JED Oil Inc. (Re), 2010 ABQB 295

Court of Queen ’ s Bench of Alberta Citation: JED Oil Inc. (Re), 2010 ABQB 295 Date: 20100503 Docket: 0801 09492 Registry: Calgary 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 , R.S.A. 2000 C. B-9 And in the Matter of a Plan of Compromise or Arrangement of JED Oil Inc. and its Subsidiaries JED Production Inc. and JED Oil (USA) Inc. _______________________________________________________ Reasons for Judgment of the Honourable Madam Justice C.A.

Kent _______________________________________________________ [ 1 ] On August 13, 2008, I granted an order giving JED Oil Inc. and related companies relief under the Companies ’ Creditors Arrangement Act , R.S.C. 1985 as amended. About 100 holders of Series B Preferred Shares of JOI submitted proofs of claim in respect of dividends that they said were payable from January, 2008 until August 12, 2008. [ 2 ] On September 3, 2009, JED obtained an order to hold a meeting of JED’s creditors to consider its Amended and Restated Plan of Arrangement. The Plan provided for four classes of affected creditors.

One of those classes was Unsecured Creditors. The Monitor and JED accepted the dividend claims of the preferred shareholders as being unsecured claims and included them in the Unsecured Creditors class. The Plan was approved and sanctioned by the Court, but subject to this application.

[3] The Plan provided that the Unsecured Creditors class would receive Class B Special Shares of the restructured JED inproportion to their claims. The creditors who bring this application argue that the dividend claims are not debt and should not rankequally with the unsecured creditors. They seek a declaration that the dividend claims are a return on equity so that they are excludedfrom the Unsecured Creditors class both with respect to voting and participation under the Plan. [4] The issue is whether the dividend claims are debt or equity. [5] The relevant terms of the Series B Preferred Shares reads as follows:

(4) Entitlement to Dividends (

a) Entitlement Holder of Series B Preferred Shares shall be entitled to receive dividends calculated at the rate of ten percent (10%) per annum of theRedemption Amount per share for the number of Series B Preferred Shares so held, accruing from the date of issuance through the dateeach such Series B Preferred Share is converted to a Common Share or redeemed by the Corporation. (

b) Quarterly Payments Dividends shall be paid quarterly, to the holder of record of the Series B Preferred Shares on the last day of each calendar quarter,commencing September 30, 2006. Payments shall be issued on the fifteenth day of the month following the end of each such calendarquarter. [6] Some facts and some legal principles that are not in dispute. Specifically, it is agreed that as of February 1, 2008, JED wasinsolvent.

Both sides agree that debt ranks ahead of equity and that dividends are equity until they are declared at which time theybecome debt. [7] Re Central Capital Corp. (ON CA), 1996, 132 DLR (4th) 223 (Ont. C.A.) is instructive for the issuesbefore me. McCutcheon and SYH were holders of preferred shares with a right to have their shares redeemed on a specific date at aspecific value. McCutcheon had acquired his shares through the sale of shares in another company for which he received cash and theredeemable shares.

SYH sold its shares in insurance companies for the redeemable shares. [8] The majority of the court found that the relationship between McCutcheon and SYH on one hand and Central Capital on theother was one of equity, not debt, for two reasons. One was the wording of the Articles which contained none of the indicia of debt.Second was the nature of the relationship of the shares to the structure of the corporation. McCutcheon and SYH continued to have therights attached to their shares. Thus the nature of the relationship - equity, not debt - did not change.

Because the dividends had not beendeclared, the majority also found no debt created. [9] Laskin, J.A., in his reasons, set out the challenge when dealing with the characterization of preferred shares. At para. 117, hesays: Preferred shares have been called “compromise securities” and even “financial mongrels”: Grover and Ross, Materials and CorporateFinance (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 byendowing preferred shareholders with rights analogous to the rights of creditors. And, at para. 119, he says: If the certificate or instrument contains features of both equity and debt - in other words if it is hybrid in character - then the Court mustdetermine the “substance” of the relationship between the holder of the certificate and the company. This is the lesson of JusticeIacobucci’s judment in Canada Deposit Insurance Corp. v.

Canadian Commercial Bank, (SCC), [1992] 3 S.C.R. 558. [10] In this case, the Applicants rely heavily on Central Capital in making five points. First, they say that on the date that theshares were issued, there was no debt because dividends had not been declared. Only on the last calendar day of each quarter would thecompany have sufficient information including the identity of the payee to declare the dividends.

Secondly, the board would not knowthe status of the company until the end of each quarter so they could not declare the dividends until then. [11] Third, the corporation cannot issue shares that in effect make the shareholders creditors. In Grover and Ross, Materials andCorporate Finance, cited in Central Capital at para. 132: On the other hand, the company cannot issue “secured” preferred shares in the sense that shares cannot have a right to a return of capitalwhich is equal or superior to the rights of creditors.

Preferred shareholders are risk-takers who are required to invest capital in thebusiness and who can look only to what is left after creditors are fully provided for. Thus, in the absence of statutory authorization, theclaims of shareholders cannot be secured by a lien on the corporate assets. They rank behind creditors but before common shareholders(if specified) on a voluntary or involuntary dissolution of the company. [12] Fourth, given s. 43 of the Business Corporations Act, any share term which purports to make an advance declaration ofdividends would be ultra vires the corporation.

S. 43 reads: Dividends 43 A corporation shall not declare or pay a dividend if there are reasonable grounds for believing that (

a) the corporation is, or would after the payment be, unable to pay its liabilities as they become due, or (

b) the realizable value of the corporation’s assets would thereby be less than the aggregate of its liabilities and stated capital of allclasses. [13] Finally, they argue that even if the dividend has been declared, if there are no funds to pay it, the declaration is a nullity.

InCorporate Finance and Canadian Law, (Toronto: Thomson Canada Ltd., 2000), Professor Nicholls says at p. 24: While the matter is not entirely free from doubt, it would appear that the better view of the law is that - in jurisdictions which CBCA-type dividend payment restrictions - when dividends have been lawfully declared, but cannot be lawfully paid, shareholders do not havean enforceable debt claim against the corporation.

The contractual right of shareholders to sue for the payment of declared dividendsappears, at common law, not to have arisen until the directors had determined that dividends could lawfully be paid. It may be that it isappropriate for that determination to be made once only, at the time of the declaration, if the governing corporate statute - such as theB.C.

Company Act - does not expressly mandate that the solvency tests be satisfied, first, before declaration and again before payment.But the CBCA does expressly refer both to declaration and payment. [14] In response, the preferred shareholders argue s. 43 makes a distinction between declaring and paying a dividend. There is no

reason why shares cannot be set up so that dividends are declared in advance but not paid until the payment date when the company knows if it is able to pay. At the date the shares were issued, all the information was available to declare the dividend. Furthermore, at the end of each quarter, shareholders can elect to take cash or shares. At the end of the first quarter of 2008, although the directors did not pay any cash because JED was insolvent, they did pay in shares until such time as it was realized that issuing those many shares would change control of the company.

The act of issuing the shares shows that the board had already declared a dividend. [ 15 ] In answer to several of the unsecured creditors’ arguments, they argue that Central Capital is of little assistance since it was dealing with retraction of shares rather than the declaration of a dividend. [ 16 ] The issue I must decide is whether the dividends were declared before February 1, 2008.

The only way that I can so find is if I find that the wording of shares means that the dividends were declared as of the date of issuance of the shares, with the result that the shareholders became creditors of the company from the day that they were issued their shares. The substance of the relationship between the shareholders and the corporation at the time they purchased their shares is not that of creditor and debtor. They 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. [ 17 ] In the result, the application is granted. The preferred shareholders are excluded from the Unsecured Creditors class and they are not entitled to any distribution within that class. Heard on the 21 st day of April, 2010. Dated at the City of Calgary, Alberta this 3 rd day of May, 2010. C.A. Kent J.C.Q.B.A. Appearances: Trevor A. Batty Burnet, Duckworth & Palmer LLP for certain creditors Marcia L. Johnston, Q.C. for the Series B Preferred Shares