported to reveal fraud at SFC. In the wake of that report, SFC's share price plummeted and Muddy Waters profited from its short position.
33 E&Y was served with a multitude of class action claims in numerous jurisdictions.
34 The plaintiffs in the Ontario Class Proceedings claim damages in the aggregate, as against all defendants, of $9.2 billion on behalf of resident and non-resident shareholders and noteholders. The causes of action alleged are both statutory, under the Securities Act (Ontario) and at common law, in negligence and negligent misrepresentation.
35 In its factum, counsel to E&Y acknowledges that the central claim in the class actions is that SFC made a series of misrepresentations in respect of its timber assets. The claims against E&Y and the other third party defendants are that they failed to detect these misrepresentations and note in particular that E&Y's audit did not comply with Canadian generally accepted accounting standards. Similar claims are advanced in Quebec and the U.S.
36 Counsel to E&Y notes that on May 14, 2012 the court granted a Claims Procedure Order which, among other things, requires proofs of claim to be filed no later than June 20, 2012. E&Y takes issue with the fact that this motion was then brought notwithstanding that proofs of claim and D&O proofs of claim had not yet been filed.
37 E&Y has filed with the Monitor, in accordance with the Claims Procedure Order, a proof of claim against SFC and a proof of claim against the directors and officers of SFC.
38 E&Y takes the position that it has contractual claims of indemnification against SFC and its subsidiaries and has statutory and common law claims of contribution and/or indemnity against SFC and its subsidiaries for all relevant years. E&Y contends that it has stand-alone claims for breach of contract and negligent and/or fraudulent misrepresentation against the company and its directors and officers.
39 Counsel submits that E&Y's claims against Sino-Forest and the SFC subsidiaries are:
(a) creditor claims;
(b) derived from E&Y retainers by and/or on behalf of Sino-Forest and the SFC subsidiaries and E&Y's relationship with such parties, all of which are wholly independent and conceptually different from the claims advanced by the class action plaintiffs;
(c) claims that include the cost of defending and responding to various proceedings, both pre- and post-filing; and
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(d) not equity claims in the sense contemplated by the CCAA. E&Y's submission is that equity holders of Sino-Forest have not advanced, and could not advance, any claims against SFC's subsidiaries.
40 Counsel further contends that E&Y's claim is distinct from any and all potential and actual claims by the plaintiffs in the class actions against Sino-Forest and that E&Y's claim for contribution and/or indemnity is not based on the claims against Sino-Forest advanced in the class actions but rather only in part on those claims, as any success of the plaintiffs in the class actions against E&Y would not necessarily lead to success against Sino-Forest, and vice versa. Counsel contends that E&Y has a distinct claim against Sino-Forest independent of that of the plaintiffs in the class actions. The success of E&Y's claims against Sino-Forest and the SFC subsidiaries, and the success of the claims advanced by the class action plaintiffs, are not co- dependent. Consequently, counsel contends that E&Y's claim is that of an unsecured creditor.
41 From a policy standpoint, counsel to E&Y contends that the nature of the relationship between a shareholder, who may be in a position to assert an equity claim (in addition to other claims) is fundamentally different from the relationship existing between a corporation and its auditors.
Position of BDO Limited
42 BDO was auditor of Sino-Forest Corporation between 2005 and 2007, when it was replaced by E&Y.
43 BDO has a filed a proof of claim against Sino-Forest pursuant to the Claims Procedure Order.
44 BDO's claim against Sino-Forest is primarily for breach of contract.
45 BDO takes the position that its indemnity claims, similar to those advanced by E&Y and the Underwriters, are not equity claims within the meaning of s. 2 of the CCAA.
46 BDO adopts the submissions of E&Y which, for the purposes of this endorsement, are not repeated.
Position of the Underwriters
47 The Underwriters take the position that the court should not decide the equity claims motion at this time because it is premature or, alternatively, if the court decides the equity claims motion, the equity claims order should not be granted because the Related Indemnity Claims are not "equity claims" as defined in s. 2 of the CCAA.
48 The Underwriters are among the defendants named in some of the class actions. In connection with the offerings, certain Underwriters entered into agreements with Sino-Forest and certain of its subsidiaries providing that Sino-Forest and, with respect to certain offerings, the Sino-Forest subsidiary companies, agree to indemnify and hold harmless the Underwriters in connection with an array of matters that could arise from the offerings.
49 The Underwriters raise the following issues:
(i) Should this court decide the equity claims motion at this time?
(ii) If this court decides the equity claims motion at this time, should the equity claims order be granted?
50 On the first issue, counsel to the Underwriters takes the position that the issue is not yet ripe for determination.
51 Counsel submits that, by seeking the equity claims order at this time, Sino-Forest is attempting to pre-empt the Claims Procedure Order, which already provides a process for the determination of claims. Until such time as the claims procedure in respect of the Related Indemnity Claims is completed, and those claims are determined pursuant to that process, counsel contends the subject of the equity claims motion raises a merely hypothetical question as the court is being asked to determine the proper interpretation of s. 2 of the CCAA before it has the benefit of an actual claim in dispute before it.
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52 Counsel further contends that by asking the court to render judgment on the proper interpretation of s. 2 of the CCAA in the hypothetical, Sino-Forest has put the court in a position where its judgment will not be made in the context of particular facts or with a full and complete evidentiary record.
53 Even if the court determines that it can decide this motion at this time, the Underwriters submit that the relief requested should not be granted.
Position of the Applicant
54 The Applicant submits that the amendments to the CCAA relating to equity claims closely parallel existing U.S. law on the subject and that Canadian courts have looked to U.S. courts for guidance on the issue of equity claims as the subordination of equity claims has long been codified there: see e.g. Blue Range Resources, supra, and Nelson Financial, supra.
55 The Applicant takes the position that based on the plain language of the CCAA, the Shareholder Claims are "equity claims" as defined in s. 2 as they are claims in respect of a "monetary loss resulting from the ownership, purchase or sale of an equity interest".
56 The Applicant also submits the following:
(a) the Ontario, Quebec, Saskatchewan and New York Class Actions (collectively, the "Class Actions") all advance claims on behalf of shareholders.
(b) the Class Actions also allege wrongful conduct that affected the trading price of the shares, in that the alleged misrepresentation "artificially inflated" the share price; and
(c) the Class Actions seek damages relating to the trading price of SFC shares and, as such, allege a "monetary loss" that resulted from the ownership, purchase or sale of shares, as defined in s. 2 of the CCAA.
57 Counsel further submits that, as the Shareholder Claims are "equity claims", they are expressly subordinated to creditor claims and are prohibited from voting on the plan of arrangement.
58 Counsel to the Applicant also submits that the definition of "equity claims" in s. 2 of the CCAA expressly includes indemnity claims that relate to other equity claims. As such, the Related Indemnity Claims are equity claims within the meaning of s. 2.
59 Counsel further submits that there is no distinction in the CCAA between the source of any claim for contribution or indemnity; whether by statute, common law, contractual or otherwise. Further, and to the contrary, counsel submits that the legal characterization of a contribution or indemnity claim depends solely on the characterization of the primary claim upon which contribution or indemnity is sought.
60 Counsel points out that in Return on Innovation Capital Ltd. v. Gandi Innovations Ltd., 2011 ONSC 5018 (Ont. S.C.J. [Commercial List]), leave to appeal denied, 2012 ONCA 10 (Ont. C.A.) [Return on Innovation] this court characterized the contractual indemnification claims of directors and officers in respect of an equity claim as "equity claims".
61 Counsel also submits that guidance on the treatment of underwriter and auditor indemnification claims can be obtained from the U.S. experience. In the U.S., courts have held that the indemnification claims of underwriters for liability or defence costs constitute equity claims that are subordinated to the claims of general creditors. Counsel submits that insofar as the primary source of liability is characterized as an equity claim, so too is any claim for contribution and indemnity based on that equity claim.
62 In this case, counsel contends, the Related Indemnity Claims are clearly claims for "contribution and indemnity" based on the Shareholder Claims.
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Position of the Ad Hoc Noteholders
63 Counsel to the Ad Hoc Noteholders submits that the Shareholder Claims are "equity claims" as they are claims in respect of an equity interest and are claims for "a monetary loss resulting from the ownership, purchase or sale of an equity interest" per subsection (d) of the definition of "equity claims" in the CCAA.
64 Counsel further submits that the Related Indemnity Claims are also "equity claims" as they fall within the "clear and unambiguous" language used in the definition of "equity claim" in the CCAA. Subsection (e) of the definition refers expressly and without qualification to claims for "contribution or indemnity" in respect of claims such as the Shareholder Claims.
65 Counsel further submits that had the legislature intended to qualify the reference to "contribution or indemnity" in order to exempt the claims of certain parties, it could have done so, but it did not.
66 Counsel also submits that, if the plain language of subsection (e) is not upheld, shareholders of SFC could potentially create claims to receive indirectly what they could not receive directly (i.e., payment in respect of equity claims through the Related Indemnity Claims) — a result that could not have been intended by the legislature as it would be inconsistent with the purposes of the CCAA.
67 Counsel to the Ad Hoc Noteholders also submits that, before the CCAA amendments in 2009 (the "CCAA Amendments"), courts subordinated claims on the basis of:
(a) the general expectations of creditors and shareholders with respect to priority and assumption of risks; and
(b) the equitable principles and considerations set out in certain U.S. cases: see e.g. Blue Range Resource Corp., Re, supra.
68 Counsel further submits that, before the CCAA Amendments took effect, courts had expanded the types of claims characterized as equity claims; first to claims for damages of defrauded shareholders and then to contractual indemnity claims of shareholders: see Blue Range Resources, supra and EarthFirst Canada, supra.
69 Counsel for the Ad Hoc Noteholders also submits that indemnity claims of underwriters have been treated as equity claims in the United States, pursuant to section 510(b) of the U.S. Bankruptcy Code. This submission is detailed at paragraphs 20-25 of their factum which reads as follows:
20. The desire to more closely align the Canadian approach to equity claims with the U.S. approach was among the considerations that gave rise to the codification of the treatment of equity claims. Canadian courts have also looked to the U.S. law for guidance on the issue of equity claims where codification of the subordination of equity claims has been long-standing.
Janis Sarra at p. 209, Ad Hoc Committee's Book of Authorities, Tab 10.
Report of the Standing Senate Committee on Banking, Trade and Commerce, "Debtors and Creditors Sharing the Burden: A Review of the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement act" (2003) at 158, [...]
Blue Range [Resources] at paras. 41-57 [...]
21. Pursuant to § 510(b) of the U.S. Bankruptcy Code, all creditors must be paid in full before shareholders are entitled to receive any distribution. § 510(b) of the U.S. Bankruptcy Code and the relevant portion of § 502, which is referenced in § 510(b), provide as follows:
§ 510. Subordination
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(b) For the purpose of distribution under this title, a claim arising from rescission of a purchase or sale of a security of the debtor or of an affiliate of the debtor, for damages arising from the purchase or sale of such a security, or for reimbursement or contribution allowed under 502 on account of such a claim, shall be subordinated to all claims or interests that are senior to or equal the claim or interest represented by such security, except that if such security is common stock, such claim has the same priority as common stock.
§ 502. Allowance of claims or interests
(e) (1) Notwithstanding subsections (a), (b) and (c) of this section and paragraph (2) of this subsection, the court shall disallow any claim for reimbursement or contribution of an entity that is liable with the debtor on or has secured the claim of a creditor, to the extent that
. . .
(B) such claim for reimbursement or contribution is contingent as of the time of allowance or disallowance of such claim for reimbursement or contribution; or
. . .
(2) A claim for reimbursement or contribution of such an entity that becomes fixed after the commencement of the case shall be determined, and shall be allowed under subsection (a), (b), or (c) of this section, or disallowed under subsection (d) of this section, the same as if such claim had become fixed before the date of the filing of the petition.
22. U.S. appellate courts have interpreted the statutory language in § 510(b) broadly to subordinate the claims of shareholders that have a nexus or causal relationship to the purchase or sale of securities, including damages arising from alleged illegality in the sale or purchase of securities or from corporate misconduct whether predicated on pre or post- issuance conduct.
Re Telegroup Inc. (2002), 281 F. 3d 133 (3 rd Cir. U.S. Court of Appeals)
[...]
American Broadcasting Systems Inc. v. Nugent, U.S. Court of Appeals for the Ninth Circuit, Case Number 98-17133 (24 January 2001) [...]
23. Further, U.S. courts have held that indemnification claims of underwriters against the corporation for liability or defence costs when shareholders or former shareholders have sued underwriters constitute equity claims in the insolvency of the corporation that are subordinated to the claims of general creditors based on: (a) the plain language of § 510(b), which references claims for "reimbursement or contribution" and (b) risk allocation as between general creditors and those parties that play a role in the purchase and sale of securities that give rise to the shareholder claims (i.e., directors, officers and underwriters).
In re Mid-American Waste Sys., 228 B.R. 816, 1999 Bankr. LEXIS 27 (Bankr. D. Del. 1999) [Mid-American] [...]
In re Jacom Computer Servs., 280 B.R. 570, 2002 Bankr. LEXIS 758 (Bankr. S.D.N.Y. 2002) [...]
24. In Mid-American, the Court stated the following with respect to the "plain language" of § 510(b), its origins and the inclusion of "reimbursement or contribution" claims in that section:
... I find that the plain language of § 510(b), its legislative history, and applicable case law clearly show that § 510(b) intends to subordinate the indemnification claims of officers, directors, and underwriters for both liability and expenses incurred in connection with the pursuit of claims for rescission or damages by purchasers or sellers of the
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debtor's securities. The meaning of amended § 510(b), specifically the language "for reimbursement or contribution ... on account of [a claim arising from rescission or damages arising from the purchase or sale of a security]," can be discerned by a plain reading of its language.
... it is readily apparent that the rationale for section 510(b) is not limited to preventing shareholder claimants from improving their position vis-a-vis general creditors; Congress also made the decision to subordinate based on risk allocation. Consequently, when Congress amended § 510(b) to add reimbursement and contribution claims, it was not radically departing from an equityholder claimant treatment provision, as NatWest suggests; it simply added to the subordination treatment new classes of persons and entities involved with the securities transactions giving rise to the rescission and damage claims. The 1984 amendment to § 510(b) is a logical extension of one of the rationales for the original section — because Congress intended the holders of securities law claims to be subordinated, why not also subordinate claims of other parties (e.g., officers and directors and underwriters) who play a role in the purchase and sale transactions which give rise to the securities law claims? As I view it, in 1984 Congress made a legislative judgment that claims emanating from tainted securities law transactions should not have the same priority as the claims of general creditors of the estate.
[emphasis added]
[...]
25. Further, the U.S. courts have held that the degree of culpability of the respective parties is a non-issue in the disallowance of claims for indemnification of underwriters; the equities are meant to benefit the debtor's direct creditors, not secondarily liable creditors with contingent claims.
In re Drexel Burnham Lambert Group, 1992 Bankr. LEXIS 2023 (Bankr. S.D.N.Y. 1992) [...]
70 Counsel submits that there is no principled basis for treating indemnification claims of auditors differently than those of underwriters.
Analysis
Is it Premature to Determine the Issue?
71 The class action litigation was commenced prior to the CCAA Proceedings. It is clear that the claims of shareholders as set out in the class action claims against SFC are "equity claims" within the meaning of the CCAA.
72 In my view, this issue is not premature for determination, as is submitted by the Underwriters.
73 The Class Action Proceedings preceded the CCAA Proceedings. It has been clear since the outset of the CCAA Proceedings that this issue — namely, whether the claims of E&Y, BDO and the Underwriters as against SFC, would be considered "equity claims" — would have to be determined.
74 It has also been clear from the outset of the CCAA Proceedings, that a Sales Process would be undertaken and the expected proceeds arising from the Sales Process would generate proceeds insufficient to satisfy the claims of creditors.
75 The Claims Procedure is in place but, it seems to me that the issue that has been placed before the court on this motion can be determined independently of the Claims Procedure. I do not accept that any party can be said to be prejudiced if this threshold issue is determined at this time. The threshold issue does not depend upon a determination of quantification of any claim. Rather, its effect will be to establish whether the claims of E&Y, BDO and the Underwriters will be subordinated pursuant to the provisions of the CCAA. This is independent from a determination as to the validity of any claim and the quantification thereof.
Should the Equity Claims Order be Granted?
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76 I am in agreement with the submission of counsel for the Ad Hoc Noteholders to the effect that the characterization of claims for indemnity turns on the characterization of the underlying primary claims.
77 In my view, the claims advanced in the Shareholder Claims are clearly equity claims. The Shareholder Claims underlie the Related Indemnity Claims.
78 In my view, the CCAA Amendments have codified the treatment of claims addressed in pre-amendment cases and have further broadened the scope of equity claims.
79 The plain language in the definition of "equity claim" does not focus on the identity of the claimant. Rather, it focuses on the nature of the claim. In this case, it seems clear that the Shareholder Claims led to the Related Indemnity Claims. Put another way, the inescapable conclusion is that the Related Indemnity Claims are being used to recover an equity investment.
80 The plain language of the CCAA dictates the outcome, namely, that the Shareholder Claims and the Related Indemnity Claims constitute "equity claims" within the meaning of the CCAA. This conclusion is consistent with the trend towards an expansive interpretation of the definition of "equity claims" to achieve the purpose of the CCAA.
81 In Return on Innovation, Newbould J. characterized the contractual indemnification claims of directors and officers as "equity claims". The Court of Appeal denied leave to appeal. The analysis in Return on Innovation leads to the conclusion that the Related Indemnity Claims are also equity claims under the CCAA.
82 It would be totally inconsistent to arrive at a conclusion that would enable either the auditors or the Underwriters, through a claim for indemnification, to be treated as creditors when the underlying actions of the shareholders cannot achieve the same status. To hold otherwise would indeed provide an indirect remedy where a direct remedy is not available.
83 Further, on the issue of whether the claims of E&Y, BDO and the Underwriters fall within the definition of equity claims, there are, in my view, two aspects of these claims and it is necessary to keep them conceptually separate.
84 The first and most significant aspect of the claims of E&Y, BDO and the Underwriters constitutes an "equity claim" within the meaning of the CCAA. Simply put, but for the Class Action Proceedings, it is inconceivable that claims of this magnitude would have been launched by E&Y, BDO and the Underwriters as against SFC. The class action plaintiffs have launched their actions against SFC, the auditors and the Underwriters. In turn, E&Y, BDO and the Underwriters have launched actions against SFC and its subsidiaries. The claims of the shareholders are clearly "equity claims" and a plain reading of s. 2(1)(e) of the CCAA leads to the same conclusion with respect to the claims of E&Y, BDO and the Underwriters. To hold otherwise, would, as stated above, lead to a result that is inconsistent with the principles of the CCAA. It would potentially put the shareholders in a position to achieve creditor status through their claim against E&Y, BDO and the Underwriters even though a direct claim against SFC would rank as an "equity claim".
85 I also recognize that the legal construction of the claims of the auditors and the Underwriters as against SFC is different than the claims of the shareholders against SFC. However, that distinction is not, in my view, reflected in the language of the CCAA which makes no distinction based on the status of the party but rather focuses on the substance of the claim.
86 Critical to my analysis of this issue is the statutory language and the fact that the CCAA Amendments came into force after the cases relied upon by the Underwriters and the auditors.
87 It has been argued that the amendments did nothing more than codify pre-existing common law. In many respects, I accept this submission. However, I am unable to accept this submission when considering s. 2(1) of the CCAA, which provides clear and specific language directing that "equity claim" means a claim that is in respect of an equity interest, including a claim for, among other things, "(e) contribution or indemnity in respect of a claim referred to in any of paragraphs (a) to (d)".
88 Given that a shareholder claim falls within s. 2(1)(d), the plain words of subsections (d) and (e) lead to the conclusions that I have set out above.
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89 I fail to see how the very clear words of subsection (e) can be seen to be a codification of existing law. To arrive at the conclusion put forth by E&Y, BDO and the Underwriters would require me to ignore the specific words that Parliament has recently enacted.
90 I cannot agree with the position put forth by the Underwriters or by the auditors on this point. The plain wording of the statute has persuaded me that it does not matter whether an indemnity claim is seeking no more than allocation of fault and contribution at common law, or whether there is a free-standing contribution and indemnity claim based on contracts.
91 However, that is not to say that the full amount of the claim by the auditors and Underwriters can be characterized, at this time, as an "equity claim".
92 The second aspect to the claims of the auditors and underwriters can be illustrated by the following hypothetical: if the claim of the shareholders does not succeed against the class action defendants, E&Y, BDO and the Underwriters will not be liable to the class action plaintiffs. However, these parties may be in a position to demonstrate that they do have a claim against SFC for the costs of defending those actions, which claim does not arise as a result of "contribution or indemnity in respect of an equity claim".
93 It could very well be that each of E&Y, BDO and the Underwriters have expended significant amounts in defending the claims brought by the class action plaintiffs which, in turn, could give rise to contractual claims as against SFC. If there is no successful equity claim brought by the class action plaintiffs, it is arguable that any claim of E&Y, BDO and the Underwriters may legitimately be characterized as a claim for contribution or indemnity but not necessarily in respect of an equity claim. If so, there is no principled basis for subordinating this portion of the claim. At this point in time, the quantification of such a claim cannot be determined. This must be determined in accordance with the Claims Procedure.
94 However, it must be recognized that, by far the most significant part of the claim, is an "equity claim".
95 In arriving at this determination, I have taken into account the arguments set forth by E&Y, BDO and the Underwriters. My conclusions recognize the separate aspects of the Related Indemnity Claims as submitted by counsel to the Underwriters at paragraph 40 of their factum which reads:
...it must be recognized that there are, in fact, at least two different kinds of Related Indemnity Claims:
(a) indemnity claims against SFC in respect of Shareholder Claims against the auditors and the Underwriters; and
(b) indemnity claims against SFC in respect of the defence costs of the auditors and the Underwriters in connection with defending themselves against Shareholder Claims.
Disposition
96 In the result, an order shall issue that the claims against SFC resulting from the ownership, purchase or sale of equity interests in SFC, including, without limitation, the claims by or on behalf of current or former shareholders asserted in the proceedings listed in Schedule "A" are "equity claims" as defined in s. 2 of the CCAA, being claims in respect of monetary losses resulting from the ownership, purchase or sale of an equity interest. It is noted that counsel for the class action plaintiffs did not contest this issue.
97 In addition, an order shall also issue that any indemnification claim against SFC related to or arising from the Shareholders Claims, including, without limitation, by or on behalf of any of the other defendants to the proceedings listed in Schedule "A" are "equity claims" under the CCAA, being claims for contribution or indemnity in respect of a claim that is an equity claim. However, I feel it is premature to determine whether this order extends to the aspect of the Related Indemnity Claims that corresponds to the defence costs of the Underwriters and the auditors in connection with defending themselves against the Shareholder Claims.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 12 Sino-Forest Corp., Re, 2012 ONSC 4377, 2012 CarswellOnt 9430 2012 ONSC 4377, 2012 CarswellOnt 9430, 218 A.C.W.S. (3d) 489, 92 C.B.R. (5th) 99
98 A direction shall also issue that these orders are made without prejudice to SFC's rights to apply for a similar order with respect to (i) any claims in the statement of claim that are in respect of securities other than shares and (ii) any indemnification claims against SFC related thereto.
Schedule "A" — Shareholder Claims
1. Trustees of the Labourers' Pension Fund of Central and Eastern Canada et al. v. Sino-Forest Corporation et al. (Ontario Superior Court of Justice, Court File No. CV-11-431153-00CP)
2. Guining Liu v. Sino-Forest Corporation et al. (Quebec Superior Court, Court File No.: 200-06-000132-111)
3. Allan Haigh v. Sino-Forest Corporation et al. (Saskatchewan Court of Queen's Bench, Court File No. 2288 of 2011)
4. David Leapard et al. v. Allen T.Y. Chan et al. (District court of the Southern District of New York, Court File No. 650258/2012) Application granted.
End of Document Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 13
TAB 12
12 Bul River Mineral Corp., Re, 2014 BCSC 1732, 2014 CarswellBC 2702 2014 BCSC 1732, 2014 CarswellBC 2702, [2014] B.C.W.L.D. 6764...
2014 BCSC 1732 British Columbia Supreme Court
Bul River Mineral Corp., Re
2014 CarswellBC 2702, 2014 BCSC 1732, [2014] B.C.W.L.D. 6764, [2014] B.C.W.L.D. 6765, [2014] B.C.W.L.D. 6771, [2014] B.C.W.L.D. 6779, 16 C.B.R. (6th) 173, 245 A.C.W.S. (3d) 333
In the Matter of the Companies Creditors Arrangement Act, R.S.C. 1985, c. C-36 as amended
In the Matter of the Business Corporations Act, S.B.C. 2002, c. 57 and the Business Corporations Act, R.S.A. 2000, c. B-9
In the Matter of Bul River Mineral Corporation, Big Bear Metal Mining Corporation, Earth's Vital Extractors Limited, Fort Steele Mineral Corporation, Fort Steele Metals Corporation, Fused Heat Ltd., Gallowai Metal Mining Corporation, Giant Steeples Mineral Corporation, Grand Mineral Corporation, International Feldspar Ltd., Jao Mine Developers Ltd., Kutteni Diamonds Ltd., Stanfield Mining Group of Canada Ltd., Sullibin Mineral Corporation, Sullibin Multi Metal Corporation, Super Feldspars Corporation, White Cat Metal Mining Corporation, Zeus Metal Mining Corporation, Zeus Metals Corporation and Zeus Mineral Corporation, Petitioners
Fitzpatrick J.
Heard: September 3, 5, 2014 Judgment: September 15, 2014 Docket: Vancouver S113459
Counsel: Colin D. Brousson for Petitioners William C. Kaplan, Q.C., Peter Bychawski for CuVeras, LLC J. Roger Webber, Q.C. for Eldon Clarence Stafford Robert M. Curtis, Q.C. for Gordon Preston and Carol Preston Tevia R.M. Jeffries for Monitor, Deloitte Restructuring Inc.
Subject: Civil Practice and Procedure; Contracts; Corporate and Commercial; Insolvency; Torts Headnote Bankruptcy and insolvency --- Companies' Creditors Arrangement Act — Miscellaneous Petitioners were owners of mining properties in British Columbia — Owners went into bankruptcy and as result, were subject of proceedings under Companies' Creditors Arrangement Act (CCAA) — Owners developed plan of arrangement for their creditors and other interested parties — Owners received indication that their mining project could be viable, due to outside financing from company C — Two claims against petitioners were at issue in hearing — First was claim by creditors P, which C claimed was claim in equity rather than debt — Second claim was by individual creditor S, which owners denied was valid claim — Hearing took place to determine nature of claims — P's claim was found to be in equity — S claim found not to be debt claim — Applicable law was amended to require debt claims to be paid in full, before any equity claims were to be paid out — P claimed that their claim was transferred into debt claim — However, claim was for recovery of own capital instead of return on capital, as was true in case relied upon by P — Other preferred shareholders were in same situation, despite not having judgment — It would be against policy objective to treat these shareholders differently — Treatment of claim as equity claim was not collateral attack on judgment given elsewhere — For S claim, intentions of parties were unclear as principal of owners was dead, and S was incapacitated — Documents between parties had to be examined — S advanced loan to principal personally, and not to his companies — There was no assignment of loan agreement — As no novation occurred, S could not characterize claim as debt claim — No agency relationship was created between parties.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 1 Bul River Mineral Corp., Re, 2014 BCSC 1732, 2014 CarswellBC 2702 2014 BCSC 1732, 2014 CarswellBC 2702, [2014] B.C.W.L.D. 6764...
Commercial law --- Agency — Creation of agency — General principles Petitioners were owners of mining properties in British Columbia — Owners went into bankruptcy and as result, were subject of proceedings under Companies' Creditors Arrangement Act (CCAA) — Owners developed plan of arrangement for their creditors and other interested parties — Owners received indication that their mining project could be viable, due to outside financing from company C — Two claims against petitioners were at issue in hearing — First was claim by creditors P, which C claimed was claim in equity rather than debt — Second claim was by individual creditor S, which owners denied was valid claim — Hearing took place to determine nature of claims — P's claim was found to be in equity — S claim found not to be debt claim — No agency relationship was created between parties. Contracts --- Novation — Proof of novation Petitioners were owners of mining properties in British Columbia — Owners went into bankruptcy and as result, were subject of proceedings under Companies' Creditors Arrangement Act (CCAA) — Owners developed plan of arrangement for their creditors and other interested parties — Owners received indication that their mining project could be viable, due to outside financing from company C — Two claims against petitioners were at issue in hearing — First was claim by creditors P, which C claimed was claim in equity rather than debt — Second claim was by individual creditor S, which owners denied was valid claim — Hearing took place to determine nature of claims — P's claim was found to be in equity — S claim found not to be debt claim — For S claim, intentions of parties were unclear as principal of owners was dead, and S was incapacitated — Documents between parties had to be examined — S advanced loan to principal personally, and not to his companies — There was no assignment of loan agreement — As no novation occurred, S could not characterize claim as debt claim — No agency relationship was created between parties. Bankruptcy and insolvency --- Proving claim — Provable debts — Claims of director, officer or shareholder of bankrupt corporation Petitioners were owners of mining properties in British Columbia — Owners went into bankruptcy and as result, were subject of proceedings under Companies' Creditors Arrangement Act (CCAA) — Owners developed plan of arrangement for their creditors and other interested parties — Owners received indication that their mining project could be viable, due to outside financing from company C — Two claims against petitioners were at issue in hearing — First was claim by creditors P, which C claimed was claim in equity rather than debt — Second claim was by individual creditor S, which owners denied was valid claim — Hearing took place to determine nature of claims — P's claim was found to be in equity — S claim found not to be debt claim — Applicable law was amended to require debt claims to be paid in full, before any equity claims were to be paid out — P claimed that their claim was transferred into debt claim — However, claim was for recovery of own capital instead of return on capital, as was true in case relied upon by P — Other preferred shareholders were in same situation, despite not having judgment — It would be against policy objective to treat these shareholders differently — Treatment of claim as equity claim was not collateral attack on judgment given elsewhere.
HEARING to determine nature of claims brought by creditors, against petitioner owners of mining companies.
Fitzpatrick J.:
Introduction
1 These are longstanding proceedings under the Companies' Creditors Arrangement Act, R.S.C., 1985, c. C-36 (the "CCAA"), having been commenced some three and a half years ago in May 2011. Since that time, the petitioners have made slow and steady progress toward the goal of presenting a plan of arrangement to their creditors and certain equity participants.
2 The principal petitioners, being Bul River Mineral Corporation ("Bul River") and Gallowai Metal Mining Corporation ("Gallowai"), are the owners of certain mining properties and related assets in the Kootenay region of British Columbia. As a result of these proceedings, Bul River and Gallowai now have some indication that the mine is viable. This has been accomplished mainly due to the participation of CuVeras, LLC ("CuVeras") who has, since late 2011, provided interim financing which allowed this further development work to continue to this point in time.
3 Some years ago, Bul River and Gallowai completed a claims process to identify not only trade creditors but also claims of its common and preferred shareholders. Now that Bul River and Gallowai, with the assistance and sponsorship of CuVeras,
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 2 Bul River Mineral Corp., Re, 2014 BCSC 1732, 2014 CarswellBC 2702 2014 BCSC 1732, 2014 CarswellBC 2702, [2014] B.C.W.L.D. 6764... are on the cusp of preparing a plan of arrangement for consideration by the stakeholders, those claims have become of central importance.
4 Some of the claims that were advanced through the claims process were not critically considered by either the petitioners or the court-appointed monitor, Deloitte Restructuring Inc. (the "Monitor"). However, at this late date, the characterization of certain claims and the validity of certain claims have been put in issue and will have a profound impact on the manner in which these restructuring proceedings go forward.
5 At present, the general intention is that the restructuring will take place along the lines of a Letter of Agreement between the petitioners and CuVeras dated May 23, 2014. By that agreement, a newly formed British Columbia entity ("Newco") will be created and the shares in Newco will be distributed to CuVeras and other related parties and also to non-voting preferred shareholders. Trade creditors will also participate in Newco. This Letter of Agreement is the product of some history, sometimes contentious, between the petitioners and CuVeras which was discussed in the court's earlier reasons: Bul River Mineral Corp, Re, 2014 BCSC 645 (B.C. S.C.).
6 One of the claims is that advanced by Gordon and Carol Preston (the "Preston Claim"), which CuVeras contends is an equity claim as opposed to a debt claim. Another claim is that advanced by Eldon Stafford (the "Stafford Claim"), which CuVeras contends is not a valid claim against Bul River or Gallowai. The substance of the issue before the court therefore is two-fold: (a) the proper categorization of the Preston Claim and (b) whether the Stafford Claim is a valid claim against the petitioners.
7 As will become apparent from the discussion below, the resolution of these issues will significantly impact how any restructuring plan can be crafted and will also impact all stakeholders in terms of how the Newco shares will be distributed between the various stakeholders. There is some urgency in resolving these last issues before the restructuring can proceed. All involved, including the Monitor, state that it is necessary for the petitioners to exit this CCAA proceeding as quickly as possible. At this time, a plan of arrangement sponsored by CuVeras is the only option available to the petitioners so as to avoid a liquidation and bankruptcy.
Background
8 The petitioners are also known as the Stanfield Mining Group (the "Group"). The Group carried on the business of developing a mining property situated near the Bull River just outside of Fernie, British Columbia. It is effectively controlled by the estate of Ross Stanfield ("Stanfield") which holds 100% and 99.9% of the voting common shares in the parent companies, Zeus Mineral Corporation and Fort Steele Mineral Corporation, respectively. As stated above, the two principal companies involved in the development and operation of the mine within the Group are Bul River and Gallowai.
9 The mine, known as the Gallowai Bul River Mine, is not currently in production. There has been significant underground development to this point such that the petitioners and CuVeras consider that with a relatively modest further investment the mine could be placed into production.
10 Bul River and Gallowai were incorporated in the 1980s. Commencing in the mid-1990s, Stanfield began raising funds for the development of the mine. The marketing program focused on "sophisticated investors" which are, through securities regulation statutes, defined as persons with a net worth in excess of $1 million willing to invest a minimum of $100,000 in a given venture. The persons targeted by Stanfield's marketing campaign were farmers in Alberta, particularly around Edmonton, Red Deer and Medicine Hat, as well as farmers from the area around Regina, Saskatchewan.
11 Until 2010, Stanfield engaged in a sophisticated marketing program to sell redeemable preferred non-voting shares to these investors. Over that period of time, approximately $229 million was invested in consideration of which preferred shares in Bul River and Gallowai were issued.
12 The marketing program involved repeated representations as to the ore content of the mine. Stanfield continually referred to the mine as an "elephant" mine, meaning that the mineral resources were enormous. Over the years, the program included visits to the mine site and presentations to potential investors by Stanfield. Those presentations referred to the history of the mine
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 3 Bul River Mineral Corp., Re, 2014 BCSC 1732, 2014 CarswellBC 2702 2014 BCSC 1732, 2014 CarswellBC 2702, [2014] B.C.W.L.D. 6764... and the future prospects of the mine, including development plans and the levels of ore content (copper, gold and platinum). The presentations also involved discussion as to when production would commence and typically production was forecast to commence within a foreseeable period of time, be it one or two years from the date of the meeting.
13 The same representations were also made in written materials, including a report from Phillip De Souza ("De Souza"), a professional engineer.
14 Some potential investors executed subscription agreements for shares during those visits to the mine or immediately thereafter. Some returned to the mine for subsequent tours and subsequent purchases. In some instances, Stanfield recruited current investors to further market the preferred shares to other investors.
15 These representations by Stanfield were made in the face of contemporaneous reports which questioned the value of the resources announced by the Group. These included papers published by the British Columbia Ministry of Energy and Mines in 2000 in which it was reported that they were unable to confirm the gold grades reported by the Group. In 2006, a professional conduct hearing in Alberta was held arising from charges that De Souza's report was "deficient and misleading". The panel issued reasons which were published in January 2008 in which it concluded that De Souza's conduct constituted unskilled practice and unprofessional conduct.
16 Eventually, Stanfield's activities caught the attention of various provincial securities regulators. In May 2010, the British Columbia Securities Commission (the "Commission") issued a Notice of Hearing against Stanfield, Bul River and Gallowai seeking to order them to produce an independently prepared technical report fully compliant with NI 43-101 (Standards of Disclosure for Mineral Projects) that would include an estimate of the mineral resources available at the mine.
17 Ross Stanfield died on August 3, 2010.
18 By the fall of 2010, in addition to being faced with the Commission proceedings, certain preferred shareholders had taken legal action against the Group in light of the failure to comply with redemption obligations arising in respect of the preferred shares. Stanfield's grandson, George Hewison, is the sole beneficiary of Stanfield's estate. He stepped in to continue the work of the Group as best he could. In late 2010 or early 2011, undertakings were given to the securities regulators in British Columbia and Alberta by which the petitioners agreed not to issue any new securities without their consent.
19 The evidence would later establish that the representations made by Stanfield regarding the mine resources were false. A technical report was later prepared by Rosco Postle and Associates Inc. ("RPA") in March 2011 that provided some review of the available mineral resources at the mine. Both the RPA report and a later report prepared by Snowden Mining Industry Consultants in March 2013 would indicate that while there is valuable ore in the mine, the quantity of the resources is markedly less than what was indicated in the representations made to investors.
20 On May 26, 2011, the Group sought and obtained creditor protection pursuant to the CCAA and an Initial Order was granted at that time.
21 At the time of the CCAA filing, the Class A common voting shares in Bul River and Gallowai were held by the Stanfield estate. Other Class B and Class E common non-voting shares were held by investors.
22 As of the date of filing, the petitioners had no secured creditors. The petition referenced debt obligations of $904,000 to trade suppliers and two unsecured judgments totalling $386,135. Various preferred non-voting shares were held by investors in Classes C, D and F. The petition materials indicated that amounts owing for "redeemable shares" (i.e., the preferred shares) were approximately $137,718,557. The holders of both common and preferred shares comprise some 3,500 individual investors.
23 The subscription agreements for the preferred shares provided that the shares were redeemable at the end of five years from the date of the subscription together with a "preferred cumulative annual dividend" of 12.75%. There is no evidence of any significant redemption of the preferred shares. Rather, as redemption dates arose, preferred shareholders were approached to execute extension agreements extending their redemption rights from a given date to a date defined by the commencement
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 4 Bul River Mineral Corp., Re, 2014 BCSC 1732, 2014 CarswellBC 2702 2014 BCSC 1732, 2014 CarswellBC 2702, [2014] B.C.W.L.D. 6764... of production from the mine. Many preferred shareholders signed those extension agreements, some did not. For those who did not, some of them demanded redemption of their shares. For the most part, those investors were told that there was no money to redeem the shares.
24 Accordingly, the largest liability faced by the petitioners is that arising from the preferred shares. The preferred shareholders appear to have certain claims arising from their holdings. Firstly, they have a claim for payment of the redemption amount plus the accumulated dividend. Secondly, they may have a claim for misrepresentation against the Group, giving rise to potential remedies of rescission of their subscription agreements, damages, or both.
The Claims Process
25 In August 2011, the Group prepared a list of creditors (the "Creditor List") in support of seeking a claims process order. The list actually included not only trade claims but also shareholder claims. Not surprisingly, the purpose of the claims process was to assist the Group in developing its restructuring plan.
26 On August 19, 2011, the court approved a Claims Process Order, which authorized the petitioners to conduct a claims process for the determination of any and all claims against them (the "Claims Process"). The Claims Process Order defined "claims" that were to be determined in the Claims Process as follows:
... indebtedness, liability or obligation (including an equity obligations arising from the ownership of equity shares) ...
... all obligations of or ownership interests in the Petitioners or any of them arising from or relating to the holding of a Share.
27 Under the Claims Process Order, all "Known Creditors" (defined in the Claims Process Order as all creditors shown on the books and records of the petitioners as having a claim in excess of $250), including holders of shares, were to receive a claims package from the petitioners that included an instruction letter, a Notice of Dispute, a Proof of Claim, and a copy of the Claims Process Order (the "Claims Package"). The Claims Process was also advertised in certain publications. The Creditor List indicating such Known Creditors was posted on the Monitor's website, as was noted in the Claims Package, such that both creditors and shareholders were able to view it. The process of determining claims was as follows:
a) all creditors and shareholders were given the opportunity to review the Creditor List;
b) in the event a creditor or shareholder agreed with the "Claim Particulars" listed in the Creditor List (which included the number and class of shares), the creditor or shareholder did not need to file a Proof of Claim with the petitioners. In that event, the Claim Particulars in the Creditor List would be deemed to be the creditor or shareholder's proven claim for voting and distribution purposes under any restructuring plan subsequently filed by the petitioners;
c) in the event a creditor or shareholder objected to the Claim Particulars in the Creditor List, or wished to advance another claim, the creditor or shareholder had to, on or before October 17, 2011 (the "Claims Bar Date"), deliver to the petitioners, with a copy to the Monitor, a notice of such objection in the form of a Notice of Dispute, together with a Proof of Claim and supporting documentation;
d) in the event a Notice of Dispute was not submitted on or before the Claims Bar Date, the creditor or shareholder was deemed to have accepted the amount owing and all other Claim Particulars set out in the Creditor List, and was forever barred from advancing any other claim against the petitioners or participating in any plan subsequently filed by the petitioners;
e) where a Notice of Dispute and/or Proof of Claim was filed by a creditor or shareholder, the petitioners were deemed to have accepted it unless they delivered to the creditor or shareholder a Notice of Disallowance on or before October 31, 2011 (later extended to November 15, 2011); and
f) in the event of the petitioners delivering a Notice of Disallowance, a creditor or shareholder had 21 days to seek a determination from the court of the validity and value of and particulars of the claim by filing and serving
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 5 Bul River Mineral Corp., Re, 2014 BCSC 1732, 2014 CarswellBC 2702 2014 BCSC 1732, 2014 CarswellBC 2702, [2014] B.C.W.L.D. 6764...
the petitioners and the Monitor with application materials. A creditor or shareholder who failed to file and serve such materials by the deadline was deemed to have accepted the particulars of its claim set out in the Notice of Disallowance.
28 The Claims Process Order did not contemplate the appointment of a claims officer or the participation of the Monitor in the process of assessing the validity of the Proofs of Claim and/or Notices of Dispute submitted to the petitioners through the Claims Process. Nor did the Claims Process allow any independent review of claims submitted by other creditors of the petitioners or by CuVeras as the interim financier.
(i) Jurisdiction of the Court
29 Before turning to claims process orders specifically, it is important to keep in mind the broad remedial objectives of the CCAA to facilitate a restructuring rather than a liquidation of assets: Ted Leroy Trucking Ltd., Re, 2010 SCC 60 (S.C.C.) [hereinafter Century Services] at paras. 15-18, 56. As the Supreme Court of Canada has noted, it is now well recognized that a supervising judge of a CCAA proceeding has a "broad and flexible authority" or statutory jurisdiction to makes such orders as are necessary to achieve those objectives: Century Services at paras. 19, 57-66.
30 The discretionary authority of the court is confirmed by s. 11 of the CCAA which provides that the court may make any order that it considers "appropriate in the circumstances". As Madam Justice Deschamps observed in Century Services, whether an order will be appropriate is driven by the policy objectives of the CCAA:
[70] The general language of the CCAA should not be read as being restricted by the availability of more specific orders. However, the requirements of appropriateness, good faith, and due diligence are baseline considerations that a court should always bear in mind when exercising CCAA authority. Appropriateness under the CCAA is assessed by inquiring whether the order sought advances the policy objectives underlying the CCAA. The question is whether the order will usefully further efforts to achieve the remedial purpose of the CCAA — avoiding the social and economic losses resulting from liquidation of an insolvent company. I would add that appropriateness extends not only to the purpose of the order, but also to the means it employs. Courts should be mindful that chances for successful reorganizations are enhanced where participants achieve common ground and all stakeholders are treated as advantageously and fairly as the circumstances permit.
31 Claims process orders are an important step in most restructuring proceedings. In Timminco Ltd., Re, 2014 ONSC 3393 (Ont. S.C.J.), Mr. Justice Morawetz reviewed the "first principles" relating to claims process orders and their purpose within CCAA proceedings:
[41] It is also necessary to return to first principles with respect to claims-bar orders. The CCAA is intended to facilitate a compromise or arrangement between a debtor company and its creditors and shareholders. For a debtor company engaged in restructuring under the CCAA, which may include a liquidation of its assets, it is of fundamental importance to determine the quantum of liabilities to which the debtor and, in certain circumstances, third parties are subject. It is this desire for certainty that led to the development of the practice by which debtors apply to court for orders which establish a deadline for filing claims.
[42] Adherence to the claims-bar date becomes even more important when distributions are being made (in this case, to secured creditors), or when a plan is being presented to creditors and a creditors' meeting is called to consider the plan of compromise. These objectives are recognized by s. 12 of the CCAA, in particular the references to "voting" and "distribution".
[43] In such circumstances, stakeholders are entitled to know the implications of their actions. The claims-bar order can assist in this process. By establishing a claims-bar date, the debtor can determine the universe of claims and the potential distribution to creditors, and creditors are in a position to make an informed choice as to the alternatives presented to them. If distributions are being made or a plan is presented to creditors and voted upon, stakeholders should be able to place a degree of reliance in the claims bar process.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 6 Bul River Mineral Corp., Re, 2014 BCSC 1732, 2014 CarswellBC 2702 2014 BCSC 1732, 2014 CarswellBC 2702, [2014] B.C.W.L.D. 6764...
32 The overall objective of achieving certainty within the restructuring proceedings - for both debtor and creditor - is what drives this process. In this vein, counsel makes an effort to draft a claims process order to achieve these objectives. A claims bar date is typically set. The process is typically designed with some idea of the issues that either have arisen or might arise in the restructuring. My comments in 0487826 B.C. Ltd., Re, 2012 BCSC 1501 (B.C. S.C.) [hereinafter Steels Products] are apposite:
[38] Similar issues often arise in CCAA proceedings where counsel and the Court must be mindful of issues that may arise in relation to the determination of claims in that proceeding. There are no set rules, but care must be taken in the drafting of the claims process order to ensure that the process by which claims are determined is fair and reasonable to all stakeholders, including those who will be directly affected by the acceptance of other claims. In Winalta Inc. (Re), 2011 ABQB 399, Madam Justice Topolniski stated that "[p]ublic confidence in the insolvency system is dependent on it being fair, just and accessible".
[39] Many CCAA proceedings provide for an independently run claims process (for example, by the monitor), the cost of which again would be borne by the general body of creditors: see for example, Pine Valley Mining Corp. (Re), 2008 BCSC 356. To this extent, the statutory procedure under the BIA and the claims process under the CCAA will have similar features, which is understandable since the overriding intention under both is to conduct a proper claims process: see Century Services Inc. v. Canada (Attorney General), 2010 SCC 60at paras. 24 and 47.
33 Nevertheless, issues can and do arise that no one is able to foresee at the time of the claims process order. In that event, the court retains its discretion to address the application of the claims process order: Timminco at para. 38. In that case, the claims process order specifically allowed the court to order a further claims bar date. No such provision is found in the Claims Process Order but I do not consider that its absence is sufficient to oust the statutory jurisdiction of the court in appropriate circumstances.
34 This, of course, is a different issue in that by the failure of the petitioners to deliver a Notice of Disallowance in respect of the claims in issue, they were deemed to have been accepted by the petitioners. This is not a case where a creditor is seeking to avoid the consequences of not filing materials by the time of the Claims Bar Date. Nevertheless, in my view, the court still retains the statutory jurisdiction to consider the validity of claims that might otherwise, by the Claims Process Order, be deemed to have been accepted.
35 The Prestons and Mr. Stafford do not suggest that the court lacks the jurisdiction to reconsider the issues that arise in relation to their claims. The Prestons do, however, contend that it is not appropriate that any reconsideration take place at this time.
(ii) Review of the Claims
36 The stated purpose of the CCAA is to facilitate compromises and arrangements between companies and their creditors (see also s. 6 of the CCAA). In accordance with that fundamental objective or purpose, it is axiomatic that it is necessary to determine what are the true claims of the creditors as might be compromised or arranged.
37 A "creditor" is not defined in the CCAA, unlike the Bankruptcy and Insolvency Act, R.S.C. 1985, c.B-3 (the "BIA") where it is defined as meaning "a person having a claim provable as a claim" under that Act (s. 2). Both the CCAA and the BIA define "claim" by reference to liabilities "provable" under the BIA. Specifically, s. 2(1) of the CCAA defines "claim" as meaning:
any indebtedness, liability or obligation of any kind that would be a claim provable within the meaning of section 2 of the Bankruptcy and Insolvency Act.
Section 2 of the BIA defines a "claim provable in bankruptcy" as "any claim or liability provable in proceedings under this Act by a creditor".
38 Section 121(1) of the BIA addresses which claims are "provable claims":
121(1) All debts and liabilities, present or future, to which the bankrupt is subject on the day on which the bankrupt becomes bankrupt or to which the bankrupt may become subject before the bankrupt's discharge by reason of any obligation
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 7 Bul River Mineral Corp., Re, 2014 BCSC 1732, 2014 CarswellBC 2702 2014 BCSC 1732, 2014 CarswellBC 2702, [2014] B.C.W.L.D. 6764...
incurred before the day on which the bankrupt becomes bankrupt shall be deemed to be claims provable in proceedings under this Act.
39 In substance, this same statutory definition is applied in the CCAA and represents a point of convergence consistent with the harmonization of certain aspects of insolvency law under both the CCAA and BIA: Century Services at para. 24. In addition, as noted by CuVeras, this definition is essentially used in the Claims Process Order by its definition of "Claim".
40 Various authorities establish that a "provable debt" must be due either at law, or in equity, by the bankrupt to the person seeking to prove a claim and must be recoverable by legal process: Excelsior Electric Dairy Machinery Ltd., Re (1922), 2 C.B.R. 599, [1923] 3 D.L.R. 1176 (Ont. S.C.); Farm Credit Corp. v. Holowach (Trustee of) (1988), 68 C.B.R. (N.S.) 255, 51 D.L.R. (4th) 501 (Alta. C.A.), leave to appeal to S.C.C. refused, (1989), 73 C.B.R. (N.S.) xxvii (note), 60 D.L.R. (4th) vii (note) (S.C.C.); Central Capital Corp., Re (1995), 29 C.B.R. (3d) 33, [1995] O.J. No. 19 (Ont. Gen. Div. [Commercial List]) ("Central Capital"), aff'd (1996), 27 O.R. (3d) 494, 38 C.B.R. (3d) 1 (Ont. C.A.) ("Central Capital (ONCA)"); Negus v. Oakley's General Contracting (1996), 40 C.B.R. (3d) 270, 152 N.S.R. (2d) 172 (N.S. S.C.).
41 In a CCAA proceeding, a claims process order is the means by which the "claims" of the creditors are determined. By reason of that process, the debtor is able to determine the nature and extent of its debts and liabilities so as to enable it to formulate a plan of arrangement. There are no rules as to when a claims process may be implemented although it is usually early in the process in anticipation of a plan and distributions to creditors. In that respect, a debtor company will be seeking some certainty regarding the determination of claims for that purpose.
42 In Timminco, the Court, prior to citing relevant authorities at para. 52, outlined many of the factors that might be considered by the court in relation to deciding whether to allow claims to be advanced after the claims bar date:
[51] Counsel to Mr. Walsh submit that courts have historically considered the following factors in determining whether to exercise their discretion to consider claims after the claims-bar date: (a) was the delay caused by inadvertence and, if so, did the claimant act in good faith? (b) what is the effect of permitting the claim in terms of the existence and impact of any relevant prejudice caused by the delay[?] (c) if relevant prejudice is found, can it be alleviated by attaching appropriate conditions to an order permitting late filing? and (d) if relevant prejudice is found which cannot be alleviated, are there any other considerations which may nonetheless warrant an order permitting late filing?
43 As I have stated above, the broad jurisdiction of the court under s. 11 of the CCAA allows the court to make such orders as are "appropriate". While the above factors have been considered in the past, there is no finite list that detracts from a consideration of all relevant circumstances. Nevertheless, the general considerations of delay and prejudice typically arise, just as they do in this case.
44 I return to the factual circumstances relating to the Claims Process and the Claims Process Order. The petitioners were themselves responsible for reviewing the Proofs of Claim and/or Notices of Dispute submitted in the Claims Process. The principal individual involved in the review was Mr. Hewison who did so with the assistance of counsel. It is apparent that the only factors considered in his review included whether a claim related to a trade debt or whether it related to an equity interest in the petitioners.
45 The Prestons argue that the Claims Process was well known to everyone and that its purpose was to establish the amount and nature of all claims. This is clearly self-evident, but back in late 2011, it was the case that the course of the restructuring proceedings was anything but certain. In fact, the ability of the petitioners to continue the proceedings was tenuous and they were scrambling to find interim financing which they eventually secured with CuVeras in November 2011. By that time, the Claims Process was essentially completed. Even so, understandably, the parties were concerned to proceed as quickly as possible to obtain further technical reports on the proven or inferred mine resources in order to determine whether a viable mine even existed. They did receive those later reports, which included a further RPA report and the Snowden report. In these circumstances, Mr. Hewison did not undertake any substantive review of the claims.
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46 The Prestons further say that, since they faithfully complied with the Claims Process Order, it would be patently unfair to now revisit the characterization of their claim. While they raise the matter of the three year plus delay, no elements of prejudice have been alleged. In my view, the delay, while relevant, will have little effect on the ability of the parties to address the substance of the matter. Nor have any rights been extinguished or compromised by reason of any delay. Accordingly, the objective of certainty has less force in this case where the plan of arrangement has yet to be formulated and the claimants have yet to consider that plan and vote on it. I note that similar considerations were at play in Timminco where it was apparent that no plan would ever be put to the creditors.
47 Finally, the Prestons argue that the Claims Process Order constituted the sole form of adjudication of the validity and nature of the claims submitted. It is true, of course, that the petitioners had an opportunity to consider these claims.
48 As discussed below, the petitioners did not forward any Notice of Disallowance in respect of the Proofs of Claim later filed by the Prestons and Mr. Stafford. Mr. Hewison considered that the Stafford Claim should be categorized as an "investment" in the mine. Further, with respect to the Preston Claim, he was not aware of the significance of the distinction between an equity claim and a debt claim. In retrospect, and now knowing what type of plan of arrangement is possible, Mr. Hewison recognizes that this was in error. It appears that a combination of factors - including Mr. Hewison's lack of familiarity with the past transactions, inadequate record keeping, lack of resources and distraction in terms of larger issues more relevant to the survival of the mine - all contributed to a less rigorous review and analysis of these claims.
49 It is the case, however, that the petitioners were acting in good faith, albeit without a full appreciation of the issues arising in respect of these claims and the also the consequences of their inaction.
50 More importantly, aside from the petitioners, other stakeholders have a significant interest in whether a claim is valid or not and that any claim be properly characterized. Based on the anticipated form of the restructuring plan, the inclusion of the Stafford Claim and characterization of the Preston Claim will impact the recovery of these stakeholders. These other creditors or stakeholders of the petitioners did not have any opportunity up to this point in time to review the claims. I would again note that the Claims Process Order did not contemplate any review of the claims by these other stakeholders, such as was the case in Steels Products (see paras. 13-15).
51 Nor has the Monitor participated in any review of these claims. I do not say this as any criticism of the Monitor as the Claims Process Order did not expressly provide for any such independent review. Nor does the Claims Process Order contemplate that any other independent review of the claims be completed which might have highlighted the issues. The Monitor did report on the Claims Process from time to time (particularly, its report from June 2012 and January 2013), however, no such issues were identified. As such, the Monitor did not conduct a critical review of the claims, similar to what a trustee in bankruptcy might have done under s. 135 of the BIA.
52 In these circumstances, and in retrospect, the Claims Process lacked procedural safeguards that might have avoided this problem: Steels Products at paras. 38-39.
53 In these circumstances, I disagree with the Prestons that the Claims Process Order constitutes an adjudication of these issues by which CuVeras or any other stakeholder is estopped in bringing these issues forward. It is clear that to this point, no such adjudication has occurred.
54 As I have indicated above, a Claims Process Order is intended to be a fair, reasonable and transparent method of determining and resolving claims against the estate. In certain circumstances, these objectives fail to be achieved through no fault of the participants. That does not preclude the court from considering the issues on their merits so as to achieve the fundamental objective under the CCAA to facilitate a restructuring based on valid claims. This would also include a consideration of the proper characterization of the Preston's claim: Steels Products at para. 42.
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55 Simply put, if the Claims Process results in a claim being advanced which is not truly a debt of the petitioners or results in a claim being improperly characterized, the fairness and transparency of these proceedings are inevitably compromised such that the objectives of the CCAA will not be fulfilled.
56 My comments in Steels Products apply equally here:
[46] In conclusion, an independent review of these claims is necessary in the circumstances. An adequate review of these related party claims has not been made. The consequences of a successful challenge to some or all of these claims would have significant financial repercussions to the Disputing Creditors and other unsecured creditors who have also proved their claims. To deny an independent review at this time would be to deny any creditor the fair, reasonable and transparent process that is expected in insolvency proceedings in determining claims before any distribution of estate assets is made.
57 Even at this late stage in the proceedings, and considering the ongoing supervisory role of the court, I consider that it is appropriate to address the issues relating to both the Preston Claim and the Stafford Claim on their merits. This is particularly so given the significant repercussions to other stakeholders and the lack of any prejudice to the Prestons and Mr. Stafford.
Discussion
(a) The Preston Claim
58 The Preston Claim is advanced as a debt claim in these proceedings, a position that is disputed by CuVeras who contends that in fact, it is an equity claim as defined in the CCAA.
(i) The Proof of Claim
59 The Creditor List referenced the Prestons as holding various Class E (2,102) and Class F (2,400) preferred shares.
60 In October 2011, the Prestons, through their counsel, submitted a Proof of Claim and Notice of Dispute.
61 The genesis of the claim was as described in a Statement of Claim filed in the Alberta Court of Queen's Bench against Gallowai on May 27, 2010. The claim was as follows: in October 2004, the Prestons subscribed for 2,400 Class F preferred shares in Gallowai in consideration of the payment to Gallowai of $120,000; Gallowai is alleged to have covenanted to redeem the preferred shares at the expiry of five years after the allotment date; the Prestons demanded redemption of the shares and the payment of dividends which was to be by way of issuance of Class E shares; Gallowai refused to respond to their demands; and the Prestons claimed the right to redeem the Class F preferred shares for $120,000 plus either dividends in the form of Class E common shares or, alternatively, cash payment of dividends at 12.75% per annum.
62 On November 19, 2010, default judgment was granted in favour of the Prestons for the claimed amount of $120,000 plus the cash dividend interest rate for a total judgment of $214,527.10 including court ordered costs. The Prestons attempted to register their judgment in British Columbia in June 2011 after the court ordered a stay arising under the Initial Order, but nothing turns on that step.
63 The Proof of Claim indicates that the Prestons were advancing both a trade claim for the judgment amount and also a claim for non-voting shares arising from the allegation that they continue to hold the 2,102 Class E shares noted on the Creditor List.
(ii) Historical Approach to Equity Claims
64 Before I turn to the current statutory regime arising from amendments to the CCAA and BIA in 2009, I will review the authorities which applied before these amendments were enacted.
65 Historically, equity and debt claims have been treated differently in an insolvency proceeding given the fundamental difference in the nature of such claims. That different treatment resulted in the subordination of equity to debt claims. The basis for this judicially developed principle was that equity investors are understood to be higher risk participants. Creditors, on the
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66 In Sino-Forest Corp., Re, 2012 ONCA 816 (Ont. C.A.), affirming 2012 ONSC 4377 (Ont. S.C.J. [Commercial List]), the Court of Appeal commented with approval on the analysis of Morawetz J. in the court below:
[30] Even before the 2009 amendments to the CCAA codified the treatment of equity claims, the courts subordinated shareholder equity claims to general creditors' claims in an insolvency. As the supervising judge described [at paras. 23-25]:
Essentially, shareholders cannot reasonably expect to maintain a financial interest in an insolvent company where creditor claims are not being paid in full. Simply put, shareholders have no economic interest in an insolvent enterprise.
The basis for the differentiation flows from the fundamentally different nature of debt and equity investments. Shareholders have unlimited upside potential when purchasing shares. Creditors have no corresponding upside potential.
As a result, courts subordinated equity claims and denied such claims a vote in plans of arrangement [citations omitted].
67 See also Central Capital at paras. 41-42; Central Capital (ONCA) at 510-11, 519.
68 In light of that key distinction, courts in the past have embarked upon a consideration as to the true characterization of certain claims in an insolvency context. There is considerable authority that in making that determination, the court will consider the true substantive nature or character of the claim, rather than the form of the claim.
69 The leading case is the Supreme Court of Canada's decision in Canada Deposit Insurance Corp. v. Canadian Commercial Bank, [1992] 3 S.C.R. 558 (S.C.C.) ("CDIC"). In that case, the issue was whether money advanced to the debtor bank was in the nature of a loan or a capital investment for the purpose of determining whether the creditors advancing the funds ranked pari passu with other unsecured creditors in a winding-up proceeding. Mr. Justice Iacobucci stated that the approach was to determine the "substance" or "true nature" of the transaction (563, 588). His oft quoted statements are found at 590-91, the relevant principles of which can be summarized as follows:
a) the fact that a transaction contains both debt and equity features does not, in itself, determine its characterization as either debt or equity;
b) the characterization of a transaction under review requires the determination of the intention of the parties;
c) it does not follow that each and every aspect of a "hybrid" debt and equity transaction must be given the exact same weight when addressing a characterization issue; and
d) a court should not too easily be distracted by aspects of a transaction which are, in reality, only incidental or secondary in nature to the main thrust of the agreement.
70 One type of financial instrument that typically has elements of both equity and debt are preferred shares, where arguably rights of redemption and rights to payment of dividends evidence debt characteristics.
71 The issue of the characterization of preferred shareholder claims in an insolvency context was addressed in Central Capital (ONCA). In that case, the court had to characterize a claim arising from the right of retraction in respect of certain preferred shares. Although differing in the result, the majority opinions and the dissenting opinion at the appellate court level were consistent in an approach toward determining the substance of the claim in terms of whether it was a "provable debt". In dissent, Finlayson J.A. stated:
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... I do not think that describing the documents as preferred shares is conclusive as to what instrument the parties thought they were creating. In the second place, it is not what the parties call the documents that is determinative of their identity, but rather it is what the facts require the court to call them. The character of the instrument is revealed by the language creating it and the circumstances of its creation.
(at 509).
. . .
Thus, in looking at the substance of the transaction that led to the issuance of the preference shares, it appears to me that the retraction clauses were promises by Central Capital to pay fixed amounts on definite dates to the appellants. They evidenced a debt to the appellants.
(at 512).
Justice Laskin specifically addressed the "substance of the relationship" at 535-36. In addition, Weiler J.A. focused on the "true nature" of the transaction or relationship:
In order to decide whether the obligation of Central Capital to redeem the preferred shares of the appellants is a claim provable in bankruptcy, it is necessary to characterize the true nature of the transaction. The court must look to the surrounding circumstances to determine whether the true nature of the relationship is that of a shareholder who has equity in the company or whether it is that of a creditor owed a debt or liability by the company: Canada Deposit Insurance Corp. v. Canadian Commercial Bank, [1992] 3 S.C.R. 558, 97 D.L.R. (4th) 385. In this case, the decision is not an easy one. Where, as here, the agreements between the parties are reflected in the articles of the corporation, it is necessary to examine them carefully to characterize the true relationship. It is not disputed that if the true nature of the relationship is that of a shareholder-equity relationship after the retraction date and at the time of the reorganization, then the appellants do not have a claim provable in bankruptcy. Consequently, they will not have a claim under the CCAA.
(at 519).
72 In Blue Range Resource Corp., Re, 2000 ABQB 4 (Alta. Q.B.), Madam Justice Romaine found that a shareholder's claim for alleged share loss, transaction costs and cash share purchase damages was in substance an equity claim or a claim by the shareholder for a return of its investment. See also EarthFirst Canada Inc., Re, 2009 ABQB 316 (Alta. Q.B.).
73 In Return on Innovation Capital Ltd. v. Gandi Innovations Ltd., 2011 ONSC 5018 (Ont. S.C.J. [Commercial List]), leave to appeal refused, 2012 ONCA 10 (Ont. C.A.), the Court was characterizing indemnity claims advanced by certain individual directors and officers against the debtor, the Gandi Group. That indemnity claim arose by reason of a claim by TA Associates Inc. against them for damages for claims relating in part to TA's US$50 million equity investment in the Gandi Group. Mr. Justice Newbould at the Ontario Superior Court concluded that TA's claim was an equity claim and that therefore, the indemnity claim was also, in substance, an equity claim.
74 I have also been referred to Dexior Financial Inc., Re, 2011 BCSC 348 (B.C. S.C. [In Chambers]). Mr. Justice Masuhara there found the claim to be an equity claim even though the shareholder had given notice of an intention to seek retraction of the shares prior to the filing. Citing CDIC and Central Capital (ONCA), the Court found that the notice did not change the original intention or substance of the claim.
(iii) The New Statutory Approach
75 In September 2009, Parliament enacted substantial amendments to the BIA and CCAA in relation to the treatment of claims arising from equity in an insolvency proceeding.
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76 One of the principle amendments was the prohibition that the court may not sanction a plan of arrangement unless all debt claims are to be paid in full before payment of any "equity claims". Section 6(8) of the CCAA provides:
(8) No compromise or arrangement that provides for the payment of an equity claim is to be sanctioned by the court unless it provides that all claims that are not equity claims are to be paid in full before the equity claim is to be paid.
77 The definitions of "equity claim" and "equity interest" are found in the CCAA, s. 2(1):
"equity claim" means a claim that is in respect of an equity interest, including a claim for, among others,
(a) a dividend or similar payment,
(b) a return of capital,
(c) a redemption or retraction obligation,
(d) a monetary loss resulting from the ownership, purchase or sale of an equity interest or from the rescission, or, in Quebec, the annulment, of a purchase or sale of an equity interest, or
(e) contribution or indemnity in respect of a claim referred to in any of paragraphs (a) to (d);
"equity interest" means
(a) in the case of a company other than an income trust, a share in the company — or a warrant or option or another right to acquire a share in the company — other than one that is derived from a convertible debt[.]
78 Section 22.1 further restricts the right of creditors having equity claims from voting on a plan of arrangement:
22.1 Despite subsection 22(1), creditors having equity claims are to be in the same class of creditors in relation to those claims unless the court orders otherwise and may not, as members of that class, vote at any meeting unless the court orders otherwise.
79 Substantially these same amendments were made to the BIA in respect of proposal proceedings under that Act in ss. 2, 54(2)(d) and 60(1.7).
80 The effect of the amendments was considered by Pepall J. (as she then was) in Nelson Financial Group Ltd., Re, 2010 ONSC 6229 (Ont. S.C.J. [Commercial List]). In that case, the court had no difficulty in finding that the claims of preferred shareholders for declared but unpaid dividends and requests for redemption were equity claims within the above definition. In addition, the approach of the courts in the past in looking at the substance or true nature of the claim was applied in finding that related claims for compensatory damages or amounts due on rescission were caught by the definition of "equity claim": paras. 32-34. As such, all the claims were not provable debts under the CCAA.
81 The court in Nelson Financial Group noted that the introduction of section 6(8) in the CCAA provided greater certainty in the treatment to be accorded equity claims and lessened the "judicial flexibility" that previously prevailed in characterizing such claims.
82 Accordingly, while the 2009 amendments did represent in part a codification of the previous case law concerning equity claims, it also represented a more concrete definition of "equity claims" and by such definition a broadening and more expansive definition of such claims: Sino-Forest Corporation (ONCA) at paras. 24, 34-60. Parliament has now clearly cast the net widely in terms of the broad definition of equity claims such that claims that might have previously escaped such characterization will now be caught by the CCAA.
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83 The claim of the Prestons is set out in their Statement of Claim. The claim is for the return of their capital investment under the redemption rights of the preferred shares. Their claim also included a claim to unpaid dividends, whether by cash payment or the issuance of other shares, being Class E common shares. It is clear that their claims, as evidenced by the Statement of Claim, fall within the definition of "equity claim" in subparas. (a)-(c).
84 The Prestons do not dispute that their claim, as described and but for one qualification, would fall within the definition. They contend, however, that by reason of their obtaining default judgment against Gallowai, they have transformed their equity claim into a debt claim that is a provable claim in the CCAA proceeding.
(iv) The Effect of the Judgment
85 The 2009 amendments have not affected the ability of the court to continue to analyze the substance of the claims, albeit in the context of the expanded definition of "equity claim". This is evident from the approach of the court in Nelson Financial Group at paras. 28 and 34.
86 In Sino-Forest Corporation, the court found that certain Shareholder Claims for damages claimed in a class action lawsuit clearly fell within the definition of "equity claims": ONSC at para. 84. Further, certain Related Indemnity Claims were also advanced against the estate by the auditors who were named in the class action lawsuit. These auditors also faced claims for damages relating to their role in what were said to be misrepresentations in the financial statements that led to the loss of equity by the class members. Again, consistent with the historical approach of the courts, Morawetz J. focused on the "substance" of the claim: para. 85. He stated:
[79] The plain language in the definition of "equity claim" does not focus on the identity of the claimant. Rather, it focuses on the nature of the claim. In this case, it seems clear that the Shareholder Claims led to the Related Indemnity Claims. Put another way, the inescapable conclusion is that the Related Indemnity Claims are being used to recover an equity investment.
[80] The plain language of the CCAA dictates the outcome, namely, that the Shareholder Claims and the Related Indemnity Claims constitute "equity claims" within the meaning of the CCAA. This conclusion is consistent with the trend towards an expansive interpretation of the definition of "equity claims" to achieve the purpose of the CCAA.
. . .
[82] It would be totally inconsistent to arrive at a conclusion that would enable either the auditors or the Underwriters, through a claim for indemnification, to be treated as creditors when the underlying actions of the shareholders cannot achieve the same status. To hold otherwise would indeed provide an indirect remedy where a direct remedy is not available.
The Court of Appeal upheld this approach: Sino-Forest Corporation (ONCA) at paras. 37, 58.
87 I would note in this regard that the Claims Process Order expressly provided:
THIS COURT ORDERS that the categorization of Claims into Trade Claims, non-voting Shares, and Voting Shares does not in any way set classes or categories for the purposes of priority or voting on a restructuring plan issued by the Creditors and shall not prejudice any party or the Petitioners from applying at a later date to set such classes or priorities in connection with voting on a plan;
88 The Prestons argue that their obtaining of a judgment against Gallowai has resulted in a replacement or transformation of their equity claim with a debt claim.
89 The Prestons place considerable reliance on the decision in I. Waxman & Sons Ltd., Re (2008), 89 O.R. (3d) 427, 40 C.B.R. (5th) 307 (Ont. S.C.J. [Commercial List]), which was decided prior to the 2009 amendments to the CCAA. In that case,
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Morris sued I. Waxman & Sons Limited ("IWS") for lost profits, profit diversions and improper distributions for bonuses paid. He obtained judgment against IWS and asserted that claim in the later bankruptcy proceedings.
90 The court began by noting that Morris' claim was not for his share of his current equity in IWS, but was, in substance, a claim related to dividends and diverted profits by way of bonuses. Justice Pepall found that the judgment was a debt claim:
[24] There is support in the case law for the proposition that equity may become debt. For example, declared dividends are treated as constituting a debt that is provable in bankruptcy. As Laskin J.A. stated in Central Capital Corp. (Re), "It seems to me that these appellants must be either shareholders or creditors. Except for declared dividends, they cannot be both." And later, "Moreover, as Justice Finlayson points out in his reasons, courts have always accepted the proposition that when a dividend is declared, it is a debt on which each shareholder can sue the corporation." Similarly, in that same decision, Weiler J.A. stated, "As I understand it, counsel does not question that when a dividend has been lawfully declared by a corporation, it is a debt of the corporation and each shareholder is entitled to sue the corporation for his [portion]: see Fraser and Stewart, supra, at p. 220 for a list of authorities." In East Chilliwack Fruit Growers Co-operative (Re), the B.C. Court of Appeal held that an agricultural co-operative member who had exercised a right of redemption and remained only to be paid was an unsecured creditor with a provable debt. Declared bonuses may also sometimes constitute debt: Stuart v. Hamilton Jockey Club [footnotes omitted].
[25] Secondly, the claims advanced by Morris are judgment debts. As stated by Weiler J.A. in Central Capital, ". . . in order to be a provable claim within the meaning of s.121 of the BIA, the claim must be one recoverable by legal process: Farm Credit Corp. v. Holowach (Trustee of)." Clearly a judgment constitutes a claim recoverable by legal process. By virtue of the judgment, the money award becomes debt and it is properly the subject of a proof of claim in bankruptcy. In this regard, the facts in this case are unlike those in Re Blue Range Resource Corp. (Re), or National Bank of Canada v. Merit Energy Ltd. Those cases involved causes of action that had been asserted in court proceedings, but in neither case had judgment been rendered [footnotes omitted].
91 In my view, Waxman is of little assistance to the Prestons.
92 Firstly, the facts are distinguishable by reason of the fact that the Preston Claim is for recovery of their capital or equity, rather than simply a return on capital as was the case in Waxman. I would note that the Preston default judgment obtained in 2010 does include the dividend interest on the preferred shares. What is somewhat anomalous is that this was claimed in the alternative to the issuance of the Class E common shares. Even so, the Prestons in their Statement of Claim did advance a claim for 2,102 Class E common shares and continue to do so by their Proof of Claim, all consistent with what the petitioners had ascribed to them in the Creditor List. It is not clear to me how they can advance both claims.
93 Secondly, in para. 24 of Waxman, the Court focused on the prevailing authority at the time prior to the amendments by which declared dividends were considered debt as opposed to equity. At present, the 2009 amendments make clear that this type of claim now clearly falls within the definition of "equity claim" in subpara. (a): CCAA, s.2(1).
94 With respect to the comments of the Court in Waxman, para. 25, I agree with CuVeras that the Court was simply observing that a judgment debt will normally satisfy the requirements of the claim being recoverable by legal process, one of the requirements of a "provable claim", as noted above. These comments do nothing more than note the obvious - that in ordinary circumstances, a judgment is a claim recoverable by legal process. I do not interpret these comments as obviating an analysis of the true nature of a claim, whether represented by a judgment or not.
95 Accordingly, I do not view Waxman as standing for the proposition advanced by the Prestons, namely that a judgment transforms an equity claim into a debt claim such that no further analysis or characterization by the court is necessary. This would have applied even before the enactment of the 2009 amendments, but certainly is more evident now given the expansive definition now contained in the CCAA.
96 Indeed, the later comments of Justice Pepall in Nelson Financial Group suggest that she only decided in Waxman that by reason of a judgment, an equity claim may become debt:
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[32] The substance of the arrangement between the preferred shareholders and Nelson was a relationship based on equity and not debt. Having said that, as I observed in I. Waxman & Sons. there is support in the case law for the proposition that equity may become debt. For instance, in that case, I held that a judgment obtained at the suit of a shareholder constituted debt. An analysis of the nature of the claims is therefore required. If the claims fall within the parameters of section 2 of the CCAA, clearly they are to be treated as equity claims and not as debt claims [footnotes omitted].
97 The Court in Dexior Financial at para. 16 commented on Waxman but those comments were clearly obiter as no judgment had been obtained in that case. See also EarthFirst Canada at para. 4.
98 At its core, the issue before the court is a narrow one - namely, whether a shareholder, having an equity claim but who obtains a judgment before the filing, has become a debt claimant rather than an equity claimant for the purposes of the insolvency proceeding? In my view, they do not, for the reasons below.
99 In light of the dearth of authority on the issue, I consider that the court must start from first principles.
100 I return to the comments in Century Services regarding the remedial purposes of the CCAA and the broad and flexible authority of this court to facilitate a restructuring that is fair, reasonable and equitable in accordance with either the express will of Parliament, as specifically dictated in the CCAA, or as might be reasonably interpreted as falling within those broad purposes.
101 At its core, the policy objectives of the CCAA are a fair and efficient resolution of competing claims in a situation (insolvency) where all obligations or expectations cannot be fulfilled. What is "fair" is a flexible or uncertain concept and needless to say, what is fair will likely be differently interpreted depending on which stakeholder you ask. Nevertheless, Parliament has clearly signalled that the policy objectives continue to be that equity will take a back seat in terms of any recovery where there are outstanding debt claims. This was so before September 2009 and is even more decidedly so now, given the express and expansive statutory treatment of equity claims that now applies.
102 In my view, the characterization of claims by the court continues to have an important role in fulfilling that purpose. I have already outlined the considerable authority from Canadian courts in respect of such claims, both pre- and post-amendments. Particularly, the court continues to have a role in applying these new equity claims provisions by considering the true nature or substance of those claims. In many cases, the matter is now considerably clearer given the definition of "equity claims". What is most important, however, is that form will still not trump substance in the consideration of this issue.
103 As was noted by counsel for CuVeras, the obtaining of a judgment does not necessarily mean that it will be recognized as a debt for the purpose of an insolvency proceeding. There are many provisions of the BIA and CCAA which allow for the challenge of certain pre-filing transactions or events that may be the basis for supposed rights in the proceeding. For example, the payment of a dividend and redemption of shares may be attacked (BIA, s. 101). Another example is that either the granting of a judgment against the debtor or payment of monies such as redemption amounts that resulted in a preference being obtained may be challenged (BIA, s. 95). Both of these provisions apply in a CCAA proceeding: CCAA, s 36.1.
104 These types of provisions reflect the policy choices of Parliament in terms of allowing for the recovery of assets transferred away from the debtor even before the filing so that those assets are brought back into the estate for the benefit of the entire stakeholder group to be distributed in accordance with the legislation. Similarly, some established rights may be challenged in certain circumstances (such as by way of the preference provisions).
105 In the same manner, the new equity provisions in the CCAA reinforce that it remains an important policy objective that equity claims be subordinated to debt claims. In Sino-Forest Corporation, the Court of Appeal focused on the purpose of the 2009 amendments and stated:
[56] In our view, in enacting s. 6(8) of the CCAA, Parliament intended that a monetary loss suffered by a shareholder (or other holder of an equity interest) in respect of his or her equity interest not diminish the assets of the debtor available to general creditors in a restructuring. If a shareholder sues auditors and underwriters in respect of his or her loss, in addition
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to the debtor, and the auditors or underwriters assert claims of contribution or indemnity against the debtor, the assets of the debtor available to general creditors would be diminished by the amount of the claims for contribution and indemnity.
106 This same recognition of the sound policy objectives of insolvency legislation was noted by Laskin J.A. in Central Capital (ONCA). He commented at 546 that "[p]ermitting preferred shareholders to be turned into creditors by endowing their shares with retraction rights runs contrary to this policy of creditor protection."
107 I see no principled basis upon which a different approach should be taken in respect of an equity claimant who has had the foresight, energy or just plain luck to seek and obtain a judgment prior to the filing date.
108 Some arguments were advanced by CuVeras and the Prestons as to the timing of the judgment. Indeed, the Preston judgment was obtained well in advance of the filing, by some six months. The Prestons cite Blue Range at para. 38 in respect of the importance of timing. However, the timing issue there was the filing of the insolvency proceeding, not the granting of a judgment. I agree that the filing of the proceeding is a significant crystallizing event, however, what is important in this case is the ability of the court to analyze the true nature of the claim. Further, whether a judgment is obtained on the eve of the filing or even years before, I consider that it is a distinction without a difference in terms of the court's role in ensuring that a proper characterizing of the claim has taken place in accordance with the CCAA.
109 The fact remains that there are thousands of other preferred shareholders holding shares in Bul River and Gallowai whose claims are in essence the same - namely, for a return of their capital and the promised return on that capital (and perhaps other damage claims). The evidence indicates that many of them had also made demand for a return of their preferred share investments and their return on capital well before the filing date. Those claims are clearly equity claims. From the perspective of the policy objective of treating similar claims in a similar fashion (i.e., fairness), it makes little sense to me that a similarly situated preferred shareholder without a judgment should be treated differently than one who does.
110 Nor does it accord with the policy objectives particularly identified in s. 6(8) of the CCAA that by the simple mechanism of obtaining a judgment an equity claimant should be elevated to a debt claimant which would inevitably diminish the recovery of other "true" debt claimants.
111 The Prestons argue that this will open the floodgates to an endless analysis of claims reduced to judgments resulting in increased cost and inefficiencies in these types of proceedings. I see no merit in this submission given that this decision relates to only equity claims and by no stretch of the imagination has the previous litigation on the point overwhelmed the court system across Canada. In any event, if that is the will of Parliament, then there is little ability in this court to take a different approach.
112 The courts have not been hesitant in preventing claimants from recharacterizing their claims such that an equity claim is indirectly advanced where no direct claim could be made: Sino-Forest Corporation, ONSC at para. 84 (although the Court of Appeal preferred to express the same sentiment in terms of the purpose of the CCAA). In Return on Innovation, Newbould J. stated, consistent with the "substance over form" approach that the court's decision will not be driven by the form of the legal action:
[59] The Claimants assert that the claim for US $50 million by TA Associates cannot be an equity claim because it is based on breaches of contract, torts and equity. I do not see that as being the deciding factor. TA Associates seeks the return of its US $50 million equity investment because of various wrongdoings alleged against the Claimants and the fact that the claim is based on these causes of action does not make it any less a claim in equity. The legal tools that are used [are] not the important thing. It is the fact that they are being used to recover an equity investment that is important.
113 Similarly, in addition to the "legal tools" not being determinative, neither are the legal forms of recovery determinative, such as the obtaining of a judgment.
114 In summary, the CCAA policy objectives in relation to equity claims are clear. In my view, those objectives are best achieved by the continued approach of the court, both pre- and post-CCAA amendments, to consider the substance or true nature of the claim. This accords with the ongoing supervisory jurisdiction of the court to exercise its statutory discretion to achieve
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115 Within those broad objectives, in my view, it is of no importance that prior to the court filing, a claimant with an equity claim has obtained a judgment. That judgment still, in substance, reflects a recovery of that equity claim and therefore, the claim comes within the broad and expansive definition in the CCAA. Accordingly, for the purposes of the CCAA, that claim or judgment must still, of necessity, bear that characterization in terms of any recovery sought within this proceeding. I conclude that any contrary interpretation, such as advanced by the Prestons, would result in the clear policy objectives under the CCAA being defeated.
116 Nor I do not accept that, as argued by the Prestons, applying this characterization amounts to a collateral attack or an "undoing" of the judgment from the Alberta court. As noted by CuVeras, the obtaining of a judgment by a creditor does not mean that insolvency laws do not apply to it. Judgments are affected by insolvency proceedings all the time. Recoveries of judgments are stayed by such proceedings and as stated above, they can be attacked as fraudulent preferences. All that results from my conclusions is that notwithstanding the granting of the judgment, within these CCAA proceedings, the judgment is to be characterized in accordance with the true nature of the underlying claim, which is an equity claim.
117 For the above reasons, I conclude that the Preston Claim is an equity claim within the meaning of the CCAA.
(b) The Stafford Claim
118 The Stafford Claim is advanced as a debt claim in these proceedings. That position is disputed by CuVeras who contends that, in fact, it is a claim owed by Stanfield personally and not by either Bul River or Gallowai such that it cannot be advanced in this CCAA proceeding.
(i) The Proof of Claim
119 The Creditor List referenced Mr. Stafford as holding Class B common shares (3,340), Class D preferred shares (4,200) and Class E preferred shares (17,548). He therefore received a Claims Package from the petitioners.
120 Mr. Stafford took no issue with the shareholdings alleged to be held by him in accordance with the Creditor List. However, on October 14, 2011, a Notice of Dispute and Proof of Claim were submitted on behalf of Mr. Stafford. This was done by Carol Morrison, who was exercising a power of attorney for Mr. Stafford by reason of his mental and physical incapacity that occurred at least as early as November 2010.
121 The Notice of Dispute refers to "claim not listed" as the "reason for dispute". The Proof of Claim submitted by Mr. Stafford notes the "type of claim" as "other — loan and accrued interest 50% Bul River Mineral Corp. and 50% Gallowai Metal Mining Corp." The Stafford Claim submitted is for outstanding principal and interest under a loan in the total amount of $2,587,174.
122 The supporting documentation submitted for Mr. Stafford includes a copy of a loan agreement between Stanfield in his personal capacity, as borrower, and Mr. Stafford, as lender, dated June 12, 1990, 21 years before the CCAA filing (the "Stafford Loan Agreement"). The Stafford Loan Agreement references a loan in the principal amount of $150,000, accruing interest in the amount of 20% per annum "on the Principal", calculated yearly and not in advance.
123 Pursuant to the terms of the Stafford Loan Agreement, Stanfield borrowed these funds for the purpose of "investing the funds in the costs of the ongoing research and development of a Process" with "Process" being defined as a "new improved method or process for extracting precious metals from ore". Paragraphs 6 and 8 of the Stafford Loan Agreement provided for a bonus payable to Mr. Stafford equal to the amount of the Principal, if the "Process" proved successful (as declared by an independent metallurgical consultant). As CuVeras submits, on its face, this was not a loan directly related to the mine or the petitioners.
(ii) Dealings in Respect of the Stafford Loan Agreement
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124 For obvious reasons, the death of Ross Stanfield and the incapacity of Mr. Stafford result in a situation where no individual is in a position to shed light on the intentions of the parties in relation to this loan. Mr. Hewison is similarly unable to provide any evidence about the loan, save for referring to such documents as have been found in relation to this loan. Those documents do provide some indication as to the how Stanfield, Bul River and Gallowai addressed this loan up to the time of the CCAA filing.
125 There are two resolutions of the directors of Bul River, dated October 1994 and February 1996 respectively, that are essentially the same. Both refer to the "need of major amounts of additional financing" and authorize Stanfield to negotiate, on behalf of Bul River, potential sources of debt or equity financing, to settle the terms of the financing, and to sign, seal and deliver any agreements necessary to secure funding required by the company. I agree that these resolutions on their face clearly do not authorize Stanfield to act as an agent for Bul River. They merely authorize him to act directly in the name of the company with the company as principal in respect to those transactions. These resolutions also do not reference any loan by Mr. Stafford to Stanfield made years before in June 1990.
126 Bul River also appears to have prepared a schedule of loan payments as of December 31, 2006. That schedule shows payment of interest to Mr. Stafford by Stanfield personally from June 1995 to September 1998 totalling approximately $183,000. In 1999 and 2000, Gallowai appears to have made interest payments of $40,000 and from that time forward, some person (unidentified) made interest payments of $25,000 for 2001 and 2002. From 2004 to 2006, it appears that Bul River made interest payments of $22,500 and principal payments of $26,000 to Mr. Stafford. Mr. Stafford's own calculations show further payments of interest from 2007 to 2009 totalling $58,000.
127 Accordingly, in respect of his $150,000 loan, as of 2009, Mr. Stafford had received $328,100 in interest payments and $26,000 in principal payments for a total recovery of $354,100.
128 Leaving aside the interest and principal payments referred to above, the involvement of Bul River and Gallowai in respect of the Stafford Loan Agreement arose, from a corporate perspective, in 2003. At that time, various resolutions were passed by the directors of Bul River. Mr. Stafford places great reliance on these resolutions and as will become apparent from the discussion below, the issue largely turns on the legal effect of these resolutions. As such, I will describe the resolutions in some detail.
129 The first resolution is dated May 13, 2003. It provides:
WHEREAS:
A. Loans, loan repayments and principal and interest payments which were property for the benefit of, or were the responsibility of, the Company have for some years been done, as a matter of convenience, in the name of the Company's President, [Stanfield] - and as a result debit and credit entries have improperly been posted to Stanfield's Shareholder Loan Account.
B. Stanfield has requested that the situation described above be corrected...
C. The Companies' accountant has examined the financial records and has verified that the said situation has occurred with respect to the Company as well as Gallowai...
D. Management has proposed, based on professional advice, that for convenience and simplicity the various Loan Accounts involving Stanfield, the Company and the Other Companies be consolidated in the books of the Company.
. . .
NOW THEREFORE, IT IS RESOLVED:
1. THAT the Loan Accounts and payments referred to above be recognized as solely the responsibility of the Company and it be confirmed that Stanfield was, in being named in the transactions, acting solely on behalf of the Company and that he had no personal, legal or beneficial interest in, or any liabilities as a result of, any of the transactions.
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2. THAT the Agreement dated this May 13, 2003 between the Company, Stanfield and the Other Companies be approved and that Stanfield or any other officer or director of the Company be authorized to sign and deliver it on behalf of the Company.
3. THAT the Company assume the obligations of the Other Companies to Stanfield pursuant to the shareholder account in their records, to be offset by inter-company accounts whereby each of the Other Companies will be indebted to the Company for the amount of shareholders accounts assumed by the Company.
130 The second resolution of Bul River is dated October 20, 2003 and relates to the May 2003 resolution. The resolution references that Stanfield is having difficulty providing full documentary verification and back-up for his expenditures for which he was requesting reimbursement. In addition, the preamble to the resolution states in part:
D. Acceptance of liability to Stanfield at this date poses some special problems due to the fact that some of the disbursements that he has requested to be reimbursed for precede the last date that the financial statements of the company were audited — and such statements did not include the expenditures.
Concern was expressed whether or not the acceptance of these responsibilities would be acceptable to Bul River's auditors. The resolution authorizes the engagement of the auditors for the purpose of conducting a special audit of the expenditures made by Stanfield. There is no evidence as to the result of that special audit or if it even took place.
131 The third resolution of Bul River is dated November 30, 2003 and is of particular significance. It reads as follows:
WHEREAS:
A. Ross Stanfield ...has submitted various claims for recognition of corporate liabilities to third parties ... as shareholder's loans for transactions undertaken as agent on behalf of the Company, Gallowai ... to finance the exploration of the British Columbia properties owned by the Companies ("Properties").
B. Stanfield and the Companies signed an Agreement dated May 13, 2003 recognizing the fact that Stanfield has acted as agent on behalf of the Companies since 1972 and had personally undertaken a variety of transactions as agent for the Companies to finance the exploration of the Properties.
C. Stanfield has submitted the following claims pursuant to the Agreement for the Director's consideration and approval.
1. Exploration Loans
These loans were negotiated between 1983 and 2002 personally by Stanfield, as the agent of the Company, and all funds were advanced to the Companies as shareholders loans from him. Payments were made on the loans with his own personal funds or shareholdings. The Directors were provided with a summary of individual loans and accrued interest for review. Files have been prepared for corporate record keeping purposes that include the documentation and amortization schedules supporting each loan.
Balances as at December 31, 2002
Loan principal $1,886,413 Accrued interest $6,281,004
. . .
NOW THEREFORE, the undersigned acting as a group excluding ... [Stanfield], RESOLVE:
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1. THAT the loans, accrued interest and share subscriptions detailed in paragraph C.1 above, negotiated by Stanfield as agent on behalf of the Companies, be accepted as liabilities of the Companies.
. . .
3. THAT the resolution passed by the full Board dated May 13, 2003 that the Company accept all of the above described liabilities on behalf of the other Companies — to be offset by inter-company accounts whereby each of the other Companies will be indebted to the Company for the amounts assumed by the Company — be further approved and ratified.
132 It should be noted that the agreement between Stanfield and Bul River (and perhaps others) dated May 13, 2003 has not been located. Nor have any similar resolutions from the directors of Gallowai been found.
133 In addition, no one has been able to locate a copy of the summary of the loans as of December 2002 referred to in paragraph C.1 of the November 2003 resolution. Mr. Hewison refers in his evidence to a spreadsheet in the name of Bul River referencing "Mine Development Loans" for the year ended December 2003 which indicates a loan from Mr. Stafford of $150,000 with accrued interest of $899,236.39. The total interest figure for all loans is slightly different (lower) than the interest amount referenced in the November 2003 resolution which was as of December 31, 2002. In any event, CuVeras does not dispute that Mr. Stafford would likely have been on the list referred to in the November 2003 resolution.
134 No audited financial statements have been produced pre-2003, as might have been amended arising from the special audit authorized in October 2003.
135 Also in evidence are various letters from Bul River to Mr. Stafford concerning these loans.
136 On April 23, 2007, a letter was sent to Mr. Stafford's accountant enclosing various amended 2006 T5 (Statement of Investment Income) forms or slips that were apparently issued to Mr. Stafford by Gallowai and Bul River, each as to 50% of interest paid or payable pursuant to the Stafford Loan Agreement. The letter indicates that as of 2006, the amount of such interest was just over $1.5 million (which included the $150,000 bonus amount supposedly due pursuant to the Stafford Loan Agreement).
137 On March 6, 2008, Mr. Stafford received correspondence from Bul River's controller concerning the 2006 T5s slips from Bul River and Gallowai. Later letters from the controller dated April 2, 2008, February 12, 2009 and January 19, 2010 refer to T5 slips being issued by Bul River and Gallowai for 2007, 2008 and 2009 relating to accrued interest on the Stafford Loan Agreement. Finally, T5 slips for 2010 appear to have been issued by Bul River and Gallowai for that taxation year.
138 There is no evidence that Mr. Stafford knew anything about the 2003 resolutions by Bul River. It does appear to be the case that he began receiving interest payments from Gallowai in 1999 and these would continue together with the payment of some principal by either Gallowai or Bul River to 2009. Bul River would also later send Mr. Stafford, commencing in 2007 and continuing to 2010, certain details or statements relating to the loan and the T5 slips.
(iii) Legal Basis for the Stafford Claim
139 For the reasons set out below, CuVeras submits that the Stafford Claim is not a debt claim against Bul River and Gallowai and ought to be expunged from the Creditor List. CuVeras argues that Mr. Stafford cannot satisfy the onus placed upon him to prove his claim against those petitioners.
140 At the outset, it is clear that Mr. Stafford advanced his loan to Stanfield personally, and not to either Bul River or Gallowai. The 2003 resolutions confirm that such was the case and, indeed, the amounts were noted in the books of Bul River and Gallowai as shareholder loans owing to Stanfield personally in that respect.
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141 CuVeras made substantial arguments on the later involvement of Bul River and Gallowai in terms of whether those petitioners became the principal obligants under the Stafford Loan Agreement. These arguments related to whether or not there had been a valid assignment of the Stafford Loan Agreement from Stanfield to Bul River and Gallowai. While Mr. Stafford agreed with these submissions, it is helpful to set out these issues and arguments in order to put in focus the later arguments of Mr. Stafford (which are contested by CuVeras).
142 I agree that there is no basis upon which Mr. Stafford can contend that Stanfield assigned the Stafford Loan Agreement to Bul River and Gallowai. There is no evidence that Gallowai agreed to anything, since the resolutions were only that of Bul River's directors.
143 Even assuming that the November 2003 resolution was intended to effect a valid assignment of the obligations under the Stafford Loan Agreement from Stanfield to Bul River and Gallowai, it is of no legal effect in that it purports to assign the burden of Stanfield's obligations to Bul River and Gallowai. It is trite law that neither the common law nor equity has ever permitted a debtor to unilaterally assign the burdens or obligations (as opposed to the benefits) of a contract to a third party without the consent of the creditor. Rather, in that case a novation is required: Mills v. Triple Five Corp. [1992 CarswellAlta 172 (Alta. Master)], 1992 CanLII 6204 at paras. 13-14, (1992), 136 A.R. 67 (Alta. Master).
144 Novation involves the substitution of a new contract or obligation for an old one which is thereby extinguished: Royal Bank v. Netupsky, 1999 BCCA 561 (B.C. C.A.). In Netupsky at paras. 11-13, the court set out the essential elements that must be established to satisfy the test to establish novation:
1. the new debtor must assume complete liability for the debt;
2. the creditor must accept the new debtor as a principal debtor, and not merely as an agent or guarantor; and
3. the creditor must accept the new contract in full satisfaction and substitution for the old contract.
145 Mr. Stafford bears the burden of proving novation which the Court in Netupsky described as a "heavy onus". Further, while the courts may look at the surrounding circumstances, including the conduct of the parties, they will not infer that a novation has occurred in the face of ambiguous evidence as to the parties' intention to effect a new agreement with the substituted party.
146 As is noted by CuVeras, it is somewhat ironic to suppose that Mr. Stafford might have advanced this issue since he is the creditor and as noted in Netupsky, it is usually the "unwilling creditor" who is objecting to any suggestion of a novation. In any event, in this case there is no evidence to suggest that:
a) Mr. Stafford had any knowledge of the 2003 resolutions or was in any other way even advised by Stanfield, Bul River or Gallowai that it was intended that Bul River and Gallowai would assume the obligations under the Stafford Loan Agreement in place of Stanfield; and
b) Stanfield, Bul River, Gallowai and Mr. Stafford reached a consensus with respect to the terms upon which any purported new or substituted agreement would operate.
147 Accordingly, it is clear, as agreed by CuVeras and Mr. Stafford, that novation did not occur such that Bul River and Gallowai assumed the obligations of Stanfield under the Stafford Loan Agreement with the consensus of Mr. Stafford. In addition, no privity of contract arose simply by reason of later payments to Mr. Stafford or issuance of T5 slips by Bul River and Gallowai. That Mr. Stafford was not directly involved in any such new contractual arrangements and that he only later "assumed" that Bul River and Gallowai were involved is made evident by his own loan summary attached to his Proof of Claim:
Commencing in 2006, T5 slips were issued by Bul River Mineral Corporation and Gallowai Metal Mining Corporation 1 (50% each). Assumption is therefore that /2 of Grand Total is receivable from each.
[Emphasis added].
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148 Nor is there any suggestion that Bul River or Gallowai provided a guarantee of the Stafford Loan Agreement to Mr. Stafford. Finally, Mr. Stafford does not argue that Bul River and Gallowai are somehow estopped from denying that they are debtors of Mr. Stafford, particularly by reason of the interest and principal payments made by them and the T5 slips prepared by them which were then forwarded to Mr. Stafford.
149 Having confirmed the agreement of CuVeras and Mr. Stafford on the above issues, I turn to Mr. Stafford's position, which is solely rooted in agency:
The corporate minutes of Bul River Mineral Corporation confirm that the actions of Ross Hale Stanfield were as agent for the company and associated companies and confirmed by resolution to accept liability of agreements signed by Stanfield as legitimate debts of a company and acted on it accordingly[.]
150 Essentially, Mr. Stafford's argument is that Stanfield was retroactively appointed as the agent of Bul River and Gallowai by reason of the November 2003 resolution such that he had the express or implied authority to bind Bul River and Gallowai at the time of the loan. He relies in particular on s. 193(2) and (4) of the Business Corporations Act, S.B.C. 2002, c. 57:
193 (2) A contract that, if made between individuals, would, by law, be required to be in writing and signed by the parties to be charged, may be made for a company in writing signed by a person acting under the express or implied authority of the company and may, in the same manner, be varied or discharged.
. . .
(4) A contract made according to this section is effectual in law and binds the company and all other parties to it.
151 It seems to be common ground that Stanfield was not acting as the agent of Bul River and Gallowai in 1990 when the loan was made. The Stafford Loan Agreement does not reference Stanfield acting as an agent and the Proof of Claim does not allege an agency relationship at the time of the Stafford Loan Agreement. Nor was Stanfield acting as the agent of Bul River and Gallowai during the ensuing 13 years when the loan was being administered. The allegation is that changes only occurred in 2003 when Stanfield decided he wanted to be reimbursed by Bul River and Gallowai for certain loans he had earlier made.
152 I was referred to only one authority on the agency issue by CuVeras, being Spidell v. LaHave Equipment Ltd., 2014 NSSC 255 (N.S. S.C.).
153 In Spidell, LaHave Equipment Ltd. was a dealer for Case Canada Limited. The plaintiff Spidell purchased a Case Canada excavator from LeHave which was financed by Case Credit Limited. Spidell alleged that employees of LaHave made representations to him about the performance of the equipment. Spidell believed LaHave was a representative or agent or dealer for Case Canada. Spidell did not make the required payments to Case Credit and the equipment was repossessed. Spidell sued LaHave claiming damages for alleged misrepresentations. LaHave defended the action but subsequently went into bankruptcy. Only then did Spidell amend his pleading to add Case Credit and Case Canada as defendants, claiming LaHave was their agent. The issue on the summary trial was whether LaHave was in fact the agent of the Case companies.
154 Mr. Justice Coughlan reviewed the law of agency, as follows:
[21] In Halsbury's Laws of Canada First Edition, "Agency" paragraph HAY-2 the three essential ingredients of an agency relationship are:
1. The consent of both the principal and the agent.
2. Authority given to the agent by the principal, allowing the former to affect the latter's legal position.
3. The principal's control of the agent's actions.
And at Agency paragraph HAY -11 the manner in which an agency relationship may be created are set out:
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"1. the express or implied consent of principal and agent,
2. by implication of law from the conduct or situation of the parties or from the necessities of the case,
3. by subsequent ratification by the principal of the agent's act done on the principal's behalf, whether the person doing the act was an agent exceeding his authority or was a person having no authority to act for the principal at all,
4. by estoppel, or
5. by operation of the principles of law."
[Emphasis added].
155 Mr. Stafford relies in particular on the creation of agency by ratification as referred to above. Justice Coughlan said this about agency by ratification:
[25] The conditions for an agency by ratification to be established were set out in Halsbury's Laws of Canada, supra, at Agency HAY-22 as follows:
"Three Conditions. Actions by a principal after the agent has purported to act on the principal's behalf may amount to creation of agency by ratification. For this to occur, three conditions must be satisfied. First, the agent whose act is sought to be ratified must have purported to act for the principal; second, at the time the act was done the agent must have had a competent principal; and third, at the time of the ratification the principal must be legally capable of doing the act himself.["]
156 The key consideration from the above quote is the first requirement. In this case, there is no evidence that Stanfield "purported to act" for Bul River and Gallowai as principals in 1990 when he entered into the Stafford Loan Agreement. In fact, the evidence is to the contrary in that he acted in his personal capacity and not as agent.
157 I agree with CuVeras that agency by ratification assumes that there exists a relationship (even though perhaps mistaken) between the principal and agent at the time of the transaction which must later be ratified. One example is as noted in the Halsbury's quote above, namely where the agent exceeded his or his authority but later the unauthorized transaction is ratified or adopted by the principal. That is not what occurred in this case. Ratification of an agent's actions in that case cannot occur when no agency relationship existed in the first place. The second example of ratification described in Halsbury's (where the person had no authority to act but their actions were later ratified) still requires that the actions be done by the agent "on the principal's behalf" in purported furtherance of an agency relationship.
158 Accordingly, the concept of ratification by Bul River and Gallowai of Stanfield's actions concerning the Stafford Loan Agreement as their agent has no application in this case.
159 What occurred in this case is that many years later, in 2003, Stanfield, Bul River and Gallowai agreed that the companies would take over responsibility for payment of the Stafford Loan Agreement in place of Stanfield. But those arrangements were only between Bul River, Gallowai and Stanfield and not Mr. Stafford.
160 Accordingly, we start from the proposition that there was no agency relationship between Stanfield and Bul River and Gallowai in 1990. The only parties to the Stafford Loan Agreement are Stanfield and Mr. Stafford.
161 The only evidence suggesting any link between Mr. Stafford and Bul River and Gallowai arise from the fact that, commencing in April 2007, Mr. Stafford began to receive T5 slips from them. Payments were also made by Bul River and Gallowai commencing in 1999. Mr. Stafford argues that by reason of such actions, Bul River and Gallowai treated the Stafford Loan Agreement as their debt since they could not have issued T5 slips for someone else's debt. The 2003 resolutions are, of course, an internal document of Bul River but do indicate that Bul River at least intended to accept the Stafford Loan Agreement
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 24 Bul River Mineral Corp., Re, 2014 BCSC 1732, 2014 CarswellBC 2702 2014 BCSC 1732, 2014 CarswellBC 2702, [2014] B.C.W.L.D. 6764... as its obligation. The basis upon which Bul River was able to accept this obligation on behalf of Gallowai is unclear and not substantiated.
162 Mr. Stafford argues that these events confirm that Bul River and Gallowai had assumed the obligations of Stanfield. But this argument brings us back to the legal bases for any liability on the part of Bul River and Gallowai that CuVeras raised and I discussed above (assignment, novation, guarantee and estoppel) and which arguments Mr. Stafford agreed did not apply.
163 I agree with the submissions of CuVeras that these later actions of Bul River and Gallowai evidence an intention on the part of Bul River (and perhaps Gallowai) to take over or assume payment of the obligations of Stanfield under the Stafford Loan Agreement. In that sense, and without a novation, in substance these arrangements amount to Bul River and Gallowai agreeing to indemnify Stanfield in respect of his obligations to pay the Stafford Loan Agreement amounts and nothing more.
164 I conclude that Mr. Stafford has not met the onus of proving that the amounts under the Stafford Loan Agreement are obligations or "provable debts" of Bul River and Gallowai.
165 Both CuVeras and Mr. Stafford made submissions concerning the issue as to whether the Stafford Loan Agreement provided for compound interest or not. In light of my conclusions above, it is not necessary to address that issue.
Conclusion
166 In accordance with the above reasons, the Court declares that:
a) the Preston Claim is an equity claim for the purposes of this CCAA proceeding; and
b) the Stafford Claim is not a debt claim as against Bul River and Gallowai. It follows that the Creditor List should be amended accordingly and that Mr. Stafford is not entitled to vote on or receive any distribution under any plan of arrangement as may subsequently be filed by those petitioners.
167 If any party is seeking costs, then written submissions should be delivered to the court and the party against whom costs are sought within 30 days of delivery of these reasons. Any response shall be delivered within 15 days and any reply to that response shall be delivered with seven days of that date. One claim found to be in equity; second claim found not to be in debt.
End of Document Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 25
TAB 13
13 Tudor Sales Ltd., Re, 2017 BCSC 119, 2017 CarswellBC 170 2017 BCSC 119, 2017 CarswellBC 170, [2017] B.C.W.L.D. 1224, 276 A.C.W.S. (3d) 530...
2017 BCSC 119 British Columbia Supreme Court
Tudor Sales Ltd., Re
2017 CarswellBC 170, 2017 BCSC 119, [2017] B.C.W.L.D. 1224, 276 A.C.W.S. (3d) 530, 44 C.B.R. (6th) 45
IN THE MATTER OF THE BANKRUPTCY OF TUDOR SALES LTD.
A. Saunders J.
Heard: January 8, 2016 Judgment: January 25, 2017 Docket: Vancouver B131477
Counsel: S.H. Stephens, for Trustee, Boale, Wood & Company Ltd. W.B. Milman, K. Macdonald, for Applicant, Cascade Steel Rolling Mills Inc. D.K. Magnus, for Applicant, Tavi Eggertson
Subject: Insolvency Headnote Bankruptcy and insolvency --- Proving claim — Provable debts — Claims of director, officer or shareholder of bankrupt corporation Bankrupt's financial statements recorded shareholder loans owed to shareholder — Bankrupt's statement of affairs included shareholder amongst list of secured creditors — Trustee's preliminary report stated that there would be significant shortfall to secured creditors and no funds available for distribution to unsecured creditors, which included corporate creditor — Corporate creditor applied for order that proof of claim and proof of security of shareholder be expunged, reduced or subordinated to claims of other creditors; shareholder applied for order that all funds currently held by trustee be released to him — Corporate creditor's application granted; shareholder's application dismissed — Shareholder's claim in respect of purported shareholder loans was in respect of equity claim and subordinated to all creditor claims — Functionally, bankrupt's payments to shareholder were being treated as subordinate to all such current liabilities, fact which was inconsistent with his claim to secured creditor status — Nature of bankrupt's liability to shareholder was more consistent with equity than debt in that there was no schedule for repayment of advances, and no certain formula to determine interest amount — Variably nature of interest payments, fluctuating with company's profitability was sufficient in itself to lead to advances from shareholder being characterized as equity — Very close proximity in time between advances made by shareholder and his acquisition of shareholder interest and increase in value of that interest strongly implied that his advances were in substance consideration paid for his ownership stake.
APPLICATION by corporate creditor for order that proof of claim and proof of security of shareholder be expunged, reduced or subordinated to claims of other creditors; APPLICATION by shareholder for order that all funds held by trustee be released to him.
A. Saunders J.:
Introduction
1 The applicant Cascade Steel Rolling Mills Inc. ("Cascade"), an acknowledged unsecured creditor of the bankrupt, Tudor Sales Ltd. ("Tudor"), seeks an order under s. 135(5) of the Bankruptcy and Insolvency Act, R.S.C. 1985 c. B-3 [BIA], that the proof of claim and proof of security of Tavi Eggertson ("Mr. Eggertson") be expunged, reduced, or subordinated to the claims of other creditors.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 1 Tudor Sales Ltd., Re, 2017 BCSC 119, 2017 CarswellBC 170 2017 BCSC 119, 2017 CarswellBC 170, [2017] B.C.W.L.D. 1224, 276 A.C.W.S. (3d) 530...
2 The applicant Mr. Eggertson, who claims to be a secured creditor, seeks an order that all funds currently held in trust by the trustee, Boale, Wood & Company Ltd. ("Boale, Wood"), be released to him.
3 The applications were argued on January 8, 2016. Cascade and Tudor were subsequently given leave to make further written submissions as to the import of the decision of the Ontario Superior Court of Justice in U.S. Steel Canada Inc., Re, 2016 ONSC 569 (Ont. S.C.J.) [U.S. Steel]. Those submissions were received by June 2, 2016. A further written submission filed by counsel for Mr. Eggertson, purportedly as sur-reply, has been disregarded, as it was, in its entirety, not proper sur-reply but essentially repetition of arguments previously advanced.
Background
4 Tudor made an assignment in bankruptcy on November 20, 2013. At that time, Tudor's most recent (unaudited) financial statements were for the fiscal year ending October 31, 2012. Those financial statements recorded shareholder loans owed to Mr. Eggertson, who was a shareholder of Tudor, and its sole officer and director, in the amount of $1,361,359. This loan liability as recorded in the financial statements arose out of two purported loans made to Tudor by Mr. Eggertson in 2005 and 2006 (collectively, the "2005-06 Advances").
5 Tudor's Form 78 Statement of Affairs, sworn to by Mr. Eggertson on November 20, 2013, included Mr. Eggertson amongst the listed secured creditors. It asserted that Mr. Eggertson's secured claim was in the amount of $1,770,656.70. How that claim amount was arrived at is not disclosed. Mr. Eggertson's evidence when examined on November 26, 2014 is that this amount was "a guess at best". As will be seen, since then Mr. Eggertson has at least implicitly resiled from that claim amount.
6 Cascade, a trade creditor of Tudor, is the single largest unsecured creditor. Its claim of $1,367,746.25 represents approximately 28% of the bankrupt's total unsecured debt. That claim amount is not in dispute.
7 Acting under a general security agreement dated March 1, 2006 and registered November 18, 2011 (the "GSA"), Mr. Eggertson sought the appointment of Boale, Wood as receiver. After satisfying itself of the validity of Mr. Eggertson's security, by way of obtaining an independent legal opinion, Boale, Wood accepted the appointment in November 2013.
8 Boale, Wood prepared and distributed a trustee's preliminary report to creditors, in December 2013. That preliminary report stated that there would be a significant shortfall to the secured creditors, and there would be no funds available for distribution to the unsecured creditors, among which was Cascade.
9 After payment of other secured claims, Boale, Wood — presumably, acting on the belief that the indebtedness to Mr. Eggertson was secured by his GSA — paid out $500,000 to Mr. Eggertson, in March 2014. That left approximately $600,000 on hand for distribution.
10 Following the aforesaid $500,000 distribution to Mr. Eggertson, Cascade advised Boale, Wood that it was investigating the validity of, and/or the amount secured by, Mr. Eggertson's GSA. Boale, Wood determined that no further distributions would be made until the issues related to Mr. Eggertson's security were resolved.
11 In May 2014, Cascade requested that Boale, Wood undertake an examination of Mr. Eggertson; Boale, Wood declined to do so, citing a lack of funds.
12 Cascade then applied for an order under s. 163(2) of the BIA that Mr. Eggertson undergo an examination under oath. That order was granted by Mr. Justice Leask, on August 21, 2014.
13 In response to that application, Mr. Eggertson filed an affidavit in which he asserted that his secured claims were comprised not only of the approximately $1.37 million in shareholder loans described in Tudor's financial statements, but also a further $1.92 million in loans he had made to Tudor in 2011 and 2012 (the "2011-12 Advances"). He put his total claim, net of the $500,000 received in March 2014, at $2,781,359. He affirmed that claim in a formal Proof of Claim delivered on October 31, 2014, in response to a Notice by Trustee Requiring Filing of Proof of Security.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 2 Tudor Sales Ltd., Re, 2017 BCSC 119, 2017 CarswellBC 170 2017 BCSC 119, 2017 CarswellBC 170, [2017] B.C.W.L.D. 1224, 276 A.C.W.S. (3d) 530...
14 Cascade examined Mr. Eggertson under oath on November 26, 2014.
15 In the course of Boale, Wood's review of Mr. Eggertson's claim, the trustee identified documentation — in evidence on these applications — that the 2011-12 Advances had been recorded in Tudor's books as being due from "TE Steel", a related company whose expenses Tudor had funded. Mr. Eggertson was advised of Boale, Wood's position that those advances should not form part of his claim against Tudor, by way of an email from the trustee's legal counsel dated December 9, 2014. The materials filed on these applications do not disclose any response to this position having been made by Mr. Eggertson.
16 On the basis of the transcript of the examination of Mr. Eggertson, Cascade sought a ruling from Boale, Wood in January 2015, asking that Mr. Eggertson's proof of security be disallowed under s. 135 of the BIA, and that the trustee demand the return of the previously distributed funds. Boale, Wood declined to do so, again citing a lack of resources, leaving it to the creditors to bring the present applications.
Positions of the Parties
17 Mr. Eggertson's evidence is that the 2005-06 Advances consisted of two loan amounts made by him: $890,000 on October 29, 2005; and a further $500,000 in December 2006. He says that there were subsequently adjustments in Tudor's accounts as a result of payments made to him by Tudor, resulting in a net reduction of $28,641, leaving a total shareholder loan of $1,361,359.
18 The first payment of $890,000 was money that his accountants (also Tudor's accountants) had recommended be paid to him by the company as a bonus, in addition to his salary. He took the bonus, in the sense that he declared it as income on his tax return, but says that he left the money in the company as a loan.
19 Determination of the amount of that bonus had been, as he described it, tax-driven. His evidence is that "everything that I did when I worked at Tudor Sales was tax driven".
20 The $890,000 payment was originally described in Tudor's October 31, 2005 financial statements as "unsecured, non- interest bearing and . . . no fixed terms of repayment". Mr. Eggertson contends that it was always intended that this money be repaid to him eventually.
21 The $500,000 loan of December 2006 was made by him to Tudor, he says, because the money was "needed for growth". Elsewhere in his evidence, he stated that the money was needed by the company "to buy product".
22 After the GSA was executed in March 2006, notes in subsequent financial statements described his shareholder loans — both the $890,000 bonus left in the company, and the $500,000 loan he made in December 2006 — as interest-bearing. However, the notes continued to refer to the loans as "unsecured". Although Mr. Eggerston signed off on the financial statements each year, he says these notes were incorrect, in that he intended the GSA to cover those loans. The financial statements began to refer to the shareholder loans as secured, beginning in 2011.
23 There was no written documentation of those shareholder loans, no fixed interest rate, or formula by which the interest rate could be determined, and no schedule for repayment. The loans are described in the October 31, 2012 financial statements of Tudor under a note that reads:
Advances, secured by a general security agreement over all present and future personal property, bears interest of 8% (October 31, 2011 — 8%; November 1, 2010 — 36%) per annum with no fixed terms of repayment.
24 Mr. Eggertson's evidence is that the interest rate at which he was paid each year in respect of his shareholder loans fluctuated with the fortunes of the company, depending on advice received from his accountants. At times, when the company was doing well, the interest rate was as high as 36%. At other times — in particular, for the fiscal year 2009 — the interest rate set by the accountants would turn out to have been too high relative to the company's performance, and the financial statements would record him as having partially forgiven interest payment.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 3 Tudor Sales Ltd., Re, 2017 BCSC 119, 2017 CarswellBC 170 2017 BCSC 119, 2017 CarswellBC 170, [2017] B.C.W.L.D. 1224, 276 A.C.W.S. (3d) 530...
25 Mr. Eggertson says that the 2011-12 Advances were made on the expectation that they were loans to Tudor secured by the GSA. These advances were used to fund the operations of T. E. Sales Inc. (formerly T. E. Steel Sales Inc.), a company controlled by his wife. (He says that the financial statements of Tudor are mistaken in referring to T. E. Sales as a related company.) T. E. Sales Inc. had no assets; it, in turn, had used the advances to fund a tequila importation venture in which Mr. Eggertson had an interest.
26 The documentation relied upon by Boale, Wood in December 2014, in denying Mr. Eggertson's claim for these advances, is a Detailed Trial Balance. It records certain expenditures reallocated by the accountants, including an amount respecting "Casi di Tavi", which I infer is the company Casa de Tavi, identified by Mr. Eggertson as one of the entities involved in the tequila venture in which he had an ownership interest. There are other references to "bottles" and "liquor", and numerous references to "TT" and "TE Steel TT", which I infer, from his description of the venture in his examination evidence, to be related to "Tavi Tequila".
27 Mr. Eggertson's evidence is that though the tequila venture was in its infancy, he hoped to build the brand, and hoped that Tudor would eventually be repaid out of profits from the sale of "Tavi Tequila" imported into British Columbia. He regarded this, he says, as an investment by Tudor. Elsewhere in his evidence, he says that he intended to make a gift to Tudor of all rights to Tavi Tequila, once the venture began consistently generating revenue.
28 Mr. Eggertson's position is that the Tudor financial statements are inaccurate and incomplete, in that they do not include the 2011-12 Advances used to fund those expenditures in the shareholder loans. He says that he had an ongoing disagreement with his accountants as to the allocation of expenses amongst Tudor and his other ventures. That disagreement led to him firing his accountants, he says, after the 2012 financial statements were prepared.
29 Mr. Eggertson's position is that whether his full claim is recognized, or whether he is obliged to discount the amount of the 2011-12 Advances and limit his claim to the remaining balance of the 2005-06 Advances, his secured claims exceed the amount remaining in trust with Boale, Wood, and he says he is entitled to payment of that amount in full.
30 Cascade's primary submission is that the 2005-06 Advances, though carried on the books of Tudor as loans, are properly characterized as equity, and must be subordinated to the claims of Tudor's creditors.
31 Alternatively, Cascade asserts that if the 2005-2006 Advances were loans, those loans were repaid in full through Mr. Eggertson having been paid an exorbitant salary, and through him having been paid interest at exorbitant rates, as high as 36%.
32 With respect to the 2011-12 Advances, Cascade says that Tudor's 2012 financial statements report advances made to "related parties" that were not in fact related to Tudor but were in fact ventures owned or controlled by Mr. Eggertson, or from which he stood to profit personally, and that Mr. Eggertson simply used Tudor as a vehicle to make those expense payments. Cascade submits, essentially, that Mr. Eggertson's use of Tudor as a vehicle was a matter of convenience to him and that he cannot shelter his payments made through Tudor under Tudor's GSA, thereby defeating the legitimate commercial interests of Tudor's trade creditors.
33 Cascade relies upon ss. 137, 139, and 140.1 of the BIA, which provide as follows:
Postponement of claims — creditor not at arm's length
137 (1) A creditor who, at any time before the bankruptcy of a debtor, entered into a transaction with the debtor and who was not at arm's length with the debtor at that time is not entitled to claim a dividend in respect of a claim arising out of that transaction until all claims of the other creditors have been satisfied, unless the transaction was in the opinion of the trustee or of the court a proper transaction.
. . .
Postponement of claims of silent partners
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 4 Tudor Sales Ltd., Re, 2017 BCSC 119, 2017 CarswellBC 170 2017 BCSC 119, 2017 CarswellBC 170, [2017] B.C.W.L.D. 1224, 276 A.C.W.S. (3d) 530...
139 Where a lender advances money to a borrower engaged or about to engage in trade or business under a contract with the borrower that the lender shall receive a rate of interest varying with the profits or shall receive a share of the profits arising from carrying on the trade or business, and the borrower subsequently becomes bankrupt, the lender of the money is not entitled to recover anything in respect of the loan until the claims of all other creditors of the borrower have been satisfied.
. . .
Postponement of equity claims
140.1 A creditor is not entitled to a dividend in respect of an equity claim until all claims that are not equity claims have been satisfied.
Discussion and Analysis
34 With respect to the shareholder loans claim arising out of the 2005-06 Advances, the threshold question is whether the amounts advanced to Tudor by Mr. Eggertson are properly characterized as a debt, or as equity.
35 These purported loans having been a non-arm's-length transaction, I am guided by the description of the court's role in characterizing, or re-characterizing, such payments, as recently set out by Justice Wilton-Siegel in U.S. Steel:
[167] Where . . . the parties are not at arm's length, the issue is not what the parties say they intended regarding the substance of the transaction as a matter of contractual interpretation. The expressed intention of the parties is clear. However, given the absence of any arm's length relationship, there can be no certainty that the language of the agreements reflects the underlying substantive reality of the transaction. Accordingly, the issue for a court is whether, as actually implemented, the substance of the transaction is, in fact, different from what the parties expressed it be in the transaction documentation.
[168] In other words, the task of a court is to determine whether the transaction in substance constituted a contribution to capital notwithstanding the expressed intentions of the parties that the transaction be treated as a loan. It is therefore not appropriate to limit the inquiry into the intentions of the parties to a review of the form of the transaction documentation. Such an exercise reduces to a "rubber stamping" of the determination of a single party to the transaction, i.e., the sole shareholder, and it does not address the substance of the transaction as it was actually implemented. In such circumstances, the determination of whether a particular claim is to be treated as debt or equity must address not just the expressed intentions of the parties as reflected in the transaction documentation but also the manner in which the transaction was implemented and the economic reality of the surrounding circumstances.
36 Further on in that judgment, Wilton-Siegel J. discussed the various factors which he found appropriate to determination of the debt claim before him, given the particular financial instruments utilized by the parties. He began that discussion with an explanation of the difference between equity and debt from an expert report tendered by one of the parties, authored by an economist, Dr. John Finnerty, which I also adopt:
[183] An appropriate starting point is the definition of debt and equity for financial purposes set out in paragraphs 32 and 34 of the Finnerty Report:
At its heart, the difference between equity and debt lies in the fundamental nature of their respective claims on the assets and cash flow of the company. Debt involves borrowing funds subject to a legal commitment to repay the borrowed money with interest at an agreed rate by a stated maturity date. This commitment is embodied in a contract, and this contract is implemented by the borrower. Lenders receive a contractually agreed set of cash flows, typically through periodic interest payments and one or more principal repayments, the last of which occur on the maturity date. . . . In contrast to debt, an equity claim entitles the holder to a share of the company's profits and residual cash flows after the company has made all the contractually required debt service payments. That is, the debt ranks senior to the equity with respect to the company's cash flows. Similarly, the debt ranks senior to the equity in the event the
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 5 Tudor Sales Ltd., Re, 2017 BCSC 119, 2017 CarswellBC 170 2017 BCSC 119, 2017 CarswellBC 170, [2017] B.C.W.L.D. 1224, 276 A.C.W.S. (3d) 530...
company must be liquidated and its assets sold to repay its debt obligations. The equityholders get what is left after the holders of the debt have been paid in full; if the debtholders can't get paid in full, then the equityholders get nothing.
37 The characterization of the 2005-06 Advances as equity, and not debt, is most strongly supported by the variable nature of the interest payments recorded in the financial statements as having been made to Mr. Eggertson. As a consequence of being variable with the company's profitability, the amount of the payments made to Mr. Eggertson could not have been determined each year until any and all current liabilities to secured and unsecured creditors had been satisfied. As noted above in the quotation from the Finnerty Report in U.S. Steel, "debt ranks senior to the equity with respect to the company's cash flows". Functionally, therefore, Tudor's payments to Mr. Eggertson were being treated as subordinated to all such current liabilities, a fact which is inconsistent with his claim to secured creditor status.
38 Furthermore, the nature of the company's liability to Mr. Eggertson was more consistent with equity than with debt, in that there was no schedule for repayment of these advances, and there was no certain formula to determine the interest amount. Payments, rather, were discretionary, based on the advice of the accountants, and varying with Tudor's profitability. The ability to draw payment in this manner is not normally incidental to the rights of a creditor; instead, it is a hallmark of ownership.
39 It is not the lack of a strict schedule for repayment in itself that is relevant; neither do I give any weight to the absence of loan documentation. This is because the relationship of a wholly-owned subsidiary to its parent obviates the need for same: see U.S. Steel at para. 217. It is, instead, the nature of those interest payments that reveals the true substance of the transaction.
40 This characteristic of the transaction — the variable nature of the interest payments, fluctuating with the company's profitability — is, I find, sufficient in itself to lead to the 2005-06 Advances being characterized as equity. In addition, I also regard the circumstances surrounding the 2005-06 Advances as germane. At the time of the first of those advances, October 29, 2005, Mr. Eggertson was not a shareholder of Tudor; the company's sole shareholder was his father, Donald Eggertson. However, as disclosed in the company's securities register, Mr. Eggertson became a shareholder as of January 1, 2006, only approximately two months later, when his father transferred nine of his 100 Class A common shares to Mr. Eggertson. There is no record of any consideration for the transfer having been paid. There is no evidence that it was a gift.
41 In December 2006, Mr. Eggertson made his second advance, of $500,000. The security register discloses that that same month, his nine Class A common shares — a 9% holding — were exchanged for 100 Class D redeemable preferred shares. Tudor's 2007 financial statements indicate those shares were redeemable for $2,542,539. They therefore represented either approximately 50% or 67% of the value of the company (depending if the value of his father's remaining Class D shares was $1,231,538 — the redemption value noted in the 2007 financial statements — or $2.5 million, the figure at which Mr. Eggertson deposed those shares to have been redeemed in 2010).
42 I agree with Cascade's submission that the very close proximity in time between these advances made by Mr. Eggertson, and at first his acquisition of a shareholder interest, and then the increase in value of that interest, strongly implies that his advances were in substance consideration paid for his ownership stake, making them equity contributions.
43 The existence of the GSA does not assist Mr. Eggertson. The GSA itself makes no specific reference to the 2005-06 Advances. In fact, the shareholder loans arising out of those advances were not even described as secured loans in Tudor's financial statements until 2011, when the company went into default on its lending covenants, reinforcing the view that the advances were not originally intended as secured debt. In any event, as U.S. Steel makes clear, what is at issue is not the superficial appearance of the transaction or transactions arising out of the transaction documentation, but the manner in which the transaction or transactions were actually implemented in the circumstances of the surrounding economic reality.
44 I therefore find Mr. Eggertson's claim in respect of the purported shareholder loans of $1,361,359 to be in respect of an equity claim, and subordinated to all creditor claims, pursuant to s.140.1 of the BIA.
45 Alternatively, if characterized more appropriately as debt, rather than equity, Mr. Eggertson's claim would fail by reason of s.139 of the BIA. That section is premised on there being a contract between lender and company under which the loan is to be repaid out of a share of profits, or is to receive a rate of interest varying with the profits. The evidence clearly discloses that
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 6 Tudor Sales Ltd., Re, 2017 BCSC 119, 2017 CarswellBC 170 2017 BCSC 119, 2017 CarswellBC 170, [2017] B.C.W.L.D. 1224, 276 A.C.W.S. (3d) 530... such interest was paid by Tudor to Mr. Eggertson. The loans being non-arm's-length transactions, the intention of Mr. Eggertson to have Tudor pay him interest varying with the profits is sufficient to bring the loans within the ambit of s.139. Although no formal written contract existed between these two non-arm's length parties, Mr. Eggertson cannot thereby claim to be in a stronger position as a consequence.
46 Nor do I find Mr. Eggertson has any legitimate claim arising out of the 2011-12 Advances. Mr. Eggertson presents no accounting evidence supporting his position that the tequila business expenses ought properly to have been allocated to Tudor. Nor is there any evidence that Tudor was regarded as being indebted to him for those advances, or that the flow of monies through Tudor's accounts to T. E. Steel and then to the tequila venture represented a bona fide investment on behalf of Tudor. Tudor was not a shareholder in Casa de Tavi; Mr. Eggertson was. It was his venture, regardless of whether he had a genuine intention that it might one day benefit Tudor.
47 Under s.137(1) of the BIA, a non-arm's-length transaction may only support a claim to a dividend in respect of a bankruptcy claim arising out of that transaction, in preference to other creditors' claims, when the transaction is judged to be "proper". I am not satisfied that Mr. Eggertson's investment in his tequila venture is properly regarded as an indirect investment achieved by means of a loan to Tudor. There is simply no justification for allowing Mr. Eggertson the luxury of securing his investment in the venture through the mechanism of the GSA granted by Tudor, and thereby defeat the legitimate interests of trade creditors.
48 In my view, Cascade is correct in arguing that Mr. Eggertson, as a non-arm's length party, bears the onus of proving the transactions are "proper". But if I am wrong in that view, I do nevertheless regard it as proven on the evidence that the 2011-12 Advances were not proper debt transactions as between Mr. Eggertson and Tudor.
49 For these reasons, the application of Mr. Eggertson is dismissed, and the application of Cascade is allowed. Corporate creditor's application granted; shareholder's application dismissed.
End of Document Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 7
TAB 14
14 All Canadian Investment Corporation (Re), 2019 BCSC 1488, 2019 CarswellBC 2578 2019 BCSC 1488, 2019 CarswellBC 2578, 309 A.C.W.S. (3d) 745, 72 C.B.R. (6th) 73...
2019 BCSC 1488 British Columbia Supreme Court
All Canadian Investment Corporation (Re)
2019 CarswellBC 2578, 2019 BCSC 1488, 309 A.C.W.S. (3d) 745, 72 C.B.R. (6th) 73, 96 B.L.R. (5th) 138
In the Matter of the Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36, as amended
And In the Matter of the Business Corporations Act, S.B.C., c. 57, as amended
And In the Matter of the Canada Business Corporations Act, R.S.C. 1985, C. c-44, as amended
And In the Matter of a Plan of Compromise and Arrangement of All Canadian Investment Corporation
Walker J.
Heard: June 18-20, 2019 Judgment: September 4, 2019 Docket: Vancouver S1710393
Counsel: J. West, for Petitioner J. Whyte, for Redeeming Shareholders M. Davies, for Non-Redeeming Shareholders V. Tickle, for Creditors, James Hancock and 1083163 Alberta Ltd. D.B. Hyndeman, for Monitor
Subject: Corporate and Commercial; Insolvency Headnote Business associations --- Specific matters of corporate organization — Shareholders — General principles — Whether creditor of corporation Prior to insolvency, petitioner company carried on business as registered mortgage investment corporation which loaned funds to third party owners of commercial and residential property from pool of funds it received from individuals and corporations who invested in company by purchasing preferred shares — Some of company's preferred shareholders delivered redemption notices to company in effort to be paid amount equal in value to their original share subscription price (redeeming preferred shareholders) — Company was unable to pay all of redemption notices it received from preferred shareholders, and it sought protection under Companies' Creditors Arrangement Act (CCAA) — Redeeming preferred shareholders claimed to be creditors of company who had priority over company's other shareholders, both non-redeeming preferred shareholders and common shareholders, who were equity claimants — Company brought petition to determine competing priority claims amongst preferred shareholders — Petition granted — Redeeming preferred shareholders, along with all of company's preferred shareholders, were equity claimants — Expanded definition of equity claim and definition of equity interest in CCAA clearly suggested that company's preferred shares constituted equity interests — Determining substance of relationship focused on transaction documents at time relationship was created — In context of CCAA proceeding, redemption claim was not indicative of debt relationship, and redemption rights, on their own, did not create debtor-creditor relationship — None of company's preferred shareholders were debt claimants, redeeming preferred shareholders were not lenders ab initio as opposed to investors, they were equity claimants, and they ranked together with all other preferred shareholders and were to be treated in same class in CCAA proceeding — Articles, offering memoranda and subscription agreement were clear that relationship between company and its preferred shareholders was equity relationship — When considered in context, mere presence of redemption rights did not establish debt relationship — Intention of company and preferred shareholders expressed in articles and transaction documents did not establish debt relationship, and there was no language that indicated that redemption was in repayment of debt —
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Preferred shareholders were advised throughout that their redemption rights were not guaranteed — Redemption rights attached to company's preferred shares were in substance rights to return of capital investment in mortgage investment corporation with significant risks — Unsatisfied redemption requests did not change substance of relationship from equity interest to debt claim — Winding-up provisions did not affect result — Redeeming preferred shareholders had not established that their contractual relationship with company changed so as to become debt creditors — Company's financial records described preferred shares as "share capital" and not as debt — All of preferred shareholders fell within ambit of equity claims.
PETITION by company in insolvency proceeding to determine competing priority claims amongst preferred shareholders.
Walker J.:
Introduction
1 The petitioner in this insolvency proceeding, All Canadian Investment Corporation ("ACIC"), seeks to determine competing priority claims amongst its preferred shareholders. Its application is brought under the statute governing this proceeding, the Companies Creditors' Arrangement Act, R.S.C. 1985, c. C-36 [CCAA].
2 ACIC is incorporated pursuant to the Business Corporations Act, S.B.C. 2002, c. 57 [BCA].
3 Prior to its insolvency, ACIC carried on business as a registered mortgage investment corporation ("MIC") since 1998. Its business was to loan funds to third party owners of commercial and residential property, mostly to be secured by mortgages, from a pool of funds it received from time to time from individuals and corporations who invested in ACIC by purchasing preferred shares.
4 Some of ACIC's preferred shareholders delivered redemption notices to the company prior to the commencement of this proceeding in an effort to be paid an amount equal in value to their original share subscription price. Some, but not all of them, are before the Court on this application. I refer to those who are as the "redeeming preferred shareholders", claim to be creditors of ACIC. They assert that all of ACIC's other shareholders, both preferred and common, rank lower in priority since they are equity claimants.
5 For ease of identification, I collectively refer to to the preferred shareholders who did not deliver redemption notices or did not deliver them prior to the commencement of this proceeding, as the "non-redeeming preferred shareholders".
6 The core issue on this application is whether the redeeming preferred shareholders are creditors of ACIC as opposed to equity claimants, so as to share rateably in the distribution of proceeds paid under any court-approved plan of arrangement with the company's other creditors, and in priority to the non-redeeming preferred shareholders and ACIC's common shareholders.
7 The redeeming preferred shareholders' claim is opposed by ACIC, two of its creditors, and the non-redeeming preferred shareholders. The common shareholders did not appear on the application.
8 ACIC agreed to take the lead in seeking a determination of the priority issue and brought this application seeking declaratory relief.
9 The priority claim advanced by the redeeming preferred shareholders must be determined before a suitable plan of arrangement, which would include a claims process and plan for distribution of ACIC's assets, can be submitted for court approval.
10 It will serve no purpose in these reasons to comment on the length of time it has taken to get to this point in the proceeding. It will suffice to say that at this juncture, all stakeholders are anxious to have a plan presented to the court for approval in this liquidating CCAA.
11 The facts set out in these reasons are my findings of fact.
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Positions of the Parties
12 The redeeming preferred shareholders' position on this application is that they were never equity investors. They assert that when the nature of ACIC's business as a MIC is considered, they are properly characterized as lenders from the outset who are debt claimants because their funds were pooled by ACIC and then loaned out to borrowers. They argue that their individual redemption requests should be viewed as akin to demands on a promissory note. In their submissions, they distinguish themselves from the non-redeeming preferred shareholders on the basis of the redemption notices they delivered to ACIC prior to the commencement of this CCAA proceeding.
13 They also advance an alternative position if they are characterized as equity investors when they purchased their preferred shares. They submit that they later became creditors of ACIC. They rely on what they characterize as the purported contractual effect of various communications from ACIC, including its promotional materials, to potential and existing investors, in an attempt to establish that the nature of their relationship with ACIC changed.The redeeming preferred shareholders acknowledge that ACIC's Articles and various offering memoranda concerning potential subscriptions for preferred shares ("Offering Memoranda") clearly state that ACIC's obligation to honour redemption requests from preferred shareholders is wholly discretionary, resting with ACIC's directors, which throughout was only one, Mr. Donald Bergman. However, they maintain that those communications altered their contractual relationship with ACIC so as to provide for contractually enforceable guaranteed redemption rights that ACIC was obliged to honour at specific points in time. As a result, they say that ACIC can no longer rely on the discretionary provisions in the Articles and the Offering Memoranda and that ACIC contractually bound itself to pay those redemptions as debts. In the result, the redeeming preferred shareholders submit that their relationship with ACIC changed to become creditors.
14 In the further alternative, those redeeming preferred shareholders whose redemption requests were partially paid before this proceeding was commenced submit that if they were equity claimants at the outset and if ACIC's communications do not constitute an enforceable contractual right to redemption sufficient to change their relationship with ACIC, then the status of their particular claims has changed, such that any redemption amounts owing are debts owed by ACIC.
15 The redeeming preferred shareholders concede that the right of each of them to recover as a debt claimant depends on ACIC's financial circumstances at the time their individual redemption notices were delivered since a redemption right is unenforceable per s. 79(1) of the BCA, if it means that redemption would render ACIC insolvent:
79 (1) A company must not make a payment or provide any other consideration to redeem any of its shares if there are reasonable grounds for believing that
(a) the company is insolvent, or
(b) making the payment or providing the consideration would render the company insolvent.
16 Language mirroring s. 79 is found in the Offering Memoranda.
17 The redeeming preferred shareholders acknowledge that at this juncture it is not known which redemption notices were delivered to ACIC at a time when reasonable grounds did not exist to believe that either ACIC was insolvent at the time of the request or that honouring the request would cause it to become insolvent.
18 Consequently, the redeeming preferred shareholders submit that if they succeed in their claim to be creditors, a further, highly specific and lengthy factual inquiry, involving Mr. Bergman's knowledge when each redemption notice was delivered to ACIC, will have to be made to determine whether s. 79 of the BCA is engaged.
19 The non-redeeming preferred shareholders disagree that the redeeming preferred shareholders are debt claimants. Their position is that all preferred shareholders are equity claimants from the outset and that nothing has changed to alter their status.
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20 Included within the non-redeeming preferred shareholders' submissions is the argument that mirroring the common law, the BCA establishes a presumption of equality amongst all shareholders. Each share of a class of shares (in this case, preferred shares) "must have attached to it the same special rights or restrictions as are attached to every other share": ss. 59(4); see also ss. 59(3), 61. Rights related to a share attach to the share, and not to the shareholder: Gower's Principles of Modern Company Law, 4 th ed. (London: Stevens and Sons, 1979), at 403; Bowater Canadian Ltd. v. R.L. Crain Inc. (1987), 46 D.L.R. (4th) 161 (Ont. C.A.) at 16. The presumption is even stronger, they argue, in a CCAA proceeding given the broad and flexible authority conferred on the supervising judge to determine a fair and efficient resolution of competing claims in circumstances where there are insufficient financial resources to meet all of them: CCAA, s. 11.
21 In addition, and relying on Ted Leroy Trucking Ltd., Re, 2010 SCC 60 (S.C.C.) [hereinafter Century Services] at paras. 13-15 and Bul River Mineral Corp., Re, 2014 BCSC 1732 (B.C. S.C.), at paras. 100-101, the non-redeeming preferred shareholders submit that if the redeeming preferred shareholders' position is correct, the inquiry called for would be unduly protracted and further delay this CCAA proceeding, so as to impede any realistic prospect to achieve the statutory objective of an efficient resolution of competing claims.
22 The non-redeeming preferred shareholders also say that they will be significantly prejudiced because they will recover little to nothing if the redeeming preferred shareholders' claim to be debt claimants prevails.
23 Some of ACIC's creditors attended the hearing of the application and opposed the redeeming preferred shareholders' claim as well, since there are insufficient assets to pay them out in full if the latter are treated as debt claimants.
24 ACIC's position on this application is that regardless of any redemption requests, whether paid or unpaid in whole or in part, all preferred shareholders are equity claimants within the meaning of s. 2(1) of the CCAA. ACIC seeks a declaration to that effect plus ancillary relief.
25 For the reasons that follow, I reject the claim advanced by the redeeming preferred shareholders. I have determined that they, along with all of ACIC's preferred shareholders, are equity claimants.
Background Facts
26 ACIC's shareholders are divided into two groups: common voting shareholders and preferred shareholders. There are currently outstanding four issued common shares and approximately 37,277 preferred shareholders and 15,647 warrants attached to the preferred shares. The preferred shares are stated to be non-voting, "unless otherwise provided for" (and none was).
27 ACIC issued preferred shares and attached warrants between 1998 and 2015, all in accordance with its articles in force throughout the material time ("Articles").
28 Draft subscription agreements for the purchase of preferred shares are contained in the various Offering Memoranda issued by ACIC over the years.
29 Each preferred shareholder acquired units comprised of one preferred share and one warrant (referred to by ACIC by the singular term, "Unit") by signing a subscription agreement. I refer to them collectively as "Subscription Agreements". The subscription price for each Unit was fixed at $1,000. Each warrant granted a preferred shareholder a non-transferable option to acquire additional preferred shares for the same price. The total capital value for all issued Units is approximately $37,277,000.
30 ACIC's preferred shares contain numerous rights, including a right of redemption (also known as a right of retraction) to receive a return of the purchase price paid for shares, as well as the right to receive dividends so long as an investing subscriber remains a preferred shareholder.
31 Preferred shareholders were paid dividends from time to time. Between 2005 and 2014, ACIC issued dividends with annual returns ranging between 6.25% and 8%. The return on dividends reduced in 2015 to approximately 2.5%, and to 1% in 2016. ACIC has not issued dividends since 2016.
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32 The redeeming preferred shareholders advise that the earliest redemption requests in issue on the application date back to 2013.
33 Approximately 540 of ACIC's preferred shareholders, comprising 27,587 preferred shares with a capital value of $27,587,000, issued redemption notices to ACIC before this CCAA proceeding was commenced. As mentioned, not all of those who did are before the Court on this application.
34 Some redeeming preferred shareholders requested redemption of all of their shares prior to the commencement of this CCAA proceeding, while others only requested partial redemptions. Some of those who delivered redemption notices were paid in full, others only in part, and some were not paid at all.
35 According to ACIC, preferred shares to the value of $1,380,500 were redeemed and paid out prior to the initial order in this proceeding, issued by Madam Justice Adair on November 10, 2017, leaving a balance of unsatisfied share redemptions of $26,207,000.
36 Sadly, many of ACIC's preferred shareholders are elderly individuals who invested most if not all of their life's savings with ACIC.
37 Due to defaults on loans it made to certain third parties, ACIC was unable to pay all of the redemption notices it received from preferred shareholders. It sought protection under the CCAA.
38 In addition to the claims asserted by the redeeming preferred shareholders, when ACIC commenced this proceeding on November 8, 2017, it faced approximately $1.785 million in secured claims and $3.96 million in unsecured claims.
39 It is now evident that this proceeding is in effect a liquidating CCAA as there is no reasonable prospect that ACIC's business can be saved. Its primary asset is its loans portfolio. ACIC maintains an office in this province in Salmon Arm, with two staff members. It is also evident that at the moment, ACIC's creditors and shareholders are better off under the CCAA as opposed to a bankruptcy under the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 [BIA].
40 Although ACIC has yet to submit a plan of arrangement, the Monitor has been actively engaged in pursuing loan recoveries and operating ACIC's business as per court appointed powers akin to those of a super monitor. Although the Monitor expects to recover a substantial amount of ACIC's loan portfolio, possibly to a maximum of approximately $37.277 million, the Monitor advises that there will be insufficient funds to pay the amounts owed to ACIC's creditors and to return the capital invested by its preferred shareholders.
Overview: Equity vs. Debt Claimants
41 In a proposed plan of arrangement or compromise submitted for court approval under the CCAA, a debtor company may divide its creditors into different classes. Equity claimants are treated as a single class, unless otherwise ordered: ss. 22(1), 22.1. They rank behind creditors.
42 Historically, in insolvency matters debt claimants have taken priority to equity claimants. The reasoning behind this approach was explained by Justice Morawetz (as he then was) in Sino-Forest Corp., Re, 2012 ONSC 4377 (Ont. S.C.J. [Commercial List]) at paras. 23-25, aff'd 2012 ONCA 816 (Ont. C.A.):
23 . . . Essentially, shareholders cannot reasonably expect to maintain a financial interest in an insolvent company where creditor claims are not being paid in full. Simply put, shareholders have no economic interest in an insolvent enterprise . . . [citations omitted]
24 The basis for the differentiation flows from the fundamentally different nature of debt and equity investments. Shareholders have unlimited upside potential when purchasing shares. Creditors have no corresponding upside potential . . . [citations omitted]
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25 As a result, courts subordinated equity claims and denied such claims a vote in plans of arrangement . . . [citations omitted]
43 Because of the superior position of debt claimants over equity claimants, it has become necessary for courts to distinguish between the two. The general approach for determining whether a party was a debt or equity claimant was set out in Canada Deposit Insurance Corp. v. Canadian Commercial Bank, [1992] 3 S.C.R. 558 (S.C.C.) [CDIC], which was helpfully summarized by Madam Justice Fitzpatrick in Bul River at para. 69:
. . . In [CDIC], the issue was whether money advanced to the debtor bank was in the nature of a loan or a capital investment for the purpose of determining whether the creditors advancing the funds ranked pari passu with other unsecured creditors in a winding-up proceeding. Mr. Justice Iacobucci stated that the approach was to determine the "substance" or "true nature" of the transaction (563, 588). His oft quoted statements are found at 590-91, the relevant principles of which can be summarized as follows:
a) the fact that a transaction contains both debt and equity features does not, in itself, determine its characterization as either debt or equity;
b) the characterization of a transaction under review requires the determination of the intention of the parties;
c) it does not follow that each and every aspect of a "hybrid" debt and equity transaction must be given the exact same weight when addressing a characterization issue; and
d) a court should not too easily be distracted by aspects of a transaction which are, in reality, only incidental or secondary in nature to the main thrust of the agreement.
44 The reference to a "hybrid" debt and equity transaction in the above noted excerpt includes preferred shares, which are one form of investment that has proven particularly challenging for courts to categorize. Preferred shares are regarded in the case authorities as hybrid instruments that may contain rights and conditions attributable to both equity and debt: Central Capital Corp., Re, [1996] O.J. No. 359 (Ont. C.A.) at para. 127.
45 The Ontario Court of Appeal said in Sino-Forest, at para. 53, that the 2009 amendments to the CCAA significantly expanded the definition of equity claims in a manner that "altered" common law. The Court of Appeal determined that the definition extends beyond a holder of an equity interest, and now includes persons that might not otherwise be within its plain meaning (such as advancing claims for contribution or indemnity against the company).
46 In Sino-Forest, shareholders made claims within the CCAA proceeding against the company's auditors who in turn sought indemnity from the company. Even though the auditors were never shareholders, their indemnity claim was characterized as an equity claim. I have excerpted what I consider to be guiding language in the Court of Appeal's reasons:
[1] In 2009, the [CCAA] was amended to expressly provide that general creditors are to be paid in full before an equity claim is paid.
[2] This appeal considers the definition of "equity claim" in s. 2(1) of the CCAA. More particularly, the central issue is whether claims by auditors and underwriters against the respondent debtor, Sino-Forest Corporation ("Sino-Forest"), for contribution and indemnity fall within that definition. The claims arise out of proposed shareholder class actions for misrepresentation.
. . .
[37] We agree with the supervising judge that the definition of equity claim focuses on the nature of the claim, and not the identity of the claimant. In our view, the appellants' claims for contribution and indemnity are clearly equity claims.
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. . .
[39] The definition [of equity claim] incorporates two expansive terms.
[40] First, Parliament employed the phrase "in respect of" twice in defining equity claim: in the opening portion of the definition, it refers to an equity claim as a "claim that is in respect of an equity interest", and in para. (e) it refers to "contribution or indemnity in respect of a claim referred to in any of paragraphs (a) to (d)" . . .
[41] The Supreme Court of Canada has repeatedly held that the words "in respect of" are "of the widest possible scope", conveying some link or connection between two related subjects. . . .
. . .
[46] "Equity claim" is not confined by its definition, or by the definition of "claim", to a claim advanced by the holder of an equity interest. Parliament could have, but did not, include language in para. (e) restricting claims for contribution or indemnity to those made by shareholders.
. . .
[53] In our view, the definition of "equity claim" is sufficiently clear to alter the pre-existing common law . . .
47 Taking the same approach as the Court of Appeal and Mr. Justice Morawitz (as he then was) in the court below (at paras. 86-90) in Sino-Forest, Fitzpatrick J. noted in Bul River, following a most helpful and thorough discussion of case authorities and the relevant 2009 amendments to the CCAA, that in one sense, the amendments codified previous case law concerning equity claims, but also provided for a broader yet more concrete definition of equity claims.
48 Relying on the reasons of Laskin J.A. in Central Capital, Fitzpatrick J. also pointed out that in the context of a CCAA proceeding, particularly in light of the 2009 amendments, the mere existence of redemption rights does not equate preferred shareholders as creditors:
[105] In the same manner, the new equity provisions in the CCAA reinforce that it remains an important policy objective that equity claims be subordinated to debt claims. In Sino-Forest Corporation, the Court of Appeal focused on the purpose of the 2009 amendments and stated:
[56] In our view, in enacting s. 6(8) of the CCAA, Parliament intended that a monetary loss suffered by a shareholder (or other holder of an equity interest) in respect of his or her equity interest not diminish the assets of the debtor available to general creditors in a restructuring. If a shareholder sues auditors and underwriters in respect of his or her loss, in addition to the debtor, and the auditors or underwriters assert claims of contribution or indemnity against the debtor, the assets of the debtor available to general creditors would be diminished by the amount of the claims for contribution and indemnity.
[106] This same recognition of the sound policy objectives of insolvency legislation was noted by Laskin J.A. in Central Capital (ONCA). He commented at 546 that "[p]ermitting preferred shareholders to be turned into creditors by endowing their shares with retraction rights runs contrary to this policy of creditor protection."
[107] I see no principled basis upon which a different approach should be taken in respect of an equity claimant who has had the foresight, energy or just plain luck to seek and obtain a judgment prior to the filing date.
[Emphasis added.]
49 Accordingly, while the 2009 amendments did represent in part a codification of the previous case law concerning equity claims, they also represent a more concrete definition of "equity claims" and by such definition a broadening and more expansive definition of such claims: Sino-Forest (ONCA) at paras. 24, 34-60. Parliament has now clearly cast the net widely in terms of
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CCAA
Introductory Remarks
50 The provisions of the CCAA greatly assist in the analysis. The expanded definition of equity claim and the definition of equity interest clearly suggest that ACIC's preferred shares, which include rights of redemption and to receive dividends, constitute equity interests and provide strong support for the position taken by ACIC and the non-redeeming shareholders that all preferred shareholders in this CCAA proceeding must be treated as equity claimants.
51 An appropriate starting point in the analysis is with a brief discussion of the key provisions and objectives of the CCAA, particulary in light of ACIC's submission that the priority issue is easily resolved in favour of its position on the application from the broad definition of "equity clamant" and "equity interest" in the statute without the need for a detailed analysis of the underlying transaction documents.
Statutory Definition of Equity Claim
52 As a result of the 2009 amendments to the CCAA, an "equity claim" is defined in s. 2(1) and includes redemption claims:
2(1)
. . .
equity claim means a claim that is in respect of an equity interest, including a claim for, among others,
(a) a dividend or similar payment,
(b) a return of capital,
(c) a redemption or retraction obligation,
(d) a monetary loss resulting from the ownership, purchase or sale of an equity interest or from the rescission, or, in Quebec, the annulment, of a purchase or sale of an equity interest, or
(e) contribution or indemnity in respect of a claim referred to in any of paragraphs (a) to (d) . . .
[Emphasis added.]
53 An "equity interest" is also defined, and includes a share in the company and a warrant to acquire additional shares:
2(1) equity interest means
(a) in the case of a company other than an income trust, a share in the company — or a warrant or option or another right to acquire a share in the company — other than one that is derived from a convertible debt, and
(b) in the case of an income trust, a unit in the income trust — or a warrant or option or another right to acquire a unit in the income trust — other than one that is derived from a convertible debt;
No Statutory Definition of Creditor
54 Unlike the BIA, there is no definition of creditor in the CCAA. In the BIA, a creditor is defined in s. 2 as "a person having a claim provable as a claim".
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55 The CCAA contains a broad definition of "claim" in s. 2, which incorporates the definition in the BIA:
claim means any indebtedness, liability or obligation of any kind that would be a claim provable within the meaning of section 2 of the [BIA].
56 A "provable claim" is defined in s. 2 of the BIA as follows:
claim provable in bankruptcy, provable claim or claim provable includes any claim or liability provable in proceedings under this Act by a creditor.
57 Section 121 of the BIA speaks to the meaning of a "provable claim". It provides that all debts and liabilities, including those payable at a future date, to which the bankrupt is subject on the date of bankruptcy by reason of an obligation incurred before bankruptcy.
58 In Bul River, Madam Justice Fitzpatrick points out, at para. 39, that the definition of "claim" found in s. 2 of both statutes "represents a point of convergence consistent with the harmonization of certain aspects of insolvency law under both the CCAA and BIA: Century Services at para. 24.
59 In the past, the claims and rights of shareholders have not been treated as provable claims and ranked behind creditors of an insolvent corporation in liquidation: Nelson Financial Group Ltd., Re, 2010 ONSC 6229 (Ont. S.C.J. [Commercial List]) at para. 25. That remains the case under the current CCAA. No plan or arrangement may be sanctioned by the court where equity claimants have priority to creditors. Section 6(8) of the CCAA states:
Compromises to be sanctioned by court
6 . . .
Payment — equity claims
(8) No compromise or arrangement that provides for the payment of an equity claim is to be sanctioned by the court unless it provides that all claims that are not equity claims are to be paid in full before the equity claim is to be paid.
60 The rationale is that equity claimants (commonly thought of as investors) are considered to take a higher degree of risk in a company's economic fortunes than creditors who do not share in any upside in the profits or value of the company and the risk of failure.
61 The following excerpt from Nelson Financial aptly describes the distinction between debt and equity claimants:
[25] . . . As noted by Laskin J.A. in Re Central Capital Corporation, on the insolvency of a company, the claims of creditors have always ranked ahead of the claims of the shareholders for the return of their capital. This principle is premised on the notion that shareholders are understood to be higher risk participants who have chosen to tie their investment to the fortunes of the corporation. In contrast, creditors choose a lower level of exposure, the assumption being that they will rank ahead of shareholders in an insolvency. Put differently, amongst other things, equity investors bear the risk relating to the integrity and character of management.
62 Creditors' claims, including repayment terms and any rates of interest are typically governed by specific, fixed terms: Bul River at paras. 65-66; Nelson Financial at para. 25; Sino-Forest (ONCA) at para. 30.
63 Although not a CCAA case, the Court of Appeal's discussion of the nature of a debt relationship in Coast Capital Savings Credit Union v. British Columbia, 2011 BCCA 20 (B.C. C.A.) provides guidance for the issues in this case, particularly in the absence of a statutory definition. At para. 57, Madam Justice Newbury adopted the following definition, which she noted was also found in numerous Canadian and English authorities:
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A debt is defined to be a sum of money which is certainly, and at all events, payable without regard to the fact whether it be payable now or at a future time.
64 At para. 23, Newbury J.A. also referred to a definition of debt in a case authority cited by the chambers judge in that case - A. Valin Petroleums Ltd. v. Imperial Oil Ltd., 2007 ABQB 134 (Alta. Q.B.) at paras. 39-40:
39 The word "equity" is not ambiguous. It is a word of ordinary use, particularly in the commercial context . . . .
40 Debt and equity are distinct concepts. Debt is a claim on the assets of the corporation and is created when money is borrowed. With it arises an obligation on the corporation to repay that money. Corporate equity, however, is comprised of the corporation's total assets unencumbered by debt or other liabilities. It is the "residual economic interest in the corporation's assets, after all outstanding debts have been satisfied." See C. Nicholls, Corporate Finance and Canadian Law (Toronto: Carswell, 2000 at page 9).
[Emphasis added.]
65 Similar definitions, drawn from Black's Law Dictionary, Jowitt's Dictionary of the English Language, and The Shorter Oxford Dictionary, are referred to by the Ontario Court of Appeal in Central Capital at 508, which again involved a CCAA proceeding.
66 There is some conflict in the case authorities as to whether a claim can be considered a debt claim where it is unenforceable: see, e.g. Bul River at para. 40; Central Capital at 531-534. However, I do not need to decide that issue in order to determine the status of the redeeming preferred shareholders' claims.
Further Analysis is Required
67 As I said at the outset of this section, the CCAA provides considerable guidance in determining the claim of the redeeming preferred shareholders. I agree with ACIC that the 2009 amendments show Parliament's intention to broaden the scope of equity claimants to include shareholders with redemption claims.
68 However, redeemable preferred shares are viewed in the case law to be "somewhat different than conventional equity capital": Central Capital at para. 128; Coast Capital at para. 49. In Central Capital, Mr. Justice Laskin, in his reasons (concurring with Madam Justice Weiler in the majority), described preferred shares as "compromise securities" and "financial mongrels" with rights analogous to rights of creditors:
127 Preferred shares have been called "compromise securities" and even "financial mongrels: Grover and Ross, Materials and Corporate Finance (1975), at p. 49. Invariably the conditions attaching to preferred shares contain attributes of equity and, at least in an economic sense, attributes of debt. Over the years financiers and corporate lawyers have blurred the distinction between equity and debt by endowing preferred shareholders with rights analogous to the rights of creditors. One example is the right of redemption -- the right of the corporation to compel preferred shareholders to sell their shares back to the corporation. Another example, and it is the case before us, is the right of retraction -- the right of shareholders to compel the corporation to buy back their shares on a specific date for a specific price.
128 I acknowledge, therefore, that redeemable or retractable preferred shares are somewhat different from conventional equity capital. What makes the appeals before us difficult is that although the appellants appear to hold equity, their right of retraction appears to be a basic characteristic of a debtor-creditor relationship: see Grover and Ross, supra, at pp. 47-49; Buckley, Gillen and Yalden, Corporations: Principles and Policies, 3d ed. (1995), at pp. 938-40.
69 The fact that a hybrid instrument contains elements of both equity and debt is not an obstacle to determining its true nature: CDIC at 590. In Central Capital, Laskin J.A. described the nature of the inquiry in this way:
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129 If the certificate or instrument contains features of both equity and debt — in other words if it is hybrid in character - then the court must determine the "substance" of the relationship between the holder of the certificate and the company. . . .
130 In determining the substance of the relationship, as in any other case of contract interpretation, the court looks to what the parties intended. In CDIC v. CCB, supra, Iacobucci J. put this proposition as follows at p. 588:
As in any case involving contractual interpretation, the characterization issue facing this Court must be decided by determining the intention of the parties to the support agreements. This task, perplexing as it sometimes proves to be, depends primarily on the meaning of the words chosen by the parties to reflect their intention. When the words alone are insufficient to reach a conclusion as to the true nature of the agreement, or when outside support for a particular characterization is required, a consideration of admissible surrounding circumstances may be appropriate.
70 Consequently, the focus of the inquiry is to determine whether in substance the redeeming preferred shareholders' claims are debt or equity. They cannot be both.
Determining the Substance of the Relationship
Overview
71 The inquiry focuses on the transaction documents at the time the relationship was created. It is, generally speaking, informed by the words chosen by the parties to reflect their intentions in conjunction with the principles underpinning insolvency legislation, which in this case includes the remedial purposes of the CCAA. Where the words are insufficient to determine the true nature of the agreement, admissible evidence of surrounding circumstances may be considered: CDIC at 588, 590; Central Capital at paras. 38, 67, 126, 129-130, 135-136.
72 Section 2(1) of the CCAA is clear that in the context of a CCAA proceeding, a redemption claim is not indicative of a debt relationship. As well, redemption rights on their own do not create a debtor-creditor relationship. They are to be considered, along with risk-taking, profit sharing, and the right to participate in the assets of the company on liquidation after creditors are paid, as "hallmarks" of a shareholder relationship and an equity interest. To establish a debt relationship, either or both the company's articles or the transaction documents must make it clear that a shareholder's redemption is repayment of a loan: Central Capital at paras. 70, 97, 135-136; Bul River at para. 109; Dexior Financial Inc., Re, 2011 BCSC 348 (B.C. S.C. [In Chambers]) at paras. 12-13,16.
73 As Weiler J.A. explained in Central Capital, language consistent with a debt obligation upon redemption must be reflected in the transaction documents:
97 Looked at another way, after the retraction date and at the time of the reorganization, the common features of a debtor- creditor relationship are not in evidence in Central Capital's articles. The agreements between the parties contain no express provision that the redemption of the shares is in repayment of a loan. The corporation was not obliged to create any fund or debt instrument to ensure that it could redeem the shares on the retraction date. There is no indemnity in the event that the money is not repaid on the retraction date. There is no provision for the payment of any interest after the retraction date in the event that the money is not repaid on the retraction date. There is no provision that after the retraction date and in the event of insolvency, the appellants would have the right to have the company wound up. (See R v. Imperial General Properties Ltd., [1985] 2 S.C.R. 288, 21 D.L.R (4 th ) 741, for a case where the articles of the company contained this right.) There is no provision that upon a winding-up or insolvency the parties are entitled to rank pari passu with the creditors as was the case in Canada Deposit Insurance Corp. v. Canadian Commercial Bank, supra.
74 In Central Capital, the parties' intention was (according to the two concurring reasons in the majority) reflected "mainly" in the share purchase agreements, conditions attaching to the shares, the company's articles, and the manner in which Central Capital recorded the shares in its financial statements. They did not establish a debt obligation on the part of the company: see, e.g., para. 131.
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75 Incidental or secondary aspects of a transaction, such as mechanisms for enforcement, should not distract the inquiry: CDIC at paras. 46-54; EarthFirst Canada Inc., Re [2009 CarswellAlta 1069 (Alta. Q.B.)] at para. 5.
Examples
76 Useful guidance for the inquiry into the true nature or substance of the relationship between preferred shareholders and ACIC can also be drawn from some of the cases cited by the parties in submissions.
77 In Bul River, Fitzpatrick J. rejected the claim of certain preferred shareholders that their equity claims converted into debt claims simply because they had obtained (default) judgment for their redemptions against one of the insolvent companies: paras. 85-98, 103-117.
78 In Return on Innovation Capital Ltd. v. Gandi Innovations Ltd., 2011 ONSC 5018 (Ont. S.C.J. [Commercial List]), it did not matter that a claim by a shareholder seeking recovery of share purchase proceeds in the amount USD $50 million was founded on breach of contract and fraud. The legal basis for the claim was not the "deciding factor". Nor were the "legal tools" used by the claimant, because, Mr. Justice Newbould said, at para. 59, they were being used to recover an equity investment.
79 In Nelson Financial, which was a CCAA proceeding, Madam Justice Pepall (as she then was) disagreed that the preferred shareholders were debt claimants. In that case, the company raised money by two different means: from lenders to whom it issued promissory notes with an annual rate of return of 12% and from investors to whom it issued non-voting preferred shares with an annual dividend of 10%. The company's articles provided the company with unilateral redemption rights on payment of the purchase price plus accrued dividends. At least one investor negotiated a right of redemption and two redemption requests were outstanding as of the CCAA filing date. The company's financial statements also treated the shareholders as equity investors and distinguished them from its creditors.
80 After referring to the distinction between debt and equity claimants, Pepall J. discussed the broad scope ascribed to the meaning of an equity claim or interest:
[26] This treatment also has been held to encompass fraudulent misrepresentation claims advanced by a shareholder seeking to recover his investment: Re Blue Range Resource Corp. In that case, Romaine J. held that the alleged loss derived from and was inextricably intertwined with the shareholder interest. . . . National Bank of Canada v. Merit Energy Ltd. and Earthfirst Canada Inc. both treated claims relating to agreements that were collateral to equity claims as equity claims. These cases dealt with separate indemnification agreements and the issuance of flow through shares. The separate agreements and the ensuing claims were treated as part of one integrated transaction in respect of an equity interest. The case law has also recognized the complications and delay that would ensue if CCAA proceedings were mired in shareholder claims.
81 In addition to reviewing the articles of the company and the share certificates, Pepall J. considered the following evidence of surrounding circumstances at para. 31:
(a) investors' right to receive dividends (said to be "a well recognized right of a shareholder");
(b) investors were given the option of investing in promissory notes or preference shares and opted for the latter;
(c) on liquidation, dissolution, or winding up, preferred shareholders ranked ahead of common shareholders; and
(d) shares were treated as equity in the company's financial statements and in its books and records.
82 In the result, and although she found characteristics of both debt and equity claims in the relationship, she concluded that the substance of the relationship between the preferred shareholders and the company was equity, not debt: paras. 31-32.
83 In the CCAA case of JED Oil Inc., Re, 2010 ABQB 295 (Alta. Q.B.), the analysis focused on the relationship at the time the shares were issued when considering the true nature of the claims of preferred shareholders for unpaid dividends.
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Madam Justice Kent rejected the shareholders' claim as creditors of debt claims. There was no language in the share certificates to establish that dividends were declared and owing on the date the shares were issued. She found that the substance of the relationship at the time the shares were purchased was not creditor-debtor. The shareholders, she said at para. 16, "are risk- takers, not creditors. For them to become creditors from the time they are issued the shares would require more explicit wording than is contained in these shares."
84 Lastly, in Dexior Financial, which involved a BIA proceeding, the fact that a redemption notice was issued prior to bankruptcy "does not change the original intention or substance of the claim": para. 16.
Summary
85 To summarize, courts take into account a number of factors when determining the substance of the relationship when assessing the status of preferred shareholders. Examples include:
(a) The specific language contained in the company's articles and the transaction documents.
(b) The right of a shareholder to redeem their shares. The absence of this right is inconsistent with a creditor relationship. A right of redemption is particularly compelling as an indicia of a creditor relationship where the articles or transaction documents expressly provide that the redemption is for the repayment of a loan.
(c) Whether the shareholder had upside potential in the return of their investment, which indicates an equity relationship and also shared in the downside risk of a lower return.
(d) Whether the shareholder had the right to receive dividends, which is a strong indicia of an equity relationship.
(e) Treatment on liquidation, dissolution, or winding up.
(f) Whether the shares are treated as equity or debt in the financial statements of the corporation.
86 The mechanism used to enforce redemption rights is irrelevant. The legal basis for any claim brought to collect on a redemption request is as well.
The Relationship between ACIC and Its Preferred Shareholders
Overview
87 As mentioned at the outset of these reasons, I reject the redeeming preferred shareholders' claim that they are debt creditors of ACIC. None of ACIC's preferred shareholders are debt claimants. The redeeming preferred shareholders were not lenders ab initio as opposed to investors. They are equity claimants and rank together with all other preferred shareholders and are to be treated as such in the same class in this CCAA proceeding.
88 The relationship between ACIC and its preferred shareholders is comprised of the Articles, the various Subscription Agreements, Offering Memoranda, and applicable legislation such as the BCA. The inquiry in this particular case is also governed by the CCAA. From them those sources, the substance of the relationship between ACIC and its preferred shareholders, including those who have delivered redemption requests, can be readily ascertained.
89 The Articles, Offering Memoranda, and Subscription Agreements are clear that the relationship between ACIC and its preferred shareholders is an equity relationship. The preferred shareholders are clearly identified as investors who purchased non-voting preferred shares with rights to receive dividends at various rates dependent on ACIC's financial performance and with redemption rights which throughout may or may not be honoured as determined by ACIC's directors in their sole discretion.
90 There is no language in the Articles suggesting, directly or indirectly, that a share redemption is in respect of a repayment of a debt. There is also no language, direct or indirect, in the Articles suggesting that preferred shareholders are lenders or that
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91 Prefered shareholders took the advantages of the potential upside in ACIC's earnings obtained from increasing lending rates as well as the risk of loss of their entire investment.
92 The risks of the investment are clearly outlined to potential investors. The Offering Memoranda characterized the "investment" as both "risky" and "speculative". Each Offering Memoranda contains a detailed discussion (including warnings) of numerous risk factors associated with an investment with ACIC, including its speculative nature, the absence of a market to transfer or assign shares and warrants, and no guarantee that dividends would be declared or paid. The Offering Memoranda also advise that their contents had not been reviewed by any regulatory authority.
93 The Offering Memoranda also describe the purchase of preferred shares as a speculative risk that should be considered only by subscribers who are able to withstand the loss of their total investment:
Item 8 Risk Factors
The purchase of Units involves a number of significant risk factors. Any or all of these risks, or other as yet unidentified risks, may have a material adverse effect on the Company's business, the value of the Preferred Shares and/or the return to Preferred Shareholders.
(a) Investment Risk
(i) Speculative Nature of Investment
This is a speculative offering. The purchase of Units involves a number of significant risk factors and is suitable only for Subscribers who are aware of the risks inherent in mortgage investments and the real estate industry and who have the ability and willingness to accept the risk of the total loss of their invested capital and who have no immediate need for liquidity.
[All emphasis in original.]
94 In some of the Offering Memoranda, ACIC's capital structure is described and shown to be comprised of common and preferred shares and is specifically distinguished from debt.
95 The Subscription Agreements also contain language making it clear that each subscriber for preferred shares is making an investment, e.g.:
2. REPRESENTATIONS, ACKNOWLEDGMENTS AND CONVENANTS
2.1. The Subscriber acknowledges represents and covenants that:
. . .
(j) the Subscriber is purchasing the Units as principal for investment only and not with the view to the resale or distribution thereof;
[Bold in original]
96 A subscriber for preferred shares is required to sign a Form 20A per the Securities Act, R.S.B.C. 1996 c. 418 confirming, inter alia:
4. I acknowledge that:
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. . .
(c) I may lose all of my investment; . . .
97 There is no language in the Subscription Agreements suggesting that a subscriber for preferred shares is a lender or creditor through any other capacity.
98 I disagree with the redeeming preferred shareholders' submission that a key indicia of an equity investor is defined in part by the word "unlimited" in respect of the opportunity to participate in the financial upside of the company if "unlimited" signifies there can be no possible limit on the rate of return.
99 They rely on a reading of the reasons in Sino-Forest (ONSC) at para. 30 and argue that given the exigencies of the mortgage lending market, it was never possible for them to participate in an "unlimited financial upside" of ACIC. They point to what they characterize as a cap on their highest rate of return for dividends and say that in effect, their relationship with ACIC was akin to creditor and debtor.
100 In my opinion, "unlimited upside" refers to the possibility of enjoying the benefits of ongoing and potentially increasing profits of the company.
101 For ACIC, the rates of return, and hence its revenues and profits, depended on market conditions and were not fixed to any maximum. Preferred shareholders always retained the opportunity to share in higher rates of return if market conditions changed to allow for higher lending rates. Conversely, they also took the risk of lower rates of return resulting from potential adverse market conditions and impediments to ACIC's ability to collect on its loan portfolio (both of which have occurred). I agree with the submission of the creditors who appeared on the application that the investment made by the preferred shareholders is akin to an investment in a fluctuating commodity.
102 I also disagree with the redeeming preferred shareholders that the fact that ACIC pooled investors' funds indicates a debt relationship or establishes the preferred shareholders as lenders. Pooling from investors is the means by which a MIC such as ACIC is able to carry on business to lend funds to third party borrowers.
103 I will conclude this section with this observation. If the redeeming preferred shareholders' position that the nature of their relationship from the outset is one of creditor is correct, then it would defeat their claim to be contrasted from the non- redeeming preferred shareholders since all of ACIC's preferred shareholders would be debt as opposed to equity claimants and rank alongside ACIC's other creditors.
Redemption Rights Do Not Affect the Outcome
104 The redeeming preferred shareholders place significant reliance on their redemption rights (to seek the return of their principal investment amount) as indicia of a debt relationship.
105 In this case, when considered in context, the mere presence of redemption rights do not establish a debt relationship. The intention of ACIC and the preferred shareholders expressed in the Articles and the transaction documents does not establish a debt relationship. There is no language in the Articles, the various Offering Memoranda, and the Subscription Agreements that indicates that the redemption is in repayment of a debt. Furthermore, preferred shareholders were advised throughout that their redemption rights were not guaranteed.
106 The redemption provisions do not state or suggest that subscribers for preferred shares are lenders. Nor do they state or suggest that preferred shares are given as security akin to a promissory note. Unlike a promissory note, which typically contains a promise to pay by a certain date or the happening of a certain event(s), ACIC's obligation to honour redemption requests was always in the sole discretion of its directors, who may also clarify or establish terms and conditions for redemption should they consent to a request.
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107 The BCA requires that all rights attached to shares be set out in a company's articles: ss. 11(h), 12(2)(b), 48. The Articles state that redemption is in the sole discretion of ACIC's directors. As noted in the previous section, the redemption provisions in the Articles are found in article 27.4. According to Mr. Bergman, ACIC's sole director throughout, ACIC's redemption policy remained unchanged since it began issuing preferred shares in 1998.
108 Article 27.4 specifically deals with redemption requests from preferred shareholders. Mr. Bergman's sole discretion to consent to or reject redemption requests is clear:
27.4 Redemption of Preferred Shares
A Preferred Share will be redeemed by the Company if and only if:
(a) the Company has received written notice from the registered holder of the Preferred Share that he wishes the Company to redeem the Preferred Share;
(b) the Directors, in their sole discretion, consent to the redemption by the Company of the Preferred Share pursuant to terms and conditions set by the Directors in their sole discretion; and
(c) the Preferred Shareholder who requested that his Preferred Share be redeemed, accepts the terms and conditions of redemption set by the Directors.
The Directors will not be obligated to provide any reasons for not consenting to a Preferred Shareholder's request to have his Preferred Shares redeemed by the Company.
[Bold in original.]
109 Further, and in contrast to Nelson Financial, there are no provisions in the Articles or transaction documents obliging ACIC to buy back shares. To the contrary, Article 8.2 provides that if ACIC proposes at its option to redeem some but not all of the shares of any class or series, then it is in the discretion of its directors subject to special rights and restrictions attached to each share. ACIC's directors are given the discretion whether to decide the manner in which the shares to be redeemed are selected and whether the redemption is pro rata.
110 Turning to the Offering Memoranda, those documents contain detailed information concerning the redemption process and restrictions on redemption requests. Mr. Bergman's discretion to consent or refuse to honour redemption requests is a pervasive theme in the various Offering Memoranda.
111 For example, ACIC's first Offering Memoranda issued in 1998 warns potential subscribers that redemptions are not guaranteed and may never be honoured:
Redemption of Preferred Shares: The Director of the Company has adopted a Policy regarding the redemption of Preferred Shares. A copy of such policy is available from the Company upon request.
Pursuant to such policy, a Preferred Share will be redeemable by the Company in certain circumstances. Although the Company will use its best commercial efforts to ensure that all requestsfor redemption are fulfilled, depending on such circumstances the Company cannot guarantee that any or all of the Preferred Shares in respect of which requests for redemption are received will be redeemed in any fiscal year. See Item 8 — "Risk Factors" — Limited Redemption Rights.
. . .
The Company will no redeem any Preferred Shares if at the time of such redemption the Company is insolvent or if such redemption will render the Company insolvent, if such redemption will reduce the Company's cash reserves below a level which the Directors determine, in their sole discretion, to be prudent, or if such redemption will cause the Company to
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breach the requirement that at least 50% of the cost amount of its property must consist of bank deposits or mortgage loans made in respect of residential properties.
[All emphasis in original.]
112 In addition to the the sole discretion to honour a redemption request vesting with the director, the Offering Memoranda spell out other limitations on redemptions, e.g., adverse financial circumstances including liquidity issues:
No Guaranteed Dividends
The dividends in which the Preferred Shareholders are entitled to participate are not cumulative and will not be paid unless such dividends have been declared by the Directors. The Directors have the sole discretion as to whether or not any such dividends are declared. Therefore, there is no guarantee that dividends payable to Preferred Shareholders will be declared.
[All emphasis in original.]
113 The Offering Memoranda issued in 2001 and 2002 provide another example. They are clear that redemption depends on the consent of the directors in their "sole discretion" pursuant to "terms and conditions set by the Directors". Subscribers are advised that the "Directors will not be obliged to provide any reasons for not consenting to a Preferred Shareholders' request to have their Preferred Shares redeemed by the Company".
114 Commencing in 2003, the Offering Memoranda referred to a redemption policy and included a summary making it clear that redemption remained in the discretion of its directors to amend or cancel it, adopt an alternative policy, or refuse to consent to a redemption.
115 This example is taken from the 2003-2006 and 2015 Offering Memoranda:
Redemption of Preferred Shares: The Company has adopted a policy regarding the redemption of Preferred Shares. A copy of such policy is available from the Company upon request.
Pursuant to such policy, a Preferred Shareholder will be redeemable by the Company in certain circumstances. Although the Company will use its best commercial efforts to ensure that all requests for redemption are fulfilled, depending on such circumstances the Company cannot guarantee that any or all of the Preferred Shares in respect of which requests for redemption are received will be redeemed in any given fiscal year. . . .
. . .
The Company will not redeem any Preferred Shares if at the time of such redemption the Company is insolvent or if such redemption will render the Company insolvent, if such redemption will reduce the Company's cash reserves below a level which the Company's directors (the "Directors") determine, in their sole discretion, to be prudent, or if such redemption will cause the Company to breach the requirement that at least 50% of the cost amount of its property must consist of bank deposits or mortgage loans made in respect of residential properties.
Further, in any calendar quarter, the Company will not redeem any more than that number of Preferred Shares which is equal to 2 1/2 % of the outstanding Preferred Shares at the end of the immediately preceding calendar quarter. . . .
. . .
The adoption of its policy regarding the redemption of Preferred Shares does not fetter the discretion of the Directors of the Company from time to time to amend or cancel such policy in whole or in part or to adopt an alternative policy with respect to the redemption of Preferred shares, or to refuse to consent to a Requesting Shareholder's request to have their Preferred Shares redeemed by the Company.
[All emphasis in original.]
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116 Nothing in ACIC's redemption policies removed or otherwise constrained Mr. Bergman's unfettered discretion to consent or refuse to honour redemption requests.
117 The redemption policy that ACIC adopted (in accordance with s. 27.4 of the Articles) on December 1, 2006 serves as a useful example of its ongoing retention of discretion to honour redemption requests. The policy language is clear that ACIC's new policy did not fetter the discretion of its director from time to time to amend or cancel it in whole or in part or refuse to consent to a redemption request:
B. Pursuant to Section 27.4 of the Articles of the Company, Preferred Shares are redeemable by the holder provided that:
. . .
2. The Company's Director, in his sole discretion consents to such redemption pursuant to terms and conditions set by the Director in his sole discretion; and
3. The holder accepts the terms and conditions of redemption set by the Director.
The Director is not required to provide any reasons for not consenting to a request for redemption of Preferred Shares.
. . .
7. The adoption of this Preferred Share Redemption Policy does not fetter the discretion of the Director from time to time to amend or cancel this policy in whole or in part or to adopt an alternative policy with respect to the redemption of Preferred Shares, or to refuse to consent to a Requesting Shareholder's request to have their Preferred Shares redeemed by the Company.
118 Another redemption policy (undated) in evidence from Mr. Bergman, attached as Exhibit "D" to his affidavit sworn November 7, 2017, is to a similar effect, making it clear that redemptions may not be honoured:
Redemption of Preferred Shares:
The Company has adopted a policy regarding the redemption of Preferred Shares. A copy of such policy is available from the Company upon request. Pursuant to such policy, a Preferred Share will be redeemable by the Company in certain circumstances. Although the Company will use its best commercial efforts to ensure that all requests for redemption are fulfilled, depending on such circumstances the Company cannot guarantee that any or all of the Preferred Shares in respect of which requests for redemption are received will be redeemed in any given fiscal year.
. . .
The adoption of its policy regarding the redemption of Preferred Shares does not fetter the discretion of the Directors of the Company from time to time to amend or cancel such policy in whole or in part or to adopt an alternative policy with respect to the redemption of Preferred shares, or to refuse to consent to a Requesting Shareholder's request to have their Preferred Shares redeemed by the Company.
There are times when redemption requests may not be processed in a timely manner and shareholders may have to wait longer than expected to receive their redemption request. The source of funds used to process redemptions may be from new capital raised and/or loans being repaid. There is no guarantee that funds will be available to meet all redemption requests.
[All emphasis in original.]
Unsatisfied Redemption Requests Are Not Debt
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119 The redeeming preferred shareholders place great importance on the decision of the Court of Appeal in East Chilliwack Agricultural Co-operative, Re (1989), 74 C.B.R. (N.S.) 1 (B.C. C.A.), to support their claim to be debt claimants when they delivered their redemption notices. The decision in that case has been the subject of adverse comment or distinguished in other case authorities in this province and others. However, it is sufficient for my determination to note that the facts of that case are clearly distinguishable from the instant proceeding.
120 In that case, farmers who owned shares in an agricultural cooperative gave notice to the co-op of their intention to have their shares redeemed. Thereafter, and before they were paid, the Superintendent of Co-operatives suspended the right of the co- op to redeem its shares due to liquidity issues. Mr. Justice Hutcheon, writing for the majority, determined that they were entitled to be treated as creditors. However, as is noted at the outset of his reasons, the effect of the Superintendent's order was not argued on the appeal. More importantly for the issues raised on the present application, by virtue of the Cooperative's constating documents, the claimant shareholders in East Chilliwack, ceased to be shareholders when they served their redemption notices.
121 As previously discussed, in the case at bar, redeeming preferred shareholders whose redemption requests were not honoured, either in whole or in part, retained their rights and privileges as shareholders. They continued to receive a share of the profits of ACIC from dividend payments through to 2016. Also unlike East Chilliwack, ACIC's obligation to honour the redemption notices and to buy back shares remained discretionary throughout. In the present case, ACIC's obligation to redeem was always premised, at a minimum, on a best efforts basis and dependent on its liquidity.
122 Thus, the decision in East Chilliwack is not authority for a general proposition that unpaid redemption requests are indicia of debt. Unsatisfied redemption requests do not of themselves change the substance of the relationship from an equity interest to a debt claim. In Central Capital, the preferred shareholders' claim that they were debt claimants on the basis of their unsatisfied rights of redemption was rejected by the majority: paras. 97, 135-136.
123 In some instances, ACIC made partial payment of a redemption request and indicated in documents provided to certain redeeming preferred shareholders that the remaining unpaid redemption amounts were "o/s", or outstanding. During oral submissions, the possibility was raised that this advice from ACIC might reflect a change in the relationship between those particular redeeming shareholders and the company. In my opinion, it does not. In Bul River, the fact that redeeming shareholders had gone one step further and obtained judgment to recover unpaid redemption amounts was insufficient to convert their equity interest to a debt claim.
Winding-Up Provisions Do Not Affect the Result
124 The redeeming preferred shareholders rely on the decision in Coast Capital, which treated similar winding up language in the Articles as indicia of a debt relationship, to support their position that they are debt claimants.
125 I disagree that the reasons in Coast Capital support the position articulated by the redeeming preferred shareholders.
126 At issue in that case was the tax treatment of shares issued by the credit union labelled "non-equity shares". The case involved statutory interpretation of provisions in the Corporation Capital Tax Act, R.S.B.C. 1996, c. 73, the Financial Institutions Act, R.S.B.C. 1966, c. 141 [FIA], and the Credit Union Incorporation Act, R.S.B.C. 1996, c. 82, as well as the certain provisions of the rules promulgated by Coast Capital respecting the impugned shares (described as "non-equity" shares). Disimilar to the case at bar, the FIA defines a non-equity share (in s. 1(1)) issued by a credit union as one evidencing indebtedness of the credit union to the holder of the share that does not represent an equity interest in the credit union.
127 The outcome in Coast Capital turned on its own facts, which are significantly different and thus distinguishable from the case at bar. For example, and unlike the case at bar, the shares in issue in Coast Capital were restricted to a 6% non-cumulative dividend in addition to the amount paid on winding up or dissolution. In addition, the credit union was required to redeem those shares on a fixed date. The Court of Appeal engaged in an analysis of the legal substance of those shares and determined that they reflected a debt interest.
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128 The statutory objectives and considerations in that case also differ from those concerning the CCAA. In her reasons in Coast Capital, Newbury J.A. observed that the case before the Court of Appeal did not concern bankruptcy of insolvency law: paras. 7, 53-56.
129 In the case at bar, and unlike CDIC, there is no provision in the Articles or Offering Memoranda stating or even suggesting that upon a winding-up or insolvency, ACIC's preferred shareholders, let alone any who have sought redemption, are entitled to rank pari passu with its creditors: CDIC at 563; Central Capital at para. 132.
130 Section 27.5 of the Articles provides a procedure for distribution of ACIC's assets upon winding up or liquidation. ACIC's assets will be distributed to the Preferred Shareholders in priority to the Common Shareholders as follows:
Upon the winding up or dissolution or liquidation of the Company, the Company's assets will be distributed to the Preferred Shareholders in priority to the Common Shareholders as follows:
• first to the Preferred Shareholders on a pro rata basis among the Preferred Shareholders until each Preferred Shareholder has received the lesser of: (i) the original subscription price for each Preferred Share for which the Preferred Shareholder is the registered holder and all dividends that have been declared but for which the Preferred Shareholder has yet to be paid; and (ii) the book value of the Preferred Shares, for which the Preferred Shareholder is the registered holder, as determined in the upcoming year-end audited financial statements; and
• the balance to the Common Shareholders on a pro rata basis among the Common Shareholders, to the exclusion of the Preferred Shareholders.
131 In Central Capital, Weiler J.A. pointed out that winding up and liquidation are other forms of insolvency. Both, she said, are "methods for secured creditors to enforce their claims by seizing the assets in which they hold security interests": para. 99. In the same paragraph, however, she said that in light of s. 173 of the governing statute in that case - the Canada Business Corporations Act, R.S.C., 1985, c. C-44 - whose provisions are similar to those found in Part 9 of the BCA, the interests of preferred shareholders with redemption rights are subordinated to creditors.
132 Laskin J.A. took a similar view. As is the case in the instant proceeding, he found that even after redemption rights are exercised, preferred shareholders continue to be entitled to dividends until their shares are in fact redeemed. On a liquidation, shareholders rank as equity claimants and not as creditors (even though in that case, and unlike the facts of this case, their redemption rights allowed shareholders to compel the company to redeem so long as it was solvent). Redemption, Laskin J.A. explained, is a return of capital not a repayment of a loan: paras. 134-135.
133 The same view was taken in Nelson Financial at para. 31(c).
No Alteration to Establish a Contractual Right to Compel Redemption Exists
134 In their alternative argument, the redeeming preferred shareholders submit that if they were equity claimants at the outset, then their contractual relationship with ACIC changed as a result of its later redemption policies and certain communications that ACIC published or delivered to potential and existing shareholders. They submit that ACIC's redemption policies moved away from a discretionary right held by Mr. Bergman and became an enforceable contractual right held by each preferred shareholder to compel redemption during specific windows of time and upon certain conditions being met.
135 I disagree. The redeeming preferred shareholders have not established that their contractual relationship with ACIC changed so as to become debt creditors.
136 The redemption policies that ACIC issued starting in 2006 did not provide an unconditional promise that redemption notices would be honoured. Those policies were clear that ACIC's right to honour a redemption request was always at the discretion of its directors.
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137 The communcations from ACIC also do not alter the contractual relationship. The examples provided by the redeeming preferred shareholders consist, for the most part, of marketing materials, executive summaries, and standard form answers to "FAQs" (frequently asked questions). Many of the impugned communications appear on their face to be intended to induce investment in ACIC through subscriptions of Units.
138 ACIC's communications do not convey an intention to enter into a binding agreement: Aubrey v. Teck Highland Valley Copper Partnership, 2017 BCCA 144 (B.C. C.A.) at paras. 47- 48.
139 As I have found, ACIC's communications with its preferred shareholders concerning redemptions and redemption policies and terms were clearly stated throughout to be subject to the sole discretion of its directors. ACIC continued to make it clear to its preferred shareholders throughout that in addition to its right to refuse to honour a redemption request, it retained the right to alter, amend, or cancel its redemption policy at any time. In some communications, ACIC advised that its ability to honour a redemption request depends on the company's liquidity.
140 Each preferred shareholder was required to sign a Subscription Agreement in order to purchase Units. They contained language confirming the subscriber's decision to purchase Units was based solely upon the information contained in the Offering Memoranda and any agreements or documents incorporated in them. There is no room to incorporate into the Subscription Agreements any representations that might have been made and relied upon by the redeeming preferred shareholders either at the time of subscription or afterward.
141 ACIC's redemption policies and communications cannot purport to change the rights attached to shares, such as redemption rights, as set out in the Articles, which is a foundation document governing the contractual rights of preferred shareholders. The Articles can only be amended by special resolution and in strict compliance with the BCA, which did not occur in this case: BCA, ss. 2(2)(b), 54(3), 58(2), 61. For example, s. 61 of the BCA provides that special rights and restrictions attached to a share are not varied or deleted until a company's articles have been altered to reflect the variation or deletion:
61. A right or special right attached to issued shares must not be prejudiced or interfered with under this Act or under the memorandum, notice of articles or articles unless the shareholders holding shares of the class or series of shares to which the right or special right is attached consent by a special separate resolution of those shareholders.
142 Further, based on the evidence adduced on this application, mass communications sent from or given by ACIC to potential and existing preferred shareholders do not establish a change in the relationship.
143 In any event, even if it could be said that there was an elimination of unfettered and at will discretion to redeem on the part of ACIC's director, the substance of the relationship between ACIC and its preferred shareholders did not change from equity to debt as a result.
144 Lastly, it is not an issue on this application whether the redeeming preferred shareholders can look beyond the four corners of their Subscription Agreements, such as to advance a claim for inducement to purchase shares or any delay in requesting a redemption through a representation(s) made by on or behalf of ACIC. The answer to that question also has no bearing on the characterization of the nature of the redeeming preferred shareholders' status in this CCAA insolvency proceeding.
145 For these reasons, I do not need to consider the redeeming preferred shareholders' submission, based on Rosas v. Toca, 2018 BCCA 191 (B.C. C.A.), that no consideration is necessary to support the alleged change in their contractual relationship with ACIC.
Treatment in Financial Records
146 Since surrounding circumstances are referred to by the redeeming preferred shareholders, it is useful to refer to the manner in which ACIC treated its preferred shareholders in its financial records. Reference to treatment in financial records was considered in some of the case authorities I have cited (e.g., Central Capital). In considering this evidence, I am mindful of the caution in CDIC (at para. 61) that a company's treatment in its financial records is to be accorded limited weight.
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147 ACIC's financial records describe the preferred shares as "Share Capital" and not as debt. There are separate, specific line items for short term and long term debt and debentures, which do not include the monies paid by subscribers for their Units. For example, the 2015 financial statements state that there is "No Long Term Debt". Capital from share subscriptions is described as "Shareholders' equity" in financial statements prepared by ACIC's third party accounting firm, BDO Dunwoody, under a line item entitled, "Liabilities and Shareholders' Equity".
Conclusion
148 The preferred shareholders' investment in ACIC was in respect of an equity interest. Their claims are not debt claims. They are claims that only a shareholder can make. The redemption rights attached to ACIC's preferred shares are in substance rights to the return of a capital invested in a MIC with significant risks.
149 ACIC's deteriorating financial position led to its inability to honour the outstanding redemption requests delivered by certain preferred shareholders. It is a risk that all preferred shareholders were clearly informed of before purchasing their shares.
150 A declaration shall issue that the claims of all of its preferred shareholders fall within the ambit of equity claims as defined in s. 2 of the CCAA. Petition granted.
End of Document Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 22
TAB 15
15 Canada Deposit Insurance Corp. v. Canadian Commercial Bank, 1992 CarswellAlta 298 1992 CarswellAlta 298, 1992 CarswellAlta 790, [1992] 3 S.C.R. 558, [1992] S.C.J. No. 96...
1992 CarswellAlta 298 Supreme Court of Canada
Canada Deposit Insurance Corp. v. Canadian Commercial Bank
1992 CarswellAlta 298, 1992 CarswellAlta 790, [1992] 3 S.C.R. 558, [1992] S.C.J. No. 96, [1993] A.W.L.D. 003, 131 A.R. 321, 143 N.R. 321, 16 C.B.R. (3d) 14, 16 C.B.R. (3d) 154, 25 W.A.C. 321, 36 A.C.W.S. (3d) 731, 5 Alta. L.R. (3d) 193, 7 B.L.R. (2d) 113, 97 D.L.R. (4th) 385, J.E. 92-1742, EYB 1992-66961
Re Winding-up Act, R.S.C. 1970, c. W-10, as amended; Re Winding-up of CANADIAN COMMERCIAL BANK; PRICE WATERHOUSE LIMITED (Liquidator of CANADIAN COMMERCIAL BANK) v. R. IN RIGHT OF ALBERTA, ROYAL BANK OF CANADA, BANK OF MONTREAL, TORONTO-DOMINION BANK, BANK OF NOVA SCOTIA, CANADIAN IMPERIAL BANK OF COMMERCE and NATIONAL BANK OF CANADA
La Forest, L'Heureux-Dubé, Gonthier, Cory, McLachlin, Stevenson * and Iacobucci JJ.
Heard: April 2, 1992 Judgment: November 19, 1992 Docket: Doc./n[o] 22084
Counsel: Charles P. Russell, for liquidator Earl A. Cherniak, Q.C., and Robert J. Morris, for general body of creditors of estate of Canadian Commercial Bank James Rout, Q.C., for respondent R. in Right of Alberta. Colin L. Campbell, Q.C., for respondents Royal Bank of Canada, Bank of Montreal, Toronto-Dominion Bank, Bank of Nova Scotia, Canadian Imperial Bank of Commerce and National Bank of Canada
Subject: Corporate and Commercial; Insolvency Headnote Banking and Banks --- Termination of business by bank — On insolvency of bank — Priority of claims against bank assets Partnership --- Accounting — Upon dissolution Corporations — Winding-up — Several parties advancing funds in attempt to save chartered bank from insolvency — Attempt failing and bank ordered wound up — Funds advanced being characterized as loan and not capital investment — Group of lenders being entitled to rank equally with bank's unsecured creditors. When a chartered bank found itself in financial difficulty, an arrangement to provide emergency financial assistance to the bank was entered into by the governments of Canada and of Alberta, six major Canadian financial institutions, the Canada Deposit Insurance Corporation ("CDIC") and the bank. Under the arrangement $255 million was advanced to the bank by way of a purchase of participation in a portfolio of assets held by the bank. The portfolio of assets consisted of loans and related security having a nominal value on the bank's books of over $500 million. The participation interest of each participant was proportional to its financial contribution. The bank undertook to indemnify the participants against any loss experienced under the support programme up to the amount paid by each of them to the bank. It was agreed that in the event of the insolvency or winding-up of the bank any amount remaining unpaid "shall constitute indebtedness of [the bank] to the members of the Support Group." Despite this infusion of money, the bank became insolvent and was ordered to be wound up under the Winding-up Act in September 1985. A liquidator was appointed. By August 1987, the liquidator had recovered approximately $112 million on account from the bank's portfolio assets, $5 million of which was attributable to the portion of the assets beneficially owned by the participants. The liquidator brought an application for the advice and direction of the court as to the interpretation of the support agreements. A judge of the Queen's Bench determined that the participants were entitled to the repayment of the $5 million recovered by the liquidator, but were
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 1 Canada Deposit Insurance Corp. v. Canadian Commercial Bank, 1992 CarswellAlta 298 1992 CarswellAlta 298, 1992 CarswellAlta 790, [1992] 3 S.C.R. 558, [1992] S.C.J. No. 96... otherwise not entitled to recover their advances until after all ordinary creditors, including unsecured creditors, were paid in full. The injection of funds by the participants was found to have been a capital investment. The participants, apart from the Government of Canada and CDIC, successfully appealed the part of the judgment characterizing the funds as a capital investment. The Court of Appeal characterized the advance of $255 million as a loan and concluded that the participants were entitled to rank equally with the bank's unsecured creditors for all moneys advanced to the bank. The liquidator applied for leave to appeal from the judgment of the Court of Appeal. Leave was granted. On the appeal, the Supreme Court of Canada considered (1) whether the $255 million advance was a loan: (2) if so, whether it was a loan coming within the postponement provision in s. 4 of the Partnerships Act (Ont.); and (3) if that Act did not apply, whether the claim of the six financial institutions and the Government of Alberta should be postponed to the claims of the general body of the bank's unsecured creditors, other than the participants, based on the United States doctrine of equitable subordination. Held: The appeal was dismissed. The words chosen by the participants in the agreements covering the advance of the $255 million clearly supported the Court of Appeal's conclusion that the assistance programme involved a loan and not a capital investment. There was nothing in the surrounding circumstances that would alter this characterization. Although the transaction had some "investment features", they were incidental to the debt features of the arrangement and did not alter the substance of the debtor-creditor relationship created by the advance of the $255 million. The loan did not fall within the ambit of the Partnerships Act as the participants were to receive neither a "rate of interest varying with the profits" of the bank, nor a "share of the profits arising from carrying on the business" of the bank. Therefore, the Court of Appeal did not err in declining to postpone the participants' claims under s. 4 of the Act. The participants were not to receive a rate of interest varying with the bank's profits in return for the advance of $255 million. The rate of interest was fixed according to the prime rate and was made contingent on whether or not an equity agreement could be carried out. Further, a lender does not share in profits within the meaning of ss. 3(3)(d) and 4 of the Act unless he or she is entitled to be paid amounts referable to profits other than in repayment of the principal amount of the loan. While the repayment was to be made from the pre-tax income of the bank, there was no direct link between the success of the bank and the overall quantum of the amount due to or payable to the participants. The principles of equitable subordination had no application to the facts of the case. In order to make a successful claim for equitable subordination (1) the claimant must have engaged in some type of inequitable conduct; (2) the misconduct must have resulted in injury to the creditors of the bankrupt or conferred an unfair advantage on the claimant; and (3) equitable subordination of the claim must not be inconsistent with the provisions of the bankruptcy statutes. The evidence adduced disclosed neither inequitable conduct on the part of the participants nor injury to the ordinary creditors of the bank as a result of the alleged misconduct......
Appeal from judgment reported at (1990), 74 Alta. L.R. (2d) 69, 69 D.L.R. (4th) 1, 107 A.R. 199 (C.A.), allowing appeal from (1987), 67 C.B.R. (N.S.) 136, 56 Alta. L.R. (2d) 244, 46 D.L.R. (4th) 518, 83 A.R. 122 (Q.B.).
The judgment of the court was delivered by Iacobucci J.:
1 In September 1985 the Canadian public witnessed what fortunately has been an infrequent occurrence in Canadian banking. Early that month, a chartered bank known as the Canadian Commercial Bank ("C.C.B.") became insolvent and was ordered to be wound up pursuant to the provisions of the Winding-up Act, R.S.C. 1985, c. W-11 (formerly R.S.C. 1970, c. W-10). This appeal [from (1990), 74 Alta. L.R. (2d) 69, 69 D.L.R. (4th) 1, 107 A.R. 199, reversing (1987), 56 Alta. L.R. (2d) 244, 67 C.B.R. (N.S.) 136, 46 D.L.R. (4th) 518, 83 A.R. 122] concerns the characterization of the unique and complex financial arrangement entered into by the governments of Canada and of Alberta, six major Canadian financial institutions, the Canadian Deposit Insurance Corporation ("C.D.I.C.") and C.C.B. in the spring of 1985 in an attempt to prevent its winding-up. The main issue is whether, in substance, the $255 million advanced to C.C.B. under this arrangement was in the nature of a loan, in which case the "lenders" thereof would rank pari passu with the other unsecured creditors of C.C.B., or whether it was in the nature of a capital investment in the business of C.C.B., in which case such unsecured creditors would have priority over the "investors." If
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 2 Canada Deposit Insurance Corp. v. Canadian Commercial Bank, 1992 CarswellAlta 298 1992 CarswellAlta 298, 1992 CarswellAlta 790, [1992] 3 S.C.R. 558, [1992] S.C.J. No. 96... the former characterization is adopted, as I believe it should be, subsidiary issues concerning the postponement of claims under s. 4 of the Partnerships Act, R.S.O. 1990, c. P.5, and the doctrine of equitable subordination are also raised.
I. Facts
2 Although they are relatively uncomplicated, the facts of this case are rather extensive and warrant a full review. C.C.B. was a chartered bank involved primarily in commercial lending. In early 1985 C.C.B. faced a solvency crisis owing to a sharp deterioration in its loan portfolio. Many of its outstanding loans had become non-performing. On March 14, 1985 C.C.B.'s chief executive officer reported this crisis to the Office of the Inspector General of Banks and announced the inability of C.C.B. to continue in operation without outside assistance. At the request of the governor of the Bank of Canada, a government and banking industry funded support initiative was undertaken to assist C.C.B. and to avoid the loss of public confidence in Canada's banking system.
3 On March 24, 1985 a support group comprising Her Majesty in right of Canada ("Canada"), Her Majesty in right of Alberta ("Alberta"), C.D.I.C. and what I shall sometimes refer to as the "bank group," consisting of the Royal Bank of Canada, the Bank of Montreal, the Toronto-Dominion Bank, the Bank of Nova Scotia, the Canadian Imperial Bank of Commerce, and the National Bank of Canada, entered into a memorandum of intent to provide the "emergency financial assistance" requested by C.C.B. "on certain terms."
4 In essence, Canada, Alberta, C.D.I.C. and the bank group, collectively referred to as the "participants," agreed to purchase from C.C.B., at a total price of $255 million, an undivided interest by way of participation in a portfolio of assets held by C.C.B. consisting of loans and related security having a nominal value, on the books of C.C.B., of over $500 million ("portfolio assets"). The participation interest of each participant was proportional to its own financial contribution and was to be evidenced by participation certificates issued by C.C.B. The parties also agreed in principle that the participants would receive from C.C.B. on a proportionate basis, and until such a time as the participants received the amount they paid for their participation certificates, a portion of the money received on account of each portfolio asset as well as 50 per cent of C.C.B.'s pre-tax income, or alternatively 100 per cent of C.C.B.'s pre-tax income plus interest. In other words, it was agreed that the $255 million advanced by the participants would be repaid by C.C.B. After repayment, the payments from the portfolio assets and from C.C.B.'s pre-tax income would cease.
5 Under the memorandum of intent, C.C.B. undertook to indemnify each participant against any loss experienced under the support program up to the amount paid by them to C.C.B. It was agreed that in the event of the insolvency or winding-up of C.C.B., any amount remaining unpaid "shall constitute indebtedness of C.C.B. to the members of the Support Group." Finally, the parties agreed in principle that each participant would receive from C.C.B., on a proportionate basis, transferable rights or warrants to purchase common shares of C.C.B. at a price of $0.25 per share. The warrants were to expire ten years after the day that C.C.B. had repaid the full amount advanced for the participation certificates.
6 On March 25, 1985 the Department of Finance issued a press release announcing a joint agreement involving "an infusion of capital with repayment provisions ... designed to provide the Canadian Commercial Bank with sufficient funds to ensure solvency following a recent and sharp deterioration in its U.S. loan portfolio." The agreement was described as resulting in the "purchase by the support group of a package of nonperforming loans," leaving C.C.B. "in a strong position of solvency in order to support its deposit base." After setting out the general terms of the support program, the Minister of State (Finance) said she had "full confidence" that this program "involving Canada's largest chartered banks and the two Governments will permit the Canadian Commercial Bank to continue its active and important role in the growing economy of Western Canada." The minister concluded that the support program represented "a strong collective vote of confidence in the health of the economy of Western Canada."
7 In order to carry out the letter and spirit of the memorandum of intent, the participants and C.C.B. were to execute, among other documents, a "participation agreement" (also referred to as "P.A."), an "equity agreement" (also referred to as "E.A.") and an "amending and subordination agreement." These agreements, which incorporate and refine the general principles agreed to earlier in the memorandum of intent, were ultimately entered into as of April 29, 1985. The participation agreement and
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 3 Canada Deposit Insurance Corp. v. Canadian Commercial Bank, 1992 CarswellAlta 298 1992 CarswellAlta 298, 1992 CarswellAlta 790, [1992] 3 S.C.R. 558, [1992] S.C.J. No. 96... the equity agreement formed the core of the support program. There are no relevant inconsistencies between these documents and the memorandum of intent. I will, however, review in closer detail the former documents as their provisions are of crucial importance to the resolution of the issues raised by this appeal.
8 Section 2 of the participation agreement provided for the participants to purchase from C.C.B., at a total price of $255 million, an undivided interest by way of participation in 255,000,000 units in the portfolio assets of C.C.B. Each participant's interest was proportional to its financial contribution. For example, C.D.I.C. advanced $75 million and received a participation interest in 75,000,000 units. The total participation in the portfolio assets was divided into 529,798,627 units, with the portion of 255,000,000 units purchased by the participants commonly referred to as the "syndicated portion." C.C.B. retained beneficially an undivided participation interest in the remaining 274,798,627 units which comprised the aggregate of the "C.C.B. portion" of the portfolio assets.
9 Under s. 5 of the participation agreement, C.C.B. warranted that the C.C.B. portion for each portfolio asset represented its "best estimate of the amount likely to be recovered from or with respect to that Portfolio Asset." Thus, as found by the learned chambers judge, the participants purchased, in essence, a portfolio of bad loans or that portion of a loan not likely to be recovered.
10 C.C.B. was appointed and authorized to act as agent to ad minister the portfolio assets (P.A. s. 6(a)). Pursuant to s. 9 of the participation agreement, all money received by C.C.B. on account of each portfolio asset, whether principal, interest or otherwise, was first to be retained by C.C.B. until the C.C.B. portion of that portfolio asset was completely recovered; then to be paid to the participants (except C.D.I.C.) proportionately to reduce or retire their respective advances; then to be paid to C.D.I.C. to reduce or retire its proportionate share; and finally to be retained by C.C.B. Each participant was entitled to receive these proceeds up until such time as it received an amount which, when taken together with all amounts received by that participant from C.C.B.'s pre-tax income pursuant to s. 10, was equal to the price paid by that participant for its participation certificate.
11 In addition to proceeds from C.C.B.'s portfolio assets, the participants were entitled to receive proportionately from C.C.B., on a quarterly basis, an amount equal to 50 per cent of C.C.B.'s pre-tax income (P.A. s. 10). C.C.B.'s "pre-tax income" was defined in s. 10 of the participation agreement as C.C.B.'s "net income ... before making any allowance for the payments to be made pursuant to this section, accrued interest on any presently existing bank debenture of CCB or any provision for income taxes payable to Canada, the United States of America and any political division of either." Again, C.C.B.'s obligation to make such payments would terminate after each participant received an amount pursuant to ss. 9 and 10 equal to the price paid by such participant for its participation certificate (P.A. s. 10).
12 Under s. 11 of the participation agreement, if C.C.B. failed by October 31, 1985 to obtain the shareholder and regulatory approval necessary for it to increase its authorized capital to the extent required for it to perform the equity agreement, as discussed below, then s. 10 of the participation agreement would be deemed to have been amended and would be construed as requiring C.C.B. to pay to the participants 100 per cent of C.C.B.'s pre-tax income. This obligation would continue until such time as the total amount received by each participant from the portfolio assets and C.C.B.'s pre-tax income satisfied the amount paid by that participant for its participation certificate, together with interest at prime rate. It should be noted that this was the only circumstance under which C.C.B. was to pay interest to the participants.
13 Section 8 of the participation agreement provided that C.C.B. indemnified each participant against any loss suffered by it by reason of the amounts realized from the portfolio assets and from 50 per cent of C.C.B.'s pre-tax income failing to equal the price paid by that participant for its participation certificate. This indemnity was to be paid only by payments of the amount and source described in ss. 10 and 11, with one important exception: "if CCB becomes insolvent or is wound up, any amount remaining unpaid and required to be paid in order to indemnify that Participant completely in accordance with the foregoing indemnity, shall constitute indebtedness of CCB, to which the provisions of section 13 shall apply."
14 The relevant parts of s. 13 of the participation agreement read as follows:
13. Priorities on Insolvency
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 4 Canada Deposit Insurance Corp. v. Canadian Commercial Bank, 1992 CarswellAlta 298 1992 CarswellAlta 298, 1992 CarswellAlta 790, [1992] 3 S.C.R. 558, [1992] S.C.J. No. 96...
(a) Notwithstanding the provisions of section 277 of the Bank Act [which otherwise gives Canada and a province a first and second charge respectively on the assets of an insolvent bank] or any other rule of law, each of the Participants agrees that, in the case of the insolvency or winding-up of CCB:
(i) neither Canada, CDIC nor Alberta shall, in connection with any money owing to it under this agreement, claim any charge on the assets of CCB;
(ii) the right of each of the Participants other than CDIC to money owing to it under this agreement shall rank pari passu with the right of the depositors of CCB to payment in full of the deposit liabilities of CCB;
(iii) the right of CDIC to money owing to it by CCB, under this agreement but not by reason of the subrogation of CDIC to the claims of depositors of CCB (if any) shall be subordinate in right of payment to the prior payment in full of all money owing to the other Participants under this agreement and to the depositors of CCB, but shall rank in priority to any outstanding bank debentures of CCB.
Each of Canada, CDIC and Alberta acknowledges that it has waived, as set out above, any priority to which it would otherwise be entitled. Each Participant agrees that this section 13 is intended to benefit the depositors of CCB, and to ensure to the benefit of the successors of CCB and any curator, liquidator or receiver that may be appointed to supervise or to wind up the business of CCB.
[Emphasis added.] Moreover, s. 13 provided that each participant would rank pari passu with each other except C.D.I.C. and that each would, as necessary, redistribute payments received by it in order to achieve this ranking.
15 Pursuant to s. 12 of the participation agreement, C.C.B. could not, without the consent of the participants, declare or pay any dividend or reduce its issued capital until such time as C.C.B. paid to each participant its purchase price, and any additional amount (interest at prime rate) payable under s. 11. Moreover, the participants required as a condition to their purchase, inter alia: (1) the execution of an amending and subordination agreement; (2) the execution of the equity agreement; and (3) the opinion of the Inspector General of Banks that C.C.B. would be solvent following the purchase (P.A. ss. 14 and 16). Finally, the parties expressly declared that the participants were not partners or joint venturers with each other (P.A. s. 18(j)) and that the law governing the agreement would be the law applicable in the province of Ontario (P.A. s. 18(d)).
16 The equity agreement (C.O.A. at pp. 154-74) gave the participants warrants providing for the right to subscribe to a total of 24,062,517 common shares of C.C.B. at a price of $0.25 per share, on a basis proportionate to each participant's participation interest (E.A. ss. 2, 3, 5 and 6). At the date of the agreement, C.C.B. had an authorized capital of 10,000,000 common shares with a par value of $10 each, of which 6,529,768 were issued and outstanding (E.A. s. 4). If all outstanding employee stock options to purchase common shares were exercised and all issued convertible preferred shares were converted into common shares, the issued capital of C.C.B. would consist of a total of 8,020,839 common shares (E.A. s. 4). Thus, if the warrants were fully exercised, the participants would own 75 per cent of C.C.B.'s common shares.
17 Shareholder and regulatory approval were required to increase C.C.B.'s authorized capital from its current level of 10,000,000 common shares to the 32,100,000 required in order to give full effect to the equity agreement. Pursuant to s. 15 thereof, C.C.B. had to first obtain shareholder approval no later than October 31, 1985, and next had to apply to the Minister of Finance pursuant to the Bank Act, R.S.C., 1985, c. B-1 (formerly S.C. 1980-81-82-83, c. 40), for the necessary change in its authorized capital. If such an application was not made by October 31, 1985, the provisions of s. 11 of the participation agreement (100 per cent pre-tax income plus interest) were triggered. In s. 8 of the memorandum of intent, Canada had agreed that "an application for such alteration in capital when made shall be approved for purposes of the Bank Act."
18 The limited authorized capital of C.C.B. was not the only obstacle to the issuance of common shares to the participants. Under present law, the chartered banks which were participants could not legally exercise their right to subscribe to common shares of C.C.B. This was recognized by the parties in para. (d) of the preamble to the equity agreement as well as in s. 10 of
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 5 Canada Deposit Insurance Corp. v. Canadian Commercial Bank, 1992 CarswellAlta 298 1992 CarswellAlta 298, 1992 CarswellAlta 790, [1992] 3 S.C.R. 558, [1992] S.C.J. No. 96... the agreement. Under s. 8 of the equity agreement, the warrants were made fully assignable and it was the declared intention of the participants, as recorded in the preamble, "that unless the present law is materially changed, they shall assign such rights."
19 The participants' right to purchase these shares was to continue for a period of ten years after the date on which each participant had been repaid the full amount it had advanced under the terms of the participation agreement (E.A. ss. 1 and 12). Again, this agreement would be governed by and construed in accordance with the law applicable in the province of Ontario (E.A. s. 19).
20 Finally, under the amending and subordination agreement, the holders of all outstanding subordinated debentures issued by C.C.B. pursuant to s. 132 of the Bank Act (i.e., Canada, British Columbia, Alberta and the Workers' Compensation Board of British Columbia), agreed to postpone the repayment of the amounts represented by their debentures until such time as C.C.B. had paid to each participant an amount equal to the price paid by that participant for its participation certificate.
21 To summarize, the participants were to receive in return for the $255 million advanced under the support program, proportionally to their own financial contribution and up to that amount: (1) payments from the portfolio assets; (2)(a) 50 per cent of C.C.B.'s pre-tax income and warrants to buy up to 75 per cent of C.C.B.'s common shares, or (b) 100 per cent of C.C.B.'s pre-tax income, with interest on the amount contributed; and (3) an indemnity for any losses caused. Under these agreements, the participants could receive a return which was greater than their contribution only in two ways, namely, by exercising or assigning their warrants up to ten years after full repayment (however, this option was contingent on shareholder, regulatory and legislative approval) or, if these warrants could not be granted, by receiving interest on the amount advanced at the prime rate.
22 C.C.B. was advised by the Office of the Inspector General of Banks, by a letter dated April 24, 1985, as to the appropriate accounting treatment to be applied to these transactions. Following these guidelines, C.C.B. wrote down its loan assets by $255 million, charged the write-down to tax-allowable appropriations for contingencies and credited the $255 million received from the participants to tax-paid appropriations for contingencies. C.C.B. was not specifically directed by the Inspector General of Banks to record its indemnity towards the participants as a liability, nor did C.C.B. do so. By effectively "selling" that portion of its loan portfolio not likely to be recovered and by not recording its indemnity obligation under the participation agreement to repay the $255 million as a liability, C.C.B. was able to restore a position of solvency on its books, thereby allowing it to remain in business, which was, after all, the raison d'être of the support program.
23 Despite this financial assistance, C.C.B.'s financial status con tinued to deteriorate. For reasons beyond the scope of this appeal, the support program was unsuccessful in ensuring C.C.B.'s long-term solvency. By an order made September 3, 1985 on a petition by C.D.I.C., Wachowich J. of the Alberta Court of Queen's Bench ordered C.C.B. to be wound up pursuant to the Winding-up Act, R.S.C. 1970, c. W-10. At that point, none of the participants had exercised or assigned (or even been granted) any of their warrants under the equity agreement as the preliminary conditions of shareholder and regulatory approval, for the authorization and issuance of additional common shares had not been fulfilled. Price Waterhouse Limited was appointed, and remains, the sole liquidator of C.C.B. ("liquidator").
24 As of August 18, 1987 the liquidator had recovered approximately $112 million on account from C.C.B.'s portfolio assets, of which $5 million was attributable to the portion thereof beneficially owned by the participants (namely, the syndicated portion). The liquidator brought an application before Wachowich J. for advice and direction as to the interpretation of the support agreements. In particular, the liquidator sought to determine the validity and ranking of the claims of the participants pursuant to the participation agreement.
25 In a judgment rendered on December 7, 1987 Wachowich J. held the participants to be entitled to the repayment of sums recovered by the liquidator on the syndicated portion of the portfolio assets (the $5 million), but otherwise not entitled to recover their advances until after all ordinary creditors, including unsecured creditors, were paid in full. Wachowich J. interpreted the injection of funds by the participants to have been a capital investment. The participants, apart from Canada and C.D.I.C., the respondents in this appeal, successfully appealed the latter part of this judgment. The Alberta Court of Appeal disagreed with Wachowich J., preferring to characterize the advance of $255 million as a loan. The Court of Appeal concluded that the
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 6 Canada Deposit Insurance Corp. v. Canadian Commercial Bank, 1992 CarswellAlta 298 1992 CarswellAlta 298, 1992 CarswellAlta 790, [1992] 3 S.C.R. 558, [1992] S.C.J. No. 96... participants were entitled to rank pari passu with C.C.B.'s unsecured creditors for all moneys advanced to C.C.B. pursuant to the participation agreement and not repaid by moneys recovered from the syndicated portion of the portfolio assets.
26 On an application by the liquidator, Wachowich J. directed the liquidator to present an application to this court for leave to appeal from the Court of Appeal's decision. Wachowich J. further ordered that Lerner & Associates be appointed as legal representative ("legal representative") of C.C.B.'s general body of creditors, other than the participants, for purposes of the application for leave to appeal and further on the appeal. Leave to appeal to this court was granted on March 14, 1991. The liquidator, as an officer of the court and as the representative of all the creditors of C.C.B., takes no position in this appeal. The bank group and Alberta, the respondents before this court, made separate written and oral submissions.
II. Judgments in the Courts Below
A. Alberta Court of Queen's Bench
27 On the initial application, the participants took the position that they were entitled under the terms of the support agreements: (1) to receive their proportionate shares of the moneys received by the liquidator or C.C.B. on account of the portfolio assets; and (2) to rank pari passu with all the other unsecured creditors of C.C.B. for any amounts not recovered from the portfolio assets and still owing to them pursuant to the participation agreement. Wachowich J. agreed with the first proposition but rejected the second.
28 According to Wachowich J., the participants' first submission involved a consideration of the validity of the participation agreement. The learned chambers judge confessed it was a "difficult task" to determine the position of the participants with respect to C.C.B.'s estate given the "extraordinary nature of the agreement" involved (at p. 126) [A.R.]. He noted there were no precedents dealing with similar commercial agreements. In his view, the participation agreement in question was not prohibited by ss. 173 and 174 of the Bank Act. While the agreement did not relate to business in which a bank would normally or commonly engage, he noted that "given the unique circumstances and the stated purpose of the Participation Agreement as a whole, one can hardly regard this as an invalid transaction" (at p. 127). He found it was a valid contractual document binding on all parties and held that the participants were entitled to receive their proportionate share from moneys recovered by the liquidator from the portfolio assets, in the manner provided for in s. 9 of the participation agreement (i.e., to the extent such recoveries exceed the C.C.B. portion).
29 Next, Wachowich J. turned to a consideration of the ranking of the participants with the general body of creditors of C.C.B. for any amounts not recovered from the syndicated portion of the portfolio assets, and still owing pursuant to the participation agreement. He noted that the participants would have "valid claims" under the terms of the participation agreement for such amounts (at p. 128). However, whether they could rank pari passu with other unsecured creditors depended on the interpretation of the agreement taken as a whole and a determination of the "real basis upon which the $255 million was paid to C.C.B." (at p. 128).
30 In Wachowich J.'s view, the essence of the participation agreement was not the creation of a mere purchase and sale of assets with an added indemnity as to the value of those assets. Rather, the transaction reflected an investment of capital into C.C.B. (at p. 129):
The agreement, as evidenced by all the surrounding circumstances, was really to effect an infusion of capital into C.C.B. whereby the Participants would be risking their monies in hope that the C.C.B. would continue as a viable and profitable business. If this in fact had occurred, the Support Group Participants stood to gain a healthy return on their investments.
31 The learned chambers judge found support for his characterization in the following: (1) the portion of the portfolio assets purchased by the participants was of little value; (2) s. 2 of the participation agreement masked the true nature of the transaction, that is, the investment of working capital into C.C.B.; (3) the indemnity provision and repayment structure set up by the agreement were directly connected to the profits and income of C.C.B.; (4) the repayment of the purchase price was to come not only from the portfolio assets, but mainly from C.C.B.'s pre-tax income; (5) if C.C.B.'s business was successful, the participants would benefit not only in recovering their purchase price, but as well by purchasing common shares in C.C.B.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 7 Canada Deposit Insurance Corp. v. Canadian Commercial Bank, 1992 CarswellAlta 298 1992 CarswellAlta 298, 1992 CarswellAlta 790, [1992] 3 S.C.R. 558, [1992] S.C.J. No. 96... under the equity agreement; (6) "[w]hile the transaction may not be a typical investment situation, where for example there is an outright purchase of shares, it is difficult to ignore the investment features of the agreement" (at p. 130); (7) while the accounting treatment had to be looked at with caution, the fact there was no liability to the participants recorded on the balance sheet of C.C.B., as created by the indemnity provisions of the agreement, supported the conclusion that the transaction was an investment; (8) the cases of Laronge Realty Ltd. v. Golconda Investments Ltd. (1986), 7 B.C.L.R. (2d) 90, 63 C.B.R. (N.S.) 76 (C.A.) ("Laronge Realty"); Re Dickie (1924), 5 C.B.R. 214 (N.S.T.D.); and Re Meade, [1951] 1 Ch. D. 774, [1951] 2 All E.R. 168, "stand for the general proposition that advances of monies will be classed as capital investments where the monies were used in the business and the business was carried on for the joint benefit of the parties involved" (at p. 131); and (9) the participants here did have a stake in the continued profitability of C.C.B. in that (a) the repayment of the money advanced would come from the income of C.C.B. and (b) their warrants allowed them to "continue to share in the profits of C.C.B." (at p. 131).
32 Thus, according to Wachowich J., the participants could not rank pari passu with the ordinary creditors of C.C.B., including unsecured creditors, for the amounts not recovered from the portfolio assets. In so doing, he applied the principle that "if a person contributes capital to a business, even though that person is not a partner in the business and may have received no share of the profits, they cannot prove their claim in bankruptcy in competition with the creditors of the business" (at p. 131): Halsbury's Laws of England (3rd ed.), vol. 2, at p. 495; Laronge Realty, supra; and Re Beale; Ex parte Corbridge (1876), 4 Ch. D. 246.
33 In concluding, Wachowich J. held the provisions of the participation agreement which attempt to rank the participants pari passu and to create a debt on insolvency are ineffective to alter the "existing legal nature of their relationship" with C.C.B. These provisions would be void as they are an attempt to alter insolvency laws through a private agreement: British Eagle International Airlines Ltd. v. Compagnie Nationale Air France, [1975] 1 W.L.R. 758, [1975] 2 All E.R. 390 (H.L.).
B. Alberta Court of Appeal
34 The respondents (the participants apart from Canada and C.D.I.C.) appealed from Wachowich J.'s conclusion with respect to their ranking on insolvency, whereas the then legal representative cross-appealed from the conclusion that the participants could receive funds from the syndicated portion of the portfolio assets. Harradence J.A. (writing for the Court of Appeal) began by stating that the learned chambers judge had erred in law in his interpretation of the decisions in Laronge Realty, supra, Re Dickie, supra, and Re Meade, supra (at p. 207) [A.R.]:
I have examined closely the cases relied upon as well as others to which I have been referred and the inescapable conclusion to be reached is that the proposition as stated [by Wachowich J.] can only be correct where one implies into the term 'monies were used in the business' a necessary condition that the investor has not expressly stipulated a requirement for the repayment of monies advanced. A failure to imply this term into the proposition results in a misstatement of the appropriate test and, further, is inconsistent with the decision of the Supreme Court of Canada in Sukloff v. Rushforth (1964), 45 D.L.R. (2d) 510 (S.C.C.).
35 Harradence J.A. reviewed the cases cited by Wachowich J. and noted that, unlike the case at bar, none of them involved transactions where provisions for the repayment of the money advanced had been included by the parties. Turning specifically to Sukloff v. A.H. Rushforth & Co., [1964] S.C.R. 459, 6 C.B.R. (N.S.) 175, 45 D.L.R. (2d) 510 ("Sukloff v. Rushforth"), Harradence J.A. said that while it was "difficult to glean" from that case the exact reason for concluding that the transaction under consideration therein was a loan rather than a capital investment, "the only reasonable conclusion to be reached is that the provision for repayment was determinative of the nature of the transaction" (at p. 209). He concluded his review of the jurisprudence by stating (at p. 210): "where, as in this case, the evidence indicated that monies advanced to a business are to be repaid, and particularly when the terms of repayment are specified, the transaction is classified as a loan."
36 Harradence J.A. next turned to the interpretation of the participation agreement. He noted at the outset the rule prohibiting extrinsic evidence from contradicting express contractual terms. He reviewed a number of factors favouring interpreting the agreement as a loan, namely: (1) there is nothing in the express terms of the agreement which supports a conclusion that the money was advanced as an investment; (2) there are express provisions pointing to the opposite conclusion, including provisions for repayment and for an indemnity that full repayment will be made; (3) pursuant to the participation agreement,
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 8 Canada Deposit Insurance Corp. v. Canadian Commercial Bank, 1992 CarswellAlta 298 1992 CarswellAlta 298, 1992 CarswellAlta 790, [1992] 3 S.C.R. 558, [1992] S.C.J. No. 96... upon insolvency or winding-up, any amount remaining unpaid was to constitute indebtedness and, in such circumstances, the participants were to rank pari passu with other creditors; and (4) the intention of the participants was consistent with a "loan" characterization. He did not find it necessary to determine whether the accounting treatment was consistent with an investment, holding that such a factor is not determinative of the legal relationship of the parties.
37 Harradence J.A. found that repayment of the money advanced was intended and was coupled with express repayment provisions. Thus, relying on Sukloff v. Rushforth, supra, and the other cases cited, he concluded that the $255 million advanced was not to be characterized as an investment in capital but rather as a "loan coupled with a purchase agreement to C.C.B." (at p. 211).
38 The observation made by the learned chambers judge that the business of C.C.B. was carried on for the "joint benefit" of C.C.B. and the participants, because (1) repayment was to come from the income of C.C.B. and (2) the warrants, if exercised, would allow the participants to continue to share in the profits of C.C.B., was next addressed. With respect to the first factor, Harradence J.A. held that Wachowich J. erred in considering the source of the funds for repayment in concluding that the participants would be sharing in C.C.B.'s profits. His comments warrant citation (at p. 211):
It is important to recognize that while repayment was to be made from pre-tax income of C.C.B., there was no direct link between the success of the C.C.B. and the overall quantum of the amount due to or payable to the Support Group Participants. I have been referred to no authority which supports the proposition that a repayment, the instalments of which are referable to the quantum of the income of the debtor, is a situation of 'joint benefit'. Since the sums to be received by the Participants were limited to repayment of monies advanced, with a contingent right to interest, the source of the repayment monies is not relevant and, with respect, the learned Chambers Judge erred in concluding the Participants were 'sharing in profits' in this respect.
39 As for the second factor, Harradence J.A. summarily rejected it as an indicium of investment and "joint benefit" mainly because of the contingent nature of the warrants in question, as recognized by both the participation agreement and the equity agreement. He added (at p. 212): "Had shares actually been issued or even approval obtained, or if there was an obligation to purchase or if a purchase had been made, then the 'joint benefit' argument might have some merit and it would have been necessary to fully address this issue."
40 Finally, Harradence J.A. considered whether repayment to the respondents was nevertheless postponed pursuant to what are now s. 139 of the Bankruptcy Act, R.S.C. 1985, c. B-3, and s. 4 of the Partnerships Act, R.S.O. 1990, c. P.5. In his view, the application of these provisions was precluded by his earlier conclusion that the participants were not to receive a rate of interest varying with the profits of C.C.B. or a share in the profits of C.C.B.
41 Thus, the appeal was allowed and it was ordered that the respondents were entitled to rank pari passu with the ordinary creditors of C.C.B. for all moneys advanced to C.C.B. pursuant to the participation agreement and not repaid by moneys recovered from the portfolio assets. In view of this result, the cross-appeal brought by the then legal representative, alleging an inconsistency in Wachowich J.'s conclusions, was dismissed.
III. Issues
42 There are many ways of characterizing the issues raised by this appeal. As I see it, the three main questions which need to be addressed are:
(1) Was the Court of Appeal correct in characterizing the advance of $255 million by the participants to the C.C.B. as a loan, as opposed to an investment in capital, thereby creating a debtor-creditor relationship between the parties?
(2) If the true legal nature of this transaction is indeed a loan, does this loan come within the postponement provision found in s. 4 of the Partnerships Act?
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 9 Canada Deposit Insurance Corp. v. Canadian Commercial Bank, 1992 CarswellAlta 298 1992 CarswellAlta 298, 1992 CarswellAlta 790, [1992] 3 S.C.R. 558, [1992] S.C.J. No. 96...
(3) If the Partnerships Act does not apply, should the respondents' claim for the money loaned under the participation agreement nonetheless be postponed to the claims of the general body of C.C.B. unsecured creditors, other than the participants, based on the United States doctrine of equitable subordination?
The legal representative raises a subsidiary issue concerning the portion of the moneys recovered attributable to the syndicated portion of the portfolio assets:
(4) Was the Court of Appeal correct in upholding the conclusion of the learned chambers judge that the participants are entitled to receive from the liquidator, pursuant to the participation agreement, the sums recovered on the syndicated portion of the portfolio assets?
43 For the reasons that follow, it is my view that the first and fourth questions should be answered in the affirmative while the second and third should be answered in the negative. In summary, the words chosen by the parties in their agreements clearly support the Court of Appeal's conclusion that the assistance program involved, in substance, a loan of $255 million and not a capital investment. The surrounding circumstances provide additional support for, rather than detract from, this conclusion. Although the transaction did have an equity component (the warrants), this aspect alone does not, in the circumstances of this case, transform the essential nature of the advance from a loan to an investment. Put another way, while it is true that this transaction does have "investment features," these features were incidental to the debt features of the arrangement and do not alter the substance of the debtor-creditor relationship that was created by the parties with respect to the $255 million advanced by the participants to C.C.B. Moreover, the fact that C.C.B.'s pre-tax income was the main source for repayment does not affect this characterization as the amount to be repaid from this source was limited to the sum advanced to C.C.B., plus a contingent interest at prime rate. Thus, the respondents are creditors of C.C.B. and, as such, are entitled to what may be called a "prima facie" pari passu ranking with the other unsecured creditors of C.C.B. in the distribution of C.C.B.'s assets.
44 In the circumstances of this case, this prima facie ranking is not altered by the principles of law and equity relied upon by the legal representative. Indeed, the loan in question does not fall within the ambit of the Ontario Partnerships Act (ss. 3(3) (d), 4) as the participants were to receive neither a "rate of interest varying with the profits" of C.C.B. nor a "share of the profits arising from carrying on the business" of C.C.B. In my view, the principles of equitable subordination have no application to the facts of this case. Finally, in light of these conclusions, the legal representative's subsidiary issue concerning the moneys recovered on the syndicated portion of the portfolio assets must also fail. Accordingly, I would dismiss the appeal.
IV. Relevant Statutory Provisions
Winding-up Act:
45
Distribution of Assets
93. The property of the company shall be applied in satisfaction of its debts and liabilities, and the charges, costs and expenses incurred in winding-up its affairs.
94. All costs, charges and expenses properly incurred in the winding-up of a company, including the remuneration of the liquidator, are payable out of the assets of the company, in priority to all other claims.
95. The court shall distribute among the persons entitled thereto any surplus that remains after the satisfaction of the debts and liabilities of the company and the winding-up charges, costs and expenses, and unless otherwise provided by law or by the Act, charter or instrument of incorporation of the company, any property or assets remaining after the satisfaction shall be distributed among the members or shareholders according to their rights and interests in the company.
Partnerships Act:
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 10 Canada Deposit Insurance Corp. v. Canadian Commercial Bank, 1992 CarswellAlta 298 1992 CarswellAlta 298, 1992 CarswellAlta 790, [1992] 3 S.C.R. 558, [1992] S.C.J. No. 96...
46
3. In determining whether a partnership does or does not exist, regard shall be had to the following rules: . . . . . 3. The receipt by a person of a share of the profits of a business is proof, in the absence of evidence to the contrary, that the person is a partner in the business, but the receipt of such a share or payment, contingent on or varying with the profits of a business, does not of itself make him or her a partner in the business, and in particular,
(a) the receipt by a person of a debt or other liquidated amount by instalments or otherwise out of the accruing profits of a business does not of itself make him or her a partner in the business or liable as such; . . . . . (d) the advance of money by way of loan to a person engaged or about to engage in a business on a contract with that person that the lender is to receive a rate of interest varying with the profits, or is to receive a share of the profits arising from carrying on the business, does not of itself make the lender a partner with the person or persons carrying on the business or liable as such, provided that the contract is in writing and signed by or on behalf of all parties thereto; . . . . . 4. In the event of a person to whom money has been advanced by way of loan upon such a contract as is mentioned in section 3, or of a buyer of the goodwill in consideration of a share of the profits of the business, becoming insolvent or entering into an arrangement to pay his or her creditors less than 100 cents on the dollar or dying in insolvent circumstances, the lender of the loan is not entitled to recover anything in respect of the loan, and the seller of the goodwill is not entitled to recover anything in respect of the share of profits contracted for, until the claims of the other creditors of the borrower or buyer, for valuable consideration in money or money's worth, are satisfied.
V. Analysis
A. Characterization of the $255 million advanced: capital investment or loan?
47 The first and foremost issue in this appeal concerns the determination of the true nature of the transaction in question between the participants and C.C.B. Was the $255 million advanced by the participants in the nature of a loan, as found by the Court of Appeal, or in the nature of an investment of capital, as found by the learned chambers judge? If the Court of Appeal was correct in describing the transaction as a loan, it follows that the participants are creditors of C.C.B. and as such, pursuant to both the participation agreement and ss. 93 to 95 of the Winding-up Act, they would be entitled, subject to the statutory (s. 4 of the Partnerships Act) and equity ("equitable subordination") principles raised by the legal representative, to rank pari passu with the other ordinary creditors of C.C.B. in the distribu tion of C.C.B.'s assets. If, however, Wachowich J.'s characterization is to be preferred, then, relying on an old common law principle, it is argued the participants would not be creditors entitled to an equal ranking with C.C.B.'s true creditors: Re Beale, supra; Re Meade, supra; Laronge Realty, supra; and Halsbury's Laws of England (4th ed.), vol. 3(2), at p. 315. Under this approach, it is said the participants would have an equitable right to share in the distribution of the assets of C.C.B., but only at such time as the ordinary creditors have been paid in full.
48 The principal argument raised by the legal representative in favour of finding the transaction to have been that of a capital infusion is the potential for unlimited returns and control over C.C.B. by reason of the warrants granted to the participants under the equity agreement. Other indicia of capital investment are also suggested. First, C.C.B.'s accounts did not show their obligation to the participants as a liability. It is submitted that, if the financial statements could have led creditors, including depositors, to believe that there was adequate capitalization, this should be taken into consideration in determining the rights of the ordinary creditors and the respondents. Second, it is argued that the Court of Appeal's interpretation of ss. 8 and 13 of the participation agreement fails to recognize that the rights of differing classes of people who provide funds for the use of a business crystallize prior to insolvency, and cannot be altered by an agreement. It is argued that the Court of Appeal erred in assuming that the characterization by the participants and C.C.B. of their rights and obligations inter se should be determinative of the relative priority of the claims of the participants and the ordinary creditors of C.C.B. According to the legal representative, "Section 13 should be disregarded by the Courts, as being a self-serving attempt by the Participants to enhance their position
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 11 Canada Deposit Insurance Corp. v. Canadian Commercial Bank, 1992 CarswellAlta 298 1992 CarswellAlta 298, 1992 CarswellAlta 790, [1992] 3 S.C.R. 558, [1992] S.C.J. No. 96... for distribution purposes in the event of insolvency." Finally, the legal representative argues that the Court of Appeal erred in its interpretation of Sukloff v. Rushforth, supra, which, according to him, stands for proposition that, if someone has an interest in a business, in the sense that his or her potential for return is unlimited except by the enterprise's actual ability to generate profits, that person may not rank as a creditor if the business becomes insolvent. The key, according to the legal representative, is the right or potential to an unlimited return, not the right to repayment.
49 The respondent Alberta, on the other hand, submits that the advance was a loan and offers the following arguments: (1) the agreement for the advance contained no express provision that the advance was an investment in capital but did contain express provisions to the contrary, including provisions for repayment and an indemnity for that repayment; (2) the parties intended the advance to be repayable; (3) C.C.B. was contingently liable to pay interest; (4) in its financial state ments C.C.B. accounted for the advance as being a debt by disclosing the outstanding balance of the advance at the opening, repayments during, and the obligation for the outstanding balance at the closing of each reporting period; (5) Mr. Justice Estey considered the advance to be a loan in the Report of the Inquiry into the Collapse of the CCB and Northland Bank (1986) ("Estey report"), at pp. 115, 118 and 125; (6) the participants could not and did not invest in C.C.B.'s equity capital; (7) the decision of this court in Sukloff v. Rushforth, supra, as correctly demonstrated by the Court of Appeal, supports the conclusion that the advance to C.C.B. was a loan; and (8) according to Sukloff v. Rushforth, supra, and other decisions, an advance of money which is to be repaid, without more, is a loan and not an investment in equity capital or the supply of capital for the business of the recipient for the joint benefit of the advancer of money and the recipient, even if it is described as an investment of capital or if the person advancing the money is to share the profits or to receive shares of the recipient or if the advance is repayable when funds are available or out of profits. Alberta also takes issue with the legal representative's characterization of s. 13 of the participation agreement. It submits that this is a common provision in loans and, rather than enhance the participants' ranking on insolvency, has the effect of reducing the otherwise priority ranking of Canada, Alberta and C.D.I.C.
50 For their part, the bank group notes that the agreements in question represent a unique response to a unique situation, and thus, cannot be perceived as a normal investment in a business. For the reasons given therein, they commend the Court of Appeal's characterization of the advances as a loan in the form of a purchase of doubtful assets. Specifically, they submit that Harradence J.A. was correct in finding that, because of the contingent nature of the warrants, the support agreements did not provide a right to share in profits or for a rate of interest that varied with profits. They characterize the equity agreement as a mere "sweetener." The bank group submits that the cases, including Sukloff v. Rushforth, supra, do not support the conclusion that a contingent right to profits in circumstances like the case at bar can represent an interest in the business. With respect to the accounting issue, they argue that they should be considered on a basis different from the other participants because they were prohibited from controlling or attempting to control C.C.B. Indeed, they had no control over how C.C.B. showed its obligations to them in its financial statements. Further, such a factor should not determine the nature of the legal relationship between the parties to the agreement.
51 For my part, I agree in essence with the position advanced by Alberta and the bank group. Briefly put, the words chosen by the parties in their agreements strongly support the Court of Appeal's conclusion that the financial assistance program involved, in sub stance, a loan of $255 million rather than a capital investment and there is nothing in the surrounding circumstances which distracts from this characterization. On the contrary, the surrounding circumstances offer additional support for the Court of Appeal's conclusion. As noted by Wachowich J. and the legal representative, the transaction did indeed have an equity component (the warrants) and did involve a repayment scheme linked to the profits of C.C.B. However, for reasons which I shall elaborate, these aspects are insufficient to justify the conclusion reached by Wachowich J.Similarly, the other indicia of capital investment put forward by the legal representative, such as the accounting treatment given to the advance, do not affect the substance of this transaction.
52 As in any case involving contractual interpretation, the characterization issue facing this court must be decided by determining the intention of the parties to the support agreements. This task, perplexing as it sometimes proves to be, depends primarily on the meaning of the words chosen by the parties to reflect their intention. When the words alone are insufficient to reach a conclusion as to the true nature of the agreement, or when outside support for a particular characterization is required a consideration of admissible surrounding circumstances may be appropriate.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 12 Canada Deposit Insurance Corp. v. Canadian Commercial Bank, 1992 CarswellAlta 298 1992 CarswellAlta 298, 1992 CarswellAlta 790, [1992] 3 S.C.R. 558, [1992] S.C.J. No. 96...
53 In the case at bar, it should be noted that the circumstances surrounding the financial arrangements between C.C.B. and the participants, and the agreements themselves, are somewhat unique. At the heart of this matter is the attempted rescue of a Canadian chartered bank. Recourse to emergency measures in order to preserve the solvency of a bank is, fortunately, relatively rare in our country. I say this not because financial support programs are harmful (quite the contrary), but because the events surrounding the C.C.B. rescue in the mid-1980s infrequently arise. Part of the result, however, is that the task of ascertaining the intention of the participants and of C.C.B. with respect to the advance of $255 million is not particularly simple. Indeed, the learned chambers judge described the participation agreement as a "unique document based on a unique set of facts" as well as an "extraordinary transaction," and he found it "most difficult" to characterize (at pp. 132 and 126). Similarly, Harradence J.A. said that "The unique situation of C.C.B. and the Participants resulted in novel and complex documentation, the interpretation and characterization of which is a challenging and difficult task" (at p. 206).
54 It is evident from reviewing the agreements in question that characteristics associated with both debt and equity financing are present. The most obvious examples are, on the one hand, ss. 8 and 13 of the participation agreement pertaining to C.C.B.'s indemnity towards the participants and their ranking in the event of a winding-up and, on the other hand, the provisions of the equity agreement con cerning the warrants granted by C.C.B. to the participants. Such a duality is apparently quite common in loan participation agreements. Indeed, in an article entitled "Characterization of Loan Participation Agreements" (1988), 14 Can. Bus. L.J. 336, Professor Ziegel uses the heterogeneity in some loan participations to explain, in part, the divergence of judicial and academic opinion in the United States on the proper characterization of a participation agreement (at p. 337):
This issue [the characterization of the participation agreement] has provoked a large body of case law and textbook and periodical literature, most of it American, and the conclusions are not always the same. At one time or another one or more of the following descriptions have been applied to a participation agreement: a simple debtor-creditor relationship, with or without the benefit of security; an agency agreement; a partnership or joint venture; a trust; and, finally, a sale or assignment of an undivided interest in the loan.
It is easy to see why there should be this divergence of opinion. As with any agreement, the parties are free to verbalize it as they see fit and ambiguous or neutral language may reflect their unwillingness to answer hard questions, perhaps in the hope that the need to do so may never arise. Frequently, the several parts of a participation agreement lend themselves to different characterizations and the agreement is really a composite of cumulative legal elements. Finally, there is a significant overlap between such flexible concepts as a secured loan or trust and the sale or assignment of an undivided share of a loan, and the language of the agreement may be consistent with more than one of them. Faced with such ambiguity, the job of the adjudicator, when a dispute arises, is to find the characterization that best seems to fit the parties' intentions as derived from the total agreement and all the surrounding circumstances.
55 As I see it, the fact that the transaction contains both debt and equity features does not, in itself, pose an insurmountable obstacle to characterizing the advance of $255 million. Instead of trying to pigeonhole the entire agreement between the participants and C.C.B. in one of two categories, I see nothing wrong in recognizing the arrangement for what it is, namely, one of a hybrid nature, combining elements of both debt and equity but which, in substance, reflects a debtor-creditor relationship. Financial and capital markets have been most creative in the variety of investments and securities that have been fashioned to meet the needs and interests of those who participate in those markets. It is not because an agreement has certain equity features that a court must either ignore these features as if they did not exist or characterize the transaction on the whole as an investment. There is an alternative. It is permissible, and often required, or desirable, for debt and equity to co-exist in a given financial transaction without altering the substance of the agreement. Furthermore, it does not follow that each and every aspect of such an agreement must be given the exact same weight when addressing a characterization issue. Again, it is not because there are equity features that it is necessarily an investment in capital. This is particularly true when, as here, the equity features are nothing more than supplementary to and not definitive of the essence of the transaction. When a court is searching for the substance of a particular transaction, it should not too easily be distracted by aspects which are, in reality, only incidental or secondary in nature to the main thrust of the agreement.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 13 Canada Deposit Insurance Corp. v. Canadian Commercial Bank, 1992 CarswellAlta 298 1992 CarswellAlta 298, 1992 CarswellAlta 790, [1992] 3 S.C.R. 558, [1992] S.C.J. No. 96...
56 The weight to be given to one aspect of the support agreements over another in assessing the true intention of the parties underlies the difference in opinion between the learned chambers judge and the Court of Appeal's characterization of the transaction. Wachowich J. emphasized both the fact that the recovery by the participants of their contribution was dependent upon the income generated by C.C.B. and the participants' potential to share in the future success of C.C.B. by the warrants, even after having been repaid, as evidencing that the essence of the transaction was that of a capital investment. The Court of Appeal, however, largely dismissed the relevance of the equity agreement because of its contingent nature and emphasized instead that the participants were only entitled to receive from C.C.B. the amount advanced to it and that the parties had included specific provisions in the participation agreement referring to debt; all of which amounted to a very strong indicium of a loan.
57 In the circumstances of this case, it is my view that the learned chambers judge and the legal representative give far too much weight to the equity features associated with the equity agreement in characterizing the overall nature of the advance of $255 million. It is true the participants received warrants to purchase common shares of C.C.B. through the equity agreement. It is also true, at least in theory, that by fully exercising their warrants the participants would own 75 per cent of the common shares issued by C.C.B. However, it is evident on the face of the record that this possibility was not only a mere hypothesis, but it was unlikely to occur. As noted by the respondents and the Court of Appeal, shareholder and regulatory approval was required to permit an increase in C.C.B.'s authorized capital and, unless the warrants were assigned, an amendment to the Bank Act was necessary before the participants who are chartered banks could fully exercise their rights to purchase shares. It is not without significance that none of the participants ever exercised any of their warrants nor did they assign them. In these circumstances, I agree with the Court of Appeal that the true effectiveness of the equity agreement was highly contingent and that the learned chambers judge erred in not considering the warrants for what they really were, namely, so-called "sweeteners" or "kickers" with respect to the advance of $255 million which were simply additional features to the underlying loan arrangement between the parties. Undoubtedly, the warrants are an equity feature of the transaction supporting a conclusion that the advance was an investment. However, in the facts of this case, only minimal weight should be given to this factor in the overall characterization of the agreement. Alone, the highly contingent warrants are surely insufficient to tip the scales when faced with the strong indicia of debt present here as identified by the Court of Appeal.
58 Wachowich J. also erred in concluding that the participants would be "sharing in the profits" of C.C.B. under the support agreements. The participation agreement simply referred to C.C.B.'s profits (i.e., pre-tax income) as one of the sources for repayment. The other source for repayment, the moneys recovered on the syndicated portion of the portfolio assets, was not linked with C.C.B.'s profits. While full repayment from the portfolio assets alone was unlikely, the fact remains that the amount of money to be paid to the participants from both sources was fixed at the amount advanced by each for their participation certificate. Regardless of where the repayments were coming from, they remained mere repayments for moneys advanced. Of course, the participants would benefit from the success of C.C.B.'s business; however, this benefit would be capped by the amount of the advance. I shall examine in greater detail the "sharing in profits" argument of the legal representative when I deal with s. 4 of the Partnerships Act. For now, it is sufficient to state that, in the circumstances of this case, the source from which C.C.B. was to repay the advance made does not carry any weight in favour of a finding that said advance was an investment in capital rather than what it appears to be on the face of the agreements, namely, a loan of $255 million coupled with an equity "sweetener" or "kicker."
59 Another error committed by the learned chambers judge relates to his reliance on the decisions of Laronge Realty, supra, and Re Meade, supra. The latter case together with Re Beale, supra, are said to have established the common law principle applied in Laronge Realty and upon which Wachowich J. relied in order to deny ranking the participants pari passu with C.C.B.'s unsecured creditors other than the participants. This principle is stated as follows in Halsbury's Laws of England (4th ed.), vol. 3(2) (at p. 315):
If a person advances money to another, not by way of loan but as a contribution to the capital of a business carried on for their joint benefit, the person who has made the advance, even though he is not a partner in the business and has received no share of the profits as such, is debarred from proving in the bankruptcy of the recipient of the money in competition with the creditors of the business.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 14 Canada Deposit Insurance Corp. v. Canadian Commercial Bank, 1992 CarswellAlta 298 1992 CarswellAlta 298, 1992 CarswellAlta 790, [1992] 3 S.C.R. 558, [1992] S.C.J. No. 96...
Briefly, I agree with Harradence J.A.'s conclusion that none of the agreements at issue in the cases relied upon by Wachowich J. contained express provisions for the repayment of the money advanced and that such a factor was crucial to the conclusions reached therein. I also agree that the express repayment scheme set out in the participation agreement clearly distinguishes the case at bar from those in which the common law rule relied upon by Wachowich J. has been applied.
60 This rule was referred to, but not applied, by this court in Sukloff v. Rushforth, supra, a case upon which the legal representative strongly relies. There, Ritchie J. declined to apply the common law rule since he found that the money advanced by Mr. Sukloff was more in the nature of a loan, thereby creating a debtor-creditor relationship between the parties. Indeed, just after citing the above excerpt, Ritchie J. stated (at p. 467): "As I have indicated, I do not construe Mr. Sukloff's role as that of one who was supplying capital for a business carried on for the joint benefit of himself and the two limited companies." Earlier, he had specifically agreed with the trial judge's finding that Mr. Sukloff's relationship with the companies in question "was confined to that of a lender or financier who had a right to share in the profits, if any, of the undertakings of these companies" (at pp. 465-66) (emphasis added). This "share in the profits" aspect was later used by Ritchie J. in order to postpone part of the money advanced by Mr. Sukloff (the unsecured $10,000 upon which the legal representative asks this court to focus on) under what was then s. 98 (now s. 139) of the Bankruptcy Act, a provision similar to s. 4 of the Partnerships Act. However, this aspect had no effect whatsoever on the characterization of the true nature of the transaction involved and on the application of the common law rule set out in Re Beale, supra, and Re Meade, supra, and applied in Laronge Realty, supra. As found on the evidence, the advances in Sukloff v. Rushforth, supra, amounted to a loan.
61 As observed by Harradence J.A. in the case at bar, it is somewhat difficult to discern what specific evidence Ritchie J. was referring to when he agreed with the finding of the trial judge in Sukloff v. Rushforth, supra. However, I would note, as did Harradence J.A., that the agreements involved therein contained express repayment provisions similar to those contained in the participation agreement. It is not unreasonable to suggest that these provisions played an important role in the characterization of the advances as a loan. In any event, what is most important for our purposes is the fact that none of the moneys advanced by Mr. Sukloff was "postponed" under the common law principle advanced by Wachowich J. and the legal representative. The only part which was indeed postponed (the $10,000), was done so under the Bankruptcy Act and not following Re Meade, supra. I will explain in the context of my analysis of s. 4 of the Partnerships Act why, contrary to Sukloff v. Rushforth, supra, such statutory postponement has no application to the facts of this case (namely, because there is no profit sharing in the case at bar, simply a repayment out of profits). Suffice it here to say that, contrary to the legal representative's submissions, Sukloff v. Rushforth has no bearing on the characterization issue facing this court.
62 Similarly, contrary to the legal representative's submissions, the accounting treatment is not by itself of great weight in the characterization of the advance. I agree with the learned chambers judge that this "evidence" should be "looked at with caution" (at p. 130). I say this for the following interrelated reasons. First, C.C.B. was following the express directives given by the Office of the Inspector General of Banks, who is not a party to any of the agreements, in using the accounting methods it did. Second, as noted by the bank group, the accounting methods used by C.C.B. were beyond the control of many of the participants. Third, the legal representative is really asking us to look at the conduct of one party, after an arrangement has been signed, in order to discern the common intention of all contracting parties at the time of signing. This type of unilateral and after the fact "evidence" is clearly of little relevance and reliability with respect to the issues before this court. Fourth, as previously noted, the accounting treatment used and the success of the support program were closely linked and it is unwise to draw inferences on the legal relationship of the parties therefrom. For all these reasons, I would not place much weight on the accounting treatment used by C.C.B. in determining the true nature of the advance of $255 million. In so concluding, I do not wish to say that there may not be other cases where the accounting treatment could be helpful in determining the nature of a given transaction.
63 Finally, I cannot agree with Wachowich J. about the relevance to the characterization issue of the fact that the portion of the portfolio assets purchased by the participants was of little value. Even assuming that courts are entitled to weigh the value of the consideration given for a particular promise when characterizing an agreement, there was more to the support agreements than the mere purchase of participations in bad loans. Regardless of the true value of the syndicated portion, the participants were to be repaid the entire $255 million they had advanced to purchase their participation certificates. The source of this repayment
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 15 Canada Deposit Insurance Corp. v. Canadian Commercial Bank, 1992 CarswellAlta 298 1992 CarswellAlta 298, 1992 CarswellAlta 790, [1992] 3 S.C.R. 558, [1992] S.C.J. No. 96... was also the profits of C.C.B. and the parties agreed that any amount remaining unpaid upon insolvency would be considered an indebtedness by C.C.B. towards the participants.
64 On the other hand, the factors noted by the Court of Appeal of Alberta and the respondents as providing indicia of the "loan" nature of the advance of $255 million are clearly relevant to the characterization issue and they strongly support such a conclusion. I have already referred to these factors in summarizing the reasons of Harradence J.A. and the submissions made by Alberta and the bank group. To repeat the most important ones: (1) there is nothing in the express terms of the agreements which supports a conclusion that the money was advanced as an investment; and (2) there are express provisions supporting a characterization of the advance as a loan, including provisions for repayment (P.A. ss. 9-11), for an indemnity should full repayment not be made from the sources contemplated (P.A. s. 8), and for equal ranking with the ordinary creditors of C.C.B. (P.A. s. 13).
65 It is interesting to note that my conclusion that the $255 million advance was a loan also accords with the views of Mr. Justice Estey in his report. The relevant passages are found at pp. 115, 118 and 125 of the Estey report:
The $255M reduced the bank's debt to the Bank of Canada, but itself became an obligation to be retired by collections on the Support Package loans or on liquidation, out of the assets of the bankrupt bank. The receipt of the $255M therefore is irrelevant to the presence or absence of solvency. Whatever state the bank was in at that time remained unaffected by the receipt of the Support Package moneys. The Inspector General, therefore, was in error in finding the bank to be solvent upon receipt of the $255M. It should be borne in mind that the $255M, by the terms of the interim and final agreements, remains an obligation in debt of the CCB...... The Support Package should have classified these moneys as an unrecoverable purchase price, as a capital grant of some nature or as a subordinated loan, repayable out of earnings only. What CCB needed at this time of crisis was a loan without recourse in the nature of a capital grant repayable only from future profits and not a loan which would retain that characteristic and revive when the bank ran into further difficulties...... The object of this Support Program therefore was to replace lost income and thereby protect and renew capital. The banks could not in law contribute equity capital, and the government agencies likewise were not in a position, either legally or practically, to do so. Resort was had to what amounted to a long-term loan repayable out of the prospects of collections from bad debts and future earnings. The money infused, therefore, could not be treated as capital, but only served to reduce liquidity advances.
66 Contrary to the legal representative's submissions, s. 13 of the participation agreement is not an attempt to enhance the ranking of the participants upon C.C.B.'s insolvency. As evidenced by the passages from this clause which I earlier emphasized, the main purpose and effect of s. 13 is to reduce, rather than enhance, the ranking of certain of the participants (Canada and Alberta) upon insolvency as the parties agreed to do away with s. 277 of the Bank Act. As for the other participants, there is nothing in s. 13 other than a confirmation that the ordinary principles of common law and of ss. 93 to 95 of the Winding-up Act apply upon insolvency, namely, the participants, as unsecured creditors of C.C.B., are entitled to rank pari passu with the other ordinary creditors of C.C.B.
67 For all the foregoing reasons, I find that the Court of Appeal did not err in characterizing the advance of $255 million to C.C.B. as being, in substance, a loan rather than an investment of capital. While indicia supporting both conclusions are present, the overall balance clearly tilts in favour of the characterization put forward by the respondents. Accordingly, I would dismiss this first ground of appeal.
B. Postponement under s. 4 of the Partnerships Act
68 In the alternative, the legal representative submits that, even if the advance of $255 million was properly characterized as a loan, the Court of Appeal erred in declining to postpone, under existing statutory and common law principles, the respondents' claims for the moneys not repaid until the claims of the other ordinary creditors of C.C.B. were satisfied. Relying on ss. 3(3)
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 16 Canada Deposit Insurance Corp. v. Canadian Commercial Bank, 1992 CarswellAlta 298 1992 CarswellAlta 298, 1992 CarswellAlta 790, [1992] 3 S.C.R. 558, [1992] S.C.J. No. 96...
(d) and 4 of the Partnerships Act, he argues that, where a lender advances money to a business borrower under a contract providing that the lender shall "participate in the profits of that business," and the borrower subsequently becomes insolvent, the lender is not entitled to recover anything in respect of the loan until the claims of all other creditors of the borrower have been satisfied. It is submitted that the support agreements in question are contracts of such a nature because the participants contracted to be repaid their advances out of C.C.B.'s pre-tax income (either 50 per cent or 100 per cent plus interest, depending on whether the equity agreement could be carried out), and because of the potential for profits inherent in the warrants granted to the participants under the equity agreement.
69 As noted earlier, the Alberta Court of Appeal rejected a similar argument on the grounds that, notwithstanding the source for repayment and the warrants, the participants were not to receive under the agreements a "rate of interest varying with the profits" or a "share of profits" (at p. 212). In other words, the loan in question was not one to which s. 4 of the Partnerships Act applied. The respondents before this court adopt a similar position on this issue.
70 Alberta argues, persuasively in my view, that a lender does not receive a "share of the profits" within the meaning of ss. 3(3)(d) and 4 of the Ontario Partnerships Act unless he or she is entitled to be paid amounts referable to profits other than in repayment of the principal amount of the loan. It is submitted that a lender does not share in profits merely by having a contingent right to acquire or possibly even by having the right to acquire or by owning shares of the borrower. In the case at bar, Alberta submits that all amounts which the participants were entitled to be paid were to be applied only in repayment of the principal amount due and hence they were not entitled to and did not share in C.C.B.'s profits. As for the bank group, it is submitted that in the case of the insolvency of a bank, the Winding-up Act and not the Partnerships Act or the Bankruptcy Act determine the priority of claims. Moreover, they argue that the transaction at hand is not one to which the Partnerships Act applies because the participation agreement referred to profits only as a means of determining the source of the participants' right to repayment, and because any alleged "share of the profits" would stop when the sum advanced was repaid.
71 I have already found that the Court of Appeal was correct in characterizing the advance of $255 million under the support program as a loan. In order to determine the applicability of s. 4 of the Partnerships Act to the facts of this case, a provision which may apply regardless of whether a partnership exists, the general question to be answered is whether this loan was made "upon such a contract as is mentioned in section 3" of the Act. If so, then, subject to any constitutional arguments not made herein, the respondents would not be entitled to recover anything in respect of the loan until the claims of the other ordinary creditors of C.C.B. are satisfied.
72 The only provisions in s. 3 of the Partnerships Act which make specific reference to a "contract" are s. 3(3)(b) and (d). Section 3(3)(b) is clearly irrelevant to this appeal. Thus, at least at first glance, the contracts in the case at bar must fall within the ambit of s. 3(3)(d) of the Partnerships Act in order to trigger the application of s. 4. The specific question then becomes whether or not the support agreements provided that the participants were to receive a "rate of interest varying with the profits" of C.C.B, or a "share of the profits arising from carrying on the business" of C.C.B. While the legal representative originally structured his s. 4 argument exclusively around the wording in s. 3(3)(d) of the Partnerships Act, he expanded this argument during oral submissions to include s. 3(3)(a). He submitted that, even if the transaction does not fall within the ambit of the former subsection, it clearly falls within the latter. Accordingly, another specific question to be considered is whether s. 4 of the Partnerships Act can be triggered by "the receipt by a person of a debt or other liquidated amount by instalments or otherwise out of the accruing profits of a business" which does not involve a contract of the sort described in s. 3(3)(d). I will deal with both of these questions in turn.
73 Sections 3(3)(d) and 4 of the Partnerships Act originate from the now repealed Act to Amend the Law of Partnership, 1865 (U.K.), 28 & 29 Vict., c. 86 ("Bovill's Act"). The intent of what is now s. 3 of the Partnerships Act was evidently to mitigate the harshness of the old common law rule, which was that any person who shared in the profits of the partnership was deemed to be a partner, and so liable for any debts of the partnership on insolvency: Grace v. Smith (1775), 2 Wm. Bl. 997, 96 E.R. 587 (at p. 588 per De Grey C.J.: "Every man who has a share of the profits of a trade ought also to bear his share of the loss"); and Waugh v. Carver (1793), 2 Hy. Bl. 235, 126 E.R. 525.
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74 The old common law rule was first modified by the decision in Cox v. Hickman (1860), 8 H.L.C. 268, 11 E.R. 431, which in some respects was very similar on the facts to the present case. The company of Smith and Son fell into financial difficulties and was unable to pay its creditors. The Smiths entered into an arrangement with five of its creditors assigning the company to them (as trustees for all of the creditors), for a term of 21 years. During that period, the trustees were to carry on the business of the company "and to pay the net income, after answering all expenses; which net income was always to be deemed the property of the two Smiths, among [all] the creditors of the Smiths" (at p. 269) [H.L.C.]. In other words, the creditors "were to be paid their debts out of the profits of their debtors' business" (Lindley on the Law of Partnership, 15th ed. (London: Sweet & Maxwell, 1984), at p. 104). The most significant fact for our purposes is that the repayment was to be only to the extent of the debts; when all the debts had been paid, the trustees were to hold the estate in trust for the Smiths. Financial troubles continued under the new management, and the company once again became unable to pay its debts.
75 Since at that time the law was thought to be that a person who shared in the profits was liable as a partner, the question in Cox v. Hickman, supra, was not, as here, whether those creditors who were being paid out of profits were to be ranked equally with subsequent creditors, but whether the former group were to be themselves liable as partners to subsequent creditors. In deciding that they were not so liable, the House of Lords is considered to have established, amongst other things, that receipt of a share of the profits is not conclusive proof of a partnership as was previously thought (Lindley on the Law of Partnership, at p. 104).
76 However, it is interesting to note one excerpt of the opinion of Wightman J. (one of the judges who came to advise the House of Lords in Cox v. Hickman) who, instead of modifying the old common rule, would simply have not applied it to the facts of the case (at p. 443 E.R.):
It is said that a person who shares in net profits is a partner; that may be so in some cases, but not in all; and it may be material to consider in what sense the words, 'sharing in the profits' are used. In the present case, I greatly doubt whether the creditor, who merely obtains payment of a debt incurred in the business by being paid the exact amount of his debt, and no more, out of the profits of the business, can be said to share the profits. If in the present case, the property of the Smiths had been assigned to the trustees to carry on the business, and divide the net profits, not amongst those creditors who signed the deed, but amongst all the creditors, until their debts were paid, would a creditor, by receiving from time to time a rateable proportion out of the net profits, become a partner? I should think not.
In my view, the undesirability of the result foreseen by Wightman J. is equally compelling in the context of ss. 3(3)(d) and 4 of the Partnerships Act.
77 Historically, s. 3(3)(d) of the Partnerships Act appears to refer to loans similar to those involved in Sukloff v. Rushforth, supra, namely, loans in which the creditor advances money to the debtor on the terms that it shall be repaid with interest, and in addition the creditor is to receive a share of the profits over and above any payments on principal until the amount is paid off, as opposed to loans such as those in the present case where the share of the profits is used solely to repay the principal. In other words, s. 3(3)(d) applied to loans which had no cap or limit on the amount to be paid to the creditor from the profits of the debtor's business or which had a cap unrelated to the principal owing on the debt.
78 It is not entirely clear in Sukloff v. Rushforth, supra, whether the lender actually received any of the profits of the company via the arrangement for 50 per cent of the profits. However, in many older cases it is clear that the lender did receive interest and the stated share of the profits for a period, and then claimed for the entire amount of the principal on bankruptcy of the debtor. In these cases ss. 2(3)(d) and 3 of the Partnership Act, 1890 (U.K.), 53 & 54 Vict., c. 39 (similar to ss. 3(3)(d) and 4 of the Partnerships Act) were applied to subordinate the claims: see Ex parte Taylor; Re Grason (1879), 12 Ch. D. 366 (C.A.); Re Stone (1886), 33 Ch. D. 541; Re Hildesheim, [1893] 2 Q.B. 357 (C.A.); Re Mason; Ex parte Bing, [1899] 1 Q.B. 810; and Re Fort; Ex parte Schofield, [1897] 2 Q.B. 495 (C.A.). These sections of the Partnership Act, 1890 essentially repeated Bovill's Act so it seems reasonable that this was the specific situation envisaged by the Act.
79 Contrary to the oral submission of the legal representative, Re Young; Ex parte Jones, [1896] 2 Q.B. 484, is not inconsistent with the distinction I am drawing. There, Mr. Jones lent money to Mr. Young which was to be used to pay the expenses of Mr.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 18 Canada Deposit Insurance Corp. v. Canadian Commercial Bank, 1992 CarswellAlta 298 1992 CarswellAlta 298, 1992 CarswellAlta 790, [1992] 3 S.C.R. 558, [1992] S.C.J. No. 96...
Young's business. The terms of the agreement provided that, in return for the use of this sum, Jones was to be paid a fixed weekly sum out of the profits of the business. When Young became insolvent, Jones claimed for the entire amount of principal, without making allowance for the amounts received by virtue of the weekly payments. In other words, the weekly sum received by Jones out of profits was not for the purpose of repaying the principal sum of the debt. Thus, Re Young is clearly distinguishable from the facts of this case and should not be seen as foreclosing the interpretation of s. 3(3)(d) that I am advancing.
80 In addition, s. 3(3)(a) of the Partnerships Act provides strong support for the distinction between profits as the source of repayment, and a share in the profits, with any repayment of a fixed debt falling into the former category. Indeed, it provides that:
(a) the receipt by a person of a debt or other liquidated amount by instalments or otherwise out of the accruing profits of a business does not of itself make him or her a partner in the business or liable as such.
This seems to preclude any reading of s. 3(3)(d) which would catch debts which are to be repaid "out of profits." In this respect, it is interesting to note that the authors of Lindley on the Law of Partnership are of the view that the equivalent of s. 3(3)(a), not s. 3(3)(d), applies to cases such as Cox v. Hickman, supra, where, as we have seen, an arrangement similar to the one at bar was involved (at p. 108).
81 For the foregoing reasons, I would conclude that any fixed debt to be repaid out of profits does not in itself constitute a "share of the profits" within the meaning of s. 3(3)(d) of the Partnerships Act. As argued by Alberta, a lender does not receive a "share of the profits" under this provision unless he or she is entitled to be paid amounts referable to profits other than in repayment of the principal amount of the loan.
82 Having said this, the question of whether the support agreements provided that the participants were to receive a "rate of interest varying with the profits" of C.C.B., or a "share of the profits arising from carrying on the business" of C.C.B., as to trigger s. 4 of the Partnerships Act, may be readily answered. Clearly, the participants were not to receive in return for the advance of $255 million a rate of interest varying with C.C.B.'s profits. The rate of interest to be paid was fixed according to the prime rate and was contingent on whether or not the equity agreement could be carried out. As for C.C.B.'s profits, they merely represented the source from which the participants were to be repaid their advance. In this respect, I entirely agree with the following excerpt taken from the reasons of Harradence J.A. in the case at bar (at p. 211):
It is important to recognize that while repayment was to be made from pre-tax income of C.C.B., there was no direct link between the success of the C.C.B. and the overall quantum of the amount due to or payable to the Support Group Participants. I have been referred to no authority which supports the proposition that a repayment, the instalments of which are referable to the quantum of the income of the debtor, is a situation of 'joint benefit'. Since the sums to be received by the Participants were limited to repayment of monies advanced, with a contingent right to interest, the source of the repayment monies is not relevant and, with respect, the learned Chambers Judge erred in concluding the Participants were 'sharing the profits' in this respect.
83 The participants had a fixed debt which would be repaid in part by the moneys received from the syndicated portion of the portfolio assets and in part by C.C.B.'s pre-tax income. With the exception of the contingent interest at prime rate, under no circumstances were the payments from the pre-tax income to be applied to anything but the repayment of the loan. All amounts that the participants were entitled to be paid were to be applied only in repayment of the principal amount of the loan. Once the loan was fully repaid, all payments from C.C.B.'s pre-tax income were to stop. Accordingly, I find that the participants were not to receive a "share of the profits" of C.C.B. within the meaning of s. 3(3)(d) of the Partnerships Act by virtue of the repayment scheme for the $255 million advance. I also do not accept that the contemplated granting of warrants under the highly contingent circumstances of this case alters this conclusion.
84 The question then is whether s. 4 of the Partnerships Act can be triggered by an arrangement falling under s. 3(3)(a). Indeed, as previously noted, the legal representative takes the alternative position that, even if s. 3(3)(d) does not apply, the transaction in this case is surely one contemplating "the receipt by a person of a debt or other liquidated amount by instalments or otherwise out of the accruing profits of a business." While one cannot seriously dispute this proposition, the fact remains
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 19 Canada Deposit Insurance Corp. v. Canadian Commercial Bank, 1992 CarswellAlta 298 1992 CarswellAlta 298, 1992 CarswellAlta 790, [1992] 3 S.C.R. 558, [1992] S.C.J. No. 96... that s. 4 cannot apply unless "money has been advanced by way of loan upon such a contract as is mentioned in section 3." The first point to note is that s. 3(3)(a) of the Partnerships Act makes no reference whatsoever to a "contract" and thus appears to be beyond the realm of s. 4. Clearly, the legislature could have chosen a more general term than "contract" in s. 4 had it wished this postponement provision to apply to every transaction described in s. 3. The same could also be said about the absence of the word "loan" in s. 3(3)(a). It is not without significance that we were not presented with any jurisprudence in which a person who had a fixed debt to be paid out of profits (i.e., who would fall under s. 3(3)(a) and not s. 3(3)(d)) was subordinated under the Act.
85 Further, if the policy on which s. 4 of the Partnerships Act is based is that a person who reaps the rewards of profits must share some risk, then this would not apply to a creditor with a fixed debt, notwithstanding that the fund or source of repayment is profits, because his or her total return will not vary with the profitability of the company.
86 From the above, I conclude that s. 4 of the Partnerships Act cannot be triggered by what is described in s. 3(3)(a) as "the receipt by a person of a debt or other liquidated amount by instalments or otherwise out of the accruing profits of a business," which does not involve a contract of the sort described in s. 3(3)(d). The present case may very well fall within s. 3(3)(a) of the Act. However, that section only deals with a guideline for determining whether or not a partnership has been created, an issue which is not raised in this appeal. Contrary to s. 3(3)(d) of the Partnerships Act, s. 3(3)(a) does not have the added function of triggering the postponement provision of the Act. As the participants were not to receive a "rate of interest varying with the profits" of C.C.B. or a "share of the profits arising from carrying on the business" of C.C.B., their claims for the return of the moneys advanced cannot be postponed under s. 4.
87 Accordingly, I would dismiss this ground of appeal. The Court of Appeal did not err in declining to postpone the respondents' claims under s. 4 of the Partnerships Act.
C. Equitable subordination
88 In the further alternative, the legal representative submits that even if the transaction in question is a loan and the Partnerships Act does not apply, the participants' claims should be subordinated on equitable grounds based on the United States doctrine of "equitable subordination."
89 More specifically, it is argued that the equitable jurisdiction of superior courts gives them authority in insolvency matters to subordinate claims that, while valid as against the insolvent's estate, arise from or are connected with conduct prejudicial to the interests of other creditors. While the legal representative does not assert that the conduct of the participants was fraudulent or worthy of censure, he argues that the participants acted to the detriment of the ordinary creditors of C.C.B. in ways (which I shall outline below) that should invoke this equitable jurisdiction. Both the bank group and Alberta challenge the proposition that equitable subordination is available under Canadian law in insolvency matters. In addition, the respondents argue that the facts of this case do not call for the application of equitable principles.
90 This issue does not appear to have been raised before Wachowich J. or the Court of Appeal and consequently this court does not have the benefit of any findings of fact as to the actual or potential prejudice suffered by C.C.B.'s depositors and other creditors as a result of the conduct of the participants. In this respect, the evidence presented to this court by the legal representative is limited to certain excerpts of the Estey report, incorporated by reference in the affidavit of Mr. Allan Taylor of the Royal Bank of Canada (C.O.A. at pp. 236-41). The excerpts in question are those found at pp. 114-21 of the Estey report under the heading "Flaws in the Support Program."
91 This court also does not have the benefit of the insight of the courts below as to whether or not, in the first place, the doctrine of equitable subordination should become part of Canadian insolvency law. As I see the matter, however, it is not necessary in the circumstances of this case to answer the question of whether a comparable equitable doctrine should exist in Canadian law and I expressly refrain from doing so. Assuming, for the sake of argument only, that Canadian courts have the power in insolvency matters to subordinate otherwise valid claims to those of other creditors on equitable grounds relating to the conduct of these creditors inter se, this court has been presented with insufficient grounds to justify the exercise of such a power in the case at bar. Briefly put, the reasons and limited evidence advanced by the legal representative before this court
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 20 Canada Deposit Insurance Corp. v. Canadian Commercial Bank, 1992 CarswellAlta 298 1992 CarswellAlta 298, 1992 CarswellAlta 790, [1992] 3 S.C.R. 558, [1992] S.C.J. No. 96... disclose neither inequitable conduct on the part of the participants nor injury to the ordinary creditors of C.C.B. as a result of the alleged misconduct.
92 As I understand it, in the United States there are three requirements for a successful claim of equitable subordination: (1) the claimant must have engaged in some type of inequitable conduct; (2) the misconduct must have resulted in injury to the creditors of the bankrupt or conferred an unfair advantage on the claimant; and (3) equitable subordination of the claim must not be inconsistent with the provisions of the bankruptcy statute: see Re Mobile Steel Co., 563 F. 2d 692 (5th Circ., 1977), at p. 700; Re Multiponics Inc., 622 F. 2d 709 (5th Circ., 1980); A. DeNatale and P.B. Abram, "The Doctrine of Equitable Subordination as Applied to Nonmanagement Creditors" (1985), 40 Bus. Law. 417, at p. 423; and L.J. Crozier, "Equitable Subordination of Claims in Canadian Bankruptcy Law" (1992), 7 C.B.R. (3d) 40, at pp. 41-42. Even if this court were to accept that a comparable doctrine to equitable subordination should exist in Canadian law, I do not view the facts of this case as giving rise to the "inequitable conduct" and ensuring "detriment" necessary to trigger its application.
93 In this regard, the actions cited by the legal representative as being detrimental to the ordinary creditors of C.C.B., thereby giving rise to equitable subordination, come down to two elements: (1) the press release of March 25, 1985 issued by the Department of Finance announcing to the general public that the support program would leave C.C.B. "in a strong position of solvency" and that sufficient funds were being advanced "to ensure solvency"; and (2) the flaws in the support program outlined in the Estey report and described by the legal representative as (a) the inadequacy of the support program to ensure C.C.B.'s solvency, (b) the accounting treatment disguised the fact that the participation agreement required the entire amount advanced to be repaid, (c) the accounting treatment used by the bank group gave rise to tax benefits not available to ordinary depositors, (d) the participation agreement allegedly obliged C.C.B. to apply all amounts received on the syndicated portion of the portfolio assets to the participants, (e) the warrants would have the effect of prohibiting C.C.B. from raising funds in the equity market since they would enable the participants to acquire 75 per cent of the common shares of C.C.B. up to 10 years after the advances had been paid in full, and (f) after making their advances and receiving their participation certificates, the bank group ceased dealing with C.C.B. in the normal manner.
94 At the outset, I note that many of the actions relied on by the legal representative cannot be attributable to the participants. For example, the press release was not issued by the respondents and the accounting treatment given by C.C.B. to the advance of $255 million simply followed the instructions given by the Office of the Inspector General of Banks. Thus, even if some inequitable connotation could be given to these actions, they would not represent misconduct on the part of the respondents to whom the ordinary creditors of C.C.B. are now attempting to rank in priority.
95 Another difficulty with the legal representative's submission, however, is that I fail to see anything remotely inequitable in the conduct complained of. With respect to the press release, the evidence does not show that the participants were necessarily of a different opinion from that set out in the press release. Certainly, they advanced the funds on the condition that the Inspector General of Banks provide them with an opinion letter confirming the solvency of C.C.B. on the infusion of the proposed funds. As for the flaws in the support program, there is nothing to show that the participants' plans were other than well intentioned. As stated at the beginning of these reasons, it is beyond the scope of this appeal to engage in a detailed review of the reasons which led to the failure of the support program. Suffice it to say that the assertions of the legal representative in substance do not show wrongdoing or unfairness on the part of the participants, but merely show that the support program did not work, and perhaps with hindsight, offer some explanations as to why.
96 In any event, it does not appear to have been suggested at any time in the courts below nor was any evidence led to suggest that any creditor of C.C.B. was misled by any of the above actions or that the press release, accounting treatment or any flaw in the support program operated to cause any creditor to act to its detriment. Thus, even if this court were to find that the participants acted in an inequitable manner in their dealings with C.C.B. and its depositors and other creditors, we do not have a shred of evidence upon which to conclude that the improper conduct resulted in actual harm to the ordinary creditors of C.C.B. now before this court. One can only speculate that depositors and other creditors relied on the press release or accounting treatment and thereby suffered damages. We have been offered no United States' decision in which mere speculation of harm to other creditors has been found sufficient to meet the second requirement of the doctrine of equitable subordination. Of course, the ordinary creditors of C.C.B. who appear before this court have, to a varying extent, suffered from the winding-up of C.C.B.,
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 21 Canada Deposit Insurance Corp. v. Canadian Commercial Bank, 1992 CarswellAlta 298 1992 CarswellAlta 298, 1992 CarswellAlta 790, [1992] 3 S.C.R. 558, [1992] S.C.J. No. 96... just as any creditor (including the participants) suffers following an insolvency or bankruptcy. The legal representative has not shown, however, that these ordinary creditors have suffered identifiable prejudice attributable specifically to the alleged misconduct of the participants.
97 Accordingly, I would reject this alternative ground of appeal. Even if equitable subordination is available under Canadian law, a question which I leave open for another day, the facts of this case do not call for an intervention with the pari passu ranking of the respondents in the name of equity.
D. The $5 million attributable to the syndicated portion of the portfolio assets
98 The last matter to be addressed pertains to the moneys recovered from the portfolio assets and attributable to the syndicated portion thereof. In his oral submissions, the legal representative argued that the learned chambers judge erred in allowing the participants to recover funds from the syndicated portion of the portfolio assets. A similar submission was made in the Alberta Court of Appeal but was summarily rejected (at p. 212). As I understand it, the argument is one of inconsistency between the treatment given, on the one hand, to the respondents' claim for their portion of the moneys recovered from the portfolio assets and, on the other hand, to the respondents' claim for all moneys advanced to C.C.B. pursuant to the participation agreement and not repaid by moneys recovered from the portfolio assets. According to the legal representative, these two claims stem from the same financial arrangement and cannot be given different legal effects. It is argued that, if the advance of $255 million is really an investment of capital, as found by Wachowich J., then it is wrong to rank the respondents behind the ordinary creditors of C.C.B. only with respect to the claim for what is not repaid by moneys recovered from the portfolio assets. Similarly, if the transaction is really a loan but the loan is one to which s. 4 of the Partnerships Act applies, then both claims ought to be postponed.
99 This submission has already been answered by my conclusion that the advance of $255 million to C.C.B. was substantially in the nature of a loan and that the Partnerships Act does not apply to postpone the loan.
VI. Disposition
100 For the foregoing reasons, I would dismiss the appeal with costs here and in the courts below. As found by the learned chambers judge and upheld by the Court of Appeal, the participants are entitled to their proportionate share of the moneys recovered from the portfolio assets of C.C.B. in the manner set out in the participation agreement, that is, to the extent such recoveries exceed the C.C.B. portion of each of the portfolio assets. Moreover, as found by the Court of Appeal, the respondents are entitled to rank pari passu with the ordinary creditors of C.C.B. for all moneys advanced pursuant to the participation agreement and not repaid by moneys recovered from the portfolio assets. Appeal dismissed.
Footnotes * Stevenson J. took no part in the judgment.
End of Document Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 22
TAB 16
16 Henderson v. Minister of National Revenue, 1975 CarswellNat 188 1975 CarswellNat 188, [1975] C.T.C. 485, [1975] F.C.J. No. 613, 12 N.R. 91...
1975 CarswellNat 188 Federal Court of Canada — Appeal Division
Henderson v. Minister of National Revenue
1975 CarswellNat 188, [1975] C.T.C. 485, [1975] F.C.J. No. 613, 12 N.R. 91, 75 D.T.C. 5332
Jack N Blinkoff and Janet Beach Henderson, Executors of the Estate of A M Collings Henderson, deceased, Appellants, and Minister of National Revenue, Respondent
Pratte, Urie and Ryan, JJ
Judgment: July 25, 1975
Proceedings: on appeal from a judgment of the Federal Court — Trial Division, reported [1973] C.T.C. 636
Counsel: J M Roland for the appellants. N A Chalmers, QC and R G Pinefor the respondent.
Subject: Securities; Estates and Trusts; Tax — Miscellaneous Headnote Estates --- Estate tax and succession duties — Taxable property — Situs — Securities Estates --- Estate tax and succession duties — Valuation — Securities Estates --- Estate tax and succession duties — Payments — Liability for payment — Personal representative Succession duty — Federal — Dominion Succession Duty Act, RSC 1952, c 89 — 6(1)(b), (2), 13, 23, 24 — Canada-US Succession Duty Convention — Article II(f) — Valuation of mining shares — Valuation of share purchase warrants — Meaning of "fair market value" — Situs of share purchase warrants. The deceased died in 1957 resident and domiciled in the State of New York. Among his assets were a large number of shares in two Canadian mining companies, "Campbell Chibougamau" and "Chibougamau Mining" and also some share purchase warrants, which were physically situate in New York, issued by Campbell Chibougamau. In issue was the determination of the fair market value of the shares and share purchase warrants and also the situs of the warrants. On the valuation question, which reduced itself to the valuation of the Campbell Chibougamau shares, the closing 7 market price on the date of death was $10 /8 and, in recognition of the depressing effect the sale of the deceased's substantial holdings would have on the market if sold all at once, the Minister considered the fair market value of these shares to be $8 each, representing a discount of about 26%. The appellants contended that the market price was not indicative of "fair market value" because the market was not in possession of accurate information concerning the ore reserves, that it was being manipulated by the deceased, and that it was under the influence of a "transient boom". As to the situs of the share purchase warrants, the appellants contended that since title passed on delivery their situs was where they were physically located, in New York, not in Canada. The Minister, on the other hand, considered them "rights in or over shares" within Schedule B, Article II of the Canada-US Succession Duty Convention, thus classifying them as shares and placing their situs in Canada. The appellants appealed from a judgment of the Trial Division dismissing their appeal on the valuation of the shares and the Minister cross-appealed in respect of the allowance of the appellants' appeal on the situs of the share purchase warrants. HELD (per curiam): On the valuation of the shares, the evidence was not such as to destroy the stock market price as the best evidence of their fair market value. On the situs of the share purchase warrants, these were not "rights or interest, legal or equitable, in or over" shares because, in relation to the warrants, there were no shares in being. The share purchase warrants did not fall within the wording of Schedule B, Article II invoked in support of the cross-appeal, which was dismissed.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 1 Henderson v. Minister of National Revenue, 1975 CarswellNat 188 1975 CarswellNat 188, [1975] C.T.C. 485, [1975] F.C.J. No. 613, 12 N.R. 91...
Ryan, J (concurred in by Pratte and Urie, JJ):
1 Mr Collings Henderson died on February 2, 1957. At the date of his death, Mr Henderson owned 471,984 and 6/8 shares of Campbell Chibougamau Mines Limited ("Campbell Chibougamau") and 56,234 warrants to purchase Campbell Chibougamau shares at $4 per share.
2 In August 1959 the Minister of National Revenue assessed duties under the Dominion Succession Duty Act, RSC 1952, c 89 (as amended), against the Henderson estate in the sum of $1,703,250.88. In so doing, he placed a value of $8 per share on the shares of Campbell Chibougamau and valued the share purchase warrants at $4 per warrant.
3 Mr Henderson also owned 288,384 shares of Chibougamau Mining and Smelting Company ("Chibougamau Mining") which the Minister valued at $2.65 per share. For purposes of the trial of this action, it was agreed that the value of the Chibougamau Mining shares should be adjusted in relation to their listed market price as at February 2, 1957 in the same proportion as the value of the Campbell Chibougamau shares is adjusted, if at all.
4 The assessment of succession duties was appealed to the Trial Division by the executors of the estate. They claimed that the value of the assets of the estate situated in Canada and subject to tax should be amended by reducing the assessed value of the Campbell Chibougamau shares from $8 per share to not more than $2.25 and that of the Chibougamau Mining shares from $2.65 per share to not more than $0.92. They also claimed that the warrants to purchase shares of Campbell Chibougamau should be excluded from the assets situated in Canada and subject to tax. There was a further claim that one-half of provincial duties paid by the estate should be deducted from the duties otherwise payable. The respondent, in the Statement of Defence, conceded and was prepared to allow, in computing the duty otherwise payable, an amount in respect of any duty paid to the Province of Quebec and to the Province of Ontario and, for this purpose, prayed that the appeal be allowed and the assessment referred back to the respondent for the purpose of allowing as a deduction one-half of the provincial duties paid to the Province of Ontario; otherwise the respondent prayed that the appeal be dismissed. The agreement between the parties as to the adjustment of the value of the Chibougamau Mining shares had, as was stated by the learned trial judge, "... the effect of narrowing the issues between the parties to (1) the value of the shares of Campbell Chibougamau as at the date of Henderson's death for estate tax purposes, rather than evaluation of shares in the two mining companies, and (2) the situs and value of share purchase warrants in Campbell Chibougamau".
5 The Trial Division allowed the appeal in respect of the situs of the share purchase warrants and referred the matter back to the Minister in order that the warrants should be excluded from the assets of the estate situated in Canada and thus that they should not be subject to tax under the Dominion Succession Duty Act and that the Minister should reassess accordingly. In all other respects the appeal was dismissed.
6 This is an appeal by the appellants, the executors, from the judgment of the Trial Division in so far as their appeal to that Division was dismissed. The respondent cross-appealed in respect of the allowance of the appeal to the Trial Division in relation to the share warrants.
7 For purposes of the appeal to the Trial Division, counsel agreed on this statement of facts:
1. Collings Henderson (Henderson) died on February 2nd, 1957.
2. Henderson at the date of his death owned 471,984 and 6/8ths shares of Campbell Chibougamau Mines Limited ("Campbell Chibougamau") and 56,234 warrants to purchase Campbell Chibougamau shares at $4.00 per share.
3. The Minister of National Revenue on August 2nd, 1959, assessed duty against the Henderson Estate in the sum of $1,703,250.88 and in doing so placed a value of $8.00 per share on the shares of Campbell Chibougamau and valued the share purchase warrants at $4.00 per warrant.
4. Henderson also owned 288,384 shares of Chibougamau Mining and Smelting Company ("Chibougamau Mining"), which the Minister valued at $2.65 per share in assessing the Henderson Estate. It has been agreed for the purposes of trial
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 2 Henderson v. Minister of National Revenue, 1975 CarswellNat 188 1975 CarswellNat 188, [1975] C.T.C. 485, [1975] F.C.J. No. 613, 12 N.R. 91...
that the value of the Chibougamau Mining shares be adjusted in relation to their listed market price as at February 2nd, 1957, in the same proportion as the value of the Campbell Chibougamau shares is adjusted, if at all.
5. Campbell Chibougamau is a public company incorporated under the laws of Quebec on March 10th, 1950. Initially the stock traded over the counter and eventually in 1952 it was listed and traded on the Toronto Stock Exchange, the Canadian Stock Exchange (then known as the Montreal Curb Market), and the American Stock Exchange. On February 1st, 1957, 7 which was a Friday, Campbell Chibougamau closed at $10 /8ths on the Toronto Stock Exchange.
6. On February 2nd, 1957, there were 3,029,985 issued, allotted and outstanding shares of Campbell Chibougamau.
7. Campbell Chibougamau was incorporated for the purpose of acquiring exploring and developing mining claims in the Chibougamau area of northern Quebec. For the first few years Campbell Chibougamau was engaged in exploration on such claims and in the period 1952-1955 development work followed the discovery of the Merrill Island Mine, production commencing on May 29, 1955. The history of the activities of Campbell Chibougamau and its financial affairs are reported in a series of annual and semi-annual reports commencing with a report for the year ended May 31st, 1953.
8. During his life Henderson was the Chairman of the Board of Campbell Chibougamau from its incorporation and had responsibility for arranging financing for the company. Henderson maintained his office in New York and it was from New York that most of the financing of the company was arranged.
9. Shortly after the incorporation of Campbell Chibougamau an agreement was entered into among EOD Campbell and others including a nominee of Henderson providing an arrangement whereby certain optioned shares of Campbell Chibougamau would be taken down under the agreement through the syndicate thereby organized. Of the initial 3,000,000 issued shares all, except 360,375 which went to Consolidated Chibougamau Gold Fields Limited in exchange for mining claims, were taken down through the syndicate. Some of these shares were then sold to the public at the times and prices stipulated by Henderson who under the syndicate agreement controlled the sale of all the shares. The syndicate agreement is dated April 25th, 1950.
10. Under the agreement, the syndicate became entitled to take down shares under option as follows: 400,000 shares @ 60cents per share 1,800,000 shares @ $1.00 per share 439,625 shares @ no cost after the initial 400,000 shares were taken down.
11. The syndicate, at the direction of Henderson, took down all the shares under option prior to April 1953. All of these shares were taken down either by brokerage houses pursuant to Henderson's direction, or by EOD Campbell. Subsequently, the shares were either held in margin accounts under syndicate control, or transferred into accounts of individuals who were part of the syndicate agreement. Mr Henderson at all times controlled the sale by the syndicate to the public of all shares so taken down.
12. In 1953, Henderson commenced litigation against EOD Campbell for the purpose of enforcing the provision of the syndicate agreement relating to sale of syndicate shares. EOD Campbell was selling such shares without Henderson's authorization. The litigation was eventually settled in March 1955 on the basis that Henderson took over EOD Campbell's stock.
13. Henderson himself retained shares of Campbell Chibougamau as part of the syndicate and from 1955 until his death the number of shares of Campbell Chibougamau he personally owned remained about constant. Although Henderson's personal holdings of Campbell Chibougamau remained more or less constant, he bought and sold shares of Campbell in the market up to the time of his death. From available stockbroking records some of his buying and selling is indicated below:
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 3 Henderson v. Minister of National Revenue, 1975 CarswellNat 188 1975 CarswellNat 188, [1975] C.T.C. 485, [1975] F.C.J. No. 613, 12 N.R. 91... Bought Sold 1951 41,700 @ $1.70 - $2.50 155,400 @ $2.05 - $2.70 1952 58,900 @ $2.00 - $2.95 49,750 @ $2.20 - $3.25 1953 76,500 @ $2.20 - $4.00 191,065 @ $2.28 - $4.60 1954 12,600 @ $2.00 - $3.75 3,900 @ $2.75 - $2.80 1955 14,400 @ $7.25 - $9.00 -- 1956 -- 16,100 @ $18.00 - $28.00 1/8
14. It appears from the records of the three above-mentioned stock exchanges that the trading of Campbell Chibougamau shares during the years 1955-1958 was as follows: 1955 -- 2,214,200 1956 -- 2,803,667 1957 -- 2,596,405 1958 -- 3,529,733
15. Annexed hereto and marked as Exhibit "A" is a graph which illustrates the prices at which the shares of Campbell Chibougamau were trading on the stock market from the listing of the shares of the company until the end of 1958 on a monthly basis. It can be noted that the shares of Campbell Chibougamau rose from a market price of between $2.00 and $3.00 after the market was initially established to a high of $28.95 in 1956 before they started to fall in price.
16. Campbell Chibougamau started to produce copper concentrate on May 29th, 1955. In doing so, during the first year of operation, it milled its highest grade ore (2.95%). In succeeding years the grade of ore milled was lower (i.e. 2.38% in 1957 and 2.07% in 1958).
17. Prior to 1957, Campbell Chibougamau discovered and owned three ore bodies known as the Main Mine (Merrill Island Group), Cedar Bay Mine and Koko Creek Mine. Of these three the largest ore body was the Main Mine and it is from this mine that ore was mined prior to 1958.
18. In February 1956, Newlund Mines (Can Co) held 45 claims as part of a group of 437 claims in the Chibougamau area. The 45 claims were assigned under an option to New York and Honduras Rosario Mining Co and they in turn commenced exploration on the 45 claims. Chibougamau Mining had 50 neighbouring claims on which they were carrying out geophysical and magnetometer surveys. Yorcan Explorations Limited was incorporated on April 30th, 1956. Ownership of Yorcan was approximately 50% by Chibougamau Mining, 25% by New York and Honduras Rosario Mining Company and the remainder by Newlund and other interests. New York and Honduras Rosario Mining Company is an American company with long experience in the mining industry. The principal purpose of Yorcan was to explore the 95 claims previously mentioned. In the winter of 1956, Yorcan drilled approximately 25 holes on Lake Chibougamau, none of which were subsequently found to contribute to the Henderson ore body. Also in 1956, Campbell Chibougamau was carrying on surface exploration and diamond drilling in an area adjacent to the Yorcan holdings. This area was known as the "K" group and consisted of 2,006 acres held by Chibougamau Venture Ltd. At this time it was worked under the exclusive control of Campbell Chibougamau and was later acquired by Campbell Chibougamau. During 1956, Campbell Chibougamau drilled fifteen holes, three of which gave favourable indications that further drilling was warranted in the area of the three holes. The holes and the dates of completion were as follows: K -- 8 completed April 7th, 1956 K -- 11 completed April 12th, 1956 K -- 12 completed April 20th, 1956
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 4 Henderson v. Minister of National Revenue, 1975 CarswellNat 188 1975 CarswellNat 188, [1975] C.T.C. 485, [1975] F.C.J. No. 613, 12 N.R. 91...
Annexed hereto and marked as Exhibit "B" is a table listing the results of the drill holes. Also annexed hereto and marked as Exhibit "C" is a copy of a map indicating all the drilling which was done in discovering the Henderson Mine.
19. As a result of the above favourable indications arising on the border of Yorcan and Campbell Chibougamau property, a joint exploration program was carried on in the winter of 1957. Prior to the death of A M Collings Henderson on February 2nd, 1957, the following holes had been drilled to completion and were among the holes which contributed to the discovery and delineation of the Henderson ore body. The holes and dates of completion are as follows: T -- 23 completed January 12th, 1957 T -- 24 completed January 12th, 1957 T -- 27 completed January 21st, 1957 T -- 26 completed January 25th, 1957 T -- 33 completed January 27th, 1957 T -- 32 completed January 28th, 1957
(See Exhibit "B").
20. In the Semi-Annual Report for the period ended December 31st, 1956, the president of Campbell Chibougamau, in a letter to the shareholders dated February 15th, 1957, discusses the drilling program that was being carried on in conjunction with Yorcan under the heading "Activities in the Chibougamau Area". The stated indications from the drilling done as of that date, was that "underground development is warranted". No mention is made of probable ore reserves and the letter also indicates that some of the ore body was still unexplored. The following holes were mentioned in the letter: T -- 33 completed January 27th, 1957 T -- 37 completed February 7th, 1957 T -- 38 completed February 18th, 1957 T -- 39 completed February 14th, 1957 T -- 45 completed February 9th, 1957 T -- 46 completed February 16th, 1957 T -- 47 completed February 13th, 1957
(See Exhibit "B").
The last six of the above holes were all completed after Mr Henderson's death on February 2nd, 1957. The following holes which were completed shortly after Mr Henderson's death also contributed to the ore body: T -- 34 completed February 3rd, 1957 T -- 35 completed February 3rd, 1957 T -- 36 completed February 6th, 1957
Drilling continued over the whole of the winter of 1957 and many more holes were drilled which also contributed to the Henderson ore body's discovery.
21. In the Annual Report of Campbell Chibougamau for the year ended June 30th, 1957, the chief geologist, Dr S E Malouf, gave a report dated June 30th, 1957, which indicated the probable ore reserves in the Henderson ore body. An independent consulting geologist, Dr J E Gill, studied the ore body and recommended that it be integrated as a unit. On July 22nd, 1957, Campbell Chibougamau entered into an agreement with Yorcan to purchase all the assets of Yorcan, in return for 506,667 shares of Campbell Chibougamau. The price of the Campbell stock at that time was $9.00 per share. The agreement was ratified by the stockholders of Campbell Chibougamau on October 30th, 1957, when the price per share was $5.50.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 5 Henderson v. Minister of National Revenue, 1975 CarswellNat 188 1975 CarswellNat 188, [1975] C.T.C. 485, [1975] F.C.J. No. 613, 12 N.R. 91...
22. The following is a table of the sales of shares of Campbell Chibougamau made by the executors from the Henderson Estate after Henderson's death and the prices received therefor which are within the range that such shares traded at the time of sale. AVERAGE YEAR SHARES TOTAL PRICE 1957 20,845 $ 95,915.90 $4.60 1958 123,000 $ 779,173.18 $6.33 1959 107,940 $ 831,895.44 $7.70 1960 108,760 6/8 $ 657,563.62 $6.08 1961 42,814 $ 328,929.88 $7.68 ------403,359 6/8 $2,693,478.02
23. The parties have agreed that the share purchase warrants owned by Henderson at the date of his death were in the form of a certificate which has been agreed upon. It is also agreed that the certificates were physically located in the State of New York at the date of Mr Henderson's death.
8 The exhibits referred to in the statement are not reproduced in these reasons.
The Executors' Appeal
9 Under the Dominion Succession Duty Act, succession duties are assessed and levied upon successions to all property of a deceased which is situated in Canada in cases in which the deceased was domiciled outside of Canada at the time of his death, as was Mr Henderson. 1 It was not disputed that the shares in Campbell Chibougamau owned by Mr Henderson at his death were situated in Canada. 2 Succession duties are assessed at rates provided in the First Schedule to the Act; in the case of so- called "initial duties" the rates applied are dependent on the "aggregate net value" of the property of the deceased 3 and in the case of "additional duties" the rate applied to a succession is the rate set forth in the Schedule corresponding to the "dutiable value" as stated in the Schedule. 4
10 Paragraph 2(a) of the Act defines "aggregate net value" as follows:
• "aggregate net value" means the fair market value as at the date of death, of all the property of the deceased, wherever situated, together with the fair market value, as at the said date, of all such other property wherever situated, mentioned and described in section 3, as deemed to be included in a succession or successions, as the case may be, from the deceased as predecessor, after the debts, encumbrances and other allowances are deducted therefrom as authorized by subsection (9) of section 7 and by section 8;
11 "Dutiable value" is defined in paragraph 2(e):
• "dutiable value" means, in the case of the death of a person domiciled in Canada, the fair market value as at the date of death, of all property included in a succession to a successor less the allowances as authorized by subsection (9) of section 7 and by section 8 and less the value of real property situated outside of Canada, and means, in the case of the death of a person domiciled outside of Canada, the fair market value of property situated in Canada of the deceased included in a succession to a successor less the allowances as authorized by subsection (9) of section 7 and by sections 8 and 9;
12 Under section 23 of the Act the Minister of National Revenue assesses the duties payable.
13 Subsection 34(1) provides:
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 6 Henderson v. Minister of National Revenue, 1975 CarswellNat 188 1975 CarswellNat 188, [1975] C.T.C. 485, [1975] F.C.J. No. 613, 12 N.R. 91...
34. (1) Subject to the provisions of this Act, the fair market value of the property included in any succession for the purpose of duty shall be ascertained by the Minister in such manner and by such means as he thinks fit, and, if he authorizes a person to inspect any property and report to him the value thereof for the purposes of this Act, the person having the custody or possession of that property shall permit the person so authorized to inspect it as such reasonable times as the Minister thinks necessary.
14 The learned trial judge described the manner in which the Minister ascertained the fair market value of the shares owned by the deceased immediately before his death and included in the successions taxed:
This is what the Minister did. He placed a value of $8 per share on the shares of Campbell Chibougamau as at February 2, 1957. It is quite obvious how he arrived at the amount of $8 per share. February 2, 1957 was a Saturday and the stock exchanges were closed on that day. The closing price of Campbell Chibougamau on the Toronto Stock Exchange on Friday, February 1, 1957 was $10.78 per share. The deceased held 471,984 6/8 shares out of 3,029,985 issued shares which is a very large holding. No prudent shareholder would place the whole of such a large holding on the market at one time. To do so would result in an inevitable depression of the market. It is only reasonable to suppose that, if the shares were to be disposed of, they would have been fed into the market gradually as the market was capable of absorbing them without undue disturbance. To do otherwise would be to require the shares to be sold at a sacrifice or dumping value. On the other hand to dispose of the shares to best advantage requires time. The Minister allowed a discount from $10.78 to $8 per share or approximately 26% by some rule of thumb to offset that inconvenience, delay and uncertainty in realizing upon the shares. This is the amount that the Minister ascertained to be the "fair market value" per share.
15 It is this amount, $8 per share, ascertained by the Minister to be the fair market value of each of the shares in question that was disputed by the appellants.
16 The shares were traded on three stock exchanges. On the face of it, their fair market value would be their price set by the interplay of forces on the exchanges. The block of shares owned by the deceased was, however, very substantial, measured both absolutely and in relation to the shares of the corporation traded on the markets. To dump the shares on the exchange in a block would, as the trial judge said, "result in an inevitable depression of the market". The very act of offering to sell would distort the market price. The decision of the Supreme Court of Canada in Executors of the Estate of Isaac Untermyer v Attorney-General for the Province of British Columbia, [1929] S.C.R. 84, makes it clear, however, that the fact that the property in question consists of a block of shares, the sale of which at a single stroke would reduce their market price, is not in itself enough to destroy the market as the best indicator of fair market value. That decision holds in contemplation the possibility of a gradual release of shares over a period. It follows that, for purposes of ascertaining fair market value of such a block, it is not necessary to postulate a hypothetical sale of the entire block on the day of death or on the preceding business day if the death occurs on a non-trading day. It is enough in such cases to postulate a decision to sell by the most convenient means and, if the most convenient means is to sell gradually, to estimate fair market value as of the day of death, having in mind that it would take a while to dispose of the lot. Given a consistent market in the sense of a market that is not "the effect of a transient boom or a sudden panic" or that is "not spasmodic or ephemeral", to adopt the terms used by Migneault, J in the Untermyer case, the stock market is the best evidence of fair market value.
17 It was argued that, to be a consistent market, the market in the stock in question must exhibit stable prices, prices with only minor variations, over a significant period within which the date of death falls. In my view, however, for the purpose of using the market as a test of fair market value, price stability, at least in the sense argued, is not essential. The stock market may be a consistent market, though prices of the stock in question vary fairly substantially, if the market is not significantly out of line with market patterns for the type of stock.
18 The learned trial judge analyzed the evidence concerning the consistency of the market for Campbell Chibougamau shares, and in particular evidence of an expert witness, called by the appellants, in relation to a submission that at the date of Mr Henderson's death the shares were within a phase of transient boom. He concluded his analysis by saying:
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 7 Henderson v. Minister of National Revenue, 1975 CarswellNat 188 1975 CarswellNat 188, [1975] C.T.C. 485, [1975] F.C.J. No. 613, 12 N.R. 91...
I do not think that the words "transient boom" in the context in which they are used by Mr Mars are synonymous with these same words in the context of Mr Justice Migneault's statement. In the latter context the words "transient boom" are used in association with the words "sudden panic" as being diametric opposites. In my view the adjective "transient" as used by Mr Justice Migneault must take its meaning from the use of the words "sudden panic" and that being so it must mean a sudden or unusual circumstance not normally contemplated and which will pass away quickly.
On the contrary the various stages through which a mining company passes, as were described by Mr Mars, are the usual stages through which it must pass from the very nature of things. Accordingly the prices for which shares of a mining company are traded for on the marker are the usual market fluctuations due to the economic factors through which a mining company must pass coupled with other factors which habitually affect the price at which shares in mining companies are traded.
There was extensive trading in the shares of Campbell Chibougamau both before and after the death of Mr Henderson. In 1955, 2,214,200 shares were traded, in 1956, 2,803,667, in 1957, 2,596,405 and in 1958, 3,529,733.
In November and December 1956 and January 1957, the three months prior to Mr Henderson's death, some 600,000 shares were traded at prices averaging out to $13.78 per share and in the three months following his death, that is February, March and April 1957 500,000 shares were traded at prices averaging out to $11.45 per share. Over this six-month period there was an element of consistency present which, in my view, makes the market price the best guide to the fair market value.
19 The learned trial judge expressed the opinion that the appellants had not discharged the onus cast on them to rebut the presumption that the market price, in a case of this kind, is the best guide to fair market value and, with respect, I agree. In so far as consistency is concerned, the market seems to have been a consistent one, at least in the sense I have indicated above.
20 Price stability may, however, have significance for a somewhat different purpose. When it comes to fixing fair market value of shares which, as in this case, would reasonably be disposed of over a period of time, consideration need not be given to discounting the stock market price at the date of death if the price is not tending to vary, except possibly for inconvenience, extra costs, and the fact that cash is not at once realizable. If, however, price has exhibited some variation, it may be appropriate to discount with this in mind. In this case, for example, the assessment of the fair market value at $8 per share rather than at the market price of $10.78 the day before death might well be justified on this basis. At any rate, there is no complaint made that the assessment was too low. I would conclude that the assessment must stand, absent a showing by the appellants that, for some reason other than inconsistency of the stock market, the Minister proceeded on an improper basis. I would only add that the finding of the trial judge that it would be reasonable to dispose of the shares by feeding them on the market gradually was in my view supported by the evidence. It is significant that attempts were made by the executors to sell the shares in a block to several different mining companies, and that these attempts failed. There was evidence that a mining company would probably not be interested in acquiring so large a block of shares in another mining corporation at the stage of development that Campbell Chibougamau had reached by that time.
21 It was also submitted, however, that the stock market price at death was not acceptable evidence of the fair market value because information available to the market was far from accurate, and therefore that the market was unfair. Particular reliance was placed on the submission that the most recent estimates of ore reserves of the corporation prior to Mr Henderson's death were estimates given by Mr Henderson himself at the annual meeting in the fall of 1956 and that these estimates were exaggerated with respect of tonnage and grade. Reliance was also placed on the submission that earlier in 1956 and during 1955 reports were issued by brokerage houses which were inaccurate.
22 The learned trial judge weighed the evidence in relation to these submissions, as well as in relation to a submission that the annual profits of the corporation had been overstated, and concluded in effect that the evidence was not such as to destroy the stock market price as the best evidence of fair market value. Considering the evidence as a whole in relation to these submissions, I see no reason for disagreeing with this conclusion.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 8 Henderson v. Minister of National Revenue, 1975 CarswellNat 188 1975 CarswellNat 188, [1975] C.T.C. 485, [1975] F.C.J. No. 613, 12 N.R. 91...
23 There was a further submission that the stock market price was not a reliable guide because stock market prices had reached high levels during 1955 and 1956 as a result of market manipulation by Mr Henderson. This submission was not pressed in argument before us. Clearly it was not established.
24 Reference should also be made to the so-called Henderson ore body and to its effect on the valuation of the shares. In his reasons for judgment, the learned trial judge stated that
Campbell Chibougamau recognized that a mining company possessed of only one ore body can expect that that ore body will be depleted and accordingly it was engaged actively in other exploration. There was a copper property in Mexico and current exploration of another ore body which became the Henderson Mine and entered into the production stage in 1960.
The activities of Campbell Chibougamau in relation to the exploration that resulted in the Henderson Mine are set out in paragraphs 18 to 21 of the agreed statement of facts. The learned trial judge found that
... the results of diamond drilling ... were known shortly prior to Mr Henderson's death and sufficient information was then available to justify an optimistic estimate of that discovery.
The appellants submitted that the trial judge erred in so finding and that accordingly he erred in finding that information about the results of the drilling could have had an effect upon the ascertainment of the fair market value of the shares at the date of Mr Henderson's death. There was, however, evidence to support the finding, particularly in the evidence of Mr Hudson, but also in paragraph 19 of the agreed statement of facts. Even, however, if there were not, it remains true that the burden was on the appellants to upset the assessment and there was nothing to indicate that, in valuing the shares at $8 per share, the Minister had in mind availability or otherwise to the market of information on the exploratory drilling that resulted in the Henderson Mine.
25 For the reasons I have stated, I would dismiss the appeal with costs.
Respondent's Cross-Appeal
26 As indicated in the agreed statement of facts, at the date of his death Mr Henderson owned 56,234 warrants to purchase Campbell Chibougamau shares at $4 per share. The parties agreed that these share purchase warrants were in the form of a certificate that was agreed upon and entered in evidence. They also agreed that the certificates were physically located in the State of New York at the date of Mr Henderson's death. In assessing succession duties against the Henderson Estate, the Minister included the warrants in the assessment and valued them at $4 per warrant. The learned trial judge allowed the appeal of the executors in respect of this part of the assessment on the ground that the warrants did not have their situs in Canada. The Minister cross-appealed.
27 Paragraph 6(1)(b) of the Dominion Succession Duty Act provides:
6. (1) Subject to the exemptions mentioned in section 7, there shall be assessed, levied and paid at the rates provided for in the First Schedule duties upon or in respect of the following successions, that is to say,
(b) where the deceased was at the time of his death domiciled outside of Canada, upon or in respect of the succession to all property situated in Canada.
28 As was noted above, the applicable Convention between Canada and the United States for the avoidance of double taxation in the case of succession duties deems shares in a company to be situated at the place where the company is incorporated. There was thus no question that the Campbell Chibougamau shares were situated in Canada. The Minister, before us, relied on this Convention in support of his submission that the warrants also had their situs in Canada. I quote the relevant provision of the Convention: 5
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 9 Henderson v. Minister of National Revenue, 1975 CarswellNat 188 1975 CarswellNat 188, [1975] C.T.C. 485, [1975] F.C.J. No. 613, 12 N.R. 91... ARTICLE II
Where a person dies a citizen of the United States of America or domiciled in the United States of America or Canada, the situs of any rights or interest, legal or equitable, in or over any of the following classes of property, which for the purposes of tax form or are deemed to form part of the estate of such person or pass or are deemed to pass on his death, shall, for the purposes of the imposition of tax, and for the purposes of the credit to be allowed under Article V, be determined exclusively in accordance with the following rules, but in cases not within such rules the situs of such rights or interests shall be determined for these purposes in accordance with the laws in force in the other contracting State:
(f) Shares, stock, bonds, debentures or debenture stock in a company (including any such property held by a nominee, whether the beneficial ownership is evidenced by scrip certificates or otherwise) shall be deemed to be situated at the place where the company is incorporated;
29 Specifically, reliance was placed on the words "... the situs of any rights or interest, legal or equitable, in or over ... shares ... shall be deemed to be situated at the place where the company is incorporated". It was submitted that the share purchase warrants were rights or interests, legal or equitable, in or over Campbell Chibougamau shares, and that Campbell Chibougamau was a company incorporated in Quebec; thus it was submitted that the warrants were situated in Canada.
30 The learned trial judge carefully considered the nature of rights involved in share purchase warrants of the kind involved in this case, and in so doing distinguished a share purchase warrant from a share warrant. He said:
The basic difference between a share warrant and a share purchase warrant is that in a share warrant share capital has actually been issued and funds acquired by the Company, instead of a share certificate the holder gets a share warrant, whereas on a share purchase warrant no capital shares have been issued by the Company.
In respect of the share purchase warrants owned by the deceased, the trial judge stated:
It is unquestionably a share purchase warrant as described above rather than a share warrant in that it entitles the bearer to purchase a specified number of shares of the par value of $1 each in Campbell Chibougamau for $4 per share, to be exercised by presentation of the share purchase warrant together with a certified cheque in payment of the subscription price to the Company's transfer agent at Montreal, PQ on or before December 1, 1960. It is specifically stated in the conditions attaching to the warrant that title to the warrant shall pass by delivery. The warrant is signed by the Company by its president and is countersigned by the transfer agent.
The learned trial judge said this:
The right which the share purchase warrants in the present appeal bestow in the holder thereof is the right to subscribe for shares in accordance with the terms of the warrant whereas the Company on its part warrants that such shares will be available from its authorized capital when application is made. However until subscription and allotment is made and communicated to the subscriber no shares come into existence. That being so the share purchase warrant does not confer rights on its holder in or over shares but only the right to have shares issued. It is a right in itself and property in itself.
31 I agree that the share purchase warrants were not "rights or interest, legal or equitable, in or over" shares of Campbell Chibougamau; in relation to the warrants there were no shares in being. Whatever may be the precise moment of creation of shares in a corporation, it had certainly not been reached in this case in respect of any rights conferred by the warrants owned by the deceased. Thus, the share purchase warrants do not fall within the words of Schedule B, Article II invoked in support of the cross-appeal.
32 I would dismiss the cross-appeal with costs.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 10 Henderson v. Minister of National Revenue, 1975 CarswellNat 188 1975 CarswellNat 188, [1975] C.T.C. 485, [1975] F.C.J. No. 613, 12 N.R. 91...
Footnotes 1 Dominion Succession Duty Act, para 6(1)(b).
2 Schedule B, Article II(f) to An Act to Amend the Canada-United States of America Tax Convention Act, 1943, and the Canada-United States of America Tax Convention Act, 1944, SC 1950, c 27. See also Dominion Succession Duty Act, subsection 6(2).
3 Dominion Succession Duty Act, section 10.
4 Ibid, section 11. See Schedule B to An Act to Amend the Canada-United States of America Tax Convention Act, 1943, and the Canada- United States of America Tax Convention Act, 1944, SC 1950, c 27, particularly Article IV.
5 Schedule B, Article II(f) to An Act to Amend the Canada-United States of America Tax Convention Act, 1943, and the Canada-United States of America Taxation Act, 1944, SC 1950, c 27.
End of Document Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 11
TAB 17
17 Tercon Contractors Ltd. v. British Columbia (Minister of..., 2010 SCC 4, 2010... 2010 SCC 4, 2010 CarswellBC 296, 2010 CarswellBC 297, [2010] 1 S.C.R. 69...
2010 SCC 4 Supreme Court of Canada
Tercon Contractors Ltd. v. British Columbia (Minister of Transportation & Highways)
2010 CarswellBC 296, 2010 CarswellBC 297, 2010 SCC 4, [2010] 1 S.C.R. 69, [2010] 3 W.W.R. 387, [2010] B.C.W.L.D. 1106, [2010] B.C.W.L.D. 1107, [2010] B.C.W.L.D. 1108, [2010] B.C.W.L.D. 1109, [2010] S.C.J. No. 4, 100 B.C.L.R. (4th) 201, 185 A.C.W.S. (3d) 81, 281 B.C.A.C. 245, 315 D.L.R. (4th) 385, 397 N.R. 331, 475 W.A.C. 245, 65 B.L.R. (4th) 1, 86 C.L.R. (3d) 163, J.E. 2010-321
Tercon Contractors Ltd. (Appellant) and Her Majesty The Queen in Right of the Province of British Columbia, by her Ministry of Transportation and Highways (Respondent) and Attorney General of Ontario (Intervener)
McLachlin C.J.C., Binnie, LeBel, Deschamps, Fish, Abella, Charron, Rothstein, Cromwell JJ.
Heard: March 23, 2009 Judgment: February 12, 2010 * Docket: 32460
Proceedings: reversing Tercon Contractors Ltd. v. British Columbia (Minister of Transportation & Highways) (2007), 73 B.C.L.R. (4th) 201, 414 W.A.C. 103, 249 B.C.A.C. 103, 66 C.L.R. (3d) 1, 2007 BCCA 592, 2007 CarswellBC 2880, [2008] 2 W.W.R. 410, 40 B.L.R. (4th) 26, 289 D.L.R. (4th) 647 (B.C. C.A.); affirming Tercon Contractors Ltd. v. British Columbia (Minister of Transportation & Highways) (2006), 2006 BCSC 499, 2006 CarswellBC 730, [2006] 6 W.W.R. 275, 18 B.L.R. (4th) 88, 51 C.L.R. (3d) 227, 53 B.C.L.R. (4th) 138 (B.C. S.C.)
Counsel: Chris R. Armstrong, Brian G. McLean, William S. McLean, Marie-France Major for Appellant J. Edward Gouge, Q.C., Jonathan Eades, Kate Hamm for Respondent Malliha Wilson, Lucy McSweeney for Intervener, Attorney General of Ontario
Subject: Contracts Headnote Construction law --- Contracts — Breach of terms of contract — Exclusion of liability In tendering process for construction of 25-km highway, Ministry of Transportation and Highways received submissions from B Ltd. and T Ltd. — Contract was awarded in name of B Ltd., notwithstanding that B Ltd. and E Co., ineligible proponent, planned to perform work as joint venture — T Ltd. brought action against Ministry for damages for failure to reject first ranked proposal from B Ltd., allegedly contrary to request for proposals — Action was allowed and T Ltd. was awarded damages — Trial judge found that Ministry breached "contract A" by accepting bid that was incapable of acceptance, for non-compliance, and breached duty of fairness by approving non-compliant bid as successful bidder — Trial judge further found that exclusion from liability clause in contract A did not apply to fundamental breaches that occurred — Ministry successfully appealed — It was determined that trial judge erred in interpreting exclusion clause and in refusing to give effect to it — T Ltd. appealed — Appeal allowed — Issues were whether successful bidder was eligible and, if not, whether T Ltd.'s claim for damages was barred — Trial judge reached right result on both issues — Foundation of tender contract was that only six, pre-selected bidders would be permitted to participate in bidding — Ministry not only breached express and implied terms of contract, it did so in way that was affront to integrity and business efficacy of tendering process — Exclusion clause did not protect Ministry from T Ltd.'s damage claim from Ministry's dealings with ineligible bidder, let alone from its breach of implied duty of fairness to bidders. Construction law --- Contracts — Breach of terms of contract — Breach by owner — General principles In tendering process for construction of 25-km highway, Ministry of Transportation and Highways received submissions from B Ltd. and T Ltd. — Contract was awarded in name of B Ltd., notwithstanding that B Ltd. and E Co., ineligible proponent, planned to perform work as joint venture — T Ltd. brought action against Ministry for damages for failure to reject first ranked
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 1 Tercon Contractors Ltd. v. British Columbia (Minister of..., 2010 SCC 4, 2010... 2010 SCC 4, 2010 CarswellBC 296, 2010 CarswellBC 297, [2010] 1 S.C.R. 69... proposal from B Ltd., allegedly contrary to request for proposals — Action was allowed and T Ltd. was awarded damages — Trial judge found that Ministry breached "contract A" by accepting bid that was incapable of acceptance, for non-compliance, and breached duty of fairness by approving non-compliant bid as successful bidder — Trial judge further found that exclusion from liability clause in contract A did not apply to fundamental breaches that occurred — Ministry successfully appealed — It was determined that trial judge erred in interpreting exclusion clause and in refusing to give effect to it — T Ltd. appealed — Appeal allowed — Issues were whether successful bidder was eligible and, if not, whether T Ltd.'s claim for damages was barred — Trial judge reached right result on both issues — Foundation of tender contract was that only six, pre-selected bidders would be permitted to participate in bidding — Ministry not only breached express and implied terms of contract, it did so in way that was affront to integrity and business efficacy of tendering process — Exclusion clause did not protect Ministry from T Ltd.'s damage claim from Ministry's dealings with ineligible bidder, let alone from its breach of implied duty of fairness to bidders. Construction law --- Contracts — Building contracts — Execution of formal contract — Tendering process — Process and procedure In tendering process for construction of 25-km highway, Ministry of Transportation and Highways received submissions from B Ltd. and T Ltd. — Contract was awarded in name of B Ltd., notwithstanding that B Ltd. and E Co., ineligible proponent, planned to perform work as joint venture — T Ltd. brought action against Ministry for damages for failure to reject first ranked proposal from B Ltd., allegedly contrary to request for proposals — Action was allowed and T Ltd. was awarded damages — Trial judge found that Ministry breached "contract A" by accepting bid that was incapable of acceptance, for non-compliance, and breached duty of fairness by approving non-compliant bid as successful bidder — Trial judge further found that exclusion from liability clause in contract A did not apply to fundamental breaches that occurred — Ministry successfully appealed — It was determined that trial judge erred in interpreting exclusion clause and in refusing to give effect to it — T Ltd. appealed — Appeal allowed — Issues were whether successful bidder was eligible and, if not, whether T Ltd.'s claim for damages was barred — Trial judge reached right result on both issues — Foundation of tender contract was that only six, pre-selected bidders would be permitted to participate in bidding — Ministry not only breached express and implied terms of contract, it did so in way that was affront to integrity and business efficacy of tendering process — Exclusion clause did not protect Ministry from T Ltd.'s damage claim from Ministry's dealings with ineligible bidder, let alone from its breach of implied duty of fairness to bidders. Droit de la construction --- Contrats — Violation des conditions du contrat — Exonération de responsabilité Dans le cadre d'un processus d'appel d'offres pour la construction d'une autoroute de 25 kilomètres, le ministère des Transports et de la Voirie a reçu des soumissions de la part de B Ltd. et T Ltd., entre autres — Contrat a été attribué au nom de B Ltd., sans tenir compte du fait que B Ltd. et E Co., un candidat inéligible, entendaient réaliser les travaux dans le cadre d'une coentreprise — T Ltd. a déposé un recours en dommages-intérêts à l'encontre du ministère parce qu'il n'avait pas rejeté la soumission de B Ltd., laquelle était arrivée au premier rang, alléguant qu'elle ne répondait pas aux exigences de l'appel d'offres — Recours a été accueilli et T Ltd. a été indemnisé — Juge de première instance a conclu que le ministère avait contrevenu au « contrat A » en acceptant une soumission qui était inacceptable, puisqu'elle n'était pas conforme, et avait manqué à son devoir d'équité à l'égard de T Ltd. en retenant une soumission non conforme — De plus, la juge de première instance a conclu que la clause d'exonération de responsabilité dans le contrat A ne s'appliquait pas aux violations fondamentales qui s'étaient produites — Ministère a interjeté appel avec succès — En appel, il a été déterminé que la juge de première instance avait commis une erreur en interprétant la clause d'exonération et en refusant de lui donner effet — T Ltd. a formé un pourvoi — Pourvoi accueilli — Il s'agissait de déterminer si l'adjudicataire était éligible et, sinon, si le recours de T Ltd. en dommages-intérêts était prescrit — Juge de première instance a eu raison sur les deux questions — Suivant le contrat issu du document d'appel d'offres, seules six entreprises présélectionnées pouvaient prendre part à l'appel d'offres — Ministère a manqué à ses obligations contractuelles expresses et tacites, et ce, d'une manière qui portait outrageusement atteinte à l'intégrité et à l'efficacité commerciale du processus d'appel d'offres — Clause d'exonération ne mettait pas le ministère à l'abri du recours en dommages-intérêts de T Ltd. pour la mise en rapport du ministère avec une entreprise qui n'était même pas admise à soumissionner, sans compter le manquement à son obligation tacite d'équité envers les soumissionnaires. Droit de la construction --- Contrats — Violation des conditions du contrat — Violation par le propriétaire — Principes généraux Dans le cadre d'un processus d'appel d'offres pour la construction d'une autoroute de 25 kilomètres, le ministère des Transports et de la Voirie a reçu des soumissions de la part de B Ltd. et T Ltd., entre autres — Contrat a été attribué au nom de B Ltd., sans tenir compte du fait que B Ltd. et E Co., un candidat inéligible, entendaient réaliser les travaux dans le cadre d'une coentreprise — T Ltd. a déposé un recours en dommages-intérêts à l'encontre du ministère parce qu'il n'avait pas rejeté la soumission de
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B Ltd., laquelle était arrivée au premier rang, alléguant qu'elle ne répondait pas aux exigences de l'appel d'offres — Recours a été accueilli et T Ltd. a été indemnisé — Juge de première instance a conclu que le ministère avait contrevenu au « contrat A » en acceptant une soumission qui était inacceptable, puisqu'elle n'était pas conforme, et avait manqué à son devoir d'équité à l'égard de T Ltd. en retenant une soumission non conforme — De plus, la juge de première instance a conclu que la clause d'exonération de responsabilité dans le contrat A ne s'appliquait pas aux violations fondamentales qui s'étaient produites — Ministère a interjeté appel avec succès — En appel, il a été déterminé que la juge de première instance avait commis une erreur en interprétant la clause d'exonération et en refusant de lui donner effet — T Ltd. a formé un pourvoi — Pourvoi accueilli — Il s'agissait de déterminer si l'adjudicataire était éligible et, sinon, si le recours de T Ltd. en dommages-intérêts était prescrit — Juge de première instance a eu raison sur les deux questions — Suivant le contrat issu du document d'appel d'offres, seules six entreprises présélectionnées pouvaient prendre part à l'appel d'offres — Ministère a manqué à ses obligations contractuelles expresses et tacites, et ce, d'une manière qui portait outrageusement atteinte à l'intégrité et à l'efficacité commerciale du processus d'appel d'offres — Clause d'exonération ne mettait pas le ministère à l'abri du recours en dommages-intérêts de T Ltd. pour la mise en rapport du ministère avec une entreprise qui n'était même pas admise à soumissionner, sans compter le manquement à son obligation tacite d'équité envers les soumissionnaires. Droit de la construction --- Contrats — Contrats de construction — Exécution d'un contrat solennel — Processus d'appel d'offres — Procédure Dans le cadre d'un processus d'appel d'offres pour la construction d'une autoroute de 25 kilomètres, le ministère des Transports et de la Voirie a reçu des soumissions de la part de B Ltd. et T Ltd., entre autres — Contrat a été attribué au nom de B Ltd., sans tenir compte du fait que B Ltd. et E Co., un candidat inéligible, entendaient réaliser les travaux dans le cadre d'une coentreprise — T Ltd. a déposé un recours en dommages-intérêts à l'encontre du ministère parce qu'il n'avait pas rejeté la soumission de B Ltd., laquelle était arrivée au premier rang, alléguant qu'elle ne répondait pas aux exigences de l'appel d'offres — Recours a été accueilli et T Ltd. a été indemnisé — Juge de première instance a conclu que le ministère avait contrevenu au « contrat A » en acceptant une soumission qui était inacceptable, puisqu'elle n'était pas conforme, et avait manqué à son devoir d'équité à l'égard de T Ltd. en retenant une soumission non conforme — De plus, la juge de première instance a conclu que la clause d'exonération de responsabilité dans le contrat A ne s'appliquait pas aux violations fondamentales qui s'étaient produites — Ministère a interjeté appel avec succès — En appel, il a été déterminé que la juge de première instance avait commis une erreur en interprétant la clause d'exonération et en refusant de lui donner effet — T Ltd. a formé un pourvoi — Pourvoi accueilli — Il s'agissait de déterminer si l'adjudicataire était éligible et, sinon, si le recours de T Ltd. en dommages-intérêts était prescrit — Juge de première instance a eu raison sur les deux questions — Suivant le contrat issu du document d'appel d'offres, seules six entreprises présélectionnées pouvaient prendre part à l'appel d'offres — Ministère a manqué à ses obligations contractuelles expresses et tacites, et ce, d'une manière qui portait outrageusement atteinte à l'intégrité et à l'efficacité commerciale du processus d'appel d'offres — Clause d'exonération ne mettait pas le ministère à l'abri du recours en dommages-intérêts de T Ltd. pour la mise en rapport du ministère avec une entreprise qui n'était même pas admise à soumissionner, sans compter le manquement à son obligation tacite d'équité envers les soumissionnaires. In the tendering process for the construction of a 25-km highway, the Ministry of Transportation and Highways received submissions from B Ltd. and T Ltd., among others. The contract was awarded in the name of B Ltd., notwithstanding that B Ltd. and E Co., an ineligible proponent, planned to perform the work as a joint venture. T Ltd. brought an action against the Ministry for damages for failure to reject the first ranked proposal from B Ltd., allegedly contrary to the request for proposals. The action was allowed and T Ltd. was awarded damages. The trial judge found that the Ministry breached "contract A" by accepting a bid that was incapable of acceptance, because of non-compliance, and breached duty of fairness owed to T Ltd. by approving a non-compliant bid as the successful bidder. The trial judge further found that the exclusion from liability clause in contract A did not apply to the fundamental breaches that occurred. The Ministry successfully appealed. In the appeal it was determined that the trial judge erred in interpreting the exclusion clause and in refusing to give effect to it. T Ltd. appealed. Held: The appeal was allowed. Per Cromwell J. (LeBel, Deschamps, Fish, Charron JJ. concurring): The issues were whether the successful bidder was eligible and, if not, whether T Ltd.'s claim for damages was barred. The trial judge reached the right result on both issues. The foundation of the tender contract was that only six, pre-selected bidders would be permitted to participate in the bidding. The Ministry not only breached the express and implied terms of contract, it did so in a way that was an affront to the integrity and business
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 3 Tercon Contractors Ltd. v. British Columbia (Minister of..., 2010 SCC 4, 2010... 2010 SCC 4, 2010 CarswellBC 296, 2010 CarswellBC 297, [2010] 1 S.C.R. 69... efficacy of the tendering process. The exclusion clause did not protect the Ministry from T Ltd.'s damage claim from the Ministry's dealings with an ineligible bidder, let alone from its breach of the implied duty of fairness to bidders. Per Binnie J. (dissenting) (McLachlin C.J.C., Abella, Rothstein JJ. concurring): The important legal issue raised by this appeal was whether, and in what circumstances, a court will deny a defendant contract breaker the benefit of an exclusion of liability clause to which the innocent party, not being under any sort of disability, has agreed. T Ltd. pointed to public interest and the transparency and integrity of the government tendering process, but such a concern, while important, did not render unenforceable the terms of the contract T Ltd. agreed to. T Ltd. was a large and sophisticated corporation, and the Ministry's conduct, while in breach of its contractual obligations, fell within the terms of the exclusion clause. There was no reason why the clause should not have been enforced. Dans le cadre d'un processus d'appel d'offres pour la construction d'une autoroute de 25 kilomètres, le ministère des Transports et de la Voirie a reçu des soumissions de la part de B Ltd. et T Ltd., entre autres. Le contrat a été attribué au nom de B Ltd., sans tenir compte du fait que B Ltd. et E Co., un candidat inéligible, entendaient réaliser les travaux dans le cadre d'une coentreprise. T Ltd. a déposé un recours en dommages-intérêts à l'encontre du ministère parce qu'il n'avait pas rejeté la soumission de B Ltd., laquelle était arrivée au premier rang, alléguant qu'elle ne répondait pas aux exigences de l'appel d'offres. Le recours a été accueilli et T Ltd. a été indemnisé. La juge de première instance a conclu que le ministère avait contrevenu au « contrat A » en acceptant une soumission qui était inacceptable, puisqu'elle n'était pas conforme, et avait manqué à son devoir d'équité à l'égard de T Ltd. en retenant une soumission non conforme. De plus, la juge de première instance a conclu que la clause d'exonération de responsabilité dans le contrat A ne s'appliquait pas aux violations fondamentales qui s'étaient produites. Le ministère a interjeté appel avec succès. En appel, il a été déterminé que la juge de première instance avait commis une erreur en interprétant la clause d'exonération et en refusant de lui donner effet. T Ltd. a formé un pourvoi. Arrêt: Le pourvoi a été accueilli. Cromwell, J. (LeBel, Deschamps, Fish, Charron, JJ., souscrivant à son opinion) : Il s'agissait de déterminer si l'adjudicataire était éligible et, sinon, si le recours de T Ltd. en dommages-intérêts était prescrit. La juge de première instance a eu raison sur les deux questions. Suivant le contrat issu du document d'appel d'offres, seules six entreprises présélectionnées pouvaient prendre part à l'appel d'offres. Le ministère a manqué à ses obligations contractuelles expresses et tacites, et ce, d'une manière qui portait outrageusement atteinte à l'intégrité et à l'efficacité commerciale du processus d'appel d'offres. La clause d'exonération ne mettait pas le ministère à l'abri du recours en dommages-intérêts de T Ltd. pour la mise en rapport du ministère avec une entreprise qui n'était même pas admise à soumissionner, sans compter le manquement à son obligation tacite d'équité envers les soumissionnaires. Binnie, J. (dissident) (McLachlin, J.C.C., Abella, Rothstein, JJ., souscrivant à son opinion) : Le présent pourvoi soulevait une question de droit importante, celle de savoir si un tribunal peut refuser à la partie coupable d'inexécution — et dans l'affirmative, à quelles conditions — le bénéfice d'une clause d'exonération de la responsabilité à laquelle a consenti l'autre partie alors qu'elle n'était frappée d'aucune inaptitude. T Ltd. a invoqué l'intérêt public lié à la transparence et à l'intégrité du processus gouvernemental d'appel d'offres, mais, même s'il s'agissait d'une condition importante, son inobservation n'a pas rendu inapplicable les clauses du contrat auxquelles T Ltd. avait consenti. T Ltd. était une grande entreprise dotée d'une vaste expérience, et le ministère, même s'il n'a pas respecté ses obligations contractuelles, bénéficiait de la clause de non-recours. Il n'y avait donc pas de raison de ne pas faire respecter celle-ci.
APPEAL by plaintiff from judgment reported at Tercon Contractors Ltd. v. British Columbia (Minister of Transportation & Highways) (2007), 73 B.C.L.R. (4th) 201, 414 W.A.C. 103, 249 B.C.A.C. 103, 66 C.L.R. (3d) 1, 2007 BCCA 592, 2007 CarswellBC 2880, [2008] 2 W.W.R. 410, 40 B.L.R. (4th) 26, 289 D.L.R. (4th) 647 (B.C. C.A.).
POURVOI du demandeur à l'encontre d'un jugement publié à Tercon Contractors Ltd. v. British Columbia (Minister of Transportation & Highways) (2007), 73 B.C.L.R. (4th) 201, 414 W.A.C. 103, 249 B.C.A.C. 103, 66 C.L.R. (3d) 1, 2007 BCCA 592, 2007 CarswellBC 2880, [2008] 2 W.W.R. 410, 40 B.L.R. (4th) 26, 289 D.L.R. (4th) 647 (B.C. C.A.).
Cromwell J.:
I. Introduction
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1 The Province accepted a bid from a bidder who was not eligible to participate in the tender and then took steps to ensure that this fact was not disclosed. The main question on appeal, as I see it, is whether the Province succeeded in excluding its liability for damages flowing from this conduct through an exclusion clause it inserted into the contract. I share the view of the trial judge that it did not.
2 The appeal arises out of a tendering contract between the appellant, Tercon Contractors Ltd., who was the bidder, and the respondent, Her Majesty the Queen in Right of the Province of British Columbia, who issued the tender call. The case turns on the interpretation of provisions in the contract relating to eligibility to bid and exclusion of compensation resulting from participation in the tendering process.
3 The trial judge found that the respondent (which I will refer to as the Province) breached the express provisions of the tendering contract with Tercon by accepting a bid from another party who was not eligible to bid and by ultimately awarding the work to that ineligible bidder. In short, a bid was accepted and the work awarded to a party who should not even have been permitted to participate in the tender process. The judge also found that this and related conduct by the Province breached the implied duty of fairness to bidders, holding that the Province had acted "egregiously" (2006 BCSC 499, 53 B.C.L.R (4th) 138 (B.C. S.C.), at para. 150). The judge then turned to the Province's defence based on an exclusion clause that barred claims for compensation "as a result of participating" in the tendering process. She held that this clause, properly interpreted, did not exclude Tercon's claim for damages. In effect, she held that it was not within the contemplation of the parties that this clause would bar a remedy in damages arising from the Province's unfair dealings with a party who was not entitled to participate in the tender in the first place.
4 The Province appealed and the Court of Appeal reversed ( 2007 BCCA 592, 73 B.C.L.R. (4th) 201 (B.C. C.A.)). Dealing only with the exclusion clause issue, it held that the clause was clear and unambiguous and barred compensation for all defaults.
5 On Tercon's appeal to this Court, the questions for us are whether the successful bidder was eligible to participate in the request for proposals ("RFP") and, if not, whether Tercon's claim for damages is barred by the exclusion clause.
6 In my respectful view, the trial judge reached the right result on both issues. The Province's attempts to persuade us that it did not breach the tendering contract are, in my view, wholly unsuccessful. The foundation of the tendering contract was that only six, pre-selected bidders would be permitted to participate in the bidding. As the trial judge held, the Province not only acted in a way that breached the express and implied terms of the contract by considering a bid from an ineligible bidder, it did so in a manner that was an affront to the integrity and business efficacy of the tendering process. One must not lose sight of the fact that the trial judge found that the Province acted egregiously by "ensuring that [the true bidder] was not disclosed" (para. 150) and that its breach "attacke[d] the underlying premise of the [tendering] process" (para. 146), a process which was set out in detail in the contract and, in addition, had been given ministerial approval as required by statute.
7 As for its reliance on the exclusion clause, the Province submits that the parties were free to agree to limitations of liability and did so. Consideration of this submission requires an interpretation of the words of the clause to which the parties agreed in the context of the contract as a whole. My view is that, properly interpreted, the exclusion clause does not protect the Province from Tercon's damage claim which arises from the Province's dealings with a party not even eligible to bid, let alone from its breach of the implied duty of fairness to bidders. In other words, the Province's liability did not arise from Tercon's participation in the process that the Province established, but from the Province's unfair dealings with a party who was not entitled to participate in that process.
8 I would allow the appeal and restore the judgment of the trial judge.
II. Brief Overview of the Facts
9 I will have to set out more factual detail as part of my analysis. For now, a very brief summary will suffice. In 2000, the Ministry of Transportation and Highways (the "Province") issued a request for expressions of interest ("RFEI") for designing and building a highway in northwestern British Columbia. Six teams made submissions, including Tercon and Brentwood
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Enterprises Ltd. Later that year, the Province informed the six proponents that it now intended to design the highway itself and would issue a RFP for its construction.
10 The RFP was formally issued on January 15, 2001. Under its terms, only the six original proponents were eligible to submit a proposal. The RFP also included a clause excluding all claims for damages "as a result of participating in this RFP" (s. 2:10).
11 Unable to submit a competitive bid on its own, Brentwood teamed up with Emil Anderson Construction Co. ("EAC"), which was not a qualified bidder, and together they submitted a bid in Brentwood's name. Brentwood and Tercon were the two short-listed proponents and the Ministry ultimately selected Brentwood as the preferred proponent.
12 Tercon brought an action seeking damages, alleging that the Ministry had considered and accepted an ineligible bid and that but for that breach, it would have been awarded the contract. The trial judge agreed and awarded roughly $3.5 million in damages and prejudgment interest. As noted, the Court of Appeal reversed and Tercon appeals by leave of the Court.
III. Issues
13 The issues for decision are whether the trial judge erred in finding that:
1. the Province breached the tendering contract by entertaining a bid from an ineligible bidder.
2. the exclusion clause does not bar the appellant's claim for damages for the breaches of the tendering contract found by the trial judge.
IV. Analysis
A. Was the Brentwood Bid Ineligible?
14 The first issue is whether the Brentwood bid was from an eligible bidder. The judge found that the bid was in substance, although not in form, from a joint venture of Brentwood and EAC and that it was, therefore, an ineligible bid. The Province attacks this finding on three grounds:
(i) a joint venture is not a legal person and therefore the Province could not and did not contract with a joint venture;
(ii) it did not award the contract to EAC and EAC had no contractual responsibility to the Province for failure to perform the contract;
(iii) there was no term of the RFP that restricted the right of proponents to enter into joint venture agreements with others; this arrangement merely left Brentwood, the original proponent, in place and allowed it to enhance its ability to perform the work.
15 While these were the Province's main points, its position became more wide-ranging during oral argument, at times suggesting that it had no contractual obligation to deal only with eligible bidders. It is therefore necessary to take a step back and look at that threshold point before turning to the Province's more focussed submissions.
1. The Province's Contractual Obligations in the Bidding Process
16 The judge found, and it was uncontested at trial, that only the six original proponents that qualified through the RFEI process were eligible to submit a response to the RFP. This finding is not challenged on appeal, although there was a passing suggestion during oral argument that there was no contractual obligation of this sort at all. The trial judge also held, noting that this point was uncontested, that a joint venture between Brentwood and EAC was ineligible to bid. This is also not contested on appeal. These two findings are critical to the case and provide important background for an issue that is in dispute, namely whether the Brentwood bid was ineligible. It is, therefore, worth reviewing the relevant background in detail. I first briefly set out the legal framework and then turn to the trial judge's findings.
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2. Legal Principles
17 Submitting a compliant bid in response to a tender call may give rise to a contract — called Contract A — between the bidder and the owner, the express terms of which are found in the tender documents. The contract may also have implied terms according to the principles set out in Canadian Pacific Hotels Ltd. v. Bank of Montreal, [1987] 1 S.C.R. 711 (S.C.C.); see also M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd., [1999] 1 S.C.R. 619 (S.C.C.), and Martel Building Ltd. v. R., 2000 SCC 60, [2000] 2 S.C.R. 860 (S.C.C.). The key word, however, is "may". The Contract A - Contract B framework is one that arises, if at all, from the dealings between the parties. It is not an artificial construct imposed by the courts, but a description of the legal consequences of the parties' actual dealings. The Court emphasized in M.J.B. that whether Contract A arises and if it does, what its terms are, depend on the express and implied terms and conditions of the tender call in each case. As Iacobucci J. put it, at para. 19:
What is important ... is that the submission of a tender in response to an invitation to tender may give rise to contractual obligations, quite apart from the obligations associated with the construction contract to be entered into upon the acceptance of a tender, depending upon whether the parties intend to initiate contractual relations by the submission of a bid. If such a contract arises, its terms are governed by the terms and conditions of the tender call [Emphasis added.]
3. The Trial Judge's Findings Concerning the Existence of Contract A
18 The question of whether Tercon's submission of a compliant bid gave rise to contractual relations between it and the Province was contested by the Province at trial. The trial judge gave extensive reasons for finding against the Province on this issue. We are told that the Province did not pursue this point in the Court of Appeal but instead premised its submissions on the existence of Contract A. The Province took the same approach in its written submissions in this Court. However, during oral argument, there was some passing reference in response to questions that there was no Contract A. In light of the position taken by the Province on its appeal to the Court of Appeal and in its written submissions in this Court, it is now too late to revisit whether there were contractual duties between Tercon and the Province. Even if it were open to the Province to make this argument now, I can see no error in legal principle or any palpable and overriding error of fact in the trial judge's careful reasons on this point.
19 The trial judge did not mechanically impose the Contract A - Contract B framework, but considered whether Contract A arose in light of her detailed analysis of the dealings between the parties. That was the right approach. She reviewed in detail the provisions of the RFP which supported her conclusion that there was an intent to create contractual relations upon submission of a compliant bid. She noted, for example, that bids were to be irrevocable for 60 days and that security of $50,000 had to be paid by all proponents and was to be increased to $200,000 by the successful proponent. Any revisions to proposals prior to the closing date had to be in writing, properly executed and received before the closing time. The RFP also set out detailed evaluation criteria and specified that they were to be the only criteria to be used to evaluate proposals. A specific form of alliance agreement was attached. There were detailed provisions about pricing that were fixed and non-negotiable. A proponent was required to accept this form of contract substantially, and security was lost if an agreement was not executed. The Ministry reserved a right to cancel the RFP under s. 2.9 but in such event was obliged to reimburse proponents for costs incurred in preparing their bids up to $15,000 each. Proponents had to submit a signed proposal form, which established that they offered to execute an agreement substantially in the form included in the RFP package. Further, they acknowledged that the security could be forfeited if they were selected as the preferred proponent and failed to enter into good faith discussions with the Ministry to reach an agreement and sign the alliance agreement.
20 In summary, as the trial judge found, the RFP set out a specifically defined project, invited proposals from a closed and specific list of eligible proponents, and contemplated that proposals would be evaluated according to specific criteria. Negotiation of the alliance construction contract was required, but the negotiation was constrained and did not go to the fundamental details of either the procurement process or the ultimate contract.
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21 There is, therefore, no basis to interfere with the judge's finding that there was an intent to create contractual obligations upon submission of a compliant bid. I add, however, that the tender call in this case did not give rise to the classic Contract A - Contract B framework in which the bidder submits an irrevocable bid and undertakes to enter into contract B on those terms if it is accepted. The alliance model process which was used here was more complicated than that and involved good faith negotiations for a contract B in the form set out in the tender documents. But in my view, this should not distract us from the main question here. We do not have to spell out all of the terms of Contract A, let alone of Contract B, so as to define all of the duties and obligations of both the bidders and the Province. The question here is much narrower: did contractual obligations arise as a result of Tercon's compliant bid and, if so, was it a term of that contract that the Province would only entertain bids from eligible bidders? The trial judge found offer, acceptance and consideration in the invitation to tender and Tercon's bid. There is no basis, in my respectful view, to challenge that finding even if it were open to the Province to try to do so at this late stage of the litigation.
4. The Trial Judge's Finding Concerning Eligibility
22 It was not contested at trial that only the six original proponents that qualified through the RFEI process were eligible to bid. This point is not in issue on appeal; the question is what this eligibility requirement means. It will be helpful, therefore, to set out the background about this limited eligibility to bid in this tendering process.
23 To begin, it is worth repeating that there is no doubt that the Province was contractually bound to accept bids only from eligible bidders. This duty may be implied even absent express stipulation. For example, in M.J.B., the Court found that an implied obligation to accept only compliant bids was necessary to give business efficacy to the tendering process, noting, at para. 41, that a bidder must expend effort and incur expense in preparing its bid and must submit bid security and that it is "obvious" that it makes "little sense" for the bidder to comply with these requirements if the owner "is allowed, in effect, to circumscribe this process and accept a non-compliant bid". But again, whether such a duty should be implied in any given case will depend on the dealings between the parties. Here, however, there is no need to rely on implied terms. The obligation to consider only bids from eligible bidders was stated expressly in the tender documents and in the required ministerial approval of the process which they described.
24 As noted, in early 2000, the Province issued a RFEI based on a design-build model; the contractor would both design and build the highway. The RFEI contemplated that a short list of three qualified contractors, or teams composed of contractors and consultants, would be nominated as proponents. Each was to provide a description of the legal structure of the team and to describe the role of each team member along with the extent of involvement of each team member as a percentage of the total scope of the project and an organization chart showing each team member's role. Any change in team management or key positions required notice in writing to the Province which reserved the right to disqualify the proponent if the change materially and negatively affected the ability of the team to carry out the project.
25 Expressions of interest ("EOI") were received from six teams including Tercon and Brentwood. The evaluation panel and independent review panel recommended a short list of three proponents with Tercon topping the evaluation. Brentwood was evaluated fifth and was not on the short list. Brentwood was known to lack expertise in drilling and blasting and so its EOI had included an outline of the key team members with that experience. EAC did not participate and had no role in the Brentwood submission. The results of this evaluation were not communicated and the process did not proceed because the Province decided to design the project itself and issue an RFP for an alliance model contract to construct the highway.
26 It was clear from the outset that only those who had submitted proposals during the RFEI process would be eligible to submit proposals under the RFP. This was specified in the approval of the process by the Minister of Transportation and Highway's ("Minister") before the RFP was issued. It is worth pausing here to briefly look at the Minister's role.
27 Pursuant to s. 23 of the Ministry of Transportation and Highways Act, R.S.B.C. 1996, c. 311, the legislation in force at the relevant time, the Minister was required to invite public tenders for road construction unless he or she determined that another process would result in competitively established costs for the work. The section provided:
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23 (1) The minister must invite tenders by public advertisement, or if that is impracticable, by public notice, for the construction and repair of all government buildings, highways and public works, except for the following: . . . . . (c) if the minister determines that an alternative contracting process will result in competitively established costs for the performance of the work.
(2) The minister must cause all tenders received to be opened in public, at a time and place stated in the advertisement or notice.
(3) The prices must be made known at the time the tenders are opened.
(4) In all cases where the minister believes it is not expedient to let the work to the lowest bidder, the minister must report to and obtain the approval of the Lieutenant Governor in Council before passing by the lowest tender, except if delay would be injurious to the public interest......
28 These provisions make clear that the work in this case had to be awarded by public tender, absent the Minister's approval of an alternative process, and had to be awarded to the lowest bidder, absent approval of the Lieutenant Governor in Council. As noted, ministerial approval was given for an alternative process under s. 23(1)(c). The Minister issued a notice that, pursuant to that section, he approved the process set out in an attached document and had determined it to be an alternative contracting process that would result in competitively established costs for the performance of the work. The attached document outlined in seven numbered paragraphs the process that had been approved.
29 The document described the background of the public RFEI (which I have set out earlier), noting that only those firms identified through the EOI process would be eligible to submit proposals for the work and that they would receive invitations to do so. The Minister's approval in fact referred to the firms who had been short-listed from the RFEI process as being eligible. If this were taken to refer only to the three proponents identified by the evaluation process of the RFEI, Tercon would be included but Brentwood would not. However, no one has suggested that anything turns on this and it seems clear that ultimately all six of the RFEI proponents — including both Tercon and Brentwood — were intended to be eligible. The ministerial approval then briefly set out the process. Proposals "by short listed firms" were to be evaluated "using the considerations set out in the RFP".
30 It is clear, therefore, that participation in the RFP process approved by the Minister was limited to those who had participated in the RFEI process.
31 The Province's factum implies that the Minister approved inclusion of the exclusion clause in the RFP. However, there is no evidence of this in the record before the Court. The Minister's approval is before us. It is dated as having been prepared on August 23, 2000 and signed on October 19, 2000, and approves a process outlined in a two-page document attached to it. It says nothing about exclusion of the Province's liability. The RFP, containing the exclusion clause in issue here, is dated January 15, 2001 and was sent out to eligible bidders under cover of a letter of the same date, some three months after the Minister's approval.
32 The RFP is a lengthy document, containing detailed instructions to proponents, required forms, a time schedule of the work, detailed provisions concerning contract pricing, a draft of the ultimate construction contract and many other things. Most relevant for our purposes are the terms of the instructions to proponents and in particular the eligibility requirements for bidders.
33 The RFP reiterates in unequivocal terms that eligibility to bid was restricted as set out in the ministerial approval. It also underlines the significance of the identity of the proponent. In s. 1.1, the RFP specifies that only the six teams involved in the RFEI would be eligible. The term "proponent", which refers to a bidder, is defined in s. 8 as "a team that has become eligible to respond to the RFP as described in Section 1.1 of the Instructions to Proponents". Section 2.8(a) of the RFP stipulates that only the six proponents qualified through the RFEI process were eligible and that proposals received from any other party would not be considered. In short, there were potentially only six participants and "Contract A" could not arise by the submission of a bid from any other party.
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34 The RFP also addressed material changes to the proponent, including changes in the proponent's team members and its financial ability to undertake and complete the work. Section 2.8(b) of the RFP provided in part as follows:
If in the opinion of the Ministry a material change has occurred to the Proponent since its qualification under the RFEI, including if the composition of the Proponent's team members has changed ... or if, for financial or other reasons, the Proponent's ability to undertake and complete the Work has changed, then the Ministry may request the Proponent to submit further supporting information as the Ministry may request in support of the Proponent's qualification to perform the Work. If in the sole discretion of the Ministry as a result of the changes the Proponent is not sufficiently qualified to perform the Work then the Ministry reserves the right to disqualify that Proponent and reject its Proposal.
35 The proponent was to provide an organization chart outlining the proponent's team members, structure and roles. If the team members were different from the RFEI process submission, an explanation was to be provided for the changes: s. 4.2(b) (i). A list of subcontractors and suppliers was also to be provided and the Ministry had to be notified of any changes: s. 4.2(e).
36 The RFP provided proponents with a mechanism to determine whether they remained qualified to submit a proposal. If a proponent was concerned about its eligibility as a result of a material change, it could make a preliminary submission to the Ministry describing the nature of the changes and the Ministry would give a written decision as to whether the proponent was still qualified: s. 2.8(b).
37 Brentwood tried to take advantage of this process. The trial judge thoroughly outlined this, at paras. 17-23 of her reasons. In brief, Brentwood lacked expertise in drilling and blasting and by the time the RFP was issued, it faced limited local bonding capacity due to commitments to other projects, a shorter construction period, the potential unavailability of subcontractors and limited equipment to perform the work. It in fact considered not bidding at all. Instead, however, it entered into a pre-bidding agreement with EAC that the work would be undertaken by a joint venture of Brentwood and EAC and that upon being awarded the work, they would enter into a joint venture agreement and would share 50-50 the costs, expenses, losses and gains. The trial judge noted that it was common in the industry for contractors to agree to a joint venture on the basis of a pre-bid agreement with the specifics of the joint venture to be worked out once the contract was awarded and that Brentwood and EAC acted consistently throughout in accordance with this industry standard.
38 Brentwood sent the Province's project manager, Mr. Tasaka, a preliminary submission as provided for in s. 2.8(b) of the RFP, advising of a material change in its team's structure in that it wished to form a joint venture with EAC. This was done, the trial judge found, because Brentwood thought it would be disqualified if it submitted a proposal as a joint venture without the Ministry's prior approval under this section of the RFP. The Province never responded in writing as it ought to have according to s. 2.8(b).
39 It seems to have been assumed by everyone that a joint venture of Brentwood and EAC was not eligible because this change would not simply be a change in the composition of the bidder's team, but in effect a new bidder. Without reviewing in detail all of the evidence referred to by the trial judge, it is fair to say that although Brentwood ultimately submitted a proposal in its own name, the proposal in substance was from the Brentwood-EAC joint venture and was evaluated as such. As the trial judge concluded:
The substance of the proposal was as a joint venture and this must have been apparent to all. The [project evaluation panel] approved Brentwood/EAC as joint venturers as the preferred proponent. The [panel] was satisfied that Tercon had the capacity and commitment to do the job but preferred the joint venture submission of Brentwood/EAC. [para. 53].
40 There was some suggestion by the Province during oral argument that the trial judge had wrongly imposed on it a duty to investigate Brentwood's bid, a duty rejected by the majority of the Court in Double N Earthmovers Ltd. v. Edmonton (City), 2007 SCC 3, [2007] 1 S.C.R. 116 (S.C.C.). In my view, the trial judge did no such thing. As her detailed findings make clear, the Province: (1) fully understood that the Brentwood bid was in fact on behalf of a joint venture of Brentwood and EAC; (2) thought that a bid from that joint venture was not eligible; and (3) took active steps to obscure the reality of the situation. No investigation was required for the Province to know these things and the judge imposed no duty to engage in one.
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5. The Province's Submissions
41 I will address the Province's first two points together.
(i) a joint venture is not a legal person and therefore the Province could not and did not contract with a joint venture; and
(ii) it did not award the contract to EAC and EAC had no contractual responsibility to the Province for failure to perform the contract;
42 I cannot accept these submissions. The issue is not, as these arguments assume, whether the Province contracted with a joint venture or whether EAC had contractual obligations to the Province. The issue is whether the Province considered an ineligible bid; the point of substance is whether the bid was from an eligible bidder.
43 At trial there was no contest that a bid from a joint venture involving an ineligible bidder would be ineligible. The Province's position was that there was no need to look beyond the face of the bid to determine who was bidding: the proposal was in the name of Brentwood and therefore the bid was from a compliant bidder. Respectfully, I see no error in the trial judge's rejection of this position. There was a mountain of evidence to support the judge's conclusions that first, Brentwood's bid, in fact if not in form, was on behalf of a joint venture between itself and EAC; second, the Province knew this and took the position that it could not consider a bid from or award the work to that joint venture; third, the existence of the joint venture was a material consideration in favour of the Brentwood bid during the evaluation process; and finally, that steps were taken by revising and drafting documentation to obfuscate the reality of the situation.
44 Brentwood was one of the original RFEI proponents and was of course eligible to bid, subject to material changes in the composition of its team. EAC had not submitted a proposal during the RFEI process. It had been involved in advising the Ministry in relation to the project in 1998 and, in the fall of 2000, the Ministry had asked EAC to prepare an internal bid for comparison purposes (although EAC did not do so) as EAC was not entitled to bid on the Project.
45 As noted earlier, after the RFP was issued, Brentwood and EAC entered into a pre-bidding agreement that provided that the work would be undertaken in the name of Brentwood-Anderson, a joint venture, that the work would be sponsored and managed by the joint venture and that upon being awarded the contract, the parties would enter into a joint venture agreement. Brentwood advised the Ministry in writing that it was forming a joint venture with EAC "to submit a more competitive price"; this fax was in effect a preliminary submission contemplated by s. 2.8(b) of the RFP and was written, as the trial judge found, because Brentwood assumed that it could be disqualified if it submitted a proposal as a joint venture unless prior arrangements had been made. The Province never responded in writing to this preliminary submission, as required by s. 2.8(b). There were, however, discussions with the Province's project manager, Mr. Tasaka who, the trial judge found, understood that a joint venture from Brentwood and EAC would not be eligible. As the judge put it, the Province's position appears to have been that the Brentwood/EAC proposal could proceed as long as the submission was in the name of Brentwood.
46 In the result, EAC was listed in the ultimate submission as a "major member" of the team. The legal relationship with EAC was not specified and EAC was listed as a subcontractor even though, as the trial judge found, their relationship bore no resemblance to a standard subcontractor agreement. The trial judge found as facts — and these findings are not challenged — that Brentwood and EAC always intended between themselves to form a joint venture and to formalize that arrangement once the contract was secured, and further, that the role of EAC was purposefully obfuscated in the bid to avoid an apparent conflict with s. 2.8(a) of the RFP.
47 During the selection process, it became clear that the bid was in reality on behalf of a joint venture. The project evaluation panel ("PEP") requested better information than provided in the bid about the structure of the business arrangements between Brentwood and EAC. Brentwood responded by disclosing the pre-bid agreement between them to form a 50/50 joint venture if successful. The PEP understood from this that Brentwood and EAC had a similar interest in the risk and reward under the contract and that this helped satisfy them that the "risk/reward" aspect of the alliance contract could be negotiated with them flexibly. The PEP clearly did not consider EAC to be a subcontractor although shown as such in the bid. In its step 6 report,
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48 The findings of the trial judge and the record make it clear that it was no mere question of form rather than a matter of substance whether the bidder was Brentwood with other team members or, as it in fact was, the Brentwood/EAC joint venture. As she noted, at para. 121 of her reasons, the whole purpose of the joint venture was to allow submission of a more competitive price than it would have been able to do as a proponent with a team as allowed under s. 2.8(b) of the RFP. The joint venture permitted a 50/50 sharing of risk and reward and co-management of the project while at the same time avoiding the restrictions on subcontracting in the tendering documents. As the judge put it, the bid by the joint venture constituted "material non- compliance" with the tendering contract: "[t]he joint venture with EAC allowed Brentwood to put forward a more competitive price than contemplated under the RFEI proposal. This went to the essence of the tendering process" (para 126).
49 The Province suggests that the trial judge's reasons allow form to triumph over substance. In my view, it is the Province's position that better deserves that description. It had a bid which it knew to be on behalf of a joint venture, encouraged the bid to proceed and took steps to obfuscate the reality that it was on behalf of a joint venture. Permitting the bid to proceed in this way gave the joint venture a competitive advantage in the bidding process, and the record could not be clearer that the joint venture nature of the bid was one of its attractions during the selection process. The Province nonetheless submits that so long as only the name of Brentwood appears on the bid and ultimate contract B, all is well. If ever a submission advocated placing form above substance, this is it.
50 It is true that the Province had legal advice and did not proceed in defiance of it. However, the facts as found by the trial judge about this legal advice hardly advance the Province's position. The judge found that the Province's lawyer was not aware of the background relevant to the question of whether the Brentwood bid was eligible, never reviewed the proponent eligibility requirements in the RFP and was not asked to and did not direct his mind to the question of eligibility. As the trial judge put it, the lawyer "appears to have operated on the assumption that Brentwood had been irreversibly selected" (para. 70).
51 The Brentwood/EAC joint venture having been selected as the preferred proponent, negotiations for the alliance contract ensued. The trial judge found that by this time, all agreed that a joint venture was not an eligible proponent and the Ministry was taking the position that the contract could not be in the name of the joint venture. Brentwood and EAC executed a revised pre-contract agreement that provided, notwithstanding the letter of intent from the Ministry addressed to Brentwood indicating that the legal relationship between them would be contractor/subcontractor, the contract would be performed and the profits shared equally between them. The work was to be managed by a committee with equal representation, the bond required by the owner was to be provided by both parties and EAC indemnified Brentwood against half of any loss or cost incurred as a result of performance of the work. According to schedule B4 of the RFP, all subcontracts were to be attached to the RFP but no contract between Brentwood and EAC was ever provided or attached to the proposal.
52 The Province has identified no palpable and overriding error in these many findings of fact by the trial judge. I conclude, therefore, that we must approach the case on the basis of the judge's finding that the bid was in fact, if not in form, submitted by a joint venture of Brentwood and EAC, that the Ministry was well aware of this, that the existence of the joint venture was a material consideration in favour of the bid during the evaluation process and that by bidding as a joint venture, Brentwood was given a competitive advantage in the bidding process.
53 I reject the Ministry's submissions that all that matters is the form and not the substance of the arrangement. In my view, the trial judge's finding that this bid was in fact on behalf of a joint venture is unassailable.
54 I turn to the Province's third point:
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(iii) there was no term of the RFP that restricted the right of proponents to enter into joint venture agreements with others; this arrangement merely left Brentwood, the original proponent in place and allowed it to enhance its ability to perform the work.
55 This submission addresses the question of whether the joint venture was an eligible bidder. The Province submits that it is, arguing that s. 2.8(b) of the RFP shows that the RFP contemplated that each proponent would be supported by a team, that the composition of the team might change and that the Province under that section retained the right to approve or reject changes in the team of any proponent. I cannot accept these submissions.
56 Section 2.8 must be read as a whole and in light of the ministerial approval which I have described earlier. Section 2.8(a), consistent with that approval, stipulates that only the six proponents qualified through the RFEI process were eligible to submit responses and that proposals from any other party "shall not be considered". The word "proponent" is defined in s. 8 as a team that has become eligible to respond to the RFP. The material change provisions in s. 2.8(b) should not be read as negating the express provisions of the RFP and the ministerial approval of the process. When read as a whole, the provisions about material change do not permit the addition of a new entity as occurred here. The process actually followed was not the one specified in the bidding contract and was not authorized by the statute because it was not the one approved by the Minister.
57 Moreover, even if one were to conclude (and I would not) that this change from the Brentwood team that participated in the RFEI to the Brentwood/EAC joint venture by whom the bid was submitted could fall within the material change provisions of s. 2.8(b), the Province never gave a written decision to permit this change as required by that provision. As the trial judge noted, in fact the Province's position was that such a bid would not be eligible and its agents took steps to obfuscate the true proponent in the relevant documentation.
58 The trial judge also found that there was an implied obligation of good faith in the contract and that the Province breached this obligation by failing to treat all bidders equally by changing the terms of eligibility to Brentwood's competitive advantage. This conclusion strongly reinforces the trial judge's decision about eligibility. Rather than repeating her detailed findings, I will simply quote her summary at para. 138:
The whole of [the Province's] conduct leaves me with no doubt that the [Province] breached the duty of fairness to [Tercon] by changing the terms of eligibility to Brentwood's competitive advantage. At best, [the Province] ignored significant information to its [i.e. Tercon's] detriment. At worst, the [Province] covered up its knowledge that the successful proponent was an ineligible joint venture. In the circumstances here, it is not open to the [Province] to say that a joint venture was only proposed. Nor can the [Province] say that it was unaware fo the joint venture when it acted deliberately to structure contract B to exclude EAC as fully responsible within a separate contract with Brentwood, so minimizing the [Province's] risk that the contract would be unenforceable against EAC if arrangements did not work out. .... The [Province] was ... prepared to take the risk that unsuccessful bidders would sue: this risk did materialize.
59 To conclude on this point, I find no fault with the trial judge's conclusion that the bid was in fact submitted on behalf of a joint venture of Brentwood and EAC which was an ineligible bidder under the terms of the RFP. This breached not only the express eligibility provisions of the tender documents, but also the implied duty to act fairly towards all bidders.
B. The Exclusion Clause:
1. Introduction
60 As noted, the RFP includes an exclusion clause which reads as follows:
2.10 ... Except as expressly and specifically permitted in these Instructions to Proponents, no Proponent shall have any claim for compensation of any kind whatsoever, as a result of participating in this RFP, and by submitting a Proposal each Proponent shall be deemed to have agreed that it has no claim. [Emphasis added.]
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61 The trial judge held that as a matter of construction, the clause did not bar recovery for the breaches she had found. The clause, in her view, was ambiguous and, applying the contra proferentem principle, she resolved the ambiguity in Tercon's favour. She also found that the Province's breach was fundamental and that it was not fair or reasonable to enforce the exclusion clause in light of the nature of the Province's breach. The Province contends that the judge erred both with respect to the construction of the clause and her application of the doctrine of fundamental breach.
62 On the issue of fundamental breach in relation to exclusion clauses, my view is that the time has come to lay this doctrine to rest, as Dickson C.J. was inclined to do more than 20 years ago: Syncrude Canada Ltd. v. Hunter Engineering Co., [1989] 1 S.C.R. 426 (S.C.C.), at p. 462. I agree with the analytical approach that should be followed when tackling an issue relating to the applicability of an exclusion clause set out by my colleague Binnie J. However, I respectfully do not agree with him on the question of the proper interpretation of the clause in issue here. In my view, the clause does not exclude Tercon's claim for damages, and even if I am wrong about that, the clause is at best ambiguous and should be construed contra proferentem as the trial judge held. As a result of my conclusion on the interpretation issue, I do not have to go on to apply the rest of the analytical framework set out by Binnie J.
63 In my view, the exclusion clause does not cover the Province's breaches in this case. The RFP process put in place by the Province was premised on a closed list of bidders; a contest with an ineligible bidder was not part of the RFP process and was in fact expressly precluded by its terms. A "Contract A" could not arise as a result of submission of a bid from any other party. However, as a result of how the Province proceeded, the very premise of its own RFP process was missing, and the work was awarded to a party who could not be a participant in the RFP process. That is what Tercon is complaining about. Tercon's claim is not barred by the exclusion clause because the clause only applies to claims arising "as a result of participating in [the] RFP", not to claims resulting from the participation of other, ineligible parties. Moreover, the words of this exclusion clause, in my view, are not effective to limit liability for breach of the Province's implied duty of fairness to bidders. I will explain my conclusion by turning first to a brief account of the key legal principles and then to the facts of the case.
2. Legal Principles
64 The key principle of contractual interpretation here is that the words of one provision must not be read in isolation but should be considered in harmony with the rest of the contract and in light of its purposes and commercial context. The approach adopted by the Court in M.J.B. is instructive. The Court had to interpret a privilege clause, which is somewhat analogous to the exclusion clause in issue here. The privilege clause provided that the lowest or any tender would not necessarily be accepted, and the issue was whether this barred a claim based on breach of an implied term that the owner would accept only compliant bids. In interpreting the privilege clause, the Court looked at its text in light of the contract as a whole, its purposes and commercial context. As Iacobucci J. said, at para. 44, "the privilege clause is only one term of Contract A and must be read in harmony with the rest of the tender documents. To do otherwise would undermine the rest of the agreement between the parties."
65 In a similar way, it is necessary in the present case to consider the exclusion clause in the RFP in light of its purposes and commercial context as well as of its overall terms. The question is whether the exclusion of compensation for claims resulting from "participating in this RFP", properly interpreted, excludes liability for the Province having unfairly considered a bid from a bidder who was not supposed to have been participating in the RFP process at all.
3. Application to this Case
66 Having regard to both the text of the clause in its broader context and to the purposes and commercial context of the RFP, my view is that this claim does not fall within the terms of the exclusion clause.
67 To begin, it is helpful to recall that in interpreting tendering contracts, the Court has been careful to consider the special commercial context of tendering. Effective tendering ultimately depends on the integrity and business efficacy of the tendering process: see, e. g., Martel, at para. 88; M.J.B., at para. 41; Double N Earthmovers Ltd., at para. 106. As Iacobucci and Major JJ. put it in Martel, at para. 116,"it is imperative that all bidders be treated on an equal footing ... Parties should at the very
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 14 Tercon Contractors Ltd. v. British Columbia (Minister of..., 2010 SCC 4, 2010... 2010 SCC 4, 2010 CarswellBC 296, 2010 CarswellBC 297, [2010] 1 S.C.R. 69... least be confident that their initial bids will not be skewed by some underlying advantage in the drafting of the call for tenders conferred upon only one potential bidder".
68 This factor is particularly weighty in the context of public procurement. In that context, in addition to the interests of the parties, there is the need for transparency for the public at large. This consideration is underlined by the statutory provisions which governed the tendering process in this case. Their purpose was to assure transparency and fairness in public tenders. As was said by Orsborn J. (as he then was) in G.J. Cahill & Co. (1979) Ltd. v. Newfoundland & Labrador (Minister of Municipal & Provincial Affairs), 2005 NLTD 129, 250 Nfld. & P.E.I.R. 145 (N.L. T.D.), at para. 35:
The owner — in this case the government — is in control of the tendering process and may define the parameters for a compliant bid and a compliant bidder. The corollary to this, of course, is that once the owner — here the government — sets the rules, it must itself play by those rules in assessing the bids and awarding the main contract.
69 One aspect that is generally seen as contributing to the integrity and business efficacy of the tendering process is the requirement that only compliant bids be considered. As noted earlier, such a requirement has often been implied because, as the Court said in M.J.B., it makes little sense to think that a bidder would comply with the bidding process if the owner could circumscribe it by accepting a non-compliant bid. Respectfully, it seems to me to make even less sense to think that eligible bidders would participate in the RFP if the Province could avoid liability for ignoring an express term concerning eligibility to bid on which the entire RFP was premised and which was mandated by the statutorily approved process.
70 The closed list of bidders was the foundation of this RFP and there were important competitive advantages to a bidder who could side-step that limitation. Thus, it seems to me that both the integrity and the business efficacy of the tendering process support an interpretation that would allow the exclusion clause to operate compatibly with the eligibility limitations that were at the very root of the RFP.
71 The same may be said with respect to the implied duty of fairness. As Iacobucci and Major JJ. wrote for the Court in Martel, at para. 88, "[i]mplying an obligation to treat all bidders fairly and equally is consistent with the goal of protecting and promoting the integrity of the bidding process." It seems to me that clear language is necessary to exclude liability for breach of such a basic requirement of the tendering process, particularly in the case of public procurement.
72 The proper interpretation of the exclusion clause should also take account of the statutory context which I have reviewed earlier. The restriction on eligibility of bidders was a key element of the alternative process approved by the Minister. It seems unlikely, therefore, that the parties intended through this exclusion clause to effectively gut a key aspect of the approved process. Of course, it is true that the exclusion clause does not bar all remedies, but only claims for compensation. However, the fact remains that as a practical matter, there are unlikely to be other, effective remedies for considering and accepting an ineligible bid and that barring compensation for a breach of that nature in practical terms renders the ministerial approval process virtually meaningless. Whatever administrative law remedies may be available, they are not likely to be effective remedies for awarding a contract to an ineligible bidder. The Province did not submit that injunctive relief would have been an option, and I can, in any event, foresee many practical problems that need not detain us here in seeking such relief in these circumstances.
73 The Province stresses Tercon's commercial sophistication, in effect arguing that it agreed to the exclusion clause and must accept the consequences. This line of argument, however, has two weaknesses. It assumes the answer to the real question before us which is: what does the exclusion clause mean? The consequences of agreeing to the exclusion clause depend on its construction. In addition, the Province's submission overlooks its own commercial sophistication and the fact that sophisticated parties can draft very clear exclusion and limitation clauses when they are minded to do so. Such clauses contrast starkly with the curious clause which the Province inserted into this RFP. The limitation of liability clause in Hunter Engineering, for example, provided that "[n]otwithstanding any other provision in this contract or any applicable statutory provisions neither the Seller nor the Buyer shall be liable to the other for special or consequential damages or damages for loss of use arising directly or indirectly from any breach of this contract, fundamental or otherwise ..." (p. 450). The Court found this to be clear and unambiguous. The limitation clause in issue in Guarantee Co. of North America v. Gordon Capital Corp., [1999] 3 S.C.R. 423 (S.C.C.), provided that legal proceedings for the recovery of "any loss hereunder shall not be brought ... after the expiration of 24 months from the
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 15 Tercon Contractors Ltd. v. British Columbia (Minister of..., 2010 SCC 4, 2010... 2010 SCC 4, 2010 CarswellBC 296, 2010 CarswellBC 297, [2010] 1 S.C.R. 69... discovery of such loss" (para. 5). Once again, the Court found this language clear. The Ontario Court of Appeal similarly found the language of a limitation of liability clause to be clear in Fraser Jewellers (1982) Ltd. v. Dominion Electric Protection Co. (1997), 34 O.R. (3d) 1 (Ont. C.A.). The clause provided in part that if the defendant "should be found liable for loss, damage or injury due to a failure of service or equipment in any respect, its liability shall be limited to a sum equal to 100% or the annual service charge or $10,000, whichever is less, as the agreed upon damages and not as a penalty, as the exclusive remedy ..." (p. 4). These, and many other cases which might be referred to, demonstrate that sophisticated parties are capable of drafting clear and comprehensive limitation and exclusion provisions.
74 I turn to the text of the clause which the Province inserted in its RFP. It addresses claims that result from "participating in this RFP". As noted, the limitation on who could participate in this RFP was one of its premises. These words must, therefore, be read in light of the limit on who was eligible to participate in this RFP. As noted earlier, both the ministerial approval and the text of the RFP itself were unequivocal: only the six proponents qualified through the earlier RFEI process were eligible and proposals received from any other party would not be considered. Thus, central to "participating in this RFP" was participating in a contest among those eligible to participate. A process involving other bidders, as the trial judge found the process followed by the Province to be, is not the process called for by "this RFP" and being part of that other process is not in any meaningful sense "participating in this RFP".
75 The Province would have us interpret the phrase excluding compensation "as a result of participating in this RFP" to mean that compensation is excluded that results from "submitting a Proposal". However, that interpretation is not consistent with the wording of the clause as a whole. The clause concludes with the phrase that "by submitting a Proposal each Proponent shall be deemed to have agreed that it has no claim". If the phrases "participating in this RFP" and "submitting a Proposal" were intended to mean the same thing, it is hard to understand why different words were used in the same short clause to express the same idea. The fact that the Minister had approved a closed list of participants strengthens the usual inference that the use of different words was deliberate so as not to exclude compensation for a departure from that basic eligibility requirement.
76 This interpretation of the exclusion clause does not rob it of meaning, but makes it compatible with other provisions of the RFP. There is a parallel between this case and the Court's decision in M.J.B. There, the Court found that there was compatibility between the privilege clause and the implied term to accept only compliant bids. Similarly, in this case, there is compatibility between the eligibility requirements of the RFP and the exclusion clause. Not any and every claim based on any and every deviation from the RFP provisions would escape the preclusive effect of the exclusion clause. It is only when the defect in the Province's adherence to the RFP process is such that it is completely outside that process that the exclusion clause cannot have been intended to operate. What is important here, in my view, is that the RFP in its conception, in its express provisions and in the statutorily required approval it was given, was premised on limiting eligibility to the six proponents in the RFEI process. Competition among others was not at all contemplated and was not part of the RFP process; in fact, the RFP expressly excluded that possibility. In short, limiting eligibility of bidders to those who had responded to the RFEI was the foundation of the whole RFP. As the judge found, acceptance of a bid from an ineligible bidder "attacks the underlying premise of the process" established by the RFP: para. 146. Liability for such an attack is not excluded by a clause limiting compensation resulting from participation in this RFP.
77 This interpretation is also supported by another provision of the RFP. Under s. 2.9, as mentioned earlier, the Province reserved to itself the right to unilaterally cancel the RFP and the right to propose a new RFP allowing additional bidders. If the exclusion clause were broad enough to exclude compensation for allowing ineligible bidders to participate, there seems to be little purpose in this reservation of the ability to cancel the RFP and issue a new one to a wider circle of bidders. It is also significant that the Province did not reserve to itself the right to accept a bid from an ineligible bidder or to unilaterally change the rules of eligibility. The RFP expressly did exactly the opposite. None of this, in my opinion, supports the view that the exclusion clause should be read as applying to the Province's conduct in this case.
78 To hold otherwise seems to me to be inconsistent with the text of the clause read in the context of the RFP as a whole and in light of its purposes and commercial context. In short, I cannot accept the contention that, by agreeing to exclude compensation for participating in this RFP process, the parties could have intended to exclude a damages claim resulting from the Province unfairly permitting a bidder to participate who was not eligible to do so. I cannot conclude that the provision was intended to
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 16 Tercon Contractors Ltd. v. British Columbia (Minister of..., 2010 SCC 4, 2010... 2010 SCC 4, 2010 CarswellBC 296, 2010 CarswellBC 297, [2010] 1 S.C.R. 69... gut the RFP's eligibility requirements as to who may participate in it, or to render meaningless the Minister's statutorily required approval of the alternative process where this was a key element. The provision, as well, was not intended to allow the Province to escape a damages claim for applying different eligibility criteria, to the competitive disadvantage of other bidders and for taking steps designed to disguise the true state of affairs. I cannot conclude that the parties, through the words found in this exclusion clause, intended to waive compensation for conduct like that of the Province in this case that strikes at the heart of the integrity and business efficacy of the tendering process which it undertook.
79 If I am wrong about my interpretation of the clause, I would hold, as did the trial judge, that its language is at least ambiguous. If, as the Province contends, the phrase "participating in this RFP" could reasonably mean "submitting a Proposal", that phrase could also reasonably mean "competing against the other eligible participants". Any ambiguity in the context of this contract requires that the clause be interpreted against the Province and in favour of Tercon under the principle contra proferentem: see, e.g. Hillis Oil & Sales Ltd. v. Wynn's Canada Ltd., [1986] 1 S.C.R. 57 (S.C.C.), at pp. 68-69. Following this approach, the clause would not apply to bar Tercon's damages claim.
V. Disposition
80 I conclude that the judge did not err in finding that the Province breached the tendering contract or in finding that Tercon's remedy in damages for that breach was not precluded by the exclusion clause in the contract. I would therefore allow the appeal, set aside the order of the Court of Appeal and restore the judgment of the trial judge. The parties advise that the question of costs has been resolved between them and that therefore no order in relation to costs is required.
Binnie J. (dissenting):
81 The important legal issue raised by this appeal is whether, and in what circumstances, a court will deny a defendant contract breaker the benefit of an exclusion of liability clause to which the innocent party, not being under any sort of disability, has agreed. Traditionally, this has involved consideration of what is known as the doctrine of fundamental breach, a doctrine which Dickson C.J. in Syncrude Canada Ltd. v. Hunter Engineering Co., [1989] 1 S.C.R. 426 (S.C.C.), suggested should be laid to rest 21 years ago (p. 462).
82 On this occasion we should again attempt to shut the coffin on the jargon associated with "fundamental breach". Categorizing a contract breach as "fundamental" or "immense" or "colossal" is not particularly helpful. Rather, the principle is that a court has no discretion to refuse to enforce a valid and applicable contractual exclusion clause unless the plaintiff (here the appellant Tercon) can point to some paramount consideration of public policy sufficient to override the public interest in freedom of contact and defeat what would otherwise be the contractual rights of the parties. Tercon points to the public interest in the transparency and integrity of the government tendering process (in this case, for a highway construction contract) but in my view such a concern, while important, did not render unenforceable the terms of the contract Tercon agreed to. There is nothing inherently unreasonable about exclusion clauses. Tercon is a large and sophisticated corporation. Unlike my colleague Justice Cromwell, I would hold that the respondent Ministry's conduct, while in breach of its contractual obligations, fell within the terms of the exclusion clause. In turn, there is no reason why the clause should not be enforced. I would dismiss the appeal.
I. Overview
83 This appeal concerns a contract to build a $35 million road in the remote Nass Valley of British Columbia (the "Kincolith project"). The respondent Ministry accepted a bid from Brentwood Enterprises Ltd. that did not comply with the terms of tender. Tercon, as the disappointed finalist in the bidding battle, seeks compensation equivalent to the profit it expected to earn had it been awarded the contract.
84 Tercon alleged, and the trial judge found, that although the winning bid was submitted in the name of Brentwood (an eligible bidder) Brentwood in fact intended, with the Ministry's knowledge and encouragement, to do the work in a co-venture with an ineligible bidder, Emil Anderson Construction Co. ("EAC"). The respondent Ministry raised a number of defences including the fact that the formal contract was signed in the name of Brentwood alone. This defence was rejected in the courts below. The Ministry's substantial defence in this Court is that even if it failed to abide by the bidding rules, it is nonetheless
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 17 Tercon Contractors Ltd. v. British Columbia (Minister of..., 2010 SCC 4, 2010... 2010 SCC 4, 2010 CarswellBC 296, 2010 CarswellBC 297, [2010] 1 S.C.R. 69... protected by an exclusion of compensation clause set out clearly in the request for proposals ("RFP"). The clause provided that "no Proponent shall have any claim for compensation of any kind whatsoever, as a result of participating in this RFP" and that "by submitting a Proposal each Proponent shall be deemed to have agreed that it has no claim" (s. 2.10 of the RFP).
85 The appeal thus brings into conflict the public policy that favours a fair, open and transparent bid process, and the freedom of contract of sophisticated and experienced parties in a commercial environment to craft their own contractual relations. I agree with Tercon that the public interest favours an orderly and fair scheme for tendering in the construction industry, but there is also a public interest in leaving knowledgeable parties free to order their own commercial affairs. In my view, on the facts of this case, the Court should not rewrite — nor should the Court refuse to give effect to — the terms agreed to by the parties.
86 I accept, as did the courts below, that the respondent Ministry breached the terms of its own RFP when it contracted with Brentwood, knowing the work would be carried out by a co-venture with Brentwood and EAC. The addition of EAC, a bigger contractor with greater financial resources than Brentwood, created a stronger competitor for Tercon than Brentwood alone. However, I also agree with the B.C. Court of Appeal that the exclusion of compensation clause is clear and unambiguous and that no legal ground or rule of law permits us to override the freedom of the parties to contract (or to decline to contract) with respect to this particular term, or to relieve Tercon against its operation in this case.
II. The Tendering Process
87 For almost three decades the law governing a structured bidding process has been dominated by the concept of Contract A/Contract B initially formulated in R. v. Ron Engineering & Construction (Eastern) Ltd., [1981] 1 S.C.R. 111 (S.C.C.). The analysis advanced by Estey J. in that case was that the bidding process, as defined by the terms of the tender call, may create contractual relations ("Contract A") prior in time and quite independently of the contract that is the actual subject matter of the bid ("Contract B"). Breach of Contract A may, depending on its terms, give rise to contractual remedies for non-performance even if Contract B is never entered into or, as in the present case, it is awarded to a competitor. The result of this legal construct is to provide unsuccessful bidders with a contractual remedy against an owner who departs from its own bidding rules. Contract A, however, arises (if at all) as a matter of interpretation. It is not imposed as a rule of law.
88 In Ron Engineering, the result of Estey J.'s analysis was that as a matter of contractual interpretation, the Ontario government was allowed to retain a $150,000 bid bond put up by Ron Engineering even though the government was told, a little over an hour after the bids were opened, that Ron Engineering had made a $750,058 error in the calculation of its bid and wished to withdraw it. Estey J. held:
The contractor was not asked to sign a contract which diverged in any way from its tender but simply to sign a contract in accordance with the instructions to tenderers and in conformity with its own tender. [p. 127]
In other words, harsh as it may have seemed to Ron Engineering, the parties were held to their bargain. The Court was not prepared to substitute "fair and reasonable" terms for what the parties had actually agreed to.
89 In M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd., [1999] 1 S.C.R. 619 (S.C.C.), Contract A included a "privilege" clause which stated that the owner was not obliged to accept the lowest or any tender. The Court implied a term, based on the presumed intention of the parties, that notwithstanding the privilege clause, only compliant bids were open to acceptance. While the owner was not obliged to accept the lowest compliant bid, the privilege clause did not, as a matter of contractual interpretation, give the owner "the privilege" of accepting a non-compliant bid. M.J.B. stops short of the issue in the present appeal because in that case, there was a breach of Contract A but no clause purporting to exclude liability on the part of the owner to pay compensation in the event of a Contract A violation.
90 In Naylor Group Inc. v. Ellis-Don Construction Ltd., 2001 SCC 58, [2001] 2 S.C.R. 943 (S.C.C.), the Court enforced the rules of the bid depository system against a contractor whose bid was based on what turned out to be a mistaken view of its collective bargaining status with the International Brotherhood of Electrical Workers. The Court again affirmed that "[t]he existence and content of Contract A will depend on the facts of the particular case" (para. 36). Ellis-Don sought relief from its bid on the basis of a labour board decision rendered subsequent to its bid that upheld, to its surprise, the bargaining rights of
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 18 Tercon Contractors Ltd. v. British Columbia (Minister of..., 2010 SCC 4, 2010... 2010 SCC 4, 2010 CarswellBC 296, 2010 CarswellBC 297, [2010] 1 S.C.R. 69... the union. This Court held that no relief was contemplated in the circumstances under Contract A and none was afforded, even though this was a costly result when viewed from the perspective of Ellis-Don.
91 In Martel Building Ltd. v. R., 2000 SCC 60, [2000] 2 S.C.R. 860 (S.C.C.), citing M.J.B., the Court implied a term in Contract A obligating the owner to be fair and consistent in the assessment of tender bids. On the facts, the disappointed bidder's claim of unfair treatment was rejected.
92 Finally, in Double N Earthmovers Ltd. v. Edmonton (City), 2007 SCC 3, [2007] 1 S.C.R. 116 (S.C.C.), the unsuccessful bidder claimed that Edmonton had accepted, in breach of Contract A, a competitor's non-compliant bid to provide heavy equipment of a certain age to move refuse at a waste disposal site. The Court refused to imply a term "requiring an owner to investigate to see if bidders will really do what they promised in their tender" (para. 50). Accepting the existence of a duty of "fairness and equality", the majority nevertheless held that "[t]he best way to make sure that all bids receive the same treatment is for an owner to weigh bids on the basis of what is actually in the bid, not to weigh them on the basis of subsequently discovered information" (para. 52). In other words, the majority's interpretation of the express terms of Contract A was enforced despite Double N Earthmovers' complaint of double dealing by the owner.
93 On the whole, therefore, while Ron Engineering and its progeny have encouraged the establishment of a fair and transparent bidding process, Contract A continues to be based not on some abstract externally imposed rule of law but on the presumed (and occasionally implied) intent of the parties. Only in rare circumstances will the Court relieve a party from the bargain it has made.
94 As to implied terms, M.J.B. emphasized (at para.29) that the focus is "the intentions of the actual parties". A court, when dealing with a claim to an implied term, "must be careful not to slide into determining the intentions of reasonable parties" (emphasis in original). Thus "if there is evidence of a contrary intention, on the part of either party, an implied term may not be found on this basis".
95 Tercon is a large and experienced contractor. As noted by Donald J.A. in the B.C. Court of Appeal, it had earlier "successfully recovered damages from the [Ministry] on a bidding default on a previous case" (2007 BCCA 592, 73 B.C.L.R. (4th) 201 (B.C. C.A.), at para. 15). See Tercon Contractors Ltd. v. British Columbia (1993), 9 C.L.R. (2d) 197 (B.C. S.C.) aff'd, (B.C. C.A.). Thus Tercon would have been more sensitive than most contractors to the risks posed by an exclusion of compensation clause. It nevertheless chose to bid on the project on the terms proposed by the Ministry.
III. Tercon's Claim for Relief from the Exclusionary Clause it Agreed to
96 In these circumstances, the first question is whether there is either a statutory legal obstacle to, or a principled legal argument against, the freedom of these parties to contract out of the obligation that would otherwise exist for the Ministry to pay compensation for a breach of Contract A. If not, the second question is whether there is any other barrier to the court's enforcement of the exclusionary clause in the circumstances that occurred. On the first branch, Tercon relies on the Ministry of Transportation and Highways Act, R.S.B.C. 1996, c. 311 ("Transportation Act" or the "Act"). On the second branch, Tercon relies on the doctrine of fundamental breach.
A. The Statutory Argument
97 Section 4 of the Transportation Act provides that before awarding a highway contract, "the minister must invite tenders in any manner that will make the invitation for tenders reasonably available to the public", but then provides for several exceptions: "The minister need not invite tenders for a project ... if ... (c) the minister believes that an alternative contracting process will result in a competitively established cost for the project". Here the required ministerial authorization was obtained for an "alternative process". The reason is as follows. As noted by Cromwell J., the Ministry's original idea was to use a "design- build" model where a single contractor would design and build the highway for a fixed price. The Ministry issued a request for expressions of interest ("RFEI") which attracted six responses. One was from Tercon. Another was from Brentwood. EAC declined to bid because it did not think the "design-build" concept was appropriate for the job.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 19 Tercon Contractors Ltd. v. British Columbia (Minister of..., 2010 SCC 4, 2010... 2010 SCC 4, 2010 CarswellBC 296, 2010 CarswellBC 297, [2010] 1 S.C.R. 69...
98 On further reflection, the Ministry decided not to pursue the design-build approach. It decided to design the highway itself. The contract would be limited to construction, as EAC had earlier advocated. EAC was not allowed to bid despite the Ministry coming around to its point of view on the proper way to tender the project. The Ministry limited bidding on the new contest to the six respondents to the original RFEI, all of whom had been found capable of performing the contract. But to do so, it needed, and did obtain, the Minister's s. 4 approval.
99 A question arose during the hearing of the appeal as to whether the Minister actually approved an "alternative process" that not only restricted eligibility to the six participants in the RFEI process (an advantage to Tercon and the other five participants), but also contained the "no claims" clause excluding compensation for non-observance of its terms (no doubt considered a disadvantage). In its factum, the Ministry states:
In this case, the Minister approved an alternate process under [s. 4(2) of the B.C. Transportation Act]. That process was set out in the Instructions to Proponents, which included the No Claim Clause. Having been approved by the Minister, the package (including the No Claims Clause) complied with section 4 of the Transportation Act. [para. 70]
100 Tercon argued at the hearing of this appeal that as a matter of law, Contract A could not have included the exclusion clause because
[t]he policy of the [Transportation Act] is to ensure that the Ministry is accountable; to preserve confidence in the integrity of the tendering process. To ensure that is so and that the Minister is accountable, the Ministry must be held liable for its breach of Contract A in considering and accepting a proposal from the joint venture...... MADAM JUSTICE ABELLA: Can I just ask you one question. Is it your position, sir, that you can never have — that a government can never have a no claims clause?
MR. McLEAN: Yes. Under this statute because of the policy of the statute. [Transcript, at pp. 26-27]
101 While it is true that the Act favours "the integrity of the tendering process", it nowhere prohibits the parties from negotiating a "no claims" clause as part of their commercial agreement, and cannot plausibly be interpreted to have that effect.
102 In the ordinary world of commerce, as Dickson C.J. commented in Hunter, "clauses limiting or excluding liability are negotiated as part of the general contract. As they do with all other contractual terms, the parties bargain for the consequences of deficient performance" (p. 461). Moreover, as Mr. Hall points out, "[t]here are many valid reasons for contracting parties to use exemption clauses, most notably to allocate risks" (G. R. Hall, Canadian Contractual Interpretation Law (2007), at p. 243). Tercon for example is a sophisticated and experienced contractor and if it decided that it was in its commercial interest to proceed with the bid despite the exclusion of compensation clause, that was its prerogative and nothing in the "policy of the Act" barred the parties' agreement on that point.
103 To the extent Tercon is now saying that as a matter of fact the Minister, in approving the RFP, did not specifically approve the exclusion clause, and that the contract was thus somehow ultra vires the Ministry, this is not an issue that was either pleaded or dealt with in the courts below. The details of the ministerial approval process were not developed in the evidence. It is not at all evident that s. 4 required the Minister to approve the actual terms of the RFP. It is an administrative law point that Tercon, if so advised, ought to have pursued at pre-trial discovery and in the trial evidence. We have not been directed to any exploration of the matter in the testimony and it is too late in the proceeding for Tercon to explore it now. Accordingly, I proceed on the basis that the exclusion clause did not run afoul of the statutory requirements.
B. The Doctrine of the Fundamental Breach
104 The trial judge considered the applicability of the doctrine of fundamental breach. Tercon argued that the Ministry, by reason of its fundamental breach, had forfeited the protection of the exclusion of compensation clause.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 20 Tercon Contractors Ltd. v. British Columbia (Minister of..., 2010 SCC 4, 2010... 2010 SCC 4, 2010 CarswellBC 296, 2010 CarswellBC 297, [2010] 1 S.C.R. 69...
105 The leading case is Hunter which also dealt with an exclusion of liability clause. The appellants Hunter Engineering and Allis-Chalmers Canada Ltd. supplied gearboxes used to drive conveyor belts at Syncrude's tar sands operations in Northern Alberta. The gearboxes proved to be defective. At issue was a broad exclusion of warranty clause that limited time for suit and the level of recovery available against Allis-Chalmers (i.e. no recovery beyond the unit price of the defective products). Dickson C.J. observed: "In the face of the contractual provisions, Allis-Chalmers can only be found liable under the doctrine of fundamental breach" (p. 451).
106 This doctrine was largely the creation of Lord Denning in the 1950s (see, e.g., Harrow Karsales Ltd. v. Wallis, [1956] 1 W.L.R. 936 (Eng. C.A.)). It was said to be a rule of law that operated independently of the intention of the parties in circumstances where the defendant had so egregiously breached the contract as to deny the plaintiff substantially the whole of its benefit. In such a case, according to the doctrine, the innocent party was excused from further performance but the defendant could still be held liable for the consequences of its "fundamental" breach even if the parties had excluded liability by clear and express language. See generally S. M. Waddams, The Law of Contracts (5th ed. 2005), at para. 478; J. D. McCamus, The Law of Contracts (2005), at pp. 765 et seq.
107 The five-judge Hunter Court was unanimous in the result and gave effect to the exclusion clause at issue. Dickson C.J. and Wilson J. both emphasized that there is nothing inherently unreasonable about exclusion clauses and that they should be applied unless there is a compelling reason not to give effect to the words selected by the parties. At that point, there was some divergence of opinion.
108 Dickson C.J. (La Forest J. concurring) observed that the doctrine of fundamental breach had "spawned a host of difficulties" (p. 460), the most obvious being the difficulty in determining whether a particular breach is fundamental. The doctrine obliged the parties to engage in "games of characterization" (p. 460) which distracted from the real question of what agreement the parties themselves intended. Accordingly, in his view, the doctrine should be "laid to rest". The situations in which the doctrine is invoked could be addressed more directly and effectively through the doctrine of "unconscionability", as assessed at the time the contract was made:
It is preferable to interpret the terms of the contract, in an attempt to determine exactly what the parties agreed. If on its true construction the contract excludes liability for the kind of breach that occurred, the party in breach will generally be saved from liability. Only where the contract is unconscionable, as might arise from situations of unequal bargaining power between the parties, should the courts interfere with agreements the parties have freely concluded. [p. 462]
Dickson C.J. explained that "[t]he courts do not blindly enforce harsh or unconscionable bargains" (p. 462), but "there is much to be gained by addressing directly the protection of the weak from over-reaching by the strong, rather than relying on the artificial legal doctrine of 'fundamental breach'" (p. 462). To enforce an exclusion clause in such circumstances could tarnish the institutional integrity of the court. In that respect, it would be contrary to public policy. However, a valid exclusion clause would be enforced according to its terms.
109 Wilson J. (L'Heureux-Dubé J. concurring) disagreed. In her view, the courts retain some residual discretion to refuse to enforce exclusion clauses in cases of fundamental breach where the doctrine of pre-breach unconscionability (favoured by Dickson C.J.) did not apply. Importantly, she rejected the imposition of a general standard of reasonableness in the judicial scrutiny of exclusion clauses, affirming that "the courts ... are quite unsuited to assess the fairness or reasonableness of contractual provisions as the parties negotiated them" (p. 508). Wilson J. considered it more desirable to develop through the common law a post-breach analysis seeking a "balance between the obvious desirability of allowing the parties to make their own bargains ... and the obvious undesirability of having the courts used to enforce bargains in favour of parties who are totally repudiating such bargains themselves" (p. 510).
110 Wilson J. contemplated a two-stage test, in which the threshold step is the identification of a fundamental breach where "the foundation of the contract has been undermined, where the very thing bargained for has not been provided" (p. 500). Having
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 21 Tercon Contractors Ltd. v. British Columbia (Minister of..., 2010 SCC 4, 2010... 2010 SCC 4, 2010 CarswellBC 296, 2010 CarswellBC 297, [2010] 1 S.C.R. 69... found a fundamental breach to exist, the exclusion clause would not automatically be set aside, but the court should go on to assess whether, having regard to the circumstances of the breach, the party in fundamental breach should escape liability:
Exclusion clauses do not automatically lose their validity in the event of a fundamental breach by virtue of some hard and fast rule of law. They should be given their natural and true construction so that the meaning and effect of the exclusion clause the parties agreed to at the time the contract was entered into is fully understood and appreciated. But, in my view, the court must still decide, having ascertained the parties' intention at the time the contract was made, whether or not to give effect to it in the context of subsequent events such as a fundamental breach committed by the party seeking its enforcement through the courts. ... [T]he question essentially is: in the circumstances that have happened should the court lend its aid to A to hold B to this clause? [Emphasis added; pp. 510-11.]
111 Wilson J. reiterated that "as a general rule" courts should give effect to exclusion clauses even in the case of fundamental breach (p. 515). Nevertheless, a residual discretion to withhold enforcement exists:
Lord Wilberforce [in Photo Production Ltd. v. Securicor Transport Ltd., [1980] A.C. 827 (H.L.)] may be right that parties of equal bargaining power should be left to live with their bargains regardless of subsequent events. I believe, however, that there is some virtue in a residual power residing in the court to withhold its assistance on policy grounds in appropriate circumstances. [Emphasis added; p. 517]
Wilson J. made it clear that such circumstances of disentitlement would be rare. She acknowledged that an exclusion clause might well be accepted with open eyes by a party "very anxious to get" the contract (p. 509). However, Wilson J. did not elaborate further on what such circumstances might be because she found in Hunter itself that no reason existed to refuse the defendant Allis-Chalmers the benefit of the exclusion clause.
112 The fifth judge, McIntyre J., in a crisp two-paragraph judgment, agreed with the conclusion of Wilson J. in respect of the exclusion clause issue but found it "unnecessary to deal further with the concept of fundamental breach in this case" (p. 481).
113 The law was left in this seemingly bifurcated state until Guarantee Co. of North America v. Gordon Capital Corp., [1999] 3 S.C.R. 423 (S.C.C.). In that case, the Court breathed some life into the dying doctrine of fundamental breach while nevertheless affirming (once again) that whether or not a "fundamental breach prevents the breaching party from continuing to rely on an exclusion clause is a matter of construction rather than a rule of law" (at para. 52). In other words, the question was whether the parties intended at the time of contract formation that the exclusion or limitation clause would apply "in circumstances of contractual breach, whether fundamental or otherwise" (para. 63). The Court thus emphasized that what was important was not the label ("fundamental or otherwise") but the intent of the contracting parties when they made their bargain. "The only limitation placed upon enforcing the contract as written in the event of a fundamental breach", the Court in Guarantee Co. continued,
would be to refuse to enforce an exclusion, of liability in circumstances where to do so would be unconscionable, according to Dickson C.J., or [note the disjunctive "or"] unfair, unreasonable or otherwise contrary to public policy, according to Wilson J. [Emphasis added; para. 52.]
(See also para. 64.)
What has given rise to some concern is not the reference to "public policy", whose role in the enforcement of contracts has never been doubted, but to the more general ideas of "unfair" and "unreasonable", which seemingly confer on courts a very broad after-the-fact discretion.
114 The Court's subsequent observations in Domtar Inc. v. Abb Inc., 2007 SCC 50, [2007] 3 S.C.R. 461 (S.C.C.), should be seen in that light. Domtar was a products liability case arising under the civil law of Quebec, but the Court observed with respect to the common law:
Once the existence of a fundamental breach has been established, the court must still analyse the limitation of liability clause in light of the general rules of contract interpretation. If the words can reasonably be interpreted in only one way, it
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will not be open to the court, even on grounds of equity or reasonableness, to declare the clause to be unenforceable since this would amount to rewriting the contract negotiated by the parties. [Emphasis added; para. 84.]
While the Domtar Court continued to refer to "fundamental breach", it notably repudiated any judicial discretion to depart from the terms of a valid contact upon vague notions of "equity or reasonableness". It did not, however, express any doubt about the residual category mentioned in Guarantee Co., namely a refusal to enforce an exclusion clause on the grounds of public policy.
115 I agree with Professor Waddams when he writes:
[I]t is surely inevitable that a court must reserve the ultimate power to decide when the values favouring enforceability are outweighed by values that society holds to be more important. [para. 557]
116 While memorably described as an unruly horse, public policy is nevertheless fundamental to contract law, both to contractual formation and enforcement and (occasionally) to the court's relief against enforcement. As Duff C.J. observed:
It is the duty of the courts to give effect to contracts and testamentary dispositions according to the settled rules and principles of law, since we are under a reign of law; but there are cases in which rules of law cannot have their normal operation because the law itself recognizes some paramount consideration of public policy which over-rides the interest and what otherwise would be the rights and powers of the individual.
(Millar, Re (1937), [1938] S.C.R. 1 (S.C.C.), at p. 4)
See generally B. Kain and D. T. Yoshida, "The Doctrine of Public Policy in Canadian Contract Law", in T. L. Archibald and R. S. Echlin, eds., Annual Review of Civil Litigation, 2007 (2007), 1.
117 As Duff C.J. recognized, freedom of contract will often, but not always, trump other societal values. The residual power of a court to decline enforcement exists but, in the interest of certainty and stability of contractual relations, it will rarely be exercised. Duff C.J. adopted the view that public policy "should be invoked only in clear cases in which the harm to the public is substantially incontestable, and does not depend upon the idiosyncratic inferences of a few judicial minds" (p. 7). While he was referring to public policy considerations pertaining to the nature of the entire contract, I accept that there may be well-accepted public policy considerations that relate directly to the nature of the breach, and thus trigger the court's narrow jurisdiction to give relief against an exclusion clause.
118 There are cases where the exercise of what Professor Waddams calls the "ultimate power" to refuse to enforce a contract may be justified, even in the commercial context. Freedom of contract, like any freedom, may be abused. Take the case of the milk supplier who adulterates its baby formula with a toxic compound to increase its profitability at the cost of sick or dead babies. In China, such people were shot. In Canada, should the courts give effect to a contractual clause excluding civil liability in such a situation? I do not think so. Then there are the people, also fortunately resident elsewhere, who recklessly sold toxic cooking oil to unsuspecting consumers, creating a public health crisis of enormous magnitude. Should the courts enforce an exclusion clause to eliminate contractual liability for the resulting losses in such circumstances? The answer is no, but the contract breaker's conduct need not rise to the level of criminality or fraud to justify a finding of abuse.
119 A less extreme example in the commercial context is Plas-Tex Canada Ltd. v. Dow Chemical of Canada Ltd., 2004 ABCA 309, 245 D.L.R. (4th) 650 (Alta. C.A.). The Alberta Court of Appeal refused to enforce an exclusion clause where the defendant Dow knowingly supplied defective plastic resin to a customer who used it to fabricate natural gas pipelines. Instead of disclosing its prior knowledge of the defect to the buyer, Dow chose to try to protect itself by relying upon limitation of liability clauses in its sales contracts. After some years, the pipelines began to degrade, with considerable damage to property and risk to human health from leaks and explosions. The court concluded that "a party to a contract will not be permitted to engage in unconscionable conduct secure in the knowledge that no liability can be imposed upon it because of an exclusionary clause" (para. 53). (See also McCamus, at p. 774, and Hall, at p. 243). What was demonstrated in Plas-Tex was that the defendant Dow was so contemptuous of its contractual obligation and reckless as to the consequences of the breach as to forfeit the assistance of the court. The public policy that favours freedom of contract was outweighed by the public policy that seeks to curb its abuse.
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120 Conduct approaching serious criminality or egregious fraud are but examples of well-accepted and "substantially incontestable" considerations of public policy that may override the countervailing public policy that favours freedom of contract. Where this type of misconduct is reflected in the breach of contract, all of the circumstances should be examined very carefully by the court. Such misconduct may disable the defendant from hiding behind the exclusion clause. But a plaintiff who seeks to avoid the effect of an exclusion clause must identify the overriding public policy that it says outweighs the public interest in the enforcement of the contract. In the present case, for the reasons discussed below, I do not believe Tercon has identified a relevant public policy that fulfills this requirement.
121 The present state of the law, in summary, requires a series of enquiries to be addressed when a plaintiff seeks to escape the effect of an exclusion clause or other contractual terms to which it had previously agreed.
122 The first issue, of course, is whether as a matter of interpretation the exclusion clause even applies to the circumstances established in evidence. This will depend on the Court's assessment of the intention of the parties as expressed in the contract. If the exclusion clause does not apply, there is obviously no need to proceed further with this analysis. If the exclusion clause applies, the second issue is whether the exclusion clause was unconscionable at the time the contract was made, "as might arise from situations of unequal bargaining power between the parties" (Hunter, at p. 462). This second issue has to do with contract formation, not breach.
123 If the exclusion clause is held to be valid and applicable, the Court may undertake a third enquiry, namely whether the Court should nevertheless refuse to enforce the valid exclusion clause because of the existence of an overriding public policy, proof of which lies on the party seeking to avoid enforcement of the clause, that outweighs the very strong public interest in the enforcement of contracts.
IV. Application to the Facts of this Case
124 I proceed to deal with the issues in the sequence mentioned above.
A. Did the Ministry Breach Contract A?
125 The trial judge found that the parties intended to create contractual relations at the bidding stage (i.e. Contract A): 2006 BCSC 499, 53 B.C.L.R. (4th) 138 (B.C. S.C.), at para. 88. I agree with that conclusion. If there were no intent to form Contract A, there would be no need to exclude liability for compensation in the event of its breach.
126 The Ministry argued that Contract A was not breached. It was entitled to enter into Contract B with Brentwood and it did so. There was no privity between the Ministry and EAC. The Ministry would have had no direct claim against EAC in the event of deficient performance. I accept as correct that Brentwood, having obtained Contract B, was in a position of considerable flexibility as to how and with whom it carried out the work. Nevertheless, it was open to the trial judge to conclude, as she did, that the RFP process was not conducted by the Ministry with the degree of fairness and transparency that the terms of Contract A entitled Tercon to expect. At the end of an unfair process, she found, Contract B was not awarded to Brentwood (the eligible bidder) but to what amounted to a joint venture consisting of Brentwood and EAC. I therefore proceed with the rest of the analysis on the basis that Contract A was breached.
B. What is the Proper Interpretation of the Exclusion of Compensation Clause and Did the Ministry's Conduct Fall Within its Terms?
127 It is at this stage that I part company with my colleague Cromwell J. The exclusion clause is contained in the RFP and provides as follows:
2:10 . . .
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Except as expressly and specifically permitted in these Instructions to Proponents, no Proponent shall have any claim for compensation of any kind whatsoever, as a result of participating in this RFP, and by submitting a Proposal each Proponent shall be deemed to have agree that it has no claim.
In my view, "participating in this RFP" began with "submitting a Proposal" for consideration. The RFP process consisted of more than the final selection of the winning bid and Tercon participated in it. Tercon's bid was considered. To deny that such participation occurred on the ground that in the end the Ministry chose a Brentwood joint venture (ineligible) instead of Brentwood itself (eligible) would, I believe, take the Court up the dead end identified by Wilson J. in Hunter:
... exclusion clauses, like all contractual provisions, should be given their natural and true construction. Great uncertainty and needless complications in the drafting of contracts will obviously result if courts give exclusion clauses strained and artificial interpretations in order, indirectly and obliquely, to avoid the impact of what seems to them ex post facto to have been an unfair and unreasonable clause. [p. 509]
Professor McCamus expresses a similar thought:
... the law concerning exculpatory clauses is likely to be more rather than less predictable if the underlying concern is openly recognized, as it is in Hunter, rather than suppressed and achieved indirectly through the subterfuge of strained interpretation of such terms. [p. 778]
128 I accept the trial judge's view that the Ministry was at fault in its performance of the RFP, but the conclusion that the process thereby ceased to be the RFP process appears to me, with due respect to colleagues of a different view, to be a "strained and artificial interpretatio[n] in order, indirectly and obliquely, to avoid the impact of what seems to them ex post facto to have been an unfair and unreasonable clause".
129 As a matter of interpretation, I agree with Donald J.A. speaking for the unanimous court below:
The [trial] judge said the word "participating" was ambiguous. With deference, I do not find it so. The sense it conveys is the contractor's involvement in the RFP/contract A stage of the process. I fail to see how "participating" could bear any other meaning. [Emphasis added; para. 16.]
Accordingly, I conclude that on the face of it, the exclusion clause applies to the facts described in the evidence before us.
C. Was the Claim Excluding Compensation Unconscionable at the Time Contract A was Made?
130 At this point, the focus turns to contract formation. Tercon advances two arguments: firstly, that it suffered from an inequality of bargaining power and secondly, (as mentioned) that the exclusion clause violates public policy as reflected in the Transportation Act.
(1) Unequal Bargaining Power
131 In Hunter, Dickson C.J. stated, at p. 462: "Only where the contract is unconscionable, as might arise from situations of unequal bargaining power between the parties, should the courts interfere with agreements the parties have freely concluded." Applying that test to the case before him, he concluded:
I have no doubt that unconscionability is not an issue in this case. Both Allis-Chalmers and Syncrude are large and commercially sophisticated companies. Both parties knew or should have known what they were doing and what they had bargained for when they entered into the contract. [p. 464]
While Tercon is not on the same level of power and authority as the Ministry, Tercon is a major contractor and is well able to look after itself in a commercial context. It need not bid if it doesn't like what is proposed. There was no relevant imbalance in bargaining power.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 25 Tercon Contractors Ltd. v. British Columbia (Minister of..., 2010 SCC 4, 2010... 2010 SCC 4, 2010 CarswellBC 296, 2010 CarswellBC 297, [2010] 1 S.C.R. 69...
(2) Policy of the Transportation Act
132 As mentioned earlier, Tercon cites and relies upon the policy of the Act which undoubtedly favours the transparency and integrity of the bidding process. I have already discussed my reasons for rejecting Tercon's argument that this "policy" operates as a bar to the ability of the parties to agree on such commonplace commercial terms as in the circumstances they think appropriate. In addition, the exclusion clause is not as draconian as Tercon portrays it. Other remedies for breach of Contract A (specific performance or injunctive relief, for example) were available.
133 In this case, injunction relief was in fact a live possibility. Although Tercon was not briefed on the negotiations with other bidders, the trial judge found that Glenn Walsh, the owner of Tercon, "had seen representatives of EAC with Brentwood following [the Brentwood/EAC interviews with the Ministry and Bill Swain of Brentwood]", and when asked whether Tercon was going to sue, Walsh had said "no" without further comment. Had Tercon pushed for more information and sought an injunction (as a matter of private law, not public law), at that stage the exclusion clause would have had no application, but Tercon did not do so. This is not to say that estoppel or waiver applies. Nor is it to say that injunctive relief would be readily available in many bidding situations (although if an injunction had been sought here, the unavailability of the alternative remedy of monetary damages might have assisted Tercon). It is merely to say that the exclusion clause is partial, not exhaustive.
134 The Kincolith road project presented a serious construction challenge on a tight time frame and within a tight budget. Contract A did not involve a bid for a fixed price contract but for the right to negotiate the bid details once the winning proponent was selected. In such a fluid situation, all participants could expect difficulties in the contracting process. Members of the construction bar are nothing if not litigious. In the circumstances, the bidders might reasonably have accepted (however reluctantly) the Ministry's need for a bidding process that excluded compensation, and adjusted their bids accordingly. The taxpayers of British Columbia were not prepared to pay the contractor's profit twice over — once to Brentwood/EAC for actually building the road, and now to Tercon, even though in Tercon's case the "profit" would be gained without Tercon running the risks associated with the performance of Contract B. The Court should not be quick to declare such a clause, negotiated between savvy participants in the construction business, to be "contrary to the Act".
D. Assuming the Validity of the Exclusion Clause at the Time the Contract was Made, is There Any Overriding Public Policy That Would Justify the Court's Refusal to Enforce it?
135 If the exclusion clause is not invalid from the outset, I do not believe the Ministry's performance can be characterized as so aberrant as to forfeit the protection of the contractual exclusion clause on the basis of some overriding public policy. While there is a public interest in a fair and transparent tendering process, it cannot be ratcheted up to defeat the enforcement of Contract A in this case. There was an RFP process and Tercon participated in it.
136 Assertions of ineligible bidders and ineligible bids are the bread and butter of construction litigation. If a claim to defeat the exclusion clause succeeds here on the basis that the owner selected a joint venture consisting of an eligible bidder with an ineligible bidder, so also by a parity of reasoning should an exclusion clause be set aside if the owner accepted a bid ineligible on other grounds. There would be little room left for the exclusion clause to operate. A more sensible and realistic view is that the parties here expected, even if they didn't like it, that the exclusion of compensation clause would operate even where the eligibility criteria in respect of the bid (including the bidder) were not complied with.
137 While the Ministry's conduct was in breach of Contract A, that conduct was not so extreme as to engage some overriding and paramount public interest in curbing contractual abuse as in the Plas-Tex case. Brentwood was not an outsider to the RFP process. It was a legitimate competitor. All bidders knew that the road contract (i.e. Contract B) would not be performed by the proponent alone. The work required a large "team" of different trades and personnel to perform. The issue was whether EAC would be on the job as a major sub-contractor (to which Tercon could not have objected) or identified with Brentwood as a joint venture "proponent" with EAC. All bidders were made aware of a certain flexibility with respect to the composition of any proponent's "team". Section 2.8(b) of the RFP provided that if "a material change has occurred to the Proponent since its qualification under the RFEI, including if the composition of the Proponent's team members has changed, ... the Ministry
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 26 Tercon Contractors Ltd. v. British Columbia (Minister of..., 2010 SCC 4, 2010... 2010 SCC 4, 2010 CarswellBC 296, 2010 CarswellBC 297, [2010] 1 S.C.R. 69... may request [further information and] ... reserves the right to disqualify that Proponent, and reject its Proposal". Equally, "[i]f a qualified Proponent is concerned that it has undergone a material change, the Proponent can, at its election, make a preliminary submission to the Ministry, in advance of the Closing Date, and before submitting a Proposal. ... The Ministry will, within three working days of receipt of the preliminary submission give a written decision as to whether the Proponent is still qualified to submit a Proposal."
138 The RFP issued on January 15, 2001. The Ministry was informed by Brentwood of a "proposed material change to our team's structure" in respect of a joint venture with EAC by fax dated January 24, 2001. From the Ministry's perspective, the change was desirable. EAC was a bigger company, had greater expertise in rock drilling and blasting (a major part of the contract) and a stronger balance sheet. EAC was identified in Brentwood's amended proposal as a sub-contractor. In the end, the Ministry did not approve the January 14, 2001 request, presumably because it doubted that a change in the "composition of the Proponent's team's members" could, according to the terms of the RFP, include a change in the Proponent itself.
139 The Ministry did obtain legal advice and did not proceed in defiance of it. On March 29, 2001, the Ministry noted in an internal e-mail that a Ministry lawyer (identified in the e-mail) had come to the conclusion that the joint venture was not an eligible proponent but advised that Contract B could lawfully be structured in a way so as to satisfy both Brentwood/EAC's concerns and avoid litigation from disappointed proponents.
140 I do not wish to understate the difference between EAC as a sub-contractor and EAC as a joint-venturer. Nor do I discount the trial judge's condemnation of the Ministry's lack of fairness and transparency in making a contract B which on its face was at odds with what the trial judge found to be the true state of affairs. Tercon has legitimate reason to complain about the Ministry's conduct. I say only that based on the jurisprudence, the Ministry's misconduct did not rise to the level where public policy would justify the court in depriving the Ministry of the protection of the exclusion of compensation clause freely agreed to by Tercon in the contract.
141 The construction industry in British Columbia is run by knowledgeable and sophisticated people who bid upon and enter government contracts with eyes wide open. No statute in British Columbia and no principle of the common law override their ability in this case to agree on a tendering process including a limitation or exclusion of remedies for breach of its rules. A contractor who does not think it is in its business interest to bid on the terms offered is free to decline to participate. As Donald J.A. pointed out, if enough contractors refuse to participate, the Ministry would be forced to change its approach. So long as contractors are willing to bid on such terms, I do not think it is the court's job to rescue them from the consequences of their decision to do so. Tercon's loss of anticipated profit is a paper loss. In my view, its claim is barred by the terms of the contract it agreed to.
V. Disposition
142 I would dismiss the appeal without costs. Appeal allowed.
Pourvoi accueilli.
Footnotes * A corrigendum issued by the court on March 18, 2010 has been incorporated herein.
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Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 27
TAB 18
18 Resolute FP Canada Inc. v. Ontario (Attorney General), 2019 SCC 60, 2019 CSC 60,... 2019 SCC 60, 2019 CSC 60, 2019 CarswellOnt 19886, 2019 CarswellOnt 19887...
2019 SCC 60, 2019 CSC 60 Supreme Court of Canada
Resolute FP Canada Inc. v. Ontario (Attorney General)
2019 CarswellOnt 19886, 2019 CarswellOnt 19887, 2019 SCC 60, 2019 CSC 60, [2019] S.C.J. No. 60, 29 C.E.L.R. (4th) 1, 311 A.C.W.S. (3d) 767, 444 D.L.R. (4th) 77, 96 B.L.R. (5th) 1
Resolute FP Canada Inc. (Appellant) and Her Majesty The Queen as represented by the Ministry of the Attorney General and Weyerhaeuser Company Limited (Respondents)
Her Majesty The Queen as represented by the Ministry of the Attorney General (Appellant) and Weyerhaeuser Company Limited and Resolute FP Canada Inc. (Respondents)
Weyerhaeuser Company Limited (Appellant) and Her Majesty The Queen as represented by the Ministry of the Attorney General (Respondent) and Attorney General of British Columbia (Intervener)
Abella, Moldaver, Karakatsanis, Côté, Brown, Rowe, Martin JJ.
Heard: March 28, 2019 Judgment: December 6, 2019 Docket: 37985
Proceedings: reversing in part Weyerhaeuser Company Limited v. Ontario (Attorney General) (2017), 77 B.L.R. (5th) 175, 13 C.E.L.R. (4th) 28, 2017 ONCA 1007, 2017 CarswellOnt 20156, David Brown J.A., John Laskin J.A., P. Lauwers J.A. (Ont. C.A.); reversing in part Weyerhaeuser Co. v. Ontario (Ministry of the Attorney General) (2016), 2016 CarswellOnt 11807, 2016 ONSC 4652, [2016] O.J. No. 3900, 60 B.L.R. (5th) 237, 3 C.E.L.R. (4th) 278, Hainey J. (Ont. S.C.J. [Commercial List])
Counsel: Andrew Bernstein, Jeremy Opolsky, Jonathan Silver, for Appellant / Respondent, Resolute FP Canada Inc. Leonard F. Marsello, Tamara D. Barclay, Nansy Ghobrial, for Appellant / Respondent, Her Majesty The Queen as represented by the Ministry of the Attorney General Christopher D. Bredt, Markus Kremer, for Appellant / Respondent, Weyerhaeuser Company Limited. Elizabeth J. Rowbotham, for Intervener, Attorney General of British Columbia
Subject: Civil Practice and Procedure; Environmental; Property; Public Headnote Environmental law --- Liability for environmental harm — Practice and procedure — Miscellaneous In 2011, Ministry of Environment issued director's order requiring W Ltd. and R Inc. to perform remedial work on abandoned mercury waste disposal site, as two of previous owners of site — W Ltd. and R Inc. contended they enjoyed benefit of 1985 indemnity provided by provincial government to earlier owners of pulp and paper facility, including waste disposal site — W Ltd. and R Inc. contended that government was obligated to indemnify them for any costs incurred to comply with director's order — Litigation ensued and motion judge granted summary judgment in favour of W Ltd. and R Inc. — Government's appeal was allowed in part — Government, W Ltd. and R Inc. appealed — Government's appeal allowed; R Inc. and W Ltd.'s appeals dismissed — Indemnity did not cover director's order — Motion judge misconstrued purpose and effect of waste disposal site — Site was not source of ongoing mercury contamination or environmental liability and therefore, its creation would not give rise to pollution claim — Indemnity was intended to cover only proceedings arising from discharge or continued presence of mercury in related ecosystems. Public law --- Crown — Miscellaneous In 2011, Ministry of Environment issued director's order requiring W Ltd. and R Inc. to perform remedial work on abandoned mercury waste disposal site, as two of previous owners of site — W Ltd. and R Inc. contended they enjoyed benefit of 1985
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 1 Resolute FP Canada Inc. v. Ontario (Attorney General), 2019 SCC 60, 2019 CSC 60,... 2019 SCC 60, 2019 CSC 60, 2019 CarswellOnt 19886, 2019 CarswellOnt 19887... indemnity provided by provincial government to earlier owners of pulp and paper facility, including waste disposal site — W Ltd. and R Inc. contended that government was obligated to indemnify them for any costs incurred to comply with director's order — Litigation ensued and motion judge granted summary judgment in favour of W Ltd. and R Inc. — Government's appeal was allowed in part — Government, W Ltd. and R Inc. appealed — Government's appeal allowed; R Inc. and W Ltd.'s appeals dismissed — Properly interpreted, indemnity only applied to third party claims — Fact that requirements of paras. 2 and 3 of memorandum of agreement would be utterly meaningless in first party claims implied that pollution claims encompassed only those brought by third parties. Droit de l'environnement --- Responsabilité pour dommages causés à l'environnement — Procédure — Divers En 2011, le ministère de l'Environnement a pris un arrêté du directeur exigeant de W ltée et R inc. qu'elles exécutent des travaux de réparation dans un lieu d'élimination de déchets mercuriels abandonné, en tant qu'anciennes propriétaires du site — W ltée et R inc. ont fait valoir qu'elles étaient bénéficiaires de l'indemnité de 1985 accordée par le gouvernement provincial aux anciennes propriétaires d'une usine de pâtes et papiers, incluant le lieu d'élimination de déchets — W ltée et R inc. ont fait valoir que le gouvernement était requis de les indemniser en raison de tout frais encouru pour se conformer à l'arrêté du directeur — Différend s'en est suivi et le juge des requêtes a rendu un jugement sommaire en faveur de W ltée et R inc. — Appel interjeté par le gouvernement a été accueilli en partie — Gouvernement, W ltée et R inc. ont formé des pourvois — Pourvoi du gouvernement accueilli; pourvois de R inc. et de W ltée rejetés — Indemnité ne visait pas l'arrêté du directeur — Juge des requêtes a mal interprété l'objet et l'effet du lieu d'élimination des déchets — Site n'était pas une source constante de contamination par le mercure ou de responsabilité environnementale, et sa création n'était donc pas susceptible de donner lieu à une réclamation pour pollution — Indemnité était censée s'appliquer seulement aux procédures découlant du rejet ou de la présence continue de mercure dans les écosystèmes connexes. Droit public --- Couronne — Divers En 2011, le ministère de l'Environnement a pris un arrêté du directeur exigeant de W ltée et R inc. qu'elles exécutent des travaux de réparation dans un lieu d'élimination de déchets mercuriels abandonné, en tant qu'anciennes propriétaires du site — W ltée et R inc. ont fait valoir qu'elles étaient bénéficiaires de l'indemnité de 1985 accordée par le gouvernement provincial aux anciennes propriétaires d'une usine de pâtes et papiers, incluant le lieu d'élimination de déchets — W ltée et R inc. ont fait valoir que le gouvernement était requis de les indemniser en raison de tout frais encouru pour se conformer à l'arrêté du directeur — Différend s'en est suivi et le juge des requêtes a rendu un jugement sommaire en faveur de W ltée et R inc. — Appel interjeté par le gouvernement a été accueilli en partie — Gouvernement, W ltée et R inc. ont formé des pourvois — Pourvoi du gouvernement accueilli; pourvois de R inc. et de W ltée rejetés — Interprétée comme il se doit, l'indemnité s'appliquait seulement aux réclamations de tiers — Fait que les exigences des par. 2 et 3 du protocole d'entente soient dénuées de tout sens en ce qui a trait aux réclamations de premières parties signifiait que les réclamations pour pollution englobaient seulement celles présentées par des tiers. In 1985, the province of Ontario granted an indemnity to two former owners of a pulp and paper mill as well as to their successors and assigns from and against any obligation, liability or loss after the date of indemnity as a result of a claim arising from damage, loss, event or circumstance caused by or with respect to the discharge, escape or presence of pollutants. The indemnity was agreed to by parties pursuant to a settlement of litigation brought by two First Nations in relation to the mercury waste contamination of two rivers. Twenty-six years later, the Ministry of the Environment and Climate Change issued a remediation order in relation to monitoring and maintaining the mercury waste disposal site at the mill. In the intervening period, ownership of the mill changed hands in several transactions and the order was issued to W Ltd. and R Inc. W Ltd. brought an action seeking a declaration that the terms of the indemnity required the government to compensate it for the cost of complying with the order. R Inc. brought a motion for leave to intervene in order to claim the same protection. W Ltd., R Inc. and the government each brought motions for summary judgment. The motion judge held that the indemnity applied to a statutory claim brought by an agent of the province. The motion judge granted the summary judgment in W Ltd. and R Inc.'s favour. The government appealed. The Court of Appeal agreed that the indemnity applied to the director's order but held that R Inc. was not entitled to indemnification and remitted W Ltd.'s entitlement to indemnification to the Superior Court. The majority of the Court of Appeal found that the motion judge erred in concluding that W Ltd. could claim the benefit of the enurement because this clause applied only to corporate successors. The government, R Inc. and W Ltd. appealed. Held: The government's appeal was allowed; R Inc. and W Ltd.'s appeals were dismissed.
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Per Abella, Moldaver, Karakatsanis, Martin JJ.: The indemnity did not cover the director's order. The motion judge erred in finding that the waste disposal site continued to discharge mercury into the environment. The mistaken finding that mercury discharges were an ongoing source of serious environmental liability undoubtedly drove the motion judge's conclusion that the discharges could give rise to pollution claims. There was no evidence of mercury-contaminated waste being discharged from the waste disposal site. The motion judge misconstrued the purpose and effect of the waste disposal site. The site was not a source of ongoing mercury contamination or environmental liability and as a result, its creation would not give rise to a pollution claim. The indemnity was intended to cover only proceedings arising from the discharge or continued presence of mercury in the related ecosystems, not those related to the mere presence of mercury contained in the waste disposal site. Properly interpreted, the indemnity only applied to third party claims. The fact that the requirements of paras. 2 and 3 of the memorandum of agreement would be utterly meaningless in first party claims implied that pollution claims encompassed only those brought by third parties. The inclusion of paras. 2 and 3 in the indemnity were completely inconsistent with the notion that para. 1 contemplated first party claims. Per Côté, Brown JJ. (dissenting in part) (Rowe J. concurring): R Inc.'s appeal should be allowed. R Inc. was entitled to rely on the indemnity to cover past and future costs incurred in complying with the director's order as a corporate successor. The motion judge did not err in failing to consider the text of the indemnity with reference to the factual matrix. The motion judge did not err in failing to interpret the indemnification clause in para. 1 in light of the agreement as a whole. The motion judge did not make any palpable and overriding errors in characterizing the reason the former owner expended certain money or in concluding that the waste disposal site was the source of the mercury contamination. The motion judge did not err in interpreting the indemnity to impermissibly fetter the legislature's law-making powers, rendering the indemnity unenforceable. The appeals brought by the province and W Ltd. should be dismissed. W Ltd. was neither an assignee of the benefit of the indemnity nor a corporate successor of former owners and thus, it had no entitlement to benefit under the indemnity. The motion judge erred in holding that R Inc.'s predecessor assigned the benefit of the indemnity to W Ltd. by failing to read the contractual term in light of the factual matrix and in a commercially sensible way. The motion judge erred in concluding that the indemnity's enurement clause extended the benefit of the indemnity to successors-in-title. When used in relation to corporations, a successor generally denoted another corporation which, through some type of legal succession, assumed the burdens and became vested with the rights of the first corporation. En 1985, la province de l'Ontario a accordé une indemnité à deux anciennes propriétaires d'une usine de pâtes et papiers ainsi qu'à leurs successeurs et ayants droit à l'égard de toute obligation, responsabilité ou perte survenue après la date de l'indemnité en raison d'une réclamation découlant de préjudices, pertes, d'événements ou de circonstances causés par le rejet, la fuite ou la présence de polluants. L'indemnité a été convenue entre les parties dans le cadre du règlement de la poursuite intentée par deux Premières Nations relativement à la pollution par le mercure de deux rivières. Vingt-six ans plus tard, le ministère de l'Environnement et des changements climatiques a pris un arrêté de remédiation en lien avec la surveillance et l'entretien d'un lieu d'élimination de déchets mercuriels à l'usine. Dans l'intervalle, l'usine avait changé de propriétaires à la suite de plusieurs opérations et l'arrêté a été adressé à W ltée et R inc. W ltée a déposé une requête visant à faire déclarer que, selon les modalités de l'indemnité, le gouvernement était tenu de l'indemniser pour les frais engagés pour se conformer à l'arrêté. R inc. a demandé l'autorisation d'intervenir pour réclamer la même protection. W ltée, R inc. et le gouvernement ont chacun présenté une motion en jugement sommaire. Le juge des requêtes a conclu que l'indemnité s'appliquait aux réclamations prévues par la loi présentées par un agent de la province. Le juge des requêtes a rendu un jugement sommaire en faveur de W ltée et R inc. Le gouvernement a interjeté appel. La Cour d'appel a convenu que l'indemnité visait l'arrêté du directeur, mais a estimé que R inc. n'avait pas droit à une indemnisation et a renvoyé à la Cour supérieure la question du droit de W ltée à une indemnité. Les juges majoritaires de la Cour d'appel ont conclu que le juge des requêtes avait commis une erreur en concluant que W ltée pouvait se prévaloir de la clause d'extension des bénéfices, affirmant que cette clause ne s'appliquait qu'aux successeurs corporatifs. Le gouvernement, R inc. et W ltée ont formé des pourvois. Arrêt: Le pourvoi du gouvernement a été accueilli; les pourvois de R inc. et de W ltée ont été rejetés. Abella, Moldaver, Karakatsanis, Martin, JJ. : L'indemnité ne visait pas l'arrêté du directeur. Le juge des requêtes a commis une erreur en concluant que le lieu d'élimination des déchets continuait de rejeter du mercure dans l'environnement. La conclusion erronée suivant laquelle les rejets de mercure depuis le lieu d'élimination des déchets constituaient une source constante de lourde responsabilité environnementale l'a sans nul doute amené à conclure que les rejets en question pourraient donner lieu à
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 3 Resolute FP Canada Inc. v. Ontario (Attorney General), 2019 SCC 60, 2019 CSC 60,... 2019 SCC 60, 2019 CSC 60, 2019 CarswellOnt 19886, 2019 CarswellOnt 19887... des réclamations pour pollution. Rien ne prouvait que des déchets contaminés par le mercure étaient rejetés du lieu d'élimination des déchets. Le juge des requêtes a mal interprété l'objet et l'effet du lieu d'élimination des déchets. Le site n'était pas une source constante de contamination par le mercure ou de responsabilité environnementale, et sa création n'était donc pas susceptible de donner lieu à une réclamation pour pollution. L'indemnité était censée s'appliquer seulement aux procédures découlant du rejet ou de la présence continue de mercure dans les écosystèmes connexes, et non à celles liées à la simple présence de mercure dans le lieu d'élimination des déchets. Interprétée comme il se doit, l'indemnité s'appliquait seulement aux réclamations de tiers. Le fait que les exigences des par. 2 et 3 du protocole d'entente soient dénuées de tout sens en ce qui a trait aux réclamations de premières parties signifiait que les réclamations pour pollution englobaient seulement celles présentées par des tiers. L'inclusion des par. 2 et 3 à l'indemnité est tout à fait incompatible avec l'idée selon laquelle le par. 1 visait les réclamations de première partie. Côté, Brown, JJ. (dissidents en partie) (Rowe, J., souscrivant à leur opinion) : Le pourvoi formé par R. inc. devrait être accueilli. R inc. avait le droit de bénéficier de l'indemnité pour couvrir les frais passés et futurs engagés pour se conformer à l'arrêté du directeur en tant que successeur corporatif. Le juge des requêtes n'a pas commis d'erreur en n'examinant pas le libellé de l'indemnité à la lumière du fondement factuel. Le juge des requêtes n'a pas commis l'erreur de ne pas avoir interprété la clause d'indemnisation figurant au par. 1 de l'indemnité à la lumière de l'entente dans son ensemble. Le juge des requêtes n'a pas commis d'erreurs manifestes et déterminantes en décrivant les raisons qui ont poussé l'ancienne propriétaire à faire certaines dépenses ou en concluant que le lieu d'élimination des déchets était la source de la contamination par le mercure. Le juge des requêtes n'a pas commis l'erreur d'avoir interprété l'indemnité de manière à entraver de manière inacceptable les pouvoirs de légiférer de la législature, de sorte que l'indemnité est devenue non exécutoire. Les pourvois formés par le gouvernement et W ltée devraient être rejetés. W ltée n'était ni cessionnaire du bénéfice de l'indemnité ni un successeur corporatif des anciennes propriétaires et, partant, n'avait pas droit au bénéfice de l'indemnité. Le juge des requêtes a commis une erreur en concluant que la prédécesseure de R inc. avait cédé le bénéfice de l'indemnité à W ltée, n'ayant pas lu la clause contractuelle contestée à la lumière du fondement factuel et d'une manière qui a du sens sur le plan commercial. Le juge des requêtes a commis une erreur en concluant que la clause d'extension des bénéfices de l'indemnité étendait le bénéfice de celle-ci aux successeurs en titre. Employé à l'égard de sociétés, le terme « successeur » désignait généralement une autre société qui, par une forme de succession juridique, assumait les obligations et acquérait les droits de la première société.
APPEALS by government, R Inc. and W Ltd. from judgment reported at Weyerhaeuser Company Limited v. Ontario (Attorney General) (2017), 2017 ONCA 1007, 2017 CarswellOnt 20156, 13 C.E.L.R. (4th) 28, 77 B.L.R. (5th) 175 (Ont. C.A.), allowing government's appeal in part, finding that R Inc. was not entitled to indemnification and remitting W Ltd.'s entitlement to indemnification to Superior Court.
POURVOIS formés par le gouvernement, R inc. et W ltée à l'encontre d'un jugement publié à Weyerhaeuser Company Limited v. Ontario (Attorney General) (2017), 2017 ONCA 1007, 2017 CarswellOnt 20156, 13 C.E.L.R. (4th) 28, 77 B.L.R. (5th) 175 (Ont. C.A.), ayant accueilli en partie l'appel interjeté par le gouvernement, ayant conclu que R inc. n'avait pas droit à une indemnité et ayant renvoyé à la Cour supérieure la question de savoir si W ltée avait droit à une indemnité.
Abella, Moldaver, Karakatsanis, Martin JJ.:
1 In 1985, the Province of Ontario granted an indemnity (the "1985 Indemnity") to Reed Ltd. and Great Lakes Forest Products Limited, both former owners of a pulp and paper mill located in Dryden, Ontario, as well as their successors and assigns, for "any damage, loss, event or circumstances, caused or alleged to be caused by or with respect to, either in whole or in part, the discharge or escape or presence of any pollutant by Reed or its predecessors, including mercury or any other substance, from or in the plant or plants or lands or premises". The 1985 Indemnity was agreed to by the parties in the context of the settlement of litigation brought by two First Nations in relation to mercury pollution caused by the operation of the Dryden mill.
2 Twenty-six years later, the Director of the Ministry of the Environment and Climate Change issued a remediation order in relation to monitoring and maintaining a mercury disposal site at the Dryden mill. In the intervening period, ownership of the mill had changed hands in several transactions. The Director's Order was issued to both Resolute, Great Lakes' corporate successor, and Weyerhaeuser, which also owned the Dryden property for a time. Both Resolute and Weyerhaeuser sought indemnification from Ontario for the costs of complying with the Director's Order.
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3 Although the parties in these appeals raise a number of issues relating to Resolute and Weyerhaeuser's claims for indemnification, the threshold question is whether the 1985 Indemnity covers the Director's Order. In our view, and for the dissenting reasons of Laskin J.A. (2017 ONCA 1007, 77 B.L.R. (5th) 175 (Ont. C.A.)), it does not. We would, therefore, allow Ontario's appeal, and grant Ontario's motion for summary judgment.
4 In the 1960s, the Dryden Paper Company Limited owned and operated a pulp and paper mill in Dryden. As part of the operation of the paper mill, Dryden Paper — through a related company, Dryden Chemicals Limited — operated a mercury cathode chlor-alkali plant on property near the mill. The chlor-alkali plant released untreated mercury waste into the English and Wabigoon rivers, which resulted in harm to the health of some local residents, the closure of a commercial fishery and damage to the region's tourism industry. Many of the affected people were members of the Grassy Narrows and Islington First Nations who lived on reserves downstream.
5 In 1971, Dryden Paper constructed a waste disposal site on its lands to serve as a burial site for mercury-contaminated waste from the chlor-alkali plant. Six monitoring wells were installed when the waste disposal site was created, with three additional wells installed in 2002, and one in 2010. These monitoring wells were sampled and analyzed twice per year. Since 1977, the waste disposal site has been the subject of various certificates under the Environmental Protection Act, R.S.O. 1990, c. E.19. The initial Provisional Certificate of Approval required the monitoring of groundwater and surface water by the owner of the waste disposal site. In 2011, the site was thought to have 35 years remaining in its "contaminating lifespan".
6 In 1976, Dryden Paper and Dryden Chemicals amalgamated to form Reed.
7 In June 1977, the two First Nations bands sued Reed, Dryden Paper and Dryden Chemicals for damages in relation to the mercury waste contamination of the rivers (the "Grassy Narrows Litigation").
8 In 1978, the Ministry of the Environment issued two further Provisional Certificates of Approval that required Reed to maintain the water monitoring program at the waste disposal site.
9 By 1979, Reed wanted to sell its Dryden properties. Its prospective purchaser, Great Lakes, expressed reluctance to complete the sale because of the Grassy Narrows Litigation. Concerned that the local economy would suffer if the pulp and paper mill closed, Ontario intervened. It agreed to limit the combined liability of Great Lakes and Reed for any environmental damages caused by Reed prior to Great Lakes' purchase of the Dryden operation to $15 million. Great Lakes and Reed agreed to share the financial consequences of the Grassy Narrows Litigation up to that limit. Great Lakes also agreed to spend approximately $200 million on the expansion and modernization of the Dryden facilities in consideration for the indemnity granted by Ontario (the "1979 Indemnity").
10 On December 4, 1979, the Ministry of the Environment issued another Provisional Certificate of Approval. It required Reed to register the certificate against title to the waste disposal site. That same month, the sale of the Dryden properties to Great Lakes closed in accordance with the terms set out in a Memorandum of Agreement dated December 7, 1979.
11 In January 1980, the Ministry issued another Provisional Certificate of Approval requiring Great Lakes to maintain the groundwater monitoring and testing program at the waste disposal site.
12 Contemporaneously, the Governments of Ontario and Canada engaged in mediation with the Islington and Grassy Narrows First Nations to address the harms caused by mercury discharge. These discussions involved the Grassy Narrows Litigation. Great Lakes, meanwhile, was reluctant to contribute to any settlement of the litigation unless it obtained a release from liability. On January 28, 1982, the then Provincial Secretary for Resources Development wrote to Great Lakes, indicating that Ontario was "prepared to indemnify Great Lakes Forest Products Limited against any claims related to mercury pollution" (the "1982 Indemnity" (A.R., vol. III, at p.176)). The 1982 Indemnity stated that Ontario would indemnify Great Lakes for any damages awarded by a court or any settlement above $15 million. Any mercury pollution-related actions were to be brought to the attention of Ontario, which would then become involved in the litigation.
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13 In late 1985, the Grassy Narrows Litigation settled. The terms of the settlement were set out in a Memorandum of Agreement dated November 22, 1985, entered into by Canada, Ontario, the Islington and Grassy Narrows First Nations, Reed and Great Lakes. The issues, as defined in the Memorandum of Agreement, pertained to "[t]he discharge by Reed and its predecessors of mercury and any other pollutants into the English and Wabigoon and related river systems, and the continu[ed] presence of any such pollutants discharged by Reed and its predecessors ... in the related ecosystems". Significantly for the purposes of the present appeals, para. 2.4 of the Memorandum of Agreement stipulated that Ontario would indemnify Great Lakes and Reed with respect to the issues, and Great Lakes and Reed would provide Ontario releases in respect of the 1979 and 1982 Indemnities.
14 The indemnification required by para. 2.4 of the Memorandum of Agreement is contained in a schedule to the settlement agreement entitled the "Ontario Indemnity" (referred to herein as the "1985 Indemnity") which was signed by Ontario, Great Lakes, Reed and Reed International. These appeals involve the interpretation of the 1985 Indemnity, and particularly para. 1, which reads:
1. Ontario hereby covenants and agrees to indemnify Great Lakes, Reed, International and any company which was at the Closing Date a subsidiary or affiliate company (whether directly or indirectly) of International, harmless from and against any obligation, liability, damage, loss, costs or expenses incurred by any of them after the date hereof as a result of any claim, action or proceeding, whether statutory or otherwise, existing at December 17, 1979 or which may arise or be asserted thereafter (including those arising or asserted after the date of this agreement), whether by individuals, firms, companies, governments (including the Federal Government of Canada and any province or municipality thereof or any agency, body or authority created by statutory or other authority) or any group or groups of the foregoing, because of or relating to any damage, loss, event or circumstances, caused or alleged to be caused by or with respect to, either in whole or in part, the discharge or escape or presence of any pollutant by Reed or its predecessors, including mercury or any other substance, from or in the plant or plants or lands or premises forming part of the Dryden assets sold by Reed Ltd. to Great Lakes under the Dryden Agreement (hereinafter referred to as "Pollution Claims"). It is hereby expressly acknowledged and agreed that in respect of Ontario's covenant and agreement hereunder to indemnify Great Lakes that the term "Pollution Claims" shall include any obligation, liability, damage, loss, costs or expense incurred by Great Lakes as a result of any claim, action or proceeding resulting from or in connection with the indemnity agreement of even date herewith made between Great Lakes, Reed and International. [A.R., vol. IV, at pp. 189-90]
15 Paragraph 2 of the 1985 Indemnity requires Great Lakes or Reed to give Ontario prompt notice of any Pollution Claim as defined in para. 1, at which point Ontario could take carriage of or participate in the litigation. Great Lakes and Reed must cooperate with Ontario in relation to the investigation of any Pollution Claims (para. 3). The 1985 Indemnity is "valid without limitation as to time" (para. 4). An enurement clause contained in para. 6 provided that: "[t]he indemnity shall be binding upon and enure to the benefit of the respective successors and assigns of Ontario, Reed, International and Great Lakes, provided however that Ontario shall not be entitled to assign this indemnity without the prior written consent of the other parties hereto" (A.R., vol. IV, at pp. 191-92).
16 In accordance with the Memorandum of Agreement, Reed and Great Lakes released Ontario from its obligations under the 1979 and 1982 Indemnities. The settlement of the Grassy Narrows Litigation was approved by the Supreme Court of Ontario on June 26, 1986.
17 In subsequent years, both Reed and Great Lakes underwent corporate changes. After amalgamating with other corporations, Reed's successor corporation dissolved in 1993. In 1998, Great Lakes became Bowater which, in 2010, became part of Abitibi- Consolidated Inc. In 2012, it became Resolute.
18 In August 1998, Weyerhaeuser entered into an agreement with Bowater, Great Lakes' corporate successor, to purchase certain assets used in the Dryden pulp and paper business. Given the potential environmental liabilities, Weyerhaeuser initially sought to exclude the waste disposal site from the purchased assets. However, this exclusion required severing the waste disposal site from title, which could not be effected before the closing of the sale. As a result, when the transaction closed, Bowater
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 6 Resolute FP Canada Inc. v. Ontario (Attorney General), 2019 SCC 60, 2019 CSC 60,... 2019 SCC 60, 2019 CSC 60, 2019 CarswellOnt 19886, 2019 CarswellOnt 19887... conveyed title to the waste disposal site to Weyerhaeuser, which then immediately leased it back to Bowater. When severance finally occurred some two years later, Weyerhaeuser reconveyed the waste disposal site to Bowater. Title was registered in Weyerhaeuser's name from September 30, 1998, to August 25, 2000. In 2007, Weyerhaeuser sold the Dryden paper plant to Domtar Inc.
19 In April 2009, Bowater and its related companies filed for protection under the Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36 ("CCAA"). In the course of the CCAA proceedings, with court approval, the waste disposal site was abandoned in April 2011.
20 On August 25, 2011, the Ministry of the Environment issued a Director's Order to Weyerhaeuser (as a former owner of the waste disposal site) and Bowater, Resolute's corporate predecessor. This order imposed three main obligations: (1) to repair certain site erosion, perform specific groundwater and surface water testing, and file annual reports containing specified information; (2) to deliver to the Ministry of the Environment the sum of $273,063 as financial assurance in respect of the waste disposal site; and (3) to "take all reasonable measures to ensure that any discharge of a contaminant to the natural environment is prevented and any adverse effect that may result from such a discharge is dealt with according to all legal requirements" (A.R., vol. IV, at p. 27).
21 Weyerhaeuser filed a notice of appeal to the Environmental Review Tribunal, seeking to revoke or amend the Director's Order.
22 In May 2013, Weyerhaeuser commenced an action in Superior Court seeking a declaration that the terms of the 1985 Indemnity required Ontario to compensate it for the cost of complying with the Director's Order. Resolute sought leave to intervene. Ontario submitted it was not responsible for the costs of complying with the Director's Order. All three parties moved for summary judgment.
23 The motion judge held that the 1985 Indemnity clearly applied to a statutory claim or proceeding brought by an agent of the Province and that both Resolute and Weyerhaeuser were entitled to indemnification under the 1985 Indemnity for their costs of complying with the Director's Order. He therefore granted summary judgment in favour of Resolute and Weyerhaeuser (2016 ONSC 4652, 60 B.L.R. (5th) 237 (Ont. S.C.J. [Commercial List])).
24 Ontario appealed. The majority at the Court of Appeal for Ontario agreed with the motion judge with respect to the scope of the 1985 Indemnity, namely that it applied to the Director's Order. The majority concluded, however, that Resolute was not entitled to indemnification and remitted the issue of Weyerhaeuser's entitlement to indemnification to the Superior Court.
25 Justice Laskin, dissenting, would have allowed Ontario's appeal. In his view, the motion judge made reversible errors in his interpretation of the 1985 Indemnity. Properly construed, the 1985 Indemnity was intended to cover only pollution claims brought by third parties. First party regulatory claims, such as the Director's Order, did not fall within the scope of the 1985 Indemnity.
Analysis
26 The overriding issue in this case is the scope of the 1985 Indemnity. We would, with respect, allow Ontario's appeal substantially for the reasons of Laskin J.A. We conclude, as he did, that the motion judge made palpable and overriding errors of fact and failed to give sufficient regard to the factual matrix when interpreting the scope of the 1985 Indemnity justifying appellate intervention. We find it difficult to improve on his reasons, and would add only the following brief comments.
27 Both Laskin J.A. and the majority at the Court of Appeal agreed that the motion judge erred when he found that the waste disposal site continues to discharge mercury into the environment. In the words of Laskin J.A.:
The motion judge's mistaken finding that discharges of mercury from the [waste disposal site] were an ongoing source of "serious environmental liability" undoubtedly drove his conclusion that these discharges could give rise to "pollution
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claims", and that unless the 1985 Indemnity covered first party claims, the respondents would be exposed to significant financial liability. His conclusion is wrong.
The motion judge misconstrued the purpose and effect of the [waste disposal site]. The [waste disposal site] was not a source of ongoing mercury contamination or environmental liability. Its creation would not give rise to a pollution claim. Quite the opposite. The [waste disposal site] was created and used as a solution to the mercury pollution problem, effectively as a burial site for mercury-contaminated waste. Again, there was no evidence of mercury-contaminated waste being discharged from the [waste disposal site]. Neither respondent submitted otherwise.
[paras. 233-34]
28 We agree that this erroneous factual finding was key to the motion judge's conclusion that the Director's Order, which imposed maintenance and monitoring obligations, was a "Pollution Claim" within the meaning of the 1985 Indemnity.
29 Yet, as Laskin J.A. noted, the 1985 Indemnity was a schedule to the broader Memorandum of Agreement settling the Grassy Narrows Litigation. The scope of the 1985 Indemnity was limited to the issues defined in that agreement, namely, "[t]he discharge by Reed and its predecessors of mercury and any other pollutants into the English and Wabigoon and related river systems, and the continu[ed] presence of any such pollutants discharged by Reed and its predecessors ... in the related ecosystems" (A.R., vol. IV, at p. 140). The motion judge failed to consider this context when interpreting the scope of the 1985 Indemnity. We agree with Laskin J.A. that, properly interpreted, the 1985 Indemnity was intended to cover only proceedings arising from the discharge or continued presence of mercury in the related ecosystems, not those related to the mere presence of mercury contained in the waste disposal site.
30 We also agree with Laskin J.A. that the 1985 Indemnity must be read in the context of the 1979 and 1982 Indemnities. Indeed, the 1985 Indemnity was given in partial consideration for Great Lakes and Reed releasing Ontario from its obligations under those prior Indemnities. It is clear that the 1979 and 1982 Indemnities were in response to the ongoing Grassy Narrows Litigation, which involved claims brought by third parties, not by Ontario directly. As Laskin J.A. observed, there is no language in those indemnities that would imply Ontario intended to provide protection against the costs of regulatory compliance.
31 Although the motion judge concluded that the addition of the phrase "statutory or otherwise" in the 1985 Indemnity expanded the scope of protection beyond that provided previously, we agree with Laskin J.A. that the motion judge's view of the importance of that phrase and why the parties entered into the 1985 Indemnity was materially affected by a palpable and overriding factual error. The motion judge found that the 1985 Indemnity was provided in consideration for commitments from Great Lakes to make significant financial investments in the Dryden plant. Given what he found to be the rationale for entering into the 1985 Indemnity, the motion judge concluded that it would be commercially absurd if Ontario could still impose remediation costs. However, Great Lakes' financial commitments were actually provided as part of the prior 1979 Indemnity. Later, Great Lakes gave no new commitments to modernize in consideration for the 1985 Indemnity. The motion judge thus premised his interpretation of the 1985 Indemnity on an incorrect factual basis — one that, as Laskin J.A. noted, led him to place too much emphasis on a change in language and misconstrue the bargain actually struck in the 1985 Indemnity.
32 Moreover, as Laskin J.A. found, the motion judge erred by failing to consider the 1985 Indemnity as a whole when determining whether or not the Director's Order fell within its scope. Paragraphs 2 and 3 of the 1985 Indemnity are critical in this regard. Paragraph 2 provides that, in "any Pollution Claim ... Ontario shall have the right to elect to either take carriage of the defence or to participate in the defence and/or settlement of the Pollution Claim and any proceeding relating thereto as Ontario deems appropriate" (A.R., vol. IV, at p. 190). Paragraph 3 of the 1985 Indemnity also requires the parties to cooperate with Ontario in the defence of a claim. We agree with Laskin J.A. that these clauses would be "utterly meaningless for first party claims".
33 Indeed, the inclusion of paras. 2 and 3 in the 1985 Indemnity are completely inconsistent with the notion that para. 1 contemplates first party claims. Nothing in the 1985 Indemnity suggests that pollution claims included both first and third party claims, but that the requirements of paras. 2 and 3 would apply only to the subset of pollution claims brought by third parties. To
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34 In sum, we agree with Laskin J.A.'s conclusion that the 1985 Indemnity does not cover the Director's Order and we would allow Ontario's appeal on that basis. As a result, we find it unnecessary to address the remaining arguments raised in these appeals.
Conclusion
35 We would allow Ontario's appeal and grant summary judgment in its favour, with costs throughout. Resolute and Weyerhaeuser's appeals are dismissed.
Côté, Brown JJ. (dissenting in part) (Rowe J. concurring):
I. Overview
36 During the 1960s, the owner of a pulp mill in Dryden, Ontario (the corporate predecessor of Reed Ltd.), stemmed the discharge of untreated mercury waste into a nearby river system by burying the waste at an adjacent disposal site. In 1979, Reed — by then the owner — sold the entire property (including the waste disposal site) and the pulp and paper operation to Great Lakes Forest Products Limited. As part of a settlement of claims related to the earlier mercury waste discharge, the Province of Ontario granted an environmental liability indemnity to both Reed and Great Lakes (the "Ontario Indemnity"). This indemnity was to inure to the benefit of those corporations' successors and assigns.
37 Our reasons address three appeals. At issue in the appeal brought by the Province is whether the scope of the Ontario Indemnity covers the costs of compliance with first party regulatory orders, including those made under legislation enacted after the execution of the agreement. The appeals brought by Weyerhaeuser Company Limited and Resolute FP Canada Inc. go to whether either or both of those corporations can benefit from the Ontario Indemnity as successors and assigns of Great Lakes.
38 These appeals also present an opportunity for this Court to apply the principles of contractual interpretation articulated in Creston Moly Corp. v. Sattva Capital Corp., 2014 SCC 53, [2014] 2 S.C.R. 633 (S.C.C.) , and Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, [2016] 2 S.C.R. 23 (S.C.C.) , to a series of complex commercial arrangements. The Province's appeal also invites us to consider the doctrine of fettering as it applies to the legislature's law making powers.
39 For the reasons that follow, we would dismiss the appeals brought by the Province and Weyerhaeuser, and allow the appeal brought by Resolute.
II. Factual Background
A. Mercury Contamination of the English and Wabigoon Rivers in the 1960s and 1970s
40 During the 1960s and 1970s, Dryden Chemical Limited and Dryden Paper Company Limited operated a mercury cathode chlor-alkali plant and a pulp and paper mill, respectively, on property located in Dryden (the "Dryden Property"). Together, their operations produced various pollutants, including untreated mercury waste, which they released into the nearby English and Wabigoon rivers, harming the health and industry of those nearby, including members of the Grassy Narrows and Islington First Nations. To dispose of these environmental contaminants, Dryden Paper constructed a waste disposal site on the Dryden Property in 1971. Since 1977, the waste disposal site has been subject to compliance requirements imposed by the Province.
41 In 1976, Dryden Paper and Dryden Chemical amalgamated to form Reed.
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42 In 1977, the Grassy Narrows and Islington First Nations sued Reed, Dryden Paper and Dryden Chemical for damage they say was caused by the contamination of the rivers (the "Grassy Narrows Litigation").
B. The Sale of the Dryden Property to Great Lakes in 1979
43 In 1979, Reed entered into negotiations to sell the operations at the Dryden Property to Great Lakes. Great Lakes was reluctant to proceed with the purchase, however, due to potential liabilities relating to the mercury contamination, including the Grassy Narrows Litigation. At the same time, the Province was anxious to see a successful sale, to ensure the continuing viability of Dryden's local economy. It therefore agreed to indemnify both Reed and Great Lakes for any environmental damages caused by Reed in excess of $15 million (the "1979 Indemnity"). In exchange, Great Lakes and Reed agreed to spend around $200 million to modernize and expand the pulp mill. The terms of this agreement were set out in a letter dated November 6, 1979, from the Treasurer of Ontario to the President of Great Lakes. The relevant portion of this letter reads as follows:
The continued viability of the Dryden facilities and the undertaking of major modernization expenditures with respect to them are of considerable importance to the people of this Province. The substantial and beneficial employment and economic effects that the operation of a modernized facility will have on the population and economy of Dryden is of real significance.
In the event that Great Lakes negotiations with the Reed group of companies are successful then in the event that Great Lakes is required to pay any monies as a result of any final decision of a court against Great Lakes, Reed Ltd. or any other person prior to the year 2010 in respect of pollution caused by Reed Ltd. or any of its predecessor companies in the Dryden area prior to the date upon which Great Lakes acquires the assets and undertaking of the Dryden complex of Reed Ltd. or in the event that any settlement with any claimant is made the amount of which settlement has been approved by the Attorney General of Ontario, I have been authorized by the Executive Council of Ontario to advise you that I will make a Recommendation to the Executive Council of Ontario that the Government of Ontario take effective steps to ensure that Great Lakes Forest Products Limited will not be required to pay any monies in excess of the maximum amount of $15 million referred to in paragraph 2 of this letter, provided that over the next three to four years Great Lakes expends in the order of $200 million for the modernization and expansion of the Dryden facilities.
(A.R., vol. IV, at pp. 135-36)
44 Great Lakes purchased the pulp mill in December 1979 by way of an asset purchase agreement (the "1979 Dryden Agreement"). That agreement addressed, among other things, environmental responsibilities respecting the Dryden Property. In particular, clause 5.3 of the 1979 Dryden Agreement created a regime for the sharing of costs arising from pollution claims, pursuant to which Reed and Great Lakes were to share the costs of environmental liabilities up to $15 million, leaving Great Lakes exclusively responsible for anything exceeding that amount. Clause 11.4 carves out of this regime the costs of compliance with a control order that the Province had issued in 1979 (the "Control Order"), making Great Lakes solely responsible for those costs.
C. The Settlement of the Grassy Narrows Litigation in 1985
45 The Governments of Canada and Ontario initiated a mediation process with the Islington and Grassy Narrows First Nations to address the problems regarding the mercury contamination and to settle the Grassy Narrows Litigation. Great Lakes was reluctant to participate in any such settlement without releases from liability in relation to the mercury pollution caused by Reed and its predecessors. To overcome this impasse, Ontario's Provincial Secretary for Resources Development, the Honourable R. H. Ramsay, wrote to Great Lakes on January 28, 1982 (the "1982 Ramsay Letter"), stating that the Province would indemnify Great Lakes against any claims related to mercury pollution:
The purpose of this letter is to facilitate a settlement of current negotiations ....
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The Government of Ontario recognizes the distinct advantage of the Indian people obtaining a settlement in the very near future. Accordingly, the Government is prepared to indemnify Great Lakes Forest Products Limited against any claims related to mercury pollution such that the Company's total payments to all claimants in respect of damages awarded by any court or for any settlement approved by the Attorney General of Ontario attributable to the operations of Reed Paper Ltd. or any of its predecessor companies in the Dryden area will be limited to $15 million. The Government of Ontario will assume responsibility for any damages awarded by any court or for any settlement approved by the Attorney General of Ontario, after $15 million has been paid by the Great Lakes Forest Products Limited, Reed Ltd., Reed International Ltd., Dryden Chemicals Ltd. and Dryden Paper Co. Ltd. in connection with the above mentioned mercury pollution claims. Such claims include personal injury, property damage and economic claims of any claimants, including adults, minors and those yet unborn, related to mercury pollution.
It must be understood that any legal proceedings which could result in the Government of Ontario becoming liable to make payments pursuant to this undertaking must be brought to the attention of the Government of Ontario immediately upon such proceedings being launched, and the Government of Ontario shall have the right either to take carriage of or to participate in the defence and/or settlement of the litigation. Failure to give such notification or to allow the Government of Ontario to either take carriage of or to participate in the defence and/or settlement of the litigation will preclude the making of any payments by the Province with regard to the action in question.
(A.R., vol. III, at pp. 175-76)
46 The Grassy Narrows Litigation was settled on terms formalized in a Memorandum of Agreement (the "Settlement Agreement") executed on November 22, 1985, by Canada, the Province, the Grassy Narrows and Islington First Nations, Reed, and Great Lakes. Its terms were approved by the Supreme Court of Ontario in 1986 (Mandamin v. Reed Ltd., No. 14716/77, June 26, 1986), and were given effect by both Parliament and the Ontario Legislature (Grassy Narrows and Islington Indian Bands Mercury Pollution Claims Settlement Act, S.C. 1986, c. 23; English and Wabigoon River Systems Mercury Contamination Settlement Agreement Act, 1986, S.O. 1986, c. 23).
47 The Settlement Agreement provides that "the parties agree, without admission of liability by any party and subject to the terms of this Agreement, that the settlement is to settle all claims and causes of action, past, present and future, arising out of the issues" (A.R., vol. IV, at p. 140 (emphasis added)). The "issues" were defined in the recitals as follows:
The discharge by Reed and its predecessors of mercury and any other pollutants into the English and Wabigoon and related river systems, and the continuing presence of any such pollutants discharged by Reed and its predecessors, including the continuing but now diminishing presence of methylmercury in the related ecosystems since its initial identification in 1969, and governmental actions taken in consequence thereof, may have had and may continue to have effects and raise concerns in respect of the social and economic circumstances and the health of the present and future members of the Bands (the "issues").
(A.R., vol. IV, at p. 140)
48 The Settlement Agreement also required the Province to indemnify Great Lakes and Reed "in respect of the issues" (para. 2.4(a)), which led to the Ontario Indemnity (A.R., vol. IV, at p. 6). That indemnity was incorporated into Schedule F of the Settlement Agreement. In return, Great Lakes and Reed released the Province from any obligations under the 1979 Indemnity and the 1982 Ramsay Letter (para. 2.4(b); (A.R., vol. IV, at p. 6).
49 Paragraph 1 of the Ontario Indemnity — the meaning of which lies at the heart of this appeal — reads, in part, as follows:
Ontario hereby covenants and agrees to indemnify Great Lakes, Reed, International and any company which was at the Closing Date [December 17, 1979] a subsidiary or affiliate company (whether directly or indirectly) of International, harmless from and against any obligation, liability, damage, loss, costs or expenses incurred by any of them after the date hereof as a result of any claim, action or proceeding, whether statutory or otherwise, existing at December 17,
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1979 or which may arise or be asserted thereafter (including those arising or asserted after the date of this agreement), whether by individuals, firms, companies, governments (including the Federal Government of Canada and any province or municipality thereof or any agency, body or authority created by statutory or other authority) or any group or groups of the foregoing, because of or relating to any damage, loss, event or circumstances, caused or alleged to be caused by or with respect to, either in whole or in part, the discharge or escape or presence of any pollutant by Reed or its predecessors, including mercury or any other substance, from or in the plant or plants or lands or premises forming part of the Dryden assets sold by Reed Ltd. to Great Lakes under the [1979] Dryden Agreement (hereinafter referred to as "Pollution Claims").
(A.R., vol. III, at pp. 189-90)
50 Paragraph 2 of the Ontario Indemnity requires the party seeking indemnification to promptly notify the Province of the receipt of any notice of "Pollution Claims" (defined in para. 1), and gives the Province the right either to take carriage of the defence, or to participate in the pollution claim's defence and settlement; para. 3 requires Great Lakes to cooperate with the Province in the investigation, defence and settlement of a pollution claim; para. 4 states that the indemnity shall be valid without limitation as to time; and para. 6 provides that the indemnity enures to the benefit of the parties' respective successors and assigns. That provision reads as follows:
The indemnity shall be binding upon and enure to the benefit of the respective successors and assigns of Ontario, Reed, International and Great Lakes, provided however that Ontario shall not be entitled to assign this indemnity without the prior written consent of the other parties hereto.
(A.R., vol. III, at pp. 191-92)
51 Great Lakes provided an indemnity to Reed in respect of environmental liabilities contemporaneously, as part of the Settlement Agreement. The parties contemplated that these two indemnities (this indemnity and the Ontario Indemnity) would operate in tandem; to the extent that Reed claimed on its indemnity against Great Lakes, Great Lakes would be indemnified under the Ontario Indemnity. This linkage was expressly recognized in the closing words of para. 1 of the Ontario Indemnity:
It is hereby expressly acknowledged and agreed that in respect of Ontario's covenant and agreement hereunder to indemnify Great Lakes that the term "Pollution Claims" shall include any obligation, liability, damage, loss, costs or expenses incurred by Great Lakes as a result of any claim, action or proceeding resulting from or in connection with the indemnity agreement of even date herewith made between Great Lakes, Reed and International.
(A.R., vol. IV, at p. 190)
52 After the parties executed the Settlement Agreement but before they signed the Ontario Indemnity, the Environmental Protection Act, R.S.O. 1980, c. 141, was amended to confer a statutory right of action on the Province and third parties against certain polluters. The amendments arose out of An Act to amend The Environmental Protection Act, 1971, S.O. 1979, c. 91, also known as the "Spills Bill". Although the Spills Bill never came into force, elements of it were incorporated into the 1980 Environmental Protection Act. The relevant provisions came into force in November 1985. For convenience, those amendments will be referred to as the "Spills Bill".
D. The Changes in Corporate Status between 1985 and 1998
53 Reed subsequently amalgamated with other corporations, and its successor corporation was dissolved in 1993. For its part, Great Lakes became Bowater Pulp and Paper Canada Inc. in July 1998.
E. Weyerhaeuser's Purchase of the Dryden Property in 1998
54 On September 30, 1998, Weyerhaeuser bought the Dryden Property from Bowater, along with certain assets used in the pulp and paper operation. This sale was recorded in the "1998 Asset Purchase Agreement". Because of possible environmental liabilities associated with the waste disposal site, Weyerhaeuser initially sought to exclude the parcel of land on which it was constructed from the transaction, and Bowater agreed to this. This parcel could not be severed from the property before the
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55 The lease agreement between Bowater and Weyerhaeuser in respect of the waste disposal site (the "Lease Agreement") required Bowater to indemnify Weyerhaeuser for, among other things, "the presence or release of mercury and any other contaminant, substance or waste on or in the land" (A.R., vol. V, at p. 126). This indemnity was to survive the term of the lease.
56 Bowater and Weyerhaeuser acknowledged that they had entered into the Lease Agreement "solely as an interim agreement pending severance approval under the Planning Act", at which time title to the waste disposal site was to be transferred back to Bowater (ibid., at p. 123). Approval of the severance was obtained around two years later, and Weyerhaeuser re-conveyed the waste disposal site to Bowater on August 25, 2000.
57 In 2007, Weyerhaeuser sold the Dryden pulp mill to Domtar Inc.
F. Bowater's Corporate Restructuring
58 In April 2009, Bowater (which by then had become Bowater Canadian Forest Products Inc.) and a number of related companies filed for creditor protection under the Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36 ("CCAA"). At this point, Bowater still owned the waste disposal site. As part of the CCAA proceedings, Bowater was granted an order authorizing it to transfer the waste disposal site to 4513541 Canada Inc. in October 2010. Several months later, 4513541 Canada Inc.'s receiver obtained court approval to abandon the waste disposal site, with no associated liability.
59 In 2012, Bowater became Resolute FP Canada Inc.
G. The 2011 Director's Order
60 On August 25, 2011, the Province, through its Ministry of the Environment, issued a Director's Order against 4513541 Canada Inc., Weyerhaeuser, Bowater, and several of Bowater's directors, requiring them:
(i) to repair certain site erosion, perform specified groundwater and surface water testing, and file annual reports containing specified information; (ii) to deliver to the [Ministry of the Environment] the sum of $273,063 as financial assurance in respect of the [Waste Disposal Site]; and (iii) to take all reasonable measures to ensure that any discharge of a contaminant to the natural environment is prevented and any adverse effect that may result from such a discharge is dealt with according to all legal requirements.
(C.A. reasons, at para. 50, citing the Director's Order, A.R., vol. IV, at p. 27)
Paragraph 3.1 of the Director's Order described these requirements as "minimum requirements only", adding that their discharge would not relieve the named parties from "complying with any other applicable Order, Statute or Regulation", or from "obtaining any approvals or consents not specified in [the Director's] Order" (A.R., vol. IV, at p. 28).
61 The Director's Order was issued under the Environmental Protection Act, R.S.O. 1990, c. E.19. That statute had been amended in 1990 to empower the Director to impose certain obligations upon former owners and those who previously held management or control of a given undertaking or property (see An Act to amend the Environmental Protection Act, S.O. 1990, c. 18, ss. 18(1) and 21-23).
62 Both Weyerhaeuser and Resolute appealed the Director's Order to the Environmental Review Tribunal. The Province says that these appeals are in abeyance. Weyerhaeuser also filed a proof of claim in Bowater's CCAA proceedings (which were still ongoing at the time) for indemnification under the Lease Agreement for the present value of the work required by the Director's Order and estimated legal costs, amounting to approximately $373,063. In settlement of its claim, Weyerhaeuser received shares in a company that emerged from CCAA protection, which shares were subsequently sold in May 2015.
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III. Proceedings Below
63 Shortly after being served with the Director's Order, counsel for Weyerhaeuser provided notice thereof to Ontario's Ministry of the Attorney General, invoking paras. 2 and 6 of the Ontario Indemnity, and claiming indemnity as a successor and assignee of Great Lakes. In response, the Attorney General denied that the costs of complying with the Director's Order fell within the scope of the Ontario Indemnity. Weyerhaeuser sued the Province for an order declaring that it is entitled to be indemnified under the terms of the Ontario Indemnity "for the costs that it has incurred and may incur as a result of [the] Director's Order made effective on September 6, 2011" (A.R., vol. II, at p. 3). Resolute was granted leave to intervene as a party to that proceeding.
A. Decision of the Ontario Superior Court of Justice, 2016 ONSC 4652, 60 B.L.R. (5th) 237 (Ont. S.C.J. [Commercial List])
64 All parties brought various motions for summary judgment before the Ontario Superior Court of Justice. At issue was whether the Ontario Indemnity covered the costs of complying with the Director's Order and, if so, whether Weyerhaeuser and Resolute are entitled to benefit thereunder.
65 The motion judge found in favour of Weyerhaeuser and Resolute, holding that the scope of the Ontario Indemnity, as set out in its own first paragraph, covered first party regulatory orders. He further held that the Ontario Indemnity did not improperly fetter the Ontario Legislature's law-making powers.
66 The motion judge also held that the enurement clause extended the rights and obligations under the Ontario Indemnity to Resolute and Weyerhaeuser — Resolute as a corporate successor to Great Lakes, and Weyerhaeuser as both a successor-in- title to the Dryden Property and an assignee of the Ontario Indemnity from Bowater pursuant to s. 3.1(xiv) of the 1998 Asset Purchase Agreement.
B. Decision of the Court of Appeal, 2017 ONCA 1007, 77 B.L.R. (5th) 175 (Ont. C.A.)
67 The Province appealed, arguing the motion judge erred in holding that the Ontario Indemnity covers the costs of complying with the Director's Order, and that Weyerhaeuser and Resolute enjoyed the benefit of indemnification thereunder.
68 At the Court of Appeal, the majority found no error in the motion judge's finding that the Ontario Indemnity covered the costs of complying with first party claims, including the Director's Order. Nor did the majority disturb the finding that the 1998 Asset Purchase Agreement had the effect of transferring the full benefit of the Ontario Indemnity from Bowater to Weyerhaeuser. Given that Weyerhaeuser had subsequently sold the Dryden pulp mill to Domtar in 2007, however, the issue of what rights, if any, Weyerhaeuser possessed as an assignee of the Ontario Indemnity at the time the Director's Order was issued in 2011 was returned to the Ontario Superior Court of Justice for decision. The majority did, however, find palpable and overriding error in the motion judge's conclusion that Weyerhaeuser could claim the benefit of the enurement clause in the Ontario Indemnity, holding that this clause applies only to corporate successors.
69 As to Resolute, the majority held that the motion judge erred in finding that Resolute could claim the benefit of the Ontario Indemnity as a corporate successor of Great Lakes, following the assignment of the Ontario Indemnity from Bowater to Weyerhaeuser under the 1998 Asset Purchase Agreement. The effect of this assignment was to extinguish Bowater's interest therein, such that Bowater could not then pass that interest on to Resolute as its corporate successor.
70 In dissent, Laskin J.A. would have found that the Ontario Indemnity did not cover the Director's Order, because it was not intended to cover first party claims, and because the Director's Order does not constitute a "Pollution Claim" as defined in that document. Having so concluded, he found it unnecessary to address the question of whether Resolute and Weyerhaeuser (or either of them) could benefit from the Ontario Indemnity as successors and assignees.
IV. Issues and Positions of the Parties
71 The Province, Resolute and Weyerhaeuser each appeal to this Court. Although they raise various interrelated issues, these appeals can be resolved by answering the following two questions:
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1. Did the motion judge err in concluding that the Ontario Indemnity covers the costs of complying with the Director's Order?
2. Did the motion judge err in concluding that Resolute and Weyerhaeuser benefit from the Ontario Indemnity as successors and assigns of Great Lakes?
72 The Province argues that the motion judge erred in both these respects and, further, that his interpretation of the Ontario Indemnity has the effect of impermissibly fettering the Ontario Legislature's law-making power. Resolute and Weyerhaeuser seek to uphold the motion judge on both questions, and further argue that the Province's obligation under the Ontario Indemnity does not impose an impermissible fetter upon the Ontario Legislature.
V. Analysis
A. Principles of Contractual Interpretation
73 The Ontario Indemnity is a contract. Today's lawyers are fortunate to live in "an age when there is a galaxy of high appellate guidance on how to interpret contracts" (Royal Devon and Exeter NHS Foundation Trust v. ATOS IT Services UK Ltd. [2017] EWCA Civ 2196, [2018] 2 All E.R. (Comm.) 535, at para. 45). While not wishing to add more gas and dark matter to the "galaxy", we do find it helpful here to stress certain first principles which we see as important in interpreting this particular contract.
74 This Court has described the object of contractual interpretation as being to ascertain the objective intentions of the parties (Sattva , at para. 55). It has also described the object of contractual interpretation as discerning the parties' "reasonable expectations with respect to the meaning of a contractual provision" (Ledcor , at para. 65). In meeting these objects, the Court has signalled a shift away from an approach to contractual interpretation that is "dominated by technical rules of construction" to one that is instead rooted in "practical[ities and] common-sense" (Sattva , at para. 47). This requires courts to read a contract "as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract" (ibid.).
75 We recognize that this Court's references to the objective intentions of the parties at the time they entered into the contract, and to parties' reasonable expectations, may leave a degree of uncertainty respecting the objects of contractual interpretation (see A. Swan, J. Adamski and A. Y. Na, Canadian Contract Law (4th ed. 2018), at pp. 671-916). Since there is no suggestion here of a divergence between the parties' intentions and their expectations, we do not find it necessary to resolve this here, but we simply note the inconsistency.
76 Contractual interpretation begins with reading the words of the contract. A legitimate interpretation will be consistent with the language that the parties employed to express their agreement (G. R. Hall, Canadian Contractual Interpretation Law (3rd ed. 2016), at p. 11). As this Court stated in Sattva , the meaning of a contract is rooted in the actual language used by the parties (para. 57). A meaning that strays too far from the actual words fails to give effect to the way in which the parties chose to define their obligations (Canadian Contractual Interpretation Law, at p. 9).
77 This is not to say that the words of the contract are to be read in isolation. This Court's direction in Sattva was that the words of the contract are to be read in light of the surrounding circumstances — sometimes referred to as the "factual matrix" — which consists of "objective evidence of the background facts at the time of the execution of the contract, that is, knowledge that was or reasonably ought to have been within the knowledge of both parties at or before the date of contracting" (para. 58 (citation omitted)). An interpretation that ignores the context in which the contract was formed will not accurately discern what the parties intended to achieve, even if the interpretation is "literally correct" (Canadian Contractual Interpretation Law, at p. 9; see also Sattva , at para. 57). Put simply, contractual text derives its meaning, in part, from the context.
78 We stress that text derives its meaning from context in part. This leads to an important caveat: the context — that is, the factual matrix — cannot "overwhelm the words" of the contract or support an interpretation that "deviate[s] from the text such
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79 As we will explain below, contractual interpretation also requires courts to consider the principle of commercial reasonableness and efficacy. Contracts ought therefore to be interpreted "in accordance with sound commercial principles and good business sense" (Scanlon v. Castlepoint Development Corp. (1992), 11 O.R. (3d) 744 (Ont. C.A.) , at p. 770). As Lord Diplock explained in Antaios Compania Naviera S.A. v. Salen Rederierna A.B. (the Antaios) (1984), [1985] A.C. 191 (U.K. H.L.), at p. 201, "if detailed semantic and syntactical analysis of a word in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense". The principle that requires contracts to be read in a commercially reasonable and efficient manner is therefore an important interpretive aid in construing contractual terms.
80 Ultimately, contractual interpretation involves the application of various tools — including consideration of the factual matrix and the principle of commercial reasonableness — in order to properly understand the meaning of the words used by the parties to express their agreement.
B. The Province's Appeal
81 At issue in the Province's appeal is whether the motion judge erred in concluding that the Province's obligation to indemnify under para. 1 of the Ontario Indemnity extends to the costs of compliance with first party regulatory orders, such as the Director's Order. In so finding, the motion judge placed considerable emphasis on the text of para. 1, which referred to "any claim, action or proceeding, whether statutory or otherwise ... whether by individuals, firms, companies, governments (including the Federal Government of Canada and any province or municipality thereof or any agency, body, or authority created by statutory or other authority)" (A.R., vol. IV, at p. 189 (emphasis added)). In his view, neither a reading of the contract as a whole nor the surrounding circumstances supported reading the Ontario Indemnity as excluding from coverage the costs of compliance with first party regulatory orders.
82 The Province sees it differently. It says that para. 1, properly interpreted, covers only "third party claims, whether statutory or at common law, in the nature of those settled in 1985" (Ontario A.F., at para. 3). Because the Director's Order was made in 2011 by the Province's Ministry of the Environment using provisions of the 1990 Environmental Protection Act, which was enacted five years after the Settlement Agreement was executed, the Province says that the obligation to indemnify does not extend to the resulting compliance costs to Weyerhaeuser and Resolute.
83 More specifically, the Province says the motion judge made four errors: (1) failing to consider the text of the Ontario Indemnity with reference to the factual matrix, which, the Province says, includes the 1979 Indemnity, the 1982 Ramsay Letter, the 1979 Dryden Agreement, the Settlement Agreement, and the Spills Bill; (2) failing to interpret para. 1 of the Ontario Indemnity in light of the remainder of the Ontario Indemnity; (3) making palpable and overriding errors in two factual findings; and (4) interpreting the Ontario Indemnity so as to impermissibly fetter the Legislature's law-making powers, thereby rendering the Ontario Indemnity altogether unenforceable.
84 Like the majority at the Court of Appeal, we reject each of these arguments, and would dismiss the Province's appeal. The motion judge made no error in interpreting the Ontario Indemnity as covering the costs imposed on the successors and assigns of Great Lakes by the Director's Order. Although his analysis on this point was rooted primarily in the wording of para. 1 of the Ontario Indemnity, the motion judge also considered para. 1's meaning in light of the agreement as a whole, and with reference to the circumstances surrounding its formation in 1985. Far from excluding the context of the agreement as a whole or the surrounding circumstances from consideration, he considered them, and then simply found that neither supported an interpretation of the Ontario Indemnity that would exclude coverage for first party claims.
(1) Did the Motion Judge Err in His Appreciation of the Factual Matrix?
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85 The Province submits that the motion judge erred by focusing on the text of the Ontario Indemnity and that, in so doing, he "failed to appreciate that events going back to 1979 significantly informed the meaning of the [Ontario] Indemnity" (Ontario A.F., at para. 71). He ought, the Province says, to have considered the interrelationship between the Ontario Indemnity and the 1979 Indemnity, the 1982 Ramsay Letter, the 1979 Dryden Agreement, the Settlement Agreement (inclusive of an escrow agreement and schedules), and the enactment of the Spills Bill.
86 The motion judge's appreciation of the factual matrix in these circumstances is entitled to deference on appeal (Sattva , at para. 52). The Province bears the burden of showing that any error in this respect is of a palpable and overriding nature.
(a) The 1979 Indemnity and the 1982 Ramsay Letter
87 The Province notes that the 1979 Indemnity, which can only be invoked in the case of a court decision requiring the payment of monies or a settlement approved by the Province, and the 1982 Ramsay Letter which contains similar terms, both evidence an intention, on its part, to indemnify only third party claims. A proper consideration of these elements of the factual matrix, it says, should have led the motion judge to find that the Ontario Indemnity likewise extends only to costs associated with third party obligations arising from court orders or settlements in respect of mercury contamination claims, and does not cover the costs of compliance with first party regulatory orders.
88 Although he did not specifically refer to the 1982 Ramsay Letter in his analysis, the motion judge did reject any comparison between the Ontario Indemnity and the 1979 Indemnity on the basis that the former "is a separate agreement and must be interpreted by considering the words used by the parties in it, not a previous agreement" (para. 48). We see no error in this holding. While it is true that the three indemnities address the same underlying problem (the mercury contamination), our colleagues in the majority do not recognize that they each represent distinct agreements given for distinct purposes in distinct sets of negotiations. Specifically, the 1979 Indemnity was given to encourage Great Lakes to purchase the Dryden Property; the indemnity in the 1982 Ramsay Letter was given to encourage Great Lakes to settle the Grassy Narrows Litigation; and the Ontario Indemnity was given as part of a final settlement of those claims.
89 Significantly, the Ontario Indemnity — unlike the 1979 Indemnity or the 1982 Ramsay Letter — captures much more than just court orders and settlements relating to the Reed-era mercury contamination, applying to "any obligation, liability, damage, loss, costs or expenses incurred ... as a result of any claim, action or proceeding, whether statutory or otherwise" (A.R., vol. IV, at p. 189). This breadth of scope, relative to the other indemnities, is significant to the interpretive exercise.
90 Additionally, the fact that the parties replaced the 1979 Indemnity and the commitment in the 1982 Ramsay Letter with the Ontario Indemnity suggests that the parties themselves — whose intentions the motion judge was called upon to discern — did not view those earlier agreements as being co-extensive in scope with the Ontario Indemnity. Tellingly, there would have been no point served by Great Lakes and Reed releasing the Province of its obligations under the 1979 Indemnity and the 1982 Ramsay Letter in Schedule E of the Settlement Agreement, only then to bind the Province to the same terms by executing the Ontario Indemnity at Schedule F of that same agreement.
91 We therefore see no palpable and overriding error in the motion judge's refusal to restrict the scope of the Ontario Indemnity on the basis of the prior indemnities.
(b) The 1979 Dryden Agreement
92 The scope of the Ontario Indemnity is substantially the same as the scope of the indemnity given to Reed by Great Lakes in clause 5.3 of the 1979 Dryden Agreement as part of its cost-sharing regime. As we have already explained, clause 11.4 of that agreement exempted the costs of complying with the Control Order issued by the Ministry of the Environment in 1979, making those costs the responsibility of Great Lakes exclusively. The motion judge found that the existence of this "specific provision that excluded the cost of regulatory compliance supports the conclusion that the Ontario Indemnity includes these costs because it does not contain a similar provision" (para. 48 (emphasis added)). 1
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93 Before this Court, the Province observes that the 1979 Dryden Agreement "was a private contractual arrangement made between Reed and Great Lakes", such that the absence of any specific exemption in the Ontario Indemnity does not mean that the Province intended to cover regulatory costs (Ontario A.F., at para. 83). While it is true that the Province was not a party to the 1979 Dryden Agreement, it was aware of its terms when it agreed to the Ontario Indemnity (as para. 7 of the Ontario Indemnity makes clear). Moreover, the text used in the indemnity in clause 5.3 of the 1979 Dryden Agreement is almost identical to that used in para. 1 of the Ontario Indemnity. Given the term exempting the Control Order from the scope of the cost-sharing regime in the 1979 Dryden Agreement, the parties must have understood that this regulatory order would otherwise have constituted a "Pollution Claim" for the purpose of clause 5.3. And, because para. 1 of the Ontario Indemnity defines the term "Pollution Claim" in near-identical terms, the motion judge did not err in placing weight on the absence of a similar exemption in the Ontario Indemnity as supporting the conclusion that regulatory orders — like the Director's Order — would fall within the scope of that indemnity.
94 In his dissenting reasons, Laskin J.A. says that "similar carve out language was not needed" in the Ontario Indemnity, since by 1985, neither Reed nor Great Lakes had any obligations under the Control Order (para. 256). But, and with respect, the parties must have been aware that a new regulatory order could easily have been made subsequent to the execution of the Ontario Indemnity. Nothing prevented them from expressly providing — as did the parties to the 1979 Dryden Agreement — that such orders would not fall within the scope of the indemnity.
(c) The Settlement Agreement
95 Under para. 2.4(a) of the Settlement Agreement, the Province was to indemnify Reed and Great Lakes in respect of "the issues" — a term that was defined in the recitals to the Settlement Agreement as follows:
The discharge by Reed and its predecessors of mercury and any other pollutants into the English and Wabigoon and related river systems, and the continuing presence of any such pollutants discharged by Reed and its predecessors, including the continuing but now diminishing presence of methylmercury in the related ecosystems since its initial identification in 1969, and governmental actions taken in consequence thereof, may have had and may continue to have effects and raise concerns in respect of the social and economic circumstances and health of the present and future members of the Bands (the "issues"). [Emphasis added.]
(A.R., vol. IV, at p. 140)
96 The Province says the motion judge failed to appreciate the importance of these portions of the Settlement Agreement to the interpretation of para. 1 of the Ontario Indemnity. Preventative orders — like the Director's Order — do not fall within the scope of "the issues" that the Settlement Agreement was intended to address, the Province says, since the waste disposal site was not a source of the discharge. We note, however, that among those "issues" are "governmental actions taken in consequence" of the mercury contamination by Reed and its predecessors. The record provides ample indication that the Province was aware of Dryden Paper's construction of the waste disposal site for the purpose of containing mercury waste, and that it had been the subject of oversight by governmental agencies since 1977 (A.R., vol. IV, at pp. 35-36; A.R., vol. VI, at pp. 2-3). It follows that such oversight falls well within the scope of the "issues" which the Settlement Agreement was intended to address.
97 In any event, the Ontario Indemnity expressly applies in respect of (among other things) the "presence of any pollutant ... including mercury or any other substance ... in the plant or plants or lands or premises forming part of the Dryden assets sold by Reed Ltd. to Great Lakes under the [1979] Dryden Agreement" (A.R., vol. IV, at p. 190). Irrespective, then, of how one understands the scope of the issues set out in the Settlement Agreement, that element of the factual matrix cannot "overwhelm" or be used to "deviate from" the text of the Ontario Indemnity (Sattva , at para. 57).
(d) The Spills Bill
98 Paragraph 1 of the Ontario Indemnity closely tracks the language of the indemnity given by Great Lakes to Reed as part of the cost-sharing regime in clause 5.3 of the 1979 Dryden Agreement, with one important difference: while the scope of the
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99 The motion judge did not consider the Spills Bill. (Neither, for that matter, do our colleagues in the majority). He did, however, rely on the text of para. 1 of the Ontario Indemnity in concluding that it applies to "a statutory claim or proceeding brought by an agency of the Province such as the [Director's Order] issued by the [Ministry of the Environment]" (para. 47). The majority at the Court of Appeal saw no error in this: "it was not open to the motion judge to consider evidence of the parties' specific intentions or negotiations, including whether they discussed the Spills Bill during the negotiations that culminated in the execution of the Ontario Indemnity" (para. 112). This, the majority explained, was rooted in the principle that evidence of the parties' specific negotiations is inadmissible for the purpose of contractual interpretation. Justice Laskin, however, instead characterized the enactment of the Spills Bill as an objective fact that the parties would have or reasonably ought to have known about when entering into their agreement, and concluded that "[t]he timing of the Spills Bill relative to the [Ontario] Indemnity demonstrates that the Spills Bil[l] was undoubtedly the reason why the [Ontario] Indemnity contained the added words relied on by the motion judge and the respondents" (para. 249).
100 We note that the "general rule" that renders evidence of the parties' specific negotiations and subjective intentions inadmissible sits uneasily next to the rule that the circumstances surrounding the formation of the agreement inform contractual interpretation. As was noted in Canadian Contact Law:
The difficulty in Canada in now giving content to or even acknowledging the continued existence of the rule stems from Rothstein J.'s statement in Sattva Capital that a court must look at the surrounding circumstances or "factual matrix". It seems very difficult to separate what happened during the negotiations from the "surrounding circumstances"; in fact and notwithstanding the decision of the House of Lords in Chartbrook Ltd. v. Persimmon Homes Ltd., [[2009] UKHL 38,] it is hard to imagine where or how the line could be drawn. [Footnote omitted; p. 746.]
The majority of the Court of Appeal may have been alluding to this difficulty when it suggested that the rule may be in need of change "as a matter of policy" (para. 112). Although we recognize the uncertainty surrounding this point of law, we would leave its resolution for another day, where it is both necessary to the disposition of the appeal and more directly addressed by the courts below and the parties in their submissions.
101 Even accepting that the proclamation of the Spills Bill in November 1985 is objective and admissible evidence of what the parties did or ought to have had in contemplation when entering into the Ontario Indemnity, it is a far leap from that premise to the conclusion that they would have understood "statutory or otherwise" to refer solely to claims brought under the Spills Bill, "or other third party statutory claims which could have been brought at that time" (Ontario A.F., at para. 88). This element of the factual matrix does not support the position that the indemnity excludes claims, actions or proceedings brought under legislation enacted following the execution of the Ontario Indemnity — particularly given that it is expressly said to cover those "existing at December 17, 1979 or which may arise or be asserted thereafter" (A.R., vol. IV, at p. 189 (emphasis added)).
102 Moreover, the proposition that the enactment of the Spills Bill as a surrounding circumstance supports reading the Ontario Indemnity narrowly — as excluding the costs of first party claims — cannot be reconciled with the Spills Bill's creation of a right of action for private persons and for the Province of Ontario. On this point, s. 68i(2) of the Spills Bill states:
(2) Her Majesty in right of Ontario or in right of Canada or any other person has the right of compensation,
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(a) for loss or damage incurred as a direct result of,
(i) the spill of a pollutant that causes or is likely to cause adverse effects,
(ii) the exercise of any authority under subsection 1 of section 68j or the carrying out of or attempting to carry out a duty imposed or an order or direction made under this Part, or
(iii) neglect or default in carrying out a duty imposed or an order or direction made under this Part;
(b) for all reasonable cost and expense incurred in respect of carrying out or attempting to carry out an order or direction under the Part,
from the owner of the pollutant and the person having control of the pollutant.
Indeed, if the parties had (or, at least, ought to have had) the Spills Bill in contemplation when executing the Ontario Indemnity, they would have known that it created first and third party liability.
103 In a similar vein, the Province also advances the curious argument that first party claims should be excluded from the scope of the Ontario Indemnity because its reference to claims, actions and proceedings brought by any "province" does not include those brought by the Government of Ontario (Ontario A.F., at paras. 43 and 93). With respect, the notion that the parties would not have understood the reference to "any province" as including the province in which the Dryden Property is located, and which clearly has the constitutional authority to enact and pursue statutory claims in circumstances such as these, is simply absurd (see motion judge's reasons, at para. 48). Indeed, Ontario may be the only "province" to which this provision could apply since, in Interprovincial Co-operative Ltd. v. R. (1975), [1976] 1 S.C.R. 477 (S.C.C.) , this Court held that Manitoba lacked the constitutional jurisdiction to enact and pursue a statutory claim against Dryden Chemical in respect of the mercury contamination into the rivers.
104 Finally, the suggestion that the scope of the indemnity excludes the costs of complying with first party regulatory orders is further undermined by its express application to claims, actions and proceedings brought by "any agency, body or authority created by statutory or other authority" (A.R., vol. IV, at p. 189). The role of such agencies, bodies or authorities is to act under the authority of Ontario statutes or regulations by, in this case, issuing regulatory orders such as that at issue in this appeal.
105 In light of the foregoing, we see no reversible error in the motion judge's consideration of the factual matrix, nor, therefore, in his interpretation of the Province's obligation under para. 1 of the Ontario Indemnity as extending to first party claims, including those brought under subsequently-enacted legislation.
(2) Did the Motion Judge Err in Failing to Read Paragraph 1 of the Ontario Indemnity in Light of the Agreement as a Whole?
106 In support of its second argument, the Province submits that paras. 2 and 3 of the Ontario Indemnity, which give Ontario the right to take carriage of a pollution claim and oblige the companies to cooperate with Ontario in relation to a pollution claim, are typical of third party indemnities, such that it should be clear that the Ontario Indemnity was not meant to address first party claims as well. Those two provisions read as follows:
2. Upon the receipt of notice of any Pollution Claim directed to Great Lakes or Reed or any predecessor in title of Reed, Great Lakes or Reed or failing Reed, International, as the case may be, shall promptly notify Ontario in writing of receipt of such notice giving reasonable particulars thereof, and Ontario shall have the right to elect to either take carriage of the defence or to participate in the defence and/or settlement of the Pollution Claim and any proceeding relating thereto as Ontario deems appropriate...... 3. Where a Pollution Claim is brought against any of the companies referred to in paragraph 1 hereof, the said companies shall fully cooperate with Ontario in the investigation and defence and settlement of any such Pollution Claim and shall
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use their best efforts to obtain the cooperation of all personnel having any knowledge or information relevant to any such Pollution Claim and shall make available to Ontario all information. ...
107 We agree with Laskin J.A. that these provisions "are meaningful only for third party claims" against the indemnified parties, and are "utterly meaningless" in the context of first party claims and orders, such as the Director's Order (para. 268). Nor did this escape the motion judge. Rather, he viewed the notification requirement in para. 2 as being "not inconsistent with the Province's obligation to indemnify Weyerhaeuser and Resolute for their costs of complying with the [Director's Order]" (para. 48). In other words, while para. 2 does not provide for first party indemnity, it did not exclude it either, and does not oust the language in para. 1 which clearly includes it. As Weyerhaeuser points out, "the fact that some procedural provisions may be unnecessary or redundant in the case of certain types of claims does not mean that a [c]ourt should ignore clear language confirming that those claims are covered by the [Ontario] Indemnity" (Weyerhaeuser R.F. (Ontario Appeal), at para. 55). (This reasoning would also apply to para. 3, given its similarity to para. 2.) Again, we see no reversible error here.
(3) Did the Motion Judge Commit Palpable and Overriding Errors of Fact in His Findings of Fact?
108 The Province's third submission relies upon what it says were two palpable and overriding errors of fact by the motion judge. It points, first, to the motion judge's suggestion that Great Lakes "continued to spend significant amounts of money to modernize the pulp and paper operation in Dryden" as part of the Settlement Agreement (para. 48). This statement shows, the Province says, that he failed to appreciate that such modernization efforts were given in exchange for the 1979 Indemnity, and that they formed no part of the consideration given by Great Lakes for the Ontario Indemnity. The second putative error is said to be found in the motion judge's conclusion, unsupported by evidence, that the waste disposal site was the source of the mercury contamination into the English and Wabigoon rivers.
109 We begin by rejecting the proposition that the motion judge erred when he stated that the Ontario Indemnity "replaced the 1979 Indemnity and was part of the settlement of the lawsuit in which Great Lakes agreed to pay millions of dollars, and also continued to spend significant amounts of money to modernize the pulp and paper operation in Dryden" (para. 48). Specifically, and contrary to the position taken by our colleagues in the majority, the motion judge did not actually find that the modernization commitment was given to the Province as part of the settlement in 1985. Rather, he simply observed that Great Lakes continued to invest in the Dryden pulp and paper mill through to 1985, as it was required to do in exchange for the 1979 Indemnity (which, as the motion judge properly found, was subsequently replaced by the Ontario Indemnity). We agree with the Court of Appeal that there is ample evidence in the record supporting these findings, and that no basis for appellate intervention is disclosed.
110 In any event, and to the extent that either of these are "errors", or even "palpable" errors, we again agree with the majority at the Court of Appeal that they could not possibly have had an overriding effect on the conclusion reached by the motion judge. In our respectful view, neither the Province nor our colleagues remotely justify the exaggerated claim that such minor and collateral findings of fact somehow acquired an overriding significance so as to determine the outcome of the case (Benhaim v. St-Germain, 2016 SCC 48, [2016] 2 S.C.R. 352 (S.C.C.) , at para. 38, quoting South Yukon Forest Corp. v. R., 2012 FCA 165, 4 B.L.R. (5th) 31 (F.C.A.), at para. 46) — particularly where the motion judge's ultimate conclusion on the scope of the indemnity rested on different factual and contextual considerations. This ground of appeal must fail.
(4) Did the Motion Judge's Interpretation of the Ontario Indemnity Render the Agreement Unenforceable as an Impermissible Fetter on the Legislature's Law-Making Powers?
111 The Province's argument here is that the motion judge's interpretation of the Ontario Indemnity — that it extends to the cost of compliance with first party statutory claims made under legislation enacted after the indemnity was given to Great Lakes and Reed in 1985 — has the impermissible effect of indirectly fettering the legislature's law-making power. Ex hypothesi, the expense that the Province would incur by indemnifying Great Lakes and Reed for compliance with such statutory claims would deter the legislature from enacting the enabling legislation in the first place. Based on the "presumption of law in favour of a legal, enforceable interpretation of a contract", the Province says that the motion judge's interpretation should be rejected and the Ontario Indemnity should instead be read as excluding the costs of complying with the Director's Order and other first party statutory claims based on legislation enacted post-1985 (Ontario A.F., at para. 132).
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112 This argument rests on two key premises. The first is that the motion judge "implied a term into [the Ontario Indemnity] under which [the Province] is required to compensate for costs incurred to comply with an order made under future legislation" (Ontario A.F., at para. 116 (emphasis added)). The second is that a contract that implicitly discourages legislative action is invalid and unenforceable. As to this second point, the Province says that an indirect fetter of legislative power — which occurs where a contract imposes an obligation on the government to compensate the other contracting party in the event of future legislative action or inaction — "should only be permitted where there is an express intention to allocate commercial risk" in this manner (Ontario A.F., at para. 115).
113 We agree with the majority at the Court of Appeal. The Province's argument rests on a mischaracterization of the terms of the Ontario Indemnity, and a significant misunderstanding of the doctrine of fettering.
(a) The Motion Judge Did Not Imply Any Terms Into the Ontario Indemnity Regarding the Effect of Orders Pursuant to Subsequently-Enacted Legislation
114 We begin by rejecting the Province's stated but unelaborated premise that the motion judge's conclusion rested on the implication of terms. Rather, his conclusion was drawn from a straightforward interpretation of the scope of the Province's obligation, expressly stated in para. 1 of the Ontario Indemnity as extending to "any obligation, liability, damage, loss, costs or expenses incurred ... as a result of any claim, action or proceeding ... existing at December 17, 1979 or which may arise or be asserted thereafter" (A.R., vol. IV, at p. 189 (emphasis added)). The motion judge's conclusion is fortified by para. 4, which provides that the indemnity is valid "without limitation as to time" (ibid.). These provisions contemplate that Reed and Great Lakes are to be indemnified in respect of all Pollution Claims, as defined, whenever asserted. Neither the text nor the surrounding circumstances support the restricting that the Province would seek to have recognized.
115 The majority at the Court of Appeal was correct. There was no error — let alone a palpable and overriding error — in the motion judge's conclusion that the Ontario Indemnity requires the Province to indemnify the costs of compliance with an order made under subsequently-enacted legislation. More to the point, the motion judge implied no term into the agreement.
(b) The Fettering Doctrine Does Not Render Unenforceable Any Contract that Discourages Legislative Action or Inaction, Whether Implicitly or Explicitly
116 As a matter of constitutional law, the executive of the Canadian state cannot bind or restrict the legislature's sovereign law-making power, whether by contract or otherwise. As this Court affirmed in Reference re Canada Assistance Plan (Canada), [1991] 2 S.C.R. 525 (S.C.C.) , "Ministers of State cannot ... by means of contractual obligations entered into on behalf of the State fetter their own freedom, or the freedom of their successors or the freedom of other members of parliament, to propose, consider and, if they think fit, vote for laws, even laws which are inconsistent with the contractual obligations" (p. 560, quoting West Lakes Ltd. v. South Australia (1980), 25 S.A.S.R. 389 (Australia S.C.) , at p. 390). Similarly, this Court recently explained in Reference re Pan-Canadian Securities Regulation, 2018 SCC 48, [2018] 3 S.C.R. 189 (S.C.C.) , that "the executive is incapable of interfering with the legislature's power to enact, amend and repeal legislation", with the result being that "[a]n executive agreement that purports to bind the parties' respective legislatures cannot, therefore, have any such effect" (para. 53).
117 It follows that a contract entered into by the executive that purports to require that a certain law be enacted, amended or repealed cannot be enforced by way of injunction or specific performance. The legislature's sovereign power to "make or unmake any law whatever" means that it can never be bound by such an order (P. W. Hogg, P. J. Monahan and W. K. Wright, Liability of the Crown (4th ed. 2011), at p. 324). This is sometimes referred to as the rule against "direct fettering".
118 At the same time — and this is the point that eludes the Province — there is an important difference between a contract that impermissibly fetters the legislature's power to enact, amend and repeal legislation, and a contract whose breach by the Crown exposes it to liability. Where the legislature exercises its law-making power in a manner inconsistent with the terms of a contract, the Crown may still face consequences in the form of liability in damages. While the possibility of such liability may deter the legislature from acting in a manner that runs contrary to the Crown's contractual promises — sometimes referred to as an "indirect fetter" — the legislature is not thereby truly fettered. Its freedom-of-action in these circumstances "is not
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 22 Resolute FP Canada Inc. v. Ontario (Attorney General), 2019 SCC 60, 2019 CSC 60,... 2019 SCC 60, 2019 CSC 60, 2019 CarswellOnt 19886, 2019 CarswellOnt 19887... diminished by holding that the enactment of a particular piece of legislation gives rise to an action for damages for breach of contract" (S. M. Waddams, The Law of Contracts (7th ed. 2017), at pp. 453-454; see also K. Horsman and G. Morley, eds., Government Liability: Law and Practice (loose-leaf), at p. 2-10). As is explained in Liability of the Crown:
While a contract entered into by the Crown (or anyone else) cannot validly impose a direct fetter on legislative power, an exercise of legislative power in breach of contract will give rise to an obligation on the Crown to compensate the private contracting party for any loss suffered by the breach of contract. That obligation is an indirect fetter on legislative power, but it is not forbidden by the rule against fettering; on the contrary, it is required by the rule of law. [Emphasis in original; p. 325.]
119 We say nothing new here: the same point emerges from Wells v. Newfoundland, [1999] 3 S.C.R. 199 (S.C.C.) . There, the claimant Wells served as a commissioner on a statutory board, under a contract which entitled him to hold office during good behaviour until the age of 70. By legislation, the board was restructured and Wells' office was abolished. When he was not reappointed to the new board, he sued for breach of contract.
120 While accepting that the legislature had throughout retained unfettered authority to restructure the Board and eliminate Wells' office, this Court nonetheless found for Wells by applying the "crucial distinction ... between the Crown legislatively avoiding a contract, and altogether escaping the legal consequences of doing so" (para. 41). The Court went on to explain that:
In a nation governed by the rule of law, we assume that the government will honour its obligations unless it explicitly exercises its power not to. In the absence of a clear express intent to abrogate rights and obligations — rights of the highest importance to the individual — those rights remain in force. To argue the opposite is to say that the government is bound only by its whim, not its word. In Canada, this is unacceptable, and does not accord with the nation's understanding of the relationship between the state and its citizens [para. 46].
121 Wells therefore affirms the distinction between fettering and exposure to liability. A legislature must be free — that is, unfettered — to exercise its law-making powers as it sees fit, within constitutional bounds. But where the legislature exercises its powers in such a way as to breach a government contract (that is, a contract between the executive and a counterparty), the Crown is, as a general rule, liable, unless the legislature also expressly and unambiguously extinguished the counterparty's rights of action or excluded Crown liability.
122 Even if, therefore (to return to the facts of this appeal), the Ontario Indemnity has the effect of imposing liability upon the Province to indemnify against first party claims — or even of deterring or otherwise discouraging the legislature from exercising its law-making power in a certain way — Wells makes it clear that these effects do not render the agreement unenforceable at law. Wells also undermines the proposition, advanced by the Province, that indirect fettering "should only be permitted where there is an express intention to allocate commercial risk" (Ontario A.F., at para. 115), since there was no such express allocation in that case. Even though Wells' employment contract was silent on the point of compensation in the event of abolition of his office, this Court had no difficulty finding that "[t]he most plausible interpretation of the respondent's terms of employment is that while his position, and the authority flowing from it, could be eliminated, he could not be deprived of the benefits of the job except by virtue of age or bad behaviour" (para. 36).
123 For its part, the Province relies heavily on this Court's decision in Pacific National Investments Ltd. v. Victoria (City), 2000 SCC 64, [2000] 2 S.C.R. 919 (S.C.C.) ("Pacific National No. 1"). At issue in that case was a contract between Pacific National Investments ("PNI") and the City of Victoria, which required PNI to redevelop a seaside neighbourhood and required the City to pass the necessary zoning and to grant subdivision. Bowing to public pressure, the City subsequently down-zoned to limit further development, thereby scuttling PNI's redevelopment. PNI sued, arguing that its contract implicitly prohibited the City from re-zoning the lands until the expiry of a reasonable amount of time, and that the City breached this implicit term when it re-zoned the land.
124 In finding for the City, this Court explained that, as a creature of statute, the City could only agree to the implied term posited by PNI if it had the statutory authority to do so. And even accepting that such a term might be read into the contract,
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125 The difficulty is that this reasoning is irreconcilable with the Court's decision only one year earlier in Wells . If the law commands that Wells be entitled to compensation for the breach of his employment contract that resulted from legislative action, we struggle to explain why the law would not operate similarly so as to entitle PNI to compensation for the breach of its development contract with the City when the City Council decided to "down-zone" the seaside lands. We note that the reasoning inPacific National No. 1 has been the subject of heavy criticism on this very issue of fettering. The authors of Liability of the Crown take the view that "the decision is wrong, even if it is limited to the exercise of municipal legislative powers" (p. 328 (emphasis added); see also Government Liability, at pp. 2-10; and Andrews v. Canada (Attorney General), 2014 NLCA 32, 354 Nfld. & P.E.I.R. 42 (N.L. C.A.), at paras. 34-41). Likewise, Perell J. in Rio Algom Ltd. v. Canada (Attorney General), 2012 ONSC 550 (Ont. S.C.J.) , said there is "a very strong argument that Pacific National No. 1 is wrong and inconsistent with other equally binding and authoritative Supreme Court of Canada's decisions" (para. 153 (emphasis added)); see also Ontario First Nations (2008) Limited Partnership v. Ontario (Minister of Aboriginal Affairs), 2013 ONSC 7141, 118 O.R. (3d) 356 (Ont. S.C.J.), at paras. 53-59).
126 Significantly, this Court in Pacific National No. 1 did not purport to overrule Wells , and instead distinguished it on two bases. First, the majority observed that Wells "did not deal with a contract governing the exercise of municipal legislative powers" (para. 61). The logic appears to be that, unlike a province, a municipality cannot indirectly fetter its law-making powers in the absence of "legislation expressing a public policy permitting it to do so" (para. 65). With great respect, and while the failing may well be ours, this distinction eludes us. As Bastarache J. observed in dissent, public policy would tend to work the other way — there is no reason why the principle that the government should honour its commitments unless its legislature explicitly exercises the power not to (as was stated in Wells , at para. 46) should not apply with equal force in the context of municipalities (seePacific National No. 1, at para. 112). In any event, this distinction would not assist the Province here, since it — and not a municipality — agreed to the Ontario Indemnity. Meaning, the circumstances of this appeal are analogous to Wells , and not to Pacific National No. 1.
127 The second way that the majority in Pacific National No. 1 distinguished Wells was to describe Wells' employment agreement as "a business contract in relation to the hiring of senior civil servants" (para. 61). In other words, a distinction was drawn between "business contracts" which can have the effect of indirectly fettering law-making powers, and other kinds of contracts which cannot. Again with great respect, we do not see the significance of this distinction — particularly since the contract in Pacific National No. 1 for land redevelopment could hardly have been seen as less of a "business contract" than Wells' employment contract. In any event, if the principle that the government should honour its commitments unless its legislature explicitly exercises the power not to is to be cast aside, we see no reason for doing so in respect of one kind of contract and not another.
128 We also note that the statements in Pacific National No. 1 regarding fettering were called into question only four years later when that dispute found its way back to this Court in Pacific National Investments Ltd. v. Victoria (City), 2004 SCC 75, [2004] 3 S.C.R. 575 (S.C.C.) ("Pacific National No. 2"). In its action against the City, PNI had also claimed in unjust enrichment for the $1.08 million that it had spent on improvements made in performing the failed development contract. In finding for PNI, a unanimous Court rejected the City's argument that the obligation to make restitution in those circumstances would constitute an indirect fetter on the City legislative power, explaining that "[t]he power to down-zone in the public interest does not immunize the City against claims for unjust enrichment" (para. 52). Commenting on this case, the authors of Liability of the Crown had the following to say:
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[In Pacific National No. 2], Binnie J. said: "Municipalities are subject to the law of unjust enrichment in the same way as other individuals or entities". We would add: what a shame that the same cannot be said about the law of contract! [Footnote omitted; p. 329.]
129 Bearing all of this in mind, and to the extent that Pacific National No. 1 can be taken as holding that the Crown will not be liable in damages for the breach of a governmental contract where that breach was caused by legislative action (or inaction), we are of the respectful view that it does not state the law as it relates to the fettering doctrine. On this point, we consider ourselves bound by Wells , and not Pacific National No. 1.
(c) Conclusion on the Fettering Issue
130 It follows that we reject the Province's arguments that invoke the doctrine of fettering. Even if the Ontario Indemnity was to be interpreted as deterring the legislature from enacting new first party statutory claims, which would then be covered by the Province's obligation under para. 1 when asserted against Great Lakes and Reed, such an effect does not render the contract unenforceable or invalid such that the legislature was fettered. This accords with the authority of this Court's judgment in Wells .
131 It also follows that we do not view the motion judge's interpretation of the Ontario Indemnity as requiring the Province to indemnify the cost of complying with orders made under subsequent legislation — as impermissibly fettering the Ontario Legislature's law-making power. While the enactment of new statutory claims might expose the Province to greater liability under the Ontario Indemnity (which might therefore discourage such enactments in the first place), the Ontario Indemnity, as interpreted by the motion judge, in no way prevents the legislature from exercising its sovereign authority to "make or unmake any law whatever" (A. V. Dicey, Introduction to the Study of the Law of the Constitution (10th ed. 1959), at p. 40, cited in Reference re Pan-Canadian Securities Regulation , at para. 54).
C. The Resolute and Weyerhaeuser Appeals
132 The appeals brought by Resolute and Weyerhaeuser ask whether either or both of them enjoy the benefit of the Ontario Indemnity by operation of the enurement clause (para. 6) of that agreement. That clause states that the indemnity "shall be binding upon and enure to the benefit of the respective successors and assigns of Ontario, Reed, International and Great Lakes" (A.R., vol. IV, at p. 191 (emphasis added)).
133 The parties' submissions on this question are directed to three separate, but related, issues, which we will address below, in turn. The first is whether the benefit of the Ontario Indemnity extends to all of Great Lakes' successors and assigns, in perpetuity, irrespective of whether those successors and assigns had themselves assigned their benefits thereunder to third parties. Resolute and Weyerhaeuser say it does, while the Province (like the Court of Appeal) says that that the assignor of a chose in action — such as a right to indemnity — loses the benefit thereunder upon assignment (see C.A. reasons, at paras. 194 and 196-98).
134 The second issue is whether Bowater actually assigned the benefit of the Ontario Indemnity to Weyerhaeuser under the 1998 Asset Purchase Agreement. Resolute says it did not, and that both the motion judge and the majority of the Court of Appeal erred in concluding otherwise. Weyerhaeuser and the Province both say no such error was made by the courts below.
135 The final issue is whether Weyerhaeuser may benefit under the Ontario Indemnity as Great Lakes' successor-in-title to the Dryden Property, independently of whether it can also benefit as an assignee of the rights thereunder. Weyerhaeuser says the motion judge correctly interpreted the term "successor" in the enurement clause as extending to Great Lakes' corporate successors (like Resolute) and to successors-in-title to the Dryden Property.
(1) Can an Indemnified Party Continue to Enjoy the Benefit of the Ontario Indemnity After It Assigns Its Rights Thereunder Absolutely to a Third Party?
136 Resolute and Weyerhaeuser say that all of Great Lakes' successors and assigns may continue to benefit in perpetuity from the Ontario Indemnity, even where they have assigned the benefit of the indemnity to third parties. In other words, they say that the enurement clause contemplates (1) Resolute's continued enjoyment of the benefit of the Ontario Indemnity as a corporate
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 25 Resolute FP Canada Inc. v. Ontario (Attorney General), 2019 SCC 60, 2019 CSC 60,... 2019 SCC 60, 2019 CSC 60, 2019 CarswellOnt 19886, 2019 CarswellOnt 19887... successor of Great Lakes, even if it had assigned its interest thereunder to Weyerhaeuser under to the 1998 Asset Purchase Agreement, and (2) Weyerhaeuser's continued enjoyment of the same as a successor-in-title to the Dryden Property and assignee of the Ontario Indemnity, even if it had subsequently assigned its interest thereunder to a third party. According to Resolute:
There is no legal principle that required the Court of Appeal to apply [a] "hot potato" theory, in which only the singular legal owner of an indemnity may rely on it. This Court relaxed the requirement of privity more than 25 years ago. Rather, the relevant question is what the parties to the Ontario Indemnity objectively intended. The only reasonable interpretation of the indemnity is that the parties intended to protect Great Lakes and its successors and assigns, in perpetuity. Any other interpretation is fundamentally inconsistent with the nature of the environmental liability that the Ontario Indemnity was given to protect against. [Emphasis in original.]
(Resolute A.F., at para. 64)
137 We disagree. Our starting position is that of the majority of the Court of Appeal: the effect of an absolute assignment of contractual right is to extinguish the assignor's right to call upon the obligation for him or herself, and to place that right in the hands of the assignee:
The party making the assignment was a promisee but became an assignor who assigned the contract right he had against a promisor. Unless the assignment is made to secure the payment of a debt, it extinguishes the contract right in the assignor (former promisee) and the right is recreated in the assignee to whom the party with the correlative duty (the promisor) made no promise. There is no longer any promisee since the former promisee has surrendered the right previously created by his promise by becoming an assignor.
(J. E. Murray, Jr., Corbin on Contracts (rev. ed. 2007), vol. 9, at p. 130)
See also C.A. reasons, at para. 194; G. Tolhurst, The Assignment of Contractual Rights (2nd ed. 2016), at § 3.10.
138 The enurement clause alters none of this. By referring to "successors and assigns", it simply affirms that the rights and obligations thereunder continue to the benefit of successors and assigns. We see nothing in either the text of para. 6 or its surrounding circumstances, and Resolute and Weyerhaeuser direct our attention to nothing in this respect that would allow the indemnity to apply to those who have alienated their interest. We therefore find no error in the conclusion of the Court of Appeal on this point.
(2) Did Bowater Transfer the Benefit of the Ontario Indemnity to Weyerhaeuser Under the 1998 Asset Purchase Agreement?
139 On this issue, Resolute says that a proper consideration of the context in which the 1998 Asset Purchase Agreement was made by the parties, in accordance with the modern approach to contractual interpretation rather than a purely textual reading of the relevant provisions, should have led the motion judge to conclude Bowater did not absolutely assign the Ontario Indemnity to Weyerhaeuser under that agreement. We agree with Resolute. By failing to read the impugned contractual term in light of the factual matrix and in a commercially sensible way, the motion judge erred in holding that Bowater assigned the Ontario Indemnity to Weyerhaeuser under the 1998 Asset Purchase Agreement. We would therefore allow Resolute's appeal. Resolute is entitled to rely on the Ontario Indemnity to cover past and future costs incurred in complying with the Director's Order.
(a) The Motion Judge Erred in Principle in His Approach to Interpreting the 1998 Asset Purchase Agreement
140 Generally, the interpretation of negotiated contracts involves questions of mixed fact and law, such that appellate review is confined to seeking out palpable and overriding error. Extricable questions of law, however, are reviewed for correctness (see Sattva , at para. 53). Such questions include "the application of an incorrect principle, the failure to consider a required element of a legal test, ... the failure to consider a relevant factor", or questions with respect to substantive legal rules of contract (Sattva , at para. 53, quoting King v. Operating Engineers Training Institute of Manitoba Inc., 2011 MBCA 80, 341 D.L.R. (4th) 520 (Man. C.A.), at para. 21).
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141 We accept Resolute's submission that the motion judge erred in law by failing to properly apply the rules of contractual interpretation in determining whether Bowater assigned the Ontario Indemnity to Weyerhaeuser under the 1998 Asset Purchase Agreement. Indeed, the motion judge gave no reasons in support of his conclusion on this point, which was stated in a somewhat peremptory manner, and grounded solely on an analysis of the text of the relevant provisions of the 1998 Asset Purchase Agreement (motion judge reasons, at paras. 20 and 64). In our respectful view, he was required to consider both the context and circumstances surrounding the formation of the 1998 Asset Purchase Agreement, as well as the commercial reasonableness of any purported assignment. As he failed to apply the proper approach to contractual interpretation, his conclusion that the Ontario Indemnity was assigned from Bowater to Weyerhaeuser is entitled to no appellate deference.
(b) Bowater Did Not Assign the Benefit of the Ontario Indemnity to Weyerhaeuser Under the 1998 Asset Purchase Agreement
(i) Contracts Must Be Interpreted With a View to Commercial Reasonableness
142 As we have already observed, commercial reasonableness is a crucial consideration in interpreting a contract (see Canadian Contractual Interpretation Law, at p. 55). This is simply a corollary of the object of discerning the parties' intentions: when interpreting commercial contracts, courts seek to reach a commercially sensible interpretation, since doing so is more likely than not to give effect to the intention of the parties (see ibid., at p. 57; Nickel Developments Ltd. v. Canada Safeway Ltd., 2001 MBCA 79, 156 Man. R. (2d) 170 (Man. C.A.), at para. 34). Simply put, courts safely assume that those who enter into commercial contracts intend for their contracts to "work" (Humphries v. Lufkin Industries Canada Ltd., 2011 ABCA 366, 68 Alta. L.R. 175 (Alta. C.A.) , at para. 15).
143 Discerning commercial reasonableness entails, like all contractual interpretation, an objective analysis (see Canadian Contractual Interpretation Law, at p. 57). Courts should therefore read commercial contracts in a "positive and purposive manner", seeking to understand the structure of the agreement reached by the parties, the purpose of the transaction and the business context in which the contract was intended to operate (Humphries , at para. 15). As Lord Wilberforce said in Reardon Smith Line v. Hansen-Tangen, [1976] 3 All E.R. 570 (U.K. H.L.) , and as quoted with approval by this Court in Sattva , at para. 47:
No contracts are made in a vacuum: there is always a setting in which they have to be placed. ... In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.
144 Given, then, the choice between an interpretation that allows the contract to function in furtherance of its commercial purpose and one that does not, it is generally the former interpretation that should prevail (see Humphries , at para. 15). While a party cannot avoid its contractual obligations simply because the bargain that they entered into was undesirable or unusual, commercially absurd interpretations should be avoided (see Canadian Contractual Interpretation Law, at pp. 61-63). As this Court said in Guarantee Co. of North America v. Gordon Capital Corp., [1999] 3 S.C.R. 423 (S.C.C.) , at para. 61, "[i]f a given construction of the contract would lead to an absurd result, the assumption is that this result could not have been intended by rational commercial actors in making their bargain, absent some explanation to the contrary". See also Toronto (City) v. W.H. Hotel Ltd., [1966] S.C.R. 434 (S.C.C.) , at p. 440.
(ii) It Was Not Commercially Reasonable for Bowater to Transfer the Ontario Indemnity to Weyerhaeuser
145 In light of the foregoing — and, in particular, based on an interpretation of the 1998 Asset Purchase Agreement that properly reflects the factual matrix and which is consistent with the principle of commercial reasonableness — we find ourselves in respectful disagreement with the conclusions reached by the courts below. We would instead hold that the Ontario Indemnity was not assigned by Bowater to Weyerhaeuser as part of the 1998 Asset Purchase Agreement. The manner in which the parties structured the transfer of the Dryden Property from Bowater to Weyerhaeuser reveals an intention that Bowater would both continue to bear the risk associated with the waste disposal site and indemnify Weyerhaeuser in respect of any environmental liabilities that the latter may incur in relation to the Reed-era mercury contamination.
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146 Section 3.1(vii) and (xiv) of the 1998 Asset Purchase Agreement recorded Bowater's agreement to sell certain intangible assets forming part of the Dryden Property to Weyerhaeuser. As already noted, the motion judge relied on both provisions in concluding that the benefit of the Ontario Indemnity was assigned to Bowater as part of the asset sale. The majority at the Court of Appeal agreed, citing the "plain and unambiguous language of s. 3.1(xiv)", and the commercial reasonableness of Weyerhaeuser's seeking to "maximize its protection against environmental liabilities associated with the [waste disposal site]" (paras. 156 and 159).
147 But s. 3.1(xiv) of the 1998 Asset Purchase Agreement cannot be read in isolation. Instead, as we have stressed throughout these reasons, contractual text must be interpreted in light of the surrounding circumstances and with a view to commercial reasonableness, taking into account the commercial purpose and the structure of the agreement.
148 Further, commercial reasonableness must be assessed from the perspective of both parties. After all, a commercial arrangement that makes sense for one party but no sense for another makes no sense as a commercial arrangement at all. As the Court of Appeal for Ontario explained in Kentucky Fried Chicken Canada v. Scott's Food Services Inc. (1998), 114 O.A.C. 357 (Ont. C.A.) , at para. 27:
Where ... the document to be construed is a negotiated commercial document, the court should avoid an interpretation that would result in a commercial absurdity. Rather, the document should be construed in accordance with sound commercial principles and good business sense. Care must be taken, however, to do this objectively rather than from the perspective of one contracting party or the other, since what might make good business sense to one party would not necessarily do so for the other.
[Emphasis added; citations omitted.]
149 This point looms large in considering the text of s. 3.1(xiv), which, at first glance, appears to transfer to Weyerhaeuser the full benefit of all of the intangible rights that Bowater enjoys under the representations, warranties, guarantees, indemnities, undertakings, certificates, covenants, agreements and security that it has received upon the acquisition of the Dryden Property or "otherwise". Read literally, "otherwise" suggests that Bowater would be stripped of all of its contractual benefits by operation of s. 3.1(xiv) even if those benefits were unconnected to the Dryden Property. This simply could not have been the intention of the parties: Weyerhaeuser could not reasonably have expected to enjoy rights unrelated to the assets it was purchasing. Such an arrangement would be commercially absurd.
150 The meaning of the term "otherwise" in s. 3.1(xiv) — and, specifically, whether it captures the benefit of the Ontario Indemnity — becomes evident, however, once the structure of the agreement between Bowater and Weyerhaeuser, and how they chose to allocate risk as between them is understood. The latter is a key consideration, since the allocation of contractual risk is an attempt by one party to shape the other's expectations in light of what they are prepared to do (see Canadian Contract Law, at p. 731).
151 Here, the parties structured the 1998 Asset Purchase Agreement in a way that imposed all risk in relation to environmental liabilities — especially in relation to the waste disposal site — on Bowater, and not on Weyerhaeuser. First and foremost, as part of the deal, Bowater provided to Great Lakes a broad environmental indemnity in respect of the entire Dryden Property, in the following terms:
10.7 Environmental Indemnity
The Vendor shall indemnify the Purchaser from and against any Claim wherein the Claimant alleges that any Loss, or any damages of any nature whatsoever, was suffered or incurred as a result of a release or discharge of any Hazardous Substance that occurred prior to the Time of Closing, which Hazardous Substance leaves or left the Purchased Assets prior to the Time of Closing and which originated from the Purchased Assets (the "Claim"). For purposes of this paragraph, Claimant shall not include the Purchaser. The carriage and defence of the Claim shall be conducted in accordance with Section 18.4. There shall be no limitation period and no maximum amount for the Indemnity under this Section 10.7.
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(A.R., vol. V, at p. 70)
152 Further, by s. 9.01 of the 1998 Lease Agreement, Bowater also provided to Weyerhaeuser a separate indemnity for all claims relating to the presence or release of mercury in relation to the waste disposal site:
9.01 Tenant's Indemnity
[Bowater] covenants to indemnify and save harmless [Weyerhaeuser] from all claims, actions, costs and losses of every nature arising during the Term or thereafter relating to or arising in any way from this lease of the Lands and the Access Area except to the extent caused by the Landlord's negligence or wilful misconduct. The foregoing indemnity extends without limitation to all claims, actions, costs or losses arising out of or relating to:
(1) the presence or release of mercury and any other contaminant, substance or waste on or in the Lands; . . . . . The obligations of the Tenant to indemnify the Landlord under the provisions of this section are to survive the termination or expiry of this lease.
(A.R., vol. V, at p. 126-27)
153 These two broadly-worded indemnities reveal with absolute clarity the risk allocation structure that Bowater and Weyerhaeuser intended to achieve. Once the indemnity in the 1998 Lease Agreement was provided, Weyerhaeuser was protected from any and all environmental liability resulting from its temporary ownership of the waste disposal site, in addition to the protection that it enjoyed in relation to the rest of the Dryden Property. The parties clearly intended that any claim against Weyerhaeuser in respect of the presence or release of the mercury waste would be covered by either the indemnity in s. 10.7 of the 1998 Asset Purchase Agreement or in s. 9.01 of the Lease Agreement (assuming, of course, that any such claim falls within the scope of either provision).
154 This risk-allocation structure makes commercial sense, however, if and only if Bowater's interests remained protected by the Ontario Indemnity. The Province acknowledged as much during the hearing in this Court and in its factum in the Superior Court of Justice (see hearing transcript, at p. 121; A.R., vol. VIII, at p. 24). As Resolute says, such an interpretation of the 1998 Asset Purchase Agreement makes sense because "Weyerhaeuser would have recourse against Bowater, and Bowater would have recourse against [the Province]", the result being that "[e]veryone would be protected" (Resolute A.F., at para. 101).
155 Weyerhaeuser also conceded that "it would have been commercially absurd for Bowater to assign the indemnity if, by doing so, Bowater (and its successor, Resolute) would lose the benefit of the Indemnity" (Weyerhaeuser R.F. (Resolute Appeal), at para. 28). It argues, however — and the majority at the Court of Appeal accepted — that it was "perfectly reasonable" for Weyerhaeuser to seek both an assignment of the Ontario Indemnity and a separate indemnity from Bowater under the Lease Agreement (ibid., at para. 27; see also C.A. reasons, at para. 159). While this is undoubtedly so, this submission views the commercial reasonableness of the transaction exclusively from the standpoint of Weyerhaeuser. But, again, commercial reasonableness has to be assessed from the standpoint of each party, and not just one of them. And, as Weyerhaeuser concedes, from the standpoint of Bowater, this arrangement would be ridiculous, leaving Bowater (and its successors) responsible for two contractual indemnities vis-à-vis Weyerhaeuser, and completely exposed to all environmental liabilities in respect of both the Dryden Property and the waste disposal site.
156 It follows that, in our view, for the purpose of applying s. 3.1(xiv) of the 1998 Asset Purchase Agreement, the contractual rights and indemnities "otherwise" received by Bowater and its corporate predecessors must not be read so as to confer on Weyerhaeuser all the rights and indemnities enjoyed by Bowater. Both the factual matrix (which includes the indemnities in the 1998 Asset Purchase Agreement and in the Lease Agreement) and the principle of commercial reasonableness indicate that this provision did not effect a transfer of Bowater's rights under the Ontario Indemnity to Weyerhaeuser. The parties could not reasonably have intended that Bowater would be obliged to indemnify Weyerhaeuser for all environmental liabilities in relation to the Dryden Property and the waste disposal site, while relinquishing its own protection.
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157 We would therefore allow Resolute's appeal.
(3) Is Weyerhaeuser a "Successor" of Great Lakes for the Purpose of the Enurement Clause at Paragraph 6 of the Ontario Indemnity?
158 While Weyerhaeuser is not an assignee of the benefit of the Ontario Indemnity, it also says that it may still benefit thereunder as a successor owner of the Dryden Property. In its submission, the term "successor" in para. 6 of the Ontario Indemnity includes both corporate successors of Great Lakes and successors-in-title to the Dryden Property. Relying on Brown v. Belleville (City), 2013 ONCA 148, 114 O.R. (3d) 561 (Ont. C.A.), Weyerhaeuser argues that the enurement clause extends the benefit of the Ontario Indemnity to a class of beneficiaries, all of whom may simultaneously benefit from the agreement.
159 Like the majority at the Court of Appeal, we are of the respectful view that the motion judge made a palpable and overriding error in concluding that the enurement clause extended the benefit of the Ontario Indemnity to successor owners of the Dryden Property (i.e., successors-in-title). In our view, the term "successors" clearly refers only to corporate successors. It is worth noting that this clause is a standard contractual term — that is, "boilerplate" — that solicitors use in order to protect their clients' interests and expectations (see Canadian Contract Law, at pp. 741-42). Certainty in commercial transactions is best protected where courts give effect to the common understanding and inclusion of such terms in contracts, absent any indication that the parties intended them to have a different effect.
160 In National Trust Co. v. Mead, [1990] 2 S.C.R. 410 (S.C.C.) , this Court observed that, "when used in relation to corporations a 'successor' generally denotes another corporation which, through merger, amalgamation or some other type of legal succession, assumes the burdens and becomes vested with the rights of the first corporation" (p. 423). Indeed, this common understanding of the term "successor" has been recognized in considering enurement clauses like the one at issue here (see C. L. Elderkin and J. S. Shin Doi, Behind and Beyond Boilerplate: Drafting Commercial Agreements (1998), at pp. 250-251; M. H. Ogilvie, "Re-Defining Privity of Contract: Brown v. Belleville (City) " (2015), 52 Alta. L. Rev. 731, at p. 736). Again, bearing in mind that the object of contractual interpretation is to discern the parties' objective intentions, the commonly-accepted meaning of that term provides a helpful starting point to considering what the parties understood the words in the enurement clause to mean.
161 We agree with the majority at the Court of Appeal that, in these particular circumstances, "nothing in the language of the Ontario Indemnity or in the circumstances surrounding the formation of the contract" supports Weyerhaeuser's interpretation of the enurement clause (para. 184). To the contrary, in reading the enurement clause together with the rest of the Ontario Indemnity, it becomes clear that the parties intended to restrict the term "successors" to corporate successors. Paragraph 2 of the Ontario Indemnity refers to Reed's "predecessor[s] in title", while para. 6 uses the term "successors" without any such qualification. As this Court remarked in Heritage Capital Corp. v. Equitable Trust Co., 2016 SCC 19, [2016] 1 S.C.R. 306 (S.C.C.) , at para. 47, "[m]eaning must be given to the choice to use one term in one clause and a different term in a different clause of the same agreement". Had the parties to the Ontario Indemnity intended the enurement clause to apply to all successors-in-title over the Dryden Property, they could have made those intentions clear.
162 This is not to say that our conclusion with respect to the word "successors" in this specific enurement clause sets out a universal definition of that term. It may be possible, in other circumstances, for the term "successors" to refer to successors- in-title (e.g. Belleville).
163 For these reasons, Weyerhaeuser is neither an assignee of the benefit of the Ontario Indemnity nor a corporate successor of either Great Lakes or Reed. Notwithstanding its rights under the 1998 Asset Purchase Agreement and the Lease Agreement, it has no entitlement to benefit under the Ontario Indemnity, and we would dismiss its appeal.
164 Given this conclusion, it is unnecessary for us to decide whether the enurement clause operates to the benefit of a class of beneficiaries (being Great Lakes' successors and assigns).
VI. Conclusion
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 30 Resolute FP Canada Inc. v. Ontario (Attorney General), 2019 SCC 60, 2019 CSC 60,... 2019 SCC 60, 2019 CSC 60, 2019 CarswellOnt 19886, 2019 CarswellOnt 19887...
165 We would dismiss the appeals of the Province and of Weyerhaeuser. We would allow Resolute's appeal and declare that Weyerhaeuser enjoys no benefit under the Ontario Indemnity. Resolute is entitled to its costs in this Court and throughout, including costs before the motion judge on the terms he ordered (Weyerhaeuser Company Limited v. Ontario (Attorney General), 2017 ONCA 1007 (Ont. C.A.)). Government's appeal allowed; R Inc. and W Ltd.'s appeals dismissed.
Pourvoi du gouvernement accueilli; pourvois de R inc. et de W ltée rejetés.
Footnotes 1 The motion judge stated that the 1979 indemnity contained that "specific provision", but given the context, it is clear that he misspoke and was instead referring to the 1979 Dryden Agreement. The Province does not take the position that this amounts to a palpable and overriding error of fact (Ontario A.F., at paras. 81-83).
End of Document Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 31
TAB 19
19 Nexxtep Resources Ltd. v. Talisman Energy Inc., 2012 ABQB 62, 2012 CarswellAlta 145 2012 ABQB 62, 2012 CarswellAlta 145, [2012] 10 W.W.R. 528, [2012] A.W.L.D. 1964...
2012 ABQB 62 Alberta Court of Queen's Bench
Nexxtep Resources Ltd. v. Talisman Energy Inc.
2012 CarswellAlta 145, 2012 ABQB 62, [2012] 10 W.W.R. 528, [2012] A.W.L.D. 1964, [2012] A.W.L.D. 2012, [2012] A.J. No. 85, 213 A.C.W.S. (3d) 484, 531 A.R. 320, 62 Alta. L.R. (5th) 219
Nexxtep Resources Ltd. (Plaintiff) and Talisman Energy Inc., as Managing Partner for Talisman Energy Canada, a partnership, and Talisman Energy Canada, and Omers Energy Inc. (Defendants) and Talisman Energy Canada by its Managing Partner Talisman Energy Inc. (Plaintiffs by Counterclaim) and Nexxtep Resources Ltd. (Defendant by Counterclaim)
G.H. Poelman J.
Heard: June 13-16, 20-22, 2011; October 13, 2011 Judgment: January 24, 2012 Docket: Calgary 0601-03847
Counsel: G. Scott Watson, Gregory W. Jaycock, Shannon L. Kelley for Plaintiff / Defendant by Counterclaim R.W. Block, Q.C., Michael A. Marion for Defendants / Plaintiffs by Counterclaim
Subject: Natural Resources; Contracts Headnote Natural resources --- Oil and gas — Exploration and operating agreements — Purchase agreement By written contract, defendant vendor agreed to sell plaintiff purchaser certain assets for $3.95 million — Assets included petroleum and natural gas rights defined as being under certain surface location plus associated equipment and miscellaneous interests (property, contractual rights, records and data) — When contract was executed there were two producing wells below designated surface location: vertical well and horizontal well — Plaintiff subsequently concluded that vertical well was producing from pool other than as designated — Board redesignated pool from which vertical well was producing — Plaintiff brought action against defendant for trespass or conversion, or, in further alternative, breach of contract, for producing gas from pool over which plaintiff claimed ownership — Action dismissed — Plaintiff conceded that when contract was signed parties believed that vertical well was producing from pool outside zone conveyed in contract — That was part of knowledge base on which parties were dealing - what authors of contract knew when they wrote it — Contract as whole showed intention to transfer defendant's entire interest in each of mineral rights equities identified on schedule, along with associated wells and rights to other facilities — Plaintiff's proposed interpretation would result in it acquiring only part of defendant's interest in pool from which vertical well produced, because it was limited to 34.4262 percent working interest it acquired as set out in schedule — Further, plaintiff would not acquire interest in vertical well, but only in pool from which it produced, and thus have to seek consent from other interest owners or board approval to produce from pool in which it claimed ownership — Plaintiff's position as to contractual intention of parties had result contrary to intention of parties as manifested by contract read as whole within its proper factual matrix — Reasonable person looking at entire contract and factual matrix would conclude that intended subject of conveyance was defendant's entire 34.4262 percent working interest in petroleum and natural gas rights below base of particular zone, but excluding pool from which vertical well produced — Words parties used meant exactly that on date of contract. Contracts --- Construction and interpretation — Surrounding circumstances By written contract, defendant vendor agreed to sell plaintiff purchaser certain assets for $3.95 million — Assets included petroleum and natural gas rights defined as being under certain surface location plus associated equipment and miscellaneous interests (property, contractual rights, records and data) — When contract was executed there were two producing wells below designated surface location: vertical well and horizontal well — Plaintiff subsequently concluded that vertical well was producing from pool other than as designated — Board redesignated pool from which vertical well was producing — Plaintiff
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 1 Nexxtep Resources Ltd. v. Talisman Energy Inc., 2012 ABQB 62, 2012 CarswellAlta 145 2012 ABQB 62, 2012 CarswellAlta 145, [2012] 10 W.W.R. 528, [2012] A.W.L.D. 1964... brought action against defendant for trespass or conversion, or, in further alternative, breach of contract, for producing gas from pool over which plaintiff claimed ownership — Action dismissed — Plaintiff conceded that when contract was signed parties believed that vertical well was producing from pool outside zone conveyed in contract — That was part of knowledge base on which parties were dealing - what authors of contract knew when they wrote it — Contract as whole showed intention to transfer defendant's entire interest in each of mineral rights equities identified on schedule, along with associated wells and rights to other facilities — Plaintiff's proposed interpretation would result in it acquiring only part of defendant's interest in pool from which vertical well produced, because it was limited to 34.4262 percent working interest it acquired as set out in schedule — Further, plaintiff would not acquire interest in vertical well, but only in pool from which it produced, and thus have to seek consent from other interest owners or board approval to produce from pool in which it claimed ownership — Plaintiff's position as to contractual intention of parties had result contrary to intention of parties as manifested by contract read as whole within its proper factual matrix — Reasonable person looking at entire contract and factual matrix would conclude that intended subject of conveyance was defendant's entire 34.4262 percent working interest in petroleum and natural gas rights below base of particular zone, but excluding pool from which vertical well produced — Words parties used meant exactly that on date of contract.
ACTION by plaintiff purchaser of petroleum and natural gas rights and other assets against defendant vendor for trespass or conversion, or, in further alternative, breach of contract.
G.H. Poelman J.:
I. Introduction
1 By written contract dated and executed March 31, 2004, entitled "Purchase and Sale Agreement" ("PSA"), Talisman Energy Canada ("Talisman") agreed to sell to Nexxtep Resources Ltd. ("Nexxtep") certain "Assets" in the Leedale area of Alberta for $3.95 million. They included petroleum and natural gas ("PNG") rights defined as being under a certain surface location and within the "base of Mannville to base of Pekisko" zone plus their associated "Tangibles" (equipment for production, transportation and processing) and "Miscellaneous Interests" (property, contractual rights, records and data relating to the PNG rights and tangibles).
2 When the contract was executed there were two producing wells below the designated surface location:
1. A vertical well produced "sweet gas" from a pool designated by the Energy Resources Conservation Board (and believed by both parties) to be within the "base of Cardium to base of Mannville" zone.
2. A horizontal well produced "sour gas" from a pool designated by the Board (and believed by the parties) to be within the lower "base of Mannville to base of Pekisko" zone.
The horizontal well's zone was immediately below the vertical well's zone. The PSA used the proper surface location and the description "base of Mannville to base of Pekisko" when referring to the PNG rights conveyed within the relevant section of lands.
3 Nearly two years after the PSA was executed, Nexxtep concluded from internal investigations of data that the vertical well was producing from a pool below the base of the Mannville, within the "base of Mannville to base of Pekisko" zone. After a contested hearing, the Board agreed and redesignated the pool from which the vertical well was producing as being below the base of the Mannville zone.
4 These basic facts raise the question of whether the PSA should be interpreted as conveying the pool from which the vertical well produced as of March 31, 2004. Answering that question requires consideration of the proper approach to interpreting these parties' contract, including what extra-textual facts should be considered. On those questions depends whether Nexxtep's action against Talisman in trespass and conversion, for producing gas from a pool over which Nexxtep claims ownership, should succeed.
II. Meaning of the Purchase and Sale Agreement
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A. Overview of Contractual Interpretation Principles
5 The objective of contractual interpretation is to ascertain what the parties objectively intended by their bargain, when they made it. Primacy is given to the parties' words, particularly in a written contract, because it is presumed that the parties chose words that embodied their intentions.
6 However, the objective remains the determination of the parties' intention, not the meaning of words in a document. Thus, the authorities give guidelines for the consideration of the "factual matrix" or "surrounding circumstances" to help determine the parties' contractual intention as would be determined by a reasonable person so situated. In other words, extra- textual evidence is used to help understand what the parties meant by the words they used.
7 The concern here is only with determining the parties' intention, objectively understood. If after that process it is found that there is ambiguity about what was intended, parol evidence may be considered. That is a different stage of analysis, and the facts to be considered when resolving ambiguity about the parties' intention may be different from those admissible on the question of interpreting their words.
8 Finally, where the evidence clearly demonstrates that the parties' objective contractual intention is not correctly embodied in their words, the court may use its equitable jurisdiction to correct or "rectify" the words of the contract. A plea of rectification involves yet another stage of analysis and different categories of evidence and standards of proof.
B. Words of the Purchase and Sale Agreement
1. The Assets
9 The principal terms of the PSA logically begin with article 2 by which the parties agreed to sell and purchase "the Assets" for $3,950,000.00 (as adjusted) on March 31, 2004. The agreement includes three types of assets, namely petroleum and natural gas rights, tangibles and miscellaneous interests.
2. Petroleum and Natural Gas Rights
10 The PSA defines petroleum and natural gas rights to include, first, the "Lands." Those, in turn, mean the lands on Schedule "A," and the petroleum and natural gas within those lands.
11 Schedule "A" lists ten properties. For each of the ten properties, there are the following nine descriptions:
• Lease. The document identifies the Crown lease under which each property is held. Some leases apply to more than one of the scheduled properties.
• MRE. Talisman used the term "mineral right equities" or "MRE" to designate different groups of owners and shares of ownership at different vertical "splits" or zones within a particular Crown lease for a surface location. Typically, the original Crown lessee made contracts with third parties who could earn interests in designated zones by conducting operations on the lands. Many contracts, with many parties, could generate a variety of ownership groups and interests in different zones held under the Crown lease. For the property in dispute, Section 16, Township 43, Range 4, W5M, Talisman had three vertical splits or MREs — and Schedule "A" to the PSA designates the one being conveyed as MRE 4.
• Legal Description. Schedule "A" indicates the surface location for each property by legal description, and the subsurface location by zone. For the property in dispute, Schedule "A" gives the surface legal description followed by the words "PNG base of Mannville to base of Pekisko."
• Interest. Schedule "A" sets out the ownership interest conveyed, by type (royalty or working interest) and percentage. For the interest in Section 16, the Schedule disclosed a gross overriding royalty before payout, convertible after payout to a 34.462% working interest.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 3 Nexxtep Resources Ltd. v. Talisman Energy Inc., 2012 ABQB 62, 2012 CarswellAlta 145 2012 ABQB 62, 2012 CarswellAlta 145, [2012] 10 W.W.R. 528, [2012] A.W.L.D. 1964...
• Permitted Encumbrances. The Schedule disclosed the type of royalty encumbrance on the interest conveyed.
• Vendor Operated. The Schedule indicated, by "yes" or "no," whether Talisman was the operator of the interest conveyed. For the relevant Section 16 interest, the Schedule showed that it was not the operator.
• Contracts. The Schedule identified contracts with non-Crown third parties which affected the interest being conveyed. For MRE 4, three contracts were identified — one of them being a farm-out agreement specifically referable to the drilling of the horizontal well and the resulting 34.462% working interest held by Talisman.
• Well UWI (TEC wells only). The Schedule identified by "unique well identifier" the wells relating to the interests being conveyed. It identified only the horizontal well for MRE 4.
3. The Tangibles
12 The parties also agreed that Talisman would convey to Nexxtep "all tangible and depreciable property and assets" on or about the conveyed lands that were or would be used to produce, process, transport and market oil or gas produced from the lands. Among other things, the sold tangibles included "use of Facilities Agreement for Outside Gas in Wilson Creek Area dated July 30, 2000," and specific wells identified on a schedule (including the horizontal well, but not the vertical well). The July 30, 2000 agreement was not introduced into evidence, and the few brief references to it in the documents do not enable me to make a finding regarding any particular relevance it may have to interpreting the PSA.
4. Miscellaneous Interests
13 Finally, the conveyed assets included various contracts, property rights, records and data relating to the petroleum and natural gas rights and tangibles. Certain schedules list some of the miscellaneous interests included in this category. Contracts related to operation and production of the vertical well are not included.
5. Other Provisions
14 There are two other provisions in the PSA that, in my view, are significant to construing the contractual intention of the parties.
15 Section 7.1(e) makes Talisman's obligation to sell subject to the condition precedent that Nexxtep has executed a release and quit claim relating to Nexxtep's Offers to Purchase made to Talisman dated May 1, 2003 and December 15, 2003, and to an action it had commenced in this Court on March 10, 2004. The relevance of this provision will become apparent later.
16 Section 10.11 is an "entire agreement" clause. It is heavily relied upon by Nexxtep, and it will therefore be useful to include it for later reference:
The provisions contained in any and all documents and agreements collateral hereto shall at all times be read subject to the provisions of this Agreement and, in the event of conflict, the provisions of this Agreement shall prevail. This Agreement shall not be varied in its terms or amended by oral agreement or by representations or otherwise other than by an instrument in writing dated subsequent to the date hereof, executed by a duly authorized representative of each Party. This Agreement supersedes all other agreements, documents, writings and verbal understandings among the Parties relating to the subject matter hereof, including, without limitation, the Offers to Purchase made to Vendor dated May 1, 3003 and December 15, 2003, and expresses the entire agreement of the Parties with respect to the subject matter hereof.
C. Factual Matrix
1. Legal Principles
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 4 Nexxtep Resources Ltd. v. Talisman Energy Inc., 2012 ABQB 62, 2012 CarswellAlta 145 2012 ABQB 62, 2012 CarswellAlta 145, [2012] 10 W.W.R. 528, [2012] A.W.L.D. 1964...
17 The factual matrix of a contract is properly considered as part of the interpretive task of ascertaining the parties' intentions having regard to the relevant background context known to the parties. 1 In other words, no special justification is needed to consider extra-textual evidence, provided it is within the prescribed limitations. Indeed, as already seen, some of the PSA's words (MRE, for example) cannot be understood at all without such evidence.
18 Talisman submits that the history of the parties' dealings with respect to the sale of Leedale area assets is part of the factual matrix. Nexxtep's position in oral argument was that this is not properly part of the factual matrix (although its written argument is less clear on this point). Part of the tension between the parties' positions is over what is excluded by the principle that factual matrix evidence should not include "prior negotiations."
19 The function of factual matrix evidence helps define its scope. Lord Wilberforce is credited with first using the term "matrix of facts" in Prenn v. Simmonds, where he explained that "we must... enquire beyond the language and see what the circumstances were with reference to which the words were used, and the object, appearing from those circumstances, which the person using them had in view." 2 Later, in Reardon Smith Line v. Hansen-Tangen, he recognized the difficulty of defining the scope of what he then referred to as "surrounding circumstances," but offered that "it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating." 3 He emphasized that this evidence was to be used only to arrive at the intention of the parties objectively — that is, as it would appear to reasonable persons in the same situation.
20 Lord Wilberforce's expositions of the function of factual matrix evidence are part of our law. In Gainers Inc. v. Pocklington Holdings Inc., while strongly cautioning against considering subjective intention, the Court of Appeal used the term "armchair rule" as letting "the courts see what the authors of the contract knew when they wrote it, in order indirectly to assist in resolving any difficulties in what certain words of the contract refer to." 4 The court explained that knowing what the parties knew could help determine what the parties were referring to by their words, and found Reardon Smith to be a good explanation of the doctrine — it "lets the court find what a reasonable person would have thought was the aim of the transaction, if that person knew the facts available to the parties." 5 The Court of Appeal also adopted the statement of Lord Hoffman, succinctly summarizing the use and purpose of factual matrix evidence in relation to words in a document:
The construction of a document is not a game with words. It is an attempt to discover what a reasonable person would have understood the parties to mean. And this involves having regard, not merely to the individual words they have used, but to the agreement as a whole, the factual and legal background against which it was concluded and the practical objectives which it was intended to achieve. 6
Or, in Conrad J.A.'s words, "it is from the whole of the document coupled with the surrounding circumstances that the general intention of the party or parties is to be ascertained." 7
21 The authorities, hold, however, that evidence of the factual matrix should not include the parties' negotiations. 8 Lord Wilberforce explained that evidence of prior negotiations is not admitted because it is not helpful, rather than for technical reasons or efficiency. Where negotiations are difficult, positions change until the parties achieve consensus. Evidence of the use of different expressions or the same expressions does not usually help interpretation of the contract's words, and may occur in a context of different surrounding circumstances. 9
22 Evidence of the factual matrix may therefore be considered to the extent it is instructive as to the genesis of the transaction; its background and context; the subject matter meant to be described by the words; and the aim, commercial purpose and practical objectives sought to be achieved. It will not be helpful to consider how, in their negotiations, the parties might have modified the contractual language or changed their bargaining positions.
23 I stated earlier that the objective of contractual interpretation is to ascertain what the parties objectively intended by their bargain as of when they made it. The Judicial Committee of the Privy Council applied this principle when interpreting
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 5 Nexxtep Resources Ltd. v. Talisman Energy Inc., 2012 ABQB 62, 2012 CarswellAlta 145 2012 ABQB 62, 2012 CarswellAlta 145, [2012] 10 W.W.R. 528, [2012] A.W.L.D. 1964... the meaning of a grant of land made by Louis XIV of France in 1693. The area of grant was described as one league in depth around a certain lake, but later geographical surveys showed that there was a chain of three lakes rather than what at the time of grant was thought to be one lake. Lord Salvesen summarized the issue as "whether the subject of the grant consists simply of the upper lake at the higher level as the Crown contends..., or as the appellants contend, embraces the whole 3 sheets of water with their connecting channels." 10 He reached this conclusion not by interpreting what the words of the grant meant when applied to circumstances existing at the time of judgment. Rather, he held:
This question must be determined, not by reference to accurate geographical conditions as they have now been ascertained, but on a construction of the grant itself as applied to the knowledge of the locality which was then available. 11
2. The Evidence
(a) The Transaction
24 The "genesis of the transaction" was in 2002, when Talisman put out a marketing package indicating that it desired to dispose of non-core assets, namely its interests in the Leedale area of Alberta (Townships 42, 43, 44, Ranges 3, 4, 5, W5M). Talisman provided Nexxtep with information about its land interests and operations in the area. The parties entered into a May 1, 2003 letter agreement (referred to in section 10.11 of the PSA) which provided for the sale by Talisman to Nexxtep of all of Talisman's oil and gas interests in the area. It was subject to internal approvals by both parties.
25 Schedule "A" to the letter agreement listed all of Talisman's interests in the area. It included all of Talisman's MREs in Section 16 (1, 3 and 4). It disclosed that Talisman had a 72.4763% working interest in the MRE 1 zone (base of Cardium to base of Mannville) with production coming from the vertical well. For the MRE 4 zone (base of Mannville to base of Pekisko), it disclosed that Talisman had a royalty interest convertible to a 34.4262% working interest after payout, with production coming from the horizontal well.
26 There followed exchanges of information, due diligence and preparations for financing, but the transaction stalled — because (according to the testimony and documents) Talisman's senior management would not allow disposal of producing assets without acquiring replacement properties elsewhere to offset loss of production. To address this hurdle, the parties entered into a letter agreement dated December 15, 2003 (also referred to in section 10.11 of the PSA) being much to the same effect, but contemplating a possible two-stage transaction with approximately one-third of the assets to be conveyed by January 31, 2004 and the remaining two-thirds by March 31, 2004.
27 Daniel Krayzel, Nexxtep's president, testified about his involvement in suggesting a two-stage transaction. On his instructions, John Caffrey (a senior engineering consultant for Nexxtep) prepared a table that organized Talisman interests according to who operated the wells and their related infrastructure. Thus, it grouped together five wells operated by Calpine, others operated by Talisman, and others operated by different parties. In the discussions surrounding the December letter agreement, the table was presented to Talisman representatives. Mr. Krayzel testified that the five Calpine-operated wells, together with the land interests, lines and infrastructure, would represent about one-third of the transaction.
28 Daniel Tesarski of Talisman testified that he met with Mr. Krayzel on or about December 15, 2003. He confirmed that Nexxtep presented the table at this meeting, separating the wells according to those operated by Talisman and those operated by Calpine, in support of Nexxtep's strategy that the transaction could be completed in two stages — the non-Talisman-operated wells being in the first stage, representing approximately one-third of overall value; and the balance of the wells and value being in the second stage. Mr. Tesarski observed that, in his view, Nexxtep had been very creative by proposing a plan based on dividing assets according to their infrastructure rather than land.
29 The December 15, 2003 letter agreement included a land schedule in a different format from the earlier letter agreement, but it listed the same three MREs in Section 16, with the same associated ownership interests and wells.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 6 Nexxtep Resources Ltd. v. Talisman Energy Inc., 2012 ABQB 62, 2012 CarswellAlta 145 2012 ABQB 62, 2012 CarswellAlta 145, [2012] 10 W.W.R. 528, [2012] A.W.L.D. 1964...
30 The targeted January 31, 2004 closing of a first-stage transaction did not occur. Nexxtep issued demand letters, and followed them up with a statement of claim (commencing the action described in section 10.11 of the PSA). It claimed all of Talisman's interests in the Leedale area, describing them by attaching the land schedule from the December 15, 2003 letter agreement.
31 The evidence for the period of approximately March 2004 establishes, in my view, that the parties were still attempting to conclude a transaction relating to all of the Leedale area assets in two stages, with the first stage including only the assets relating to the five Calpine-operated wells. The information provided by Talisman in response to Nexxtep's inquiries focussed on the Calpine wells, and that was also the focus of Nexxtep's internal evaluations. The parties did not conduct due diligence on the vertical well or its production. In order to obtain financing, Nexxtep commissioned an evaluation that was specifically directed to the five Calpine wells and their respective producing zones. A second "stage 2" draft evaluation which included the vertical well and its presumed producing zone (Lower Mannville C pool) was not finalized.
32 The parties were in regular communication to the end of March 2004. On March 24, Mr. Krayzel proposed including additional zones on the land schedule for the transaction closing March 31, 2004. Thus, for Section 16, in addition to MRE 4 (base of Mannville to base of Pekisko) with the horizontal well operated by Calpine, MREs 1 and 3 would be added, together with their associated wells and producing zones — including base of Cardium to base of Mannville with the vertical well and its associated production. In a March 24, 3:24 pm e-mail he sent to Darwin Luft of Talisman, he wrote:
Please provide a complete land schedule for both parcels as well as facilities, infrastructure, wells, pipelines, contracts, afe's.
Calpine land schedule shall include all rights in the particular section(s), please revise as per original [land] schedule.
33 Dan Tesarski of Talisman responded promptly at 3:49 pm, firmly rejecting the addition of more zones:
We will commence with providing the additional schedules, albeit this may take several days to pull together.
The first Closing contemplates the Calpine-operated wells as listed on the Land Schedule and only includes the producing zones from those sections which Calpine operates and which go to the Calpine-operated Plant. You will recall that we argued that point because from a Land Admin point of view, it would be preferable not to split these Leases. However, by including the other zones, the deal would have to include production from at least three other wells. This would have blown the 1/3 - 2/3 split out the window with the increased value being in excess of 50% of the total deal.
Accordingly, you argued that the deal should be split along considerations of infrastructure and Field Operations as opposed to Land considerations.
The Land Schedule for the first Closing is correct as it stands. The second Land Schedule for the additional Leedale interests will include the other zones in these sections.
34 Mr. Krayzel responded to Talisman's position on what would be included in the transaction later the same day:
I am afraid we don't have "a few days" to pull it together. Please have your people to produce those reports. Leedale - other assets, if the lands (Calpine ones) are in the other package, it is ok with us.
The email is cryptic and poorly worded. However, considered in context of the correspondence chain and the testimony of Mr. Krayzel and Mr. Tesarski, I find that Mr. Krayzel confirmed agreement with Mr. Tesarski's position. The first stage of the transaction would close with the only interests being those operated by Calpine — in Section 16, this included the zone believed to be produced by the horizontal well but not the zone believed to be produced by the vertical well. In a second stage, other interests in sections where Calpine operated an interest would be conveyed. Thus, in Section 16, zones other than the one containing the horizontal well would then be sold to Nexxtep.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 7 Nexxtep Resources Ltd. v. Talisman Energy Inc., 2012 ABQB 62, 2012 CarswellAlta 145 2012 ABQB 62, 2012 CarswellAlta 145, [2012] 10 W.W.R. 528, [2012] A.W.L.D. 1964...
35 Eric Myketyn, a landman consulting to Nexxtep on the transaction, testified that he had a conversation with Mr. Tesarski on March 24. Mr. Myketyn's notes indicate that Mr. Tesarski "indicated the lands are severed as a result of the Calpine asset split."
36 The parties were unable to reach agreement on a two-stage transaction. On the morning of March 31, 2004, Mr. Krayzel took the initiative by telephoning Mr. Luft to see whether a business deal could be completed solely on a smaller group of assets. He testified that "we proposed to close on the first portion of the assets being the non-operated assets operated by Calpine at that point, and we selected ... those assets as being higher quality to us, being managed by one operator going to ... one place for processing, having good ... upside potential." The PSA was finalized and executed by the end of March 31.
37 The purchase price was, of course, an important part of the PSA. The amount paid for assets is not always helpful in interpreting a contract. However, courts will consider the amount paid if it helps determine what the parties intended to convey. 12 For that purpose, the purchase price in the PSA is instructive.
38 When the parties were attempting to conclude a transaction for all of Talisman's Leedale assets, they seem to have valued them in the range of $15.3 to $16.3 million. The May 1, 2003 letter agreement, which contemplated a sale of all of these assets, had a purchase price of $15.8 million. Mr. Caffrey's reserves report for Nexxtep, prepared as of March 1, 2003, valued proven reserves at approximately $16.3 million. The table prepared by Mr. Caffrey for discussions with Talisman in December 2003 showed a net present value of approximately $15.3 million for all of the assets.
39 The Calpine-operated assets (including the horizontal well but not the vertical well) were valued by Mr. Caffrey at approximately $5.6 million in his December 2003 table, $1.26 million of which was attributed to the horizontal well. (In accordance with Nexxtep's "one-third — two- thirds" two-stage proposal, the Calpine assets comprised approximately one-third of the total Leedale area assets by value.) The valuations done by the parties shortly before the March 2004 closing showed valuations for the Calpine assets as follows:
• Talisman valued the Calpine-operated assets at approximately $5.5 million, of which $795,000.00 was attributed to valuation of the horizontal well's production.
• The evaluation commissioned by Nexxtep showed a $4.8 million valuation for the five Calpine-operated properties, $703,000.00 of which was attributed to the horizontal well.
40 By comparison, production from the vertical well was estimated at approximately $2.7 million in Mr. Caffrey's December 2003 table. In the valuations obtained shortly before the March 2004 closing, Talisman's value for the vertical well production was $1.7 million, while Nexxtep's was $1.6 million.
41 Mr. Luft testified, on behalf of Talisman, that the $3.95 million purchase price in the PSA represented an attribution of value to the Calpine-operated assets, with a discount to reflect settlement of the action commenced by Nexxtep for Talisman's failure to complete the initial agreements for sale of all of the Leedale assets. Not surprisingly, there is no direct correlation between either party's valuation of the Calpine-operated assets and the purchase price. Using rough averages between the parties' pre-PSA evaluations, the vertical well's value exceeded 30% of the value of the Calpine-operated assets (which included the horizontal, but not the vertical well), and over 40% of the PSA purchase price. The materiality of the vertical well's value (on both parties' evaluations) is an indication that it was not intended to be added to the Calpine-operated assets in the conveyance. (Of course, this is consistent with the subjective beliefs of both parties on March 31, 1984 that the vertical well's producing zone was not captured in the assets conveyed in the PSA. Neither the price nor subjective beliefs are determinative for purposes of interpretation.)
(b) Factual and Regulatory Context
42 The narrative of the parties' dealings leading to execution of the PSA is an important part of the factual matrix because it illumines their commercial objectives. In addition, the factual and regulatory framework is part of the background or context within which the parties made their bargain.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 8 Nexxtep Resources Ltd. v. Talisman Energy Inc., 2012 ABQB 62, 2012 CarswellAlta 145 2012 ABQB 62, 2012 CarswellAlta 145, [2012] 10 W.W.R. 528, [2012] A.W.L.D. 1964...
43 The production of oil and gas in Alberta is highly regulated, primarily through the Oil and Gas Conservation Act 13 and its regulations, administered and enforced by the Energy Resources Conservation Board. The purposes of the Act are expressly set out in section 4, as follows:
4 The purposes of this Act are
(a) to effect the conservation of, and to prevent the waste of, the oil and gas resources of Alberta;
(b) to secure the observance of safe and efficient practices in the locating, spacing, drilling, equipping, constructing, completing, reworking, testing, operating, maintenance, repair, suspension and abandonment of wells and facilities and in operations for the production of oil and gas or the storage or disposal of substances;
(c) to provide for the economic, orderly and efficient development in the public interest of the oil and gas resources of Alberta;
(d) to afford each owner the opportunity of obtaining the owner's share of the production of oil or gas from any pool.
[...]
44 A part owner of a pool (natural underground reservoir), such as that from which the vertical well produces, cannot produce oil or gas without consent of co-owners or the Board's order, and the Board will have regard to many factors in determining the most effective and efficient means by which to produce oil or gas.
45 The expert evidence of Trevor Williams on behalf of Talisman, which I accept, was that customary industry practice is that when a producing property is purchased the wellbore is acquired along with it. In his view, it would be highly unlikely that a purchaser would acquire producing property without the wellbore because of the consequent need to incur additional capital costs to recover the reserves. He acknowledged that a wellbore could be split from a known producing zone in a transaction, but he had never seen it. Nexxtep acknowledged in argument that it would be very unusual and unexpected to transfer a producing zone without the production equipment and facilities, but it would not be impossible.
46 Lyle H. Burk, who testified as an expert on behalf of Nexxtep, put forward several possible means by which sweet gas from the pool produced by the vertical well could be produced by Nexxtep without owning the vertical well. The gas could be used as part of a "gas lift scheme" to enhance recovery of sour gas from the deeper Pekisko formation (either to assist or replace the existing plunger lift system); or the horizontal well could be re-completed as a "dual producer," by flowing the sweet gas through the annulus space while the Pekisko sour gas was produced through the tubing.
47 While Mr. Burk has extensive experience in the oil and gas industry, his experience in regulatory matters involving the Board is limited. Further, while he considered what he described as "safe and regulatory compliant" options for producing the sweet gas, he did not address the necessary involvement of other parties who own interests in the sweet gas pool and the horizontal well used to produce Pekisko sour gas.
48 Talisman's expert, Gerry J. DeSorcy, has extensive experience with such matters, including many years as a member and then chair of the Board. In his opinion, which I accept, the options identified by Nexxtep for production of the sweet gas other than through the vertical well (in which it claims no interest) raise complex and problematic considerations. First, the interests of the other owners of the sweet gas pool (including the leftover Talisman interest, which Nexxtep does not claim) need to be consulted and, absent agreement, a regulatory application would be required. Second, on a regulatory application the Board would consider the advisability and implication of adding facilities to produce sweet gas when adequate production facilities are already in place; the effectiveness of draining the reserves by the proposed method; and the risk of inadvertently establishing communication between the sweet and sour pools by producing them through the horizontal well as a dual producer.
49 The main points that I draw from Mr. DeSorcy's report, as relevant to the issues before me, are as follows:
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 9 Nexxtep Resources Ltd. v. Talisman Energy Inc., 2012 ABQB 62, 2012 CarswellAlta 145 2012 ABQB 62, 2012 CarswellAlta 145, [2012] 10 W.W.R. 528, [2012] A.W.L.D. 1964...
• While it is impossible to predict what the Board would decide, it is unlikely that it would allow production from the sweet gas pool through both the vertical well and the horizontal well.
• It would be difficult for Nexxtep to convince the Board that re-completion of the horizontal well would be more in the "public interest" than production through the existing vertical well. It is more likely that, if Nexxtep was successful in a compulsory pooling application, production would occur through the vertical well and the Board would allocate appropriate costs of that well and related infrastructure among all parties.
• The complexity of the situation, caused by the existence of two wells and different groups of working interest owners, make it difficult to predict the outcome of any Board application.
(c) Findings
50 From the facts and context described above, I summarize my findings on the relevant commercial context within which the PSA must be interpreted in the following points:
1. The parties' initial objective, as reflected in the first letter agreement, was to transfer all of Talisman's interests in the Leedale area to Nexxtep, subject to internal approvals. That became problematic because Talisman's internal approvals did not allow disposal of producing assets without acquiring replacement properties to offset the loss of production.
2. By the time the December 15, 2003 letter agreement was executed, the initial objectives were maintained but a two- stage transaction was contemplated to give Talisman additional time to acquire replacement properties. The parties worked towards the objective of initially transferring one-third of the value of the Leedale assets by January 31, 2004, with the balance by March 31, 2004.
3. Nexxtep took the initiative in suggesting the value split, as a way to move forward within Talisman's parameters. It prepared a proposed division of the subject assets by dividing the properties and their producing wells into those operated by Talisman and those operated by Calpine.
4. There was again no satisfactory progress, with the result that Nexxtep commenced a lawsuit demanding all of Talisman's interest in the Leedale area, based on the December 15, 2003 letter agreement. Discussions following Nexxtep's statement of claim focussed on a two-stage transaction (one-third of the value first, followed by the balance), with each party conducting evaluations based on two separate packages: one comprising the Calpine- operated wells (including the horizontal well), the other the balance of the wells (including the vertical well operated by Talisman).
5. On March 24, 2004, Nexxtep attempted to expand the land schedule to include vertical splits within Section 16 other than the Calpine-operated well — thus adding the vertical well operated by Talisman. That would have significantly increased the value of the first-stage transaction, and was therefore rejected by Talisman.
6. When the entire transaction seemed to fall apart on March 30, it was resurrected on the basis that it would close as only one transaction, comprising the assets operated by Calpine. Nexxtep agreed to abandon its claim to all the additional Talisman assets in the Leedale area.
51 The subject matter of the transaction, the commercial purpose, aim and practical objectives sought to be achieved clearly emerge from this evidence. The parties wanted to complete the sale of a portion of Talisman's Leedale assets that would not exceed Talisman's internal requirements to replace producing assets. They found a method to do that (largely by Nexxtep's initiative) in segregating the Section 16 assets according to operatorship, wells and infrastructure: MRE 4 (among other properties) was operated by Calpine, produced from its own well and used a transportation and processing infrastructure distinct from the vertical well. MRE 1 (along with other properties) produced from its own well, was operated by Talisman and had a separate transportation and processing infrastructure. Of fundamental importance was that on both parties' evaluations and pricing strategies, the first stage could not include the MRE 1 without "blowing the 1/3 - 2/3 split out the window." So,
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 10 Nexxtep Resources Ltd. v. Talisman Energy Inc., 2012 ABQB 62, 2012 CarswellAlta 145 2012 ABQB 62, 2012 CarswellAlta 145, [2012] 10 W.W.R. 528, [2012] A.W.L.D. 1964... while price is seldom determinative as an interpretive aid, in this case it was critical to what could be included in the stage 1 transaction and ultimately the only transaction, and in assisting to determine the subject matter of the contract.
52 I have not considered as part of the factual matrix events that occurred after closing. They are relevant, if at all, only as parol evidence to resolve ambiguity. I have also not considered evidence adduced by witnesses of both parties as to their "understanding" at various stages of their dealings. As I said during the trial, such evidence falls into the prohibited category of subjective intention at best, and in any event a parties' internal understanding of something is seldom relevant to any issue. 14
53 I have also not considered negotiations by the parties before execution of the PSA in the sense referred to by McEachern C.J. B.C. 15 It would be unhelpful, as Lord Wilberforce held, to consider the nuances of parties' changing positions and variations between drafts of contracts. However, in this case I find that communications between the parties relevant to the basic objectives and subject matter of the contract are probative and are part of the context that gives meaning to the words they chose.
D. Conclusions on Meaning of Contract
54 Nexxtep fairly conceded in argument that when the PSA was signed both parties believed that the vertical well was producing from a pool above the base of the Mannville, and therefore outside the zone conveyed in the PSA. That was part of the knowledge base on which the parties were dealing, "what the authors of the contract knew when they wrote it." 16 Their mutual objective was to transfer certain mineral interests and associated wells and other interests which, for Section 16, meant interests below the base of the Mannville, along with Talisman's interest in the horizontal well and related facilities. The agreement was specifically structured in this way to enable its value to fall within the parameters that would permit internal approval at Talisman.
55 Does this finding do such violence to the words of the PSA that it overwhelms them or contradicts them — things evidence of a factual matrix may not do? 17 In my view, it does not.
56 A contract must be interpreted as of the time it was made. What would a reasonable person conclude that the words meant, having regard to the contract as a whole, used in the context of and with the knowledge of the parties at the time? Reference to the contract's words and the factual matrix are complementary tasks, to be undertaken together.
57 The PSA as a whole shows an intention to transfer Talisman's entire interest in each of the MREs identified on the schedule, along with the associated wells and rights to other facilities necessary to produce, transport and market the substances. Nexxtep's proposed interpretation would result in it acquiring only a part of Talisman's interest in the pool from which the vertical well produces, because it is limited to the 34.4262% working interest it acquired as set out in Schedule "A" of the PSA. That interest corresponds exactly to Talisman's interest in MRE 4, but is less than Talisman's 72.4763% working interest in the sweet gas pool that was thought to form part of MRE 1 and is now claimed by Nexxtep.
58 Further, Nexxtep would not acquire an interest in the vertical well, but only in the pool from which it produces; and thus it would have to seek consent from other interest owners or Board approval to produce from the pool in which it claims ownership. Nexxtep called expert evidence about how it might produce through or along side the horizontal well, but as I have found, that would also involve interests of co-owners in the sweet gas pool and a different group of co-owners in the horizontal wellbore.
59 Nexxtep submits, in effect, that the March 31, 2004 contractual intention of the parties as reflected in the PSA (even though it acknowledges that neither of them subjectively understood this then) was that:
1. Nexxtep acquired 34% of the zone described as "base of Mannville to base of Pekisko," including the sweet gas pool previously produced through the vertical well;
2. Nexxtep did not acquire the vertical well, and thus obtained no present means to produce the sweet gas interest it purchased; and
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 11 Nexxtep Resources Ltd. v. Talisman Energy Inc., 2012 ABQB 62, 2012 CarswellAlta 145 2012 ABQB 62, 2012 CarswellAlta 145, [2012] 10 W.W.R. 528, [2012] A.W.L.D. 1964...
3. Most of the ownership in the sweet gas pool was left to Talisman and other co-owners, with no present means for them to produce their interests, as they could no longer use the vertical well.
That result is contrary to the intention of the parties as manifested by the PSA read as a whole within its proper factual matrix. Nexxtep hangs everything on six words ("PNG base Mannville to base Pekisko") in one box of the land schedule; it ignores the other parts of the PSA that show an intention to convey tangibles and miscellaneous interests along with petroleum and natural gas rights, and the evidence that leads through two letter agreements and a statement of claim expressly referred to in the PSA. A reasonable person looking at the entire PSA and the factual matrix would conclude that the intended subject of conveyance with respect to Section 16 rights was Talisman's entire 34.4262% working interest in the petroleum and natural gas rights below the base of the Mannville zone, but excluding the pool from which the vertical well produced. The words they used meant exactly that on March 31, 2004.
III. Ambiguity
60 If the PSA in its factual matrix cannot be interpreted as I have concluded, then I find that it "is of doubtful meaning or application and that extrinsic evidence may be admitted not only to demonstrate the ambiguity but to assist in clearing it up." 18
61 At best, Nexxtep's position on what the words "PNG base of Mannville to base of Pekisko" in the land schedule mean leads, when applied to present facts, to tension between those words and the rest of the document and the factual matrix, and therefore to ambiguity. The reasons for my finding on this point are set out above.
62 Where an ambiguity exists, evidence of subsequent conduct may be considered to resolve it. 19 The undisputed evidence, well documented, is that between the March 31, 2004 closing of the PSA and Nexxtep's first notice of alleged trespass on March 6, 2006, Nexxtep approached Talisman on several occasions seeking to purchase the vertical well, its production and rights to the zone from which it produced. Those efforts clearly resolve any ambiguity that may be left if only the PSA and the factual matrix as of March 31, 2004 are considered. For nearly two years following the transaction, both parties believed that the rights purchased by Nexxtep did not include any ownership in the vertical well or the pool from which it produced.
IV. Rectification
63 As a further alternative to my finding that Nexxtep's claim fails on a proper interpretation of the PSA (with or without ambiguity), I consider Talisman's plea of rectification.
64 Rectification is available for either a mutual (or common) mistake where both parties had a different intention than the one recorded in their contract; or a unilateral mistake, where only one party made the mistake. 20 In my view, only the first type of rectification is potentially available.
65 The evidence does not support a finding that the parties had different contractual intentions as of March 31, 2004, when the PSA was executed. Mr. Krayzel testified that Nexxtep was looking for an "upside" in the transaction, and appeared to suggest (without saying so expressly) that this meant a discovery that the vertical well's producing pool was below the Mannville zone was within Nexxtep's contractual intentions. In my view, the testimony of Mr. Krayzel, Mr. Prenioslo and Mr. Caffrey and the relevant documents show that Nexxtep neither found nor included a valuation in Section 16 for any "upside" potential outside of the known producing zones and wells. Mr. Krayzel's testimony that Nexxtep was looking for an "upside" is, at best, too subjective, general and unsubstantiated by the documentary record to found a basis for contractual intention; and at worst, is a weak after-the-fact justification for retaining an unexpected asset.
66 Courts are understandably sceptical of claims that the parties' real agreement was something other than recorded by the words of their contract, properly interpreted in the factual matrix. The "high hurdles" established by the Supreme Court of Canada in Sylvan Lake Golf & Tennis Club Ltd. v. Performance Industries Ltd. are instructive filters for rectification claims, but may not be entirely applicable to claims based on mutual mistake. The Court set the hurdles out explicitly as applying to the
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 12 Nexxtep Resources Ltd. v. Talisman Energy Inc., 2012 ABQB 62, 2012 CarswellAlta 145 2012 ABQB 62, 2012 CarswellAlta 145, [2012] 10 W.W.R. 528, [2012] A.W.L.D. 1964... facts of the unilateral mistake case before it. 21 Nevertheless, it is clear that a high standard of proof is required for rectification to be ordered, 22 and that the Court must be able to put into words the contract that was mistakenly recorded. A useful, concise summary of the test for rectification, which I adopt as a correct statement of the law, is given by Fridman, as follows:
What must be shown by a party claiming rectification, either in a suit for such remedy, or by way of a defence to an action on a contract, is a mistake in putting down the parties' intentions, and some earlier agreement which shows that there was such a mistake. There must be a written document that does not reflect the true agreement of the parties, and proof of a common intention of the parties at the time of signing, not reflected in the document. 23
67 Evidence of the parties' conduct after execution of the written contract is admissible to show the true intention behind the bargain. 24 The efforts Nexxtep made after execution of the PSA to purchase the vertical well, to which I referred when addressing ambiguity, is also compelling to establish part of the evidentiary basis for an Order of Rectification.
68 The findings I made above with respect to the factual matrix and parol evidence resolving ambiguity lead me as well to the conclusion that the mutual contractual intention of Talisman and Nexxtep was to convey Talisman's entire 34.4262% working interest in the petroleum and natural gas rights in Section 16 below the base of the Mannville zone, but excluding the pool from which the vertical well produced. If the principles of contractual interpretation do not permit the PSA to be interpreted at law to achieve that result, then there must be an order in equity rectifying the document in accordance with the aforesaid words.
V. Conclusion on Liability
69 For the reasons given above, I find that Nexxtep's action for trespass fails. The PSA, when interpreted as a whole and in its proper context, conveyed Talisman's entire 34.4262% working interest in the petroleum and natural gas rights below the base of the Mannville zone, but excluding the pool from which the vertical well produced. If, despite my interpretation, that result cannot be achieved by contractual construction then equity will accomplish the same result by rectification, because it reflects the common intention of the parties on March 31, 2004.
VI. Damages
A. Introduction
70 The parties have both approached the issue of damages on the assumption that if Talisman's contractual arguments fail, Nexxtep is entitled to damages according to the rules in trespass cases. There are aspects of the case that might be more apt to a conversion action, which Nexxtep pleaded in the alternative. However, for present purposes there are no significant differences between the applicable damages principles for these causes of action, and as both parties have approached the case in trespass I will do the same.
B. Measure of Damages
1. Legal Principles
71 Damages for a trespass or a conversion involving the wrongful taking of natural resources are assessed on either a restitutionary or a compensatory basis. 25 A restitutionary award is designed to ensure that a wrongdoer does not profit from its wrong, and thus operates to remove any benefit or gain from it, applying (according to how egregious the wrongdoer's conduct has been) either a "mild" or "harsh" rule of damages. The compensatory approach focuses instead on the Plaintiff, as is more consistent with other measures of damages in tort and contract, by seeking to place it in the position it would have been in but for the tort.
72 The authorities make it difficult to draw much distinction between the "mild" form of restitutionary damages and the compensatory measure of damages. In general, it may be said that the courts will gravitate towards a restitutionary approach
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 13 Nexxtep Resources Ltd. v. Talisman Energy Inc., 2012 ABQB 62, 2012 CarswellAlta 145 2012 ABQB 62, 2012 CarswellAlta 145, [2012] 10 W.W.R. 528, [2012] A.W.L.D. 1964... where there is something in the Defendant's conduct making it proper not only to ensure compensation to the Plaintiff, but to strip away from the Defendant any possible reward of its wrongdoing.
2. Findings
73 To paraphrase Kent J. in Freyberg v. Fletcher Challenge Oil & Gas Inc., 26 to make an award that focuses on Talisman's conduct (and thus determine damages based on the restitutionary measure) would require that I find conduct sufficiently reprehensible to ignore the possibility that Nexxtep would be over compensated.
74 The conduct of Talisman on which Nexxtep relies may be summarized as follows:
a. After Nexxtep notified Talisman of the alleged trespass, Talisman said it would do a thorough engineering and geological review but within twenty-four hours dismissed the merits of Nexxtep's claim. It never produced the results of this analysis.
b. Talisman pleaded that the Board's designation order substantively proclaimed that the vertical well was producing from above the base of the Mannville zone; that the Board's designations are binding on the parties and Nexxtep had not availed itself of the statutory procedures for challenging or amending the order; and that the action should therefore be dismissed as a collateral attack on the Board's order. Despite this pleading, Talisman then attempted to stay the Board proceedings commenced by Nexxtep, and later sought to appeal a Board order that ruled in Nexxtep's favour.
c. Omers continued the trespass after acquiring Talisman's interest in the vertical well on February 1, 2007, despite having full knowledge of the circumstances surrounding the alleged trespass.
These will be addressed in order.
75 In my view, the absence of information about Talisman's initial review is of little moment. The parties agreed to a consent order providing that they are bound, for purposes of this action, by the Board's re-designation order. Further, the zone from which the vertical well produced is not the only or the determining issue for the parties' rights in this action. As these reasons demonstrate, more fundamentally the question is whether the parties' contract, properly understood or rectified, conveyed the vertical well's producing zone to Nexxtep. Finally, it appears from the submissions of both parties that the case management justice, Kenny J., rejected Nexxtep's application to produce the requested information, upholding Talisman's claim of privilege. (Nexxtep argues that her determination is not binding for trial purposes — a point that I cannot accept in the absence of a renewed application in different circumstances, or an appeal.)
76 Talisman's plea regarding the Board's order relates to section 33 of the Oil and Gas Conservation Act, 27 which provides for the Board's power to designate the area that is to be allocated to a well in connection with fixing allowable production. Subsection (2) provides that "if a dispute arises in the application of a pool or zone designation made by the Board, the dispute shall be referred to the Board and its decision on it is final."
77 Talisman's strategy in its proceedings before the Board (and extensions thereof) and this action appears to have been two-fold. First, if it could succeed before the Board in resisting Nexxtep's technical arguments that the vertical well should be designated as producing from below the base of the Mannville, then the facts would remain as understood by the parties at March 31, 2004 and no contractual issues would arise. Talisman's position before the Board was unsuccessful, but that does not mean it had no merit. The hearing was held in two parts, the Board took over six months to issue its decision, and there was a significant amount of expert testimony. Ultimately, the Board granted Nexxtep's application for redesignation, but there was a split decision (two against one) in which the two geologist Board panel members disagreed about the technical evidence. Those circumstances do not allow me to conclude that Talisman's conduct in contesting the redesignation application justifies application of a harsher rule of damages.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 14 Nexxtep Resources Ltd. v. Talisman Energy Inc., 2012 ABQB 62, 2012 CarswellAlta 145 2012 ABQB 62, 2012 CarswellAlta 145, [2012] 10 W.W.R. 528, [2012] A.W.L.D. 1964...
78 Finally, the allegations about Omers' knowledge and conduct add nothing to the analysis. Nexxtep is correct that it purchased with knowledge of the circumstances, but its role in these proceedings has been represented by Talisman. It can have no more culpability than Talisman.
79 I therefore find that Talisman's conduct, even if its contractual position is not ultimately justified, does not require that damages be determined on anything other than an compensatory basis. It pursued a legal position that was consistent with both parties' belief about ownership of production from the vertical well. Its position had at least arguable merit when considered historically, technically and legally.
80 Therefore, in my view damages should be measured on a compensatory basis.
C. Assessment of Damages
1. Period of Damages
81 To measure damages, it is first necessary to identify the date on which they begin. Nexxtep argues they began upon execution of the PSA, which was also its effective date. Talisman's position is that damages could not begin until the Board issued its redesignation order on August 7, 2009, because such orders are not retroactive.
82 In my view, Nexxtep's position is correct. As Talisman necessarily recognizes in other aspects of its argument, the Board's order (which went against it) is not determinative of the parties' contractual rights. Talisman cannot have it both ways. If Talisman conveyed the vertical well's producing zone to Nexxtep, then it lacked the ownership rights to continue producing. Its lack of knowledge, and the continued sanction of a Board designation that the well was producing from the Lower Mannville until August 7, 2009, goes only to the measure of damages the court should apply. In Costello v. Calgary (City) 28 , Picard J.A. held that "a trespass occurs, regardless of consciousness of wrongdoing, if the Defendant intends to conduct itself in a certain manner and exercises its volition to do so." 29 Liability does not depend on proof of some fault, other than volitional conduct, on the part of the Defendant.
83 Nexxtep did not make a claim for or adduce evidence in support of damages for the period after the vertical well was shut in by the Board.
2. Calculation of Damages
(a) General
84 The compensatory measure of damages requires the court to put Nexxtep in the position it would have enjoyed had Talisman not committed the act assumed to have been wrongful, namely production of gas through the vertical well from March 31, 2004, until it was shut in as a result of the Board's order on August 11, 2009. Of course, the evidence cannot recreate what would have occurred had Talisman ceased production on March 31, 2004. All that can be done is to construct a reasonable means of compensating Nexxtep for the produced gas, less appropriate costs.
85 Nexxtep's approach to damages calculation is based on the opinions of Mr. Burke, who (as noted earlier) supported the view that Nexxtep did not require the existing wellbore or any associated gathering and processing facilities. This approach entails, I find, a significant risk that Nexxtep would be better off with a damages award than having kept the gas, because it incurs low capital costs for producing and bringing it to market.
(b) Net Operating Revenues
86 The proper approach to determining damages, using the compensable measure, requires me to first determine Nexxtep's 34.426% share of net operating revenues (gross revenues, less royalties, operating expenses and processing operating expenses.) For that purpose, I accept Mr. White's calculations. He is the only expert who made the necessary calculations for all of these deductions. (Mr. Burke acknowledged in his surrebuttal report that Mr. White's assumed charges for processing were reasonable
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 15 Nexxtep Resources Ltd. v. Talisman Energy Inc., 2012 ABQB 62, 2012 CarswellAlta 145 2012 ABQB 62, 2012 CarswellAlta 145, [2012] 10 W.W.R. 528, [2012] A.W.L.D. 1964... if using a facility in which the gas owner did not share an interest.) The net revenues, before any inflationary adjustment, are $1,649,892.00 for the March 31, 2004 to August 11, 2009 period.
(c) Deductions for Capital
87 Mr. Burke's initial report made no deductions for any capital costs. His surrebuttal report (considerably longer than his first report) proposed as an alternative the deduction of capital costs associated with producing the gas alongside the horizontal well or using the gas as part of a gas lift scheme to enhance recovery of sour gas from the deeper Pekisko formation. As I found earlier, these are speculative options which would face significant hurdles. They are not, in my view, a reasonable basis on which to assess damages.
88 Alternatively, Nexxtep argues that if the vertical well must be used, the capital costs of that method of production (incurred as early as 1980) had been completely depreciated over the years and are not a relevant factor. Again, I find that is not a reasonable basis for calculating damages. Furthermore, it seems very doubtful that the owners of the vertical well would agree to allow, or the Board would order, Nexxtep to have access without making any contribution to the facilities.
89 In my view, for assessment purposes, it must be assumed that the gas would have been produced through the vertical well. As I found earlier, while it is difficult to predict what might have occurred through the negotiation and Board approval process, the evidence leads me to conclude that production would most likely occur through the vertical well (rather than the horizontal well) and the Board would allocate appropriate costs of the means of that production among all interested parties. In fact, there is a reasonable argument that Nexxtep could not have produced at all for some time because of the complexity of negotiations and regulatory approvals caused by the sale of a resource without its means of production, but that does not change the fact that it is entitled to compensation if Talisman wrongfully produced the gas.
90 Unfortunately, Talisman's position presents challenges of its own. It argues that Nexxtep must "pay" (by deduction against net production revenue) according to detailed calculations performed by Robert White of PricewaterhouseCoopers, under three scenarios. Scenario one assumes that damages are recoverable only for the four-day period from the Board's order on August 7, 2009 to the date of shut-in, August 11, 2009. Scenario two assumes that Nexxtep is entitled to damages for gas produced from April 2004 through shut-in, but only after a deduction for 100% of the capital costs of drilling its own vertical well. Both of those scenarios generate "damages" that are significantly negative in value, and in my view are not reasonable. First, I have already found that damages must be calculated from execution of the PSA. Second, it is not reasonable to assume a separate vertical well into the same producing pool, nor would it be commercially reasonable even if feasible from technical and regulatory perspectives.
91 Mr. White's scenario three comes closer to the outlines of a reasonable approach. It assumes that Nexxtep would be obligated to pay 34.426% (the interest it claims in the pool from which the vertical well produces) of the actual historical costs of the well, the assumed cost of the other facilities, as inflated to current values. However, when Mr. White applies his preferred means of calculation to this scenario, he again generates largely negative damages. His approach was critiqued by Scott Lawritsen of Meyers Norris Penny in a surrebuttal report (he did not testify). In my view, there is considerable merit in Mr. Lawritsen's criticism that Mr. White's approach "effectively expenses the entire capital amount for a well that is 31 years old over a 65 month period (i.e. from March 2004 through August 2009). This does not take into consideration the 24 years of existence of the well prior to March 31, 2004, nor the continued life expectancy of the well...." Mr. Lawritsen also critiqued Mr. White's addition of a charge related to a return on capital. In my view, Mr. White's approach is an overly aggressive application of capital to a short period of production, giving a result that is neither commercially sensible or reasonable for the purpose of calculating damages.
92 If Nexxtep is entitled to damages, they must be calculated with a reasonable deduction for the use of the capital facilities for the wells, gathering and processing facilities. Unfortunately, the evidence does not allow me to make anything other than an arbitrary determination of what that deduction would be because of the widely divergent positions of the parties, and the understandably reduced amount of attention that was paid to this issue at trial. It would be unfair to both parties for me to make an arbitrary determination on such an important factor in the calculation of damages.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 16 Nexxtep Resources Ltd. v. Talisman Energy Inc., 2012 ABQB 62, 2012 CarswellAlta 145 2012 ABQB 62, 2012 CarswellAlta 145, [2012] 10 W.W.R. 528, [2012] A.W.L.D. 1964...
93 Regretfully, therefore, if Nexxtep is entitled to damages, there must be a further hearing to enable the court to make an assessment. Hopefully, my findings and directions will expedite that process.
(d) Expenses of Board Hearing
94 Finally, Nexxtep requests compensation for the expenses of the Board hearing. The Board did not award costs of the hearing to either party, which is consistent with its governing legislation and rules of practice. Nexxtep now seeks recovery of its Board hearing expenses as a form of damages.
95 Its claim must rest on the theory that if its contractual claim is ultimately proved true and therefore Talisman was a trespasser, the Board proceedings were a necessary step because the technical designation of the vertical well's producing zone was an essential factual underpinning of the claim. In other words, Talisman's position required Nexxtep to establish two fundamental elements to succeed in its action. First, the vertical well was producing from a pool below the base of the Mannville zone. Second, the PSA, properly interpreted or rectified, conveyed that pool to Nexxtep. The first element was in dispute, because Talisman did not accept Nexxtep's interpretation of the data. Nexxtep's position had to be proved, either in this action or before the Board (which Talisman accepted as determinative for purposes of this action).
96 There is merit in Nexxtep's claim for compensation for Board proceedings, but in my view it should be considered as an element of litigation costs if Nexxtep ultimately succeeds in this action. To award compensation as damages would in effect give Nexxtep costs as between a solicitor and client for an important element of the overall claim. Compensation for Board proceedings should be addressed in the context of an overall determination of costs entitlement and amount. Therefore, I do not include expenses of the Board proceedings in damages for provisional purposes.
VII. Summary and Relief
97 In brief, I find that Nexxtep's action in trespass or conversion (or breach of contract, in the further alternative) against Talisman fails and its claim is dismissed. The parties have leave to speak to costs, if necessary. Action dismissed.
Footnotes 1 Atco Electric Ltd. v. Alberta (Energy & Utilities Board), 2004 ABCA 215, 361 A.R. 1 (Alta. C.A.) at para. 76.
2 [1971] 3 All E.R. 237 (U.K. H.L.), at 239 - 40.
3 [1976] 3 All E.R. 570 (U.K. H.L.), at 574.
4 2000 ABCA 151, 255 A.R. 373 (Alta. C.A.) at para. 21.
5 Ibid. at para. 22.
6 Jumbo King Ltd. v. Faithful Properties Ltd., [1999] 2 HKCFAR 279 (Hong Kong C.A.); quoted by Conrad J.A. in Omers Energy Inc. v. Alberta (Energy Resources Conservation Board), 2011 ABCA 251 (Alta. C.A.) at para. 34.
7 Omers, supra, at para. 33. Suncor Inc. v. Norcen International Ltd. (1988), 89 A.R. 200 (Alta. Q.B.).
8 Prenn v. Simmonds, supra, note 2 at 241.
9 Ibid. at 240.
10 R. v. Price Brothers & Co., [1926] 3 D.L.R. 642 (Canada P.C.), at 644.
11 Ibid.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 17 Nexxtep Resources Ltd. v. Talisman Energy Inc., 2012 ABQB 62, 2012 CarswellAlta 145 2012 ABQB 62, 2012 CarswellAlta 145, [2012] 10 W.W.R. 528, [2012] A.W.L.D. 1964...
12 Augdome Corp. v. Gray (1974), [1975] 2 S.C.R. 354 (S.C.C.), at 368.
13 RSA 2000, c. O-6.
14 Supra note 4 at para. 20.
15 Langley Lo-Cost Builders Ltd. v. 474835 B.C. Ltd., 2000 BCCA 365, 5 B.L.R. (3d) 31 (B.C. C.A.) at para. 29.
16 Gainers, supra note 4 at para. 21.
17 Dow Chemical Canada Inc. v. Shell Chemicals Canada Ltd., 2010 ABCA 126, 477 A.R. 112 (Alta. C.A.) at para. 20; leave to appeal to SCC refused, [2010] S.C.C.A. No. 234 (S.C.C.); Herron v. Hunting Chase Inc., 2003 ABCA 219, 330 A.R. 53 (Alta. C.A.) at para. 15; Gainers, supra note 4 at para. 23.
18 Qualico Developments Ltd. v. Calgary (City) (1987), 81 A.R. 161 (Alta. Q.B.), at 168.
19 Scurry-Rainbow Oil Ltd. v. Kasha (1996), 184 A.R. 177 (Alta. C.A.) at para. 45; leave to appeal to SCC refused, (1997), [1996] S.C.C.A. No. 391 (S.C.C.).
20 Sylvan Lake Golf & Tennis Club Ltd. v. Performance Industries Ltd., 2002 SCC 19, [2002] 1 S.C.R. 678 (S.C.C.) at para. 31.
21 Ibid.
22 Ibid. at paras 41 - 43, and cases there cited.
23 Fridman, The Law of Contract in Canada, 5th ed. (Toronto: Thomson Carswell, 2006) at 829 (footnote omitted).
24 Smith v. Hemeon, [1953] 4 D.L.R. 157 (N.S. T.D.); Barrett v. Krebs (1995), 164 A.R. 218 (Alta. Q.B.) at para. 26. affd. (1996), 181 A.R. 132 (Alta. C.A.).
25 Freyberg v. Fletcher Challenge Oil & Gas Inc., 2007 ABQB 353, 428 A.R. 102 (Alta. Q.B.) at paras. 98 - 130; Montreal Trust Co. v. Williston Wildcatters Corp., 2004 SKCA 116, 254 Sask. R. 38 (Sask. C.A.) at paras. 72 - 80 and paras. 108 - 110; leave to appeal to SCC dismissed (2005), [2004] S.C.C.A. No. 474 (S.C.C.).
26 Supra note 25 at para. 131.
27 RSA 2000, c. O-6.
28 1997 ABCA 281, 209 A.R. 1 (Alta. C.A.), leave to appeal to SCC refused (1998), 212 A.R. 398 (note) (S.C.C.).
29 Ibid. at 465.
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Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 18