Canadian Sahara Energy Inc. v. Sonde Resources Corp., 2010 ABQB 730

Court of Queen ’ s Bench of Alberta Citation: Canadian Sahara Energy Inc. v. Sonde Resources Corp., 2010 ABQB 730 Date: 20101124 Docket: BE01 418982 Registry: Calgary Between: Canadian Sahara Energy Inc. Applicant - and - Sonde Resources Corp. Respondent _______________________________________________________ Reasons for Judgment of the Honourable Madam Justice C.A. Kent _______________________________________________________ [ 1 ] Sonde Resources (Sonde) and Sahara Energy (Sahara) are equal partners in the development of an oil and gas property called the November block off shore of Libya and Tunisia.

As assessment well, Zarat, is being drilled. The relevant documents establishing the relationship between Sonde and Sahara are the Participation Agreement dates July 8, 2008, the Exploration and Production Sharing Agreement (EPSA) between Sonde for itself and Sahara and Joint Oil, the Libyan national oil company and the Joint Operating Agreement between Sonde and Sahara dated July 5 2010. Also important is the Clarification Agreement signed on July 5, 2010. Sonde has provided $ 64 million in corporate guarantees. [ 2 ] The provisions of the agreements which are relevant to this decision are: 1.

The Participation Agreement provides that upon execution, Sahara would receive $750,000 from Sonde and Sonde would pay all

the operating costs for the first year so that Sahara started to pay its 50% share on July 5, 2009. The amount of expenses paid by Sonde during the first year amounted to about $2.5 million. From July 5, 2009 to May, 2010, Sahara paid slightly over $300,000 as its share of expenses. 2. Sonde is the operator. (Article 6 of EPSA) 3. The EPSA requires Sonde to drill the Zarat North-1 well in November, 2010. If drilling is not commenced Joint Oil could demand payment of a $15 million bond. Drilling the well will cost about $30 million. Drilling has commenced. 4.

If a party fails to pay its expenses, the non-defaulting party can serve a notice of default. If the default is not cured within 5 days, a 30-day default period runs. If the default is not remedied by the 30 th day, the non-defaulting party can require the defaulting party to withdraw from the JOA and the EPSA. (JOA) 5. The Clarification Agreement and Release came into being as a result of issues that had arisen between 2008 and 2010 between Sonde and Sahara.

Those issues were resolved by the Clarification Agreement whereby Sahara agreed to release Sonde with respect to all of Sonde’s activities up to July 16, 2010 and Sonde agreed that Sahara had paid its share of expenses up to April 1, 2010. [ 3 ] Pursuant to the Clarification Agreement, Sahara was required to pay its share of the expenses incurred between May and September, 2010 by September 15, 2010. That amounted to about $5.5 million. Sahara requested an extension of time to pay those expenses because it was looking for a partner or purchaser to take over its obligations.

Sonde did not agree to an extension. [ 4 ] On September 16, Sonde served Sahara with a Notice of Default. The notice gave Sahara 5 days to cure its default. That did not happen so that the default period began to run on September 24, 2010. That meant that 30 days following, Sonde would be in a position to serve a Notice to Withdraw on Sahara with the result that Sahara would forfeit all its interest in the November Block. [ 5 ] On October 15, 2010, Sahara filed a Notice of Intention to make a proposal under the Bankruptcy and Insolvency Act , R.S.C. 1985, c. B-3 ( BIA ).

Pursuant to s.69 (1) of the BIA, filing that notice results in a stay on the ability of creditors to claim any ‘remedy’ against the insolvent person’s property. Sahara complains that Sonde did two things after the stay which were inappropriate because they were remedies as contemplated by s. 69. First, Sonde advised Sahara that it was not entitled to attend the next Management Committee meeting, a committee formed pursuant to EPSA. Second, Sonde served the Notice to Withdraw on Sahara. [ 6 ] As indicated above, Sahara was looking for a purchaser for its interests. There were three potential buyers.

There does not appear to be any dispute that when asked, Sonde provided whatever information was requested by the potential buyers. Of the three, only Petroceltic made an offer. A Letter of Intent was signed which provided that in exchange for paying Sahara’s immediate debt to Sonde, Petroceltic would have an option to purchase the shares of Sahara. Although previous drafts of the LOI provided that Petroceltic would be entitled to claim back its costs should it decide not to exercise the option, the most current version does not have that provision. [ 7 ] I have two applications before me.

Sahara applies to have the BIA proceedings continued under the Companies Creditors Arrangement Act , R.S.C. 1985, c. C-36 ( CCAA ). That would result in a continuation of the stay so that Sonde could not move to terminate Sahara’s interest in the November Block. It would allow Sahara to complete its agreement with Petroceltic which in turn would permit Sahara to propose a plan to Sonde to pay Sahara’s debt to Sonde. Sahara has no other creditors. [ 8 ] Sonde applies to lift the BIA stay so that it can proceed to terminate Sahara’s interest.

That would permit Sonde to look for other partners to assist in financing the continued development of the November Block. [ 9 ] Sahara argues that to permit Sonde to terminate the agreement would mean that Sahara would forfeit its interest. I have the discretion to grant relief from forfeiture. Sahara says that Sonde acted contemptuously by notifying Sahara that it was not entitled to attend the Management Committee meeting and by serving the Notice to Withdraw. Those two actions were taken after the automatic stay triggered by the filing of the Notice of Intention under the BIA .

Second, Sahara argues that Sonde failed to abide by the agreements, most particularly by failing to file a budget and work plan by August 15. That affected Sahara’s ability to find a purchaser. Third, Sahara argues that the agreement with Petroceltic will result in the payment of Sahara’s immediate debt to Sonde. That is all that Sonde is

entitled to. [ 10 ] Sonde argues that Sahara used the BIA provisions to avoid the consequences of failing to pay its share of the expenses. Sonde says that the CCAA proceedings are doomed to fail because there is no prospect that Sahara will be able to develop a plan that is acceptable to Sonde.

All that a CCAA stay will do is deprive Sonde of valuable time to find another partner, a partner that it needs to help cover the costs of drilling the North Zarat well. [ 11 ] The BIA permits the court to terminate the period within which an insolvent party may make a proposal if the conditions set out in s. 50.4(11) of the BIA have been met. One of matters which I must consider is whether the insolvent person will be able to make a proposal that will be accepted by the creditors. The same consideration arises in CCAA proceedings.

The purpose of the CCAA is to give an insolvent company breathing room so that it can develop a plan that will satisfy the creditors and permit the company to remain in business. That means that the plan requires creditor approval. Assuming that all other factors weigh heavily in favour of Sahara being granted CCAA protection, is the fact that Sonde says now that it will not approve the plan sufficient to lift the BIA stay and refuse CCAA protection?

If I do permit Sahara to proceed pursuant to the CCAA , knowing that Sonde will not agree to the plan which is shaping up by way of the Sahara/Petroceltic agreement, is the proceeding doomed to fail? Can I force Sonde to accept Sahara’s plan? [ 12 ] All of these questions can be answered by looking at the benefits and prejudice suffered by each of the parties. I must balance the benefits to Sahara in allowing it time to finalize its agreement with Petroceltic with the benefits to Sonde in allowing it to terminate its relationship with Sahara so that it can pursue other partners.

I begin with the obvious: these parties agreed to the contractual provisions in the various agreements. While one party to a contract may, in certain circumstances, be entitled to relief from the harshness of contractual provisions, in most cases the need for contractual certainty must prevail and the contract must be enforced. Both Sahara and Sonde knew what their respective rights and obligations were. Sahara now faces the prospect that it will forfeit its rights under the agreement because it has not been able to pay the money it agreed to pay.

Sonde now faces the prospect that it will need to find a new partner in very short order or take full responsibility for drilling the Zarat well. [ 13 ] The factors that I find significant are the expenses which Sonde faces in drilling the North Zarat well, the $ 64 million in guarantees given by Sonde, the uncertainty created by the Petroceltic agreement which is really only an option which could leave Sonde without a partner as development of the project proceeds, and the relatively small amount of costs paid by Sahara to date. Sonde’s risks and investment in this project are large, Sahara’s are small.

The equities favour Sonde. I have considered the fact that the budget and work plan were not finished. I cannot find any prejudice to Sahara in the failure to formalize the budget and work plan because the evidence satisfies me that Sonde provided whatever information was needed both to Sahara and to potential purchasers. Finally, I see no prejudice as a result of Sonde advising Sahara that it was not welcome at the Management Committee meeting. Those actions did not put Sahara in the situation that it finds itself.

Taking all of those factors into consideration, it would not be appropriate to force Sonde to take the Sahara/Petroceltic plan, either in the context of a BIA proposal or a CCAA plan [ 14 ] I have not directly addressed Sahara’s argument that Sonde was in contempt of court when it took steps to act on Sahara’s default after Sahara filed its Notice of Intention. Even if refusing to allow Sahara to attend a Management Committee meeting and serving the Notice to Withdraw were remedies as contemplated by s. 69 of the BIA , the stay is a statutory stay, not a court-ordered stay.

I do not accept the argument that Sonde was in contempt of court in taking these two actions. As I said above, they were of no consequence, in any event. [ 15 ] In the result, Sahara’s application to continue the current BIA proceedings under the CCAA is dismissed. The BIA stay is lifted. Heard on the 19 th day of November, 2010. Dated at the City of Calgary, Alberta this 24 th day of November, 2010.

C.A. Kent J.C.Q.B.A. Appearances: Frances R. Dearlove Michael A. Loberg Fasken Martineau for the Applicant Roger F. Smith and Allison G. Kuntz Macleod Dixon LLP for the Respondent