Piikani Energy Corporation (Re), 2012 ABQB 187

Court of Queen ’ s Bench of Alberta Citation: Piikani Energy Corporation (Re), 2012 ABQB 187 Date: 20120321 Docket: BE01 436014, 0901 18791, 0901 15297 Registry: Calgary

In the Matter of the Bankruptcy of Piikani Energy Corporation; And in the Matter of the Bankruptcy and Insolvency Act , R.S.C. 1985 c. B-3 as amended Between: Alger & Associates Inc., in its capacity as Trustee of Piikani Energy Corporation Applicant - and - 607385 Alberta Ltd., Stephanie Ho Lem and Dale McMullen Respondents And Between: Piikani Nation Plaintiff - and - Piikani Energy Corporation Defendant

And Between: Piikani Nation Plaintiff - and - Piikani Investment Corporation Defendant Corrected judgment: A corrigendum was issued on March 26, 2012; the corrections have been made to the text and the corrigendum is appended to this judgment. _______________________________________________________ Memorandum of Decision on the Fraudulent Preference Claim of the Honourable Mr. Justice R.A.

Graesser _______________________________________________________ Nature of Application [ 1 ] This application is brought by the trustee in bankruptcy of Piikani Energy Corporation (“PEC”) for an order setting aside certain payments made to 607385 Alberta Ltd., Stephanie Ho Lem and Dale McMullen as being fraudulent preferences under s. 95 of The Bankruptcy and Insolvency Act , R.S.C. 1985, c. B-3, as amended (“ BIA ”).

The payments were made in the face of an application by the trustee in his then capacity as an Investigator of Piikani Investment Corporation (“PIC”), which was the sole shareholder of PEC, to freeze certain funds belonging to PEC. [ 2 ] Ms. Ho Lem and Mr. McMullen were at the time directors and officers of PEC. 607385 Alberta Inc. is Ms. Ho Lem’s corporation through which she provided services to PEC.

Background [ 3 ] Most of this background information is taken from the various affidavits filed on behalf of the parties in this proceeding. Bruce Alger of Alger & Associates Inc. swore an affidavit on February 15. 2011 in support of the application, and swore a supplemental affidavit on July 8, 2011. I will refer generally to Alger & Associates as “Alger”, and Mr. Alger himself as “Mr. Alger”. He was questioned on his affidavits. [ 4 ] Dale McMullen swore affidavits on June 10, 2011, July 7, 2011, July 29, 2011 and November 1, 2011 in opposition to the application.

Stephanie Ho Lem swore an affidavit in opposition to this application on June 10, 2011. There has been questioning on these affidavits and responses to undertakings given on the various questionings. [ 5 ] In 2002, the Piikani Nation reached a settlement with the Province of Alberta and the Government of Canada over use of a portion of the Nation’s lands for the purposes of the Old Man River Dam and the related hydro-electric generation project.

The Settlement Agreement is dated July 16, 2002. [ 6 ] The Settlement Agreement, amongst other things, established an investment fund. $36,300,000.00 was settled into the Piikani Trust for the lasting benefit of the Piikani Nation.

The Trustee was and remains CIBC Trust Corporation, and the Trust is to be administered in accordance with the Trust Agreement, which was appended to the Settlement Agreement. [ 7 ] The intention at the time was to have the Piikani Trust invest in projects that would have long term benefit to the Piikani Nation, including participating with ATCO in the hydro-electric generation facility associated with the Old Man River dam, acquiring further lands to be added to the Reserve and development of wind power electricity generation, along with other initiatives. [ 8 ] PIC was to be (and was) incorporated pursuant to the provisions of the Settlement Agreement and the Trust Agreement.

Its role was to act as advisor to the Piikani Trust regarding the investment of any trust funds in projects. Basically, investment opportunities were to be reviewed by PIC. On approval of a project by the Piikani Nation (through the Chief and Council) and by the board of PIC, funding could be arranged with the Trustee, and trust funds could then be invested in accordance with the individual project documents. [ 9 ] Without the approval of the Chief and Council and by the board of PIC, trust funds could not be invested.

The Trustee was entitled to rely on the decisions and directions of the Chief and Council and the board of PIC as to the merits of any particular investment. [ 10 ] Funding was to be made to “Piikani Business Entities”, corporations set up to carry out approved projects. These corporations, of which PEC is one, were generally incorporated with shareholders from the Piikani Nation holding their shares in trust for the Piikani Nation. At some stage, PEC became a wholly-owned subsidiary of PIC, and the shares held by former shareholders were redeemed.

The redemption is contentious, as a former shareholder disputes that his shares were validly redeemed, and he claims to continue to be a shareholder of PEC along with PIC. For the purpose of this decision, that issue or dispute need not be resolved. [ 11 ] PIC’s board of directors were required to be separate from the Chief and Council. Two of the board members were required to be professionals (a lawyer and an accountant), independent from the Piikani Nation. A third board member was to be an “experienced business person” also independent from the Nation.

The Chief and Council were entitled to appoint one member to the PIC board. Terms for board members were fixed and were different from the terms of the elected Chief and Council, with the intent of maintaining some separation between the PIC board and the Chief and Council of the day. [ 12 ] Since its inception, the Trust has loaned $14.025 million to PIC. PIC in turn has loaned $11,400,000.00 to PEC. [ 13 ] PIC was incorporated on October 16, 2002 as an Alberta Corporation. It was continued as a Federal corporation on February 5, 2004.

[ 14 ] Dale McMullen, a chartered accountant, was elected to the PIC board on December 3, 2003 and on December 4, 2004 became PIC’s managing director and chief executive officer. He continued to be PIC’s managing director and chief executive officer until December 3, 2008, when he was removed from those positions. He was a director until his term of office expired on November 30, 2008.

Stephanie Ho Lem, an experienced business person, was elected to the PIC board in December, 2004 and remained on the PIC board until November, 2008. [ 15 ] The history of PIC since its incorporation has been plagued by disputes with the various Chiefs and Councils from time to time and litigation between it and former board members and employees. Mr. McMullen had adversarial relationships with various Chiefs and Councils, leading to litigation whenever the Chief and Council of the day attempted to have Mr. McMullen removed as a director and officer of PIC.

Disputes between the board of PIC and the Chief and Council led to court applications in January, 2005, June, 2008 and October, 2008. (See Piikani Investment Corporation v. Piikani First Nation , 2008 ABQB 775 , for a history of the disputes between Mr. McMullen and the Nation.) [ 16 ] The Settlement Agreement provided that the Nation had an option to acquire an interest in the power generation facility resulting from the construction of the Old Man River dam. PEC was incorporated on January 24, 2004 to pursue that investment opportunity. Mr.

McMullen became a director of PEC on September 13, 2005 and became its president and chief executive officer on February 1, 2009. Mr. McMullen ceased to be PEC’s chief executive officer on December 17, 2009. He remains on the PEC board of directors to the present time. Ms. Ho Lem became a member of PEC’s board on June 6, 2007 and remains on the PEC board to the present time. [ 17 ] Ms. Ho Lem deposes that starting in late 2008, she assumed many duties for PEC which had been previously provided by its former chief operating officer. She reported to Mr.

McMullen and worked with him on the ATCO hydro-electric project, the Oldman irrigation project, the wind farm project and the AltaLink project. Her title was Vice President and Corporate Secretary [ 18 ] The terms of directors of PEC are not limited as they are in PIC, and the Chief and Council have no right to appoint a director to the PEC board. [ 19 ] PEC was incorporated initially for the purpose of holding the Nation’s interest in the Old Man River hydro-electric project. The interest consists of a 25% interest in the hydro electric facility through a joint venture with ATCO.

That interest is held in the Piikani Oldman Hydro Limited Partnership (“POHLP”) in which the Nation owns 99% of the limited partner units and PEC owns 1% of the limited partner units.. PEC acted as general partner until it was replaced in that capacity by a new Piikani Business Entity, Piikani Resource Development Ltd., in December 2009. [ 20 ] Other Piikani Business Entities were incorporated as subsidiaries of PIC.

They included Piikani Land Holdings Corporation and Oldman Irrigation Ltd. [ 21 ] As a means of funding the administrative expenses of PIC, the Trust Agreement and Settlement Agreement provide that PIC is to be provided with an annual operating grant of $300,000.00 from the Piikani Trust. [ 22 ] Ultimately, revenues to PIC and PEC over the years between 2002 and 2009 included the $300,000.00 annual operating grants from the Trust to PIC, and revenues from POHLP to PEC. [ 23 ] Of the $14,025,000.00 loaned by the Trust, $7,800,000.00 was advanced to POHLP for the acquisition of its interest in the hydro facility.

The remaining $6,525,000.00 received by PEC has been spent on administrative costs and operating costs for PIC and PEC. From the time the ATCO joint venture began paying a return until PEC was replaced as General Partner of POHLP in December, 2009, PEC received over $2,000,000.00 in distributions. PEC spent those revenues on its administrative costs and operating costs. Of the funds and revenues POHLP (to the end of 2009), the Nation has received $1,000,000.00 which PEC claims is a loan to it from PEC.

The Nation characterizes the $1,000,000.00 as an advance of profits. [ 24 ] For some reason not explained in these proceedings and not directly relevant to the outcome of these proceedings, the Trust loaned the funds directly to PIC, which in turn loaned monies to PEC and other Piikani Business Entities. Because PIC had no ongoing revenue-producing activities, and was dependent on the Trust for the annual $300,000.00 operating funds, PIC’s ability to service its debts to the Trust were dependent on the Piikani Business Entities making their respective loan payments to PIC in a timely way.

[ 25 ] PIC’s subsequent financial difficulties resulted largely from the failure of PEC and other Piikani Business Entities to make their loan payments to PIC. PIC was then unable to make its loan payments to the Trust. It was in default of its payment obligations to the Trust from the time its first payment on its first loan was due. [ 26 ] PEC alleges that the Nation has benefited from PIC’s and PEC’s activities in relation to the negotiation of power transmission lines, referred to as the AltaLink project. The negotiations, according to PEC, were conducted by PEC as part of PEC’s approved Business Plan.

Negotiations resulted in a payment of some $7,000,000.00 in return for use of some of the Nation’s lands. Instead of any portion of the revenues coming to PIC or PEC, however, the Nation directed that the monies be paid directly to the Nation, essentially circumventing PIC and PEC. [ 27 ] PEC says that it should be given credit for its role in negotiating the settlement agreement and resulting $7,000,000.00 payment to the Nation for AltaLink.

Had those funds been directed to PEC, its financial situations would have been significantly different. [ 28 ] Apart from the $7,000,000.00 resulting from the AltaLink settlement, and $1,000,000.00 by way of a loan to the Nation from PEC or distributions from POHLP through PEC to the Nation, the Nation has received no funds from the Trust, PIC, PEC or any of the other Piikani Business Entities.

Only $100,000.00 has ever been paid to the Trustee as a payment on the $14,025,000.00 in loans since it began loaning money to PIC and PEC and Piikani Business Entities. [ 29 ] As a result of ongoing disagreements between PIC and the Chief and Council, and litigation commenced against the Nation by PEC relating to the $1,000,000.00 payment, the Chief and Council applied in October, 2009 for the appointment of an Investigator for PIC under the

Canada Business Corporations Act , R.S.C.1985, c. 44. By order dated October 22, 2009, in Action No. 0901-15297, I appointed Alger & Associates Inc. as Investigator of PIC. PIC’s affairs were effectively frozen by this action, and a stay of proceedings relating to PIC was put in place at that time, and remains in place now. PIC has since been placed in receivership. Alger is the receiver.

Alger has provided four reports to the Court on PIC’s affairs. [ 30 ] Part of the investigation of PIC involved the investigation of PIC subsidiaries including PEC, as well as the investigation of inter-corporate loans and transactions between PIC and PEC. Alger’s first report in November 2009 indicated that PIC had not prepared financial statements for at least the preceding two fiscal years, and PEC had never prepared any financial statements. [ 31 ] By early December, Alger concluded that PEC was in default of loan payment obligations to PIC.

Alger also became aware that $480,000.00 was being held in trust for PEC at the Calgary office of Davis LLP. These funds were held pursuant to an Escrow Agreement between PEC and Dale McMullen. Alger recommended in its preliminary report dated November 30, 2009 that these funds be frozen. Following that report, PEC and Mr. McMullen terminated the Escrow Agreement on December 10, 2009. $471,662.17 was received by PEC from Davis LLP on December 15, 2009 and placed in PEC’s general bank account. [ 32 ] On December 18, 2009, PEC paid $150,000.00 to Ms.

Ho Lem through her corporation 607385 Alberta Inc., describing the payment as a “base annual retainer”, pursuant to a Consulting Agreement between PEC, 607385 and Ms. Ho Lem dated January 1, 2009. [ 33 ] Ms. Ho Lem continued to provide services to PEC until July 6, 2010 when the January 1, 2009 agreement was terminated by Alger in its then capacity as Receiver of PEC. Concurrent with the notice of termination, Alger demanded repayment of $73,150.00 from Ms. Ho Lem and 607385, citing the BIA and the Fraudulent Preferences Act , R.S.A. 2000, c.

F-24, and this is one of the payments which has resulted in these proceedings. [ 34 ] The demanded amount represented the “unearned” portion of Ms. Ho Lem’s retainer as at the date of termination. [ 35 ] Also on December 18, 2009, PEC paid $240,000.00 to Mr. McMullen, describing the payment as a “severance payment” pursuant to the provisions of an Employment Agreement between Mr. McMullen and PEC dated February 1, 2009. By notice to Mr. McMullen dated July 6, 2010, Alger (in its capacity as Receiver of PEC) demanded repayment of the $240,000.00 by Mr. McMullen to

PEC, citing the BIA and the Fraudulent Preferences Act . This is the other payment which resulted in these proceedings. [ 36 ] Because of its concerns over the trust funds held at Davis LLP, the Chief and Council brought an application returnable on December 21, 2009 for various relief under the Alberta Business Corporations Act , R.S.A. 2000., c. B-9 . On December 21, 2009, I appointed Alger & Associates Inc. to be the Interim Conservator of PEC. Proceedings involving PEC were stayed (and continued to be stayed), and PEC’s bank accounts were frozen at that time.

By then, it was known by the Chief and Counsel and by Alger (and the Court) that the funds had been transferred by Davis LLP to PEC, and that $390,000.00 of those funds had been paid out to Mr. McMullen and Ms. Ho Lem or 607385. [ 37 ] Following Alger’s report as Interim Conservator, Alger was appointed Receiver of PEC on May 20, 2010. On November 29, 2010, mainly driven by limitation periods for commencing proceedings relating to the payments made to Ms. Ho Lem and Mr.

McMullen in December, 2009, Alger & Associates Inc. was appointed as the trustee in bankruptcy of PEC. [ 38 ] This application was commenced by notice of application dated in February, 2011 and was initially heard on September 9, 2011. Because of time constraints, the application was adjourned to December 22, 2011 for completion of argument. I reserved decision. Position of Parties Alger & Associates Inc. [ 39 ] Alger argues that both Ms. Ho Lem and Mr.

McMullen, as directors, officers and senior employees of PEC, were not at arms length to PEC and that the appropriate time under the BIA for pursuing the fraudulent preferences claims against them is 12 months, relying on s. 95(1) (

b) of the BIA . That

section provides: 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 (

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. [ 40 ] With respect to the payment to Ms. Ho Lem, Alger argues that: 1. Ms.

Ho Lem, or 607385, were, on December 18, 2009, creditors of PEC by virtue of the Consulting Agreement dated January 1, 2009; 2. The payment to Ms. Ho Lem or 607385 of $150,000.00 on December 18, 2009 was made at a time when PEC was insolvent; 3. The payment to Ms. Ho Lem or 607385 was made within 12 months of the date of PEC’s bankruptcy; and 4. Alger acknowledges that Ms. Ho Lem or 607385 continued to provide services to PEC until July 8, 2010, such that only the unearned portion of the $150,000.00 “retainer” should be returned to PEC. [ 41 ] With respect to the payment to Mr. McMullen, Alger argues that:

1. Mr. McMullen was, on December 18, 2009, a creditor of PEC by virtue of the February 1, 2009 Employment Agreement and thetermination of Mr. McMullen’s employment on December 17, 2009; 2. The payment to Mr. McMullen on December 18, 2009 was made at a time when PEC was insolvent; and 3. The payment the Mr. McMullen was made within 12 months of the date of PEC’s bankruptcy. [42] Alger cites Re Viteway Natural Foods Ltd., 1986 CarswellBC 499 (S.C.), on the issues of insolvency and “accruing due”.

Asto the intent to prefer issue, it refers to Re Consolidated Seed Exports Ltd., 1986 CarswellBC 481 (S.C.), and Re Tremblay, 1980CarswellQue 59 (S.C.). Re Galaxy Sports, 2003 CarswellBC 734 (S.C.), is cited in relation to the issue of arm’s length. Tremblay alsocomments on arm’s length. Ms. Ho Lem [43] Ms. Ho Lem argues that she and 607385 were, on December 18, 2009, at arm’s length to PEC. As a result of being at arm’slength, s. 95(1)(

b) of the BIA has no application here. The appropriate statutory provision according to Ms. Ho Lem is s. 95(1)(a). Thatsection provides that “a transfer of property made, a provision of services made, a charge on property made, a payment made, anobligation 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 togiving that creditor a preference over another creditor is void as against — or, in Quebec, may not be set up against — the trustee if it ismade, incurred, taken or suffered, as the case may be, during the period beginning on the day that is three months before the date of theinitial bankruptcy event and ending on the date of the bankruptcy; and [44] In the brief filed on Ms.

Ho Lem’s behalf, she points out that despite the use of the term “arm’s length” in s. 95, the term is notdefined in the BIA. The BIA does have a definition of “related persons” in s. 4, and s. 4(4) states that “it is a question of fact whetherpersons not related to one another were at a particular time dealing with each other at arm’s length”. [45] S. 251 of the Income Tax Act provides that related persons are deemed to not deal with each other at arm’s length, and that itis a question of fact whether persons not related to each other dealt at arm’s length. [46] Ms.

Ho Lem cites Re Abou-Fached, 2002 BCSC 1022 , 2002 CarswellBC 1642 (S.C.) and Tremblay, Gingras,Robitaille, Marcoux Ltee. v. Beaudry, (1980), 36 C.B.R. (N.S.) 111 (Que. S.C.). [47] Ms. Ho Lem also refers to McLarty v. R., 2008 SCC 26, Zameck v. R., 2000 CarswellNat 3042 (T.C.C.), and Gestion YvanDrouin Inc. c. R., 2000 CarswellNat 3296 (T.C.C.). [48] She deposes that in late December, 2009, she was advised by Mr.

McMullen that the annual fee (retainer) under the January1, 2009 Consulting Agreement which was due to be paid on January 1, 2010, was going to be paid out early. [49] She notes that as at October 31, 2009, there was over $510,000.00 in PEC’s bank account, and even after the impugnedpayments on December 18, 2009, there remained over $300,000.00 in PEC’s account. [50] Ms. Ho Lem denies that either she or 607385 was a “creditor” within the meaning of s. 95 of the BIA, and refers to Jones &MacLean v. J.G. Touchie & Associates, (N.B.C.A.), St. Anne-Nackawic Pulp Company Ltd., 2005 NBCA 55

, [2005] N.B.J. No. 204 (N.B.C.A.), Appleby Estates Ltd., [1984] O.J. No. 3337 (Ont. C.A.) and Re Axelrod, (Ont. S.C.), because the payment to her was for future services, analogous to pre-payment of monthly rent. Before the hearingrecommenced in December, 2011, Ms. Ho Lem identified other authorities on this point: Re Wiebe, [1995] O.J. No. 436 (O.C.J. Gen.Div.), and Gardener v. Newton, [1916] M.J.

No. 41 (K.B.). [51] She further argues that there is no evidence before the court that the $150,000.00 annual retainer did not represent fair marketvalue for the services to be performed under the Consulting Agreement. Indeed, Ms. Ho Lem argues that Alger has essentially concededthat $150,000.00 does represent fair market value, as it is only seeking to recover the “unearned” or pro-rated portion of the whole fee.That argument relates, in my view, to a potential claim under s. 96 of the BIA which has never been advanced. It is not relevant here. [52] Ms.

Ho Lem argues that PEC was in any event not insolvent when the payment was made to her or 607385 on December 18,2009, adopting Mr. McMullen’s arguments in that regard. [53] Further, Ms. Ho Lem argues that even if she or 607385 were found to be a non-arm’s length creditor of PEC, the evidence onthis application rebuts the presumption that the intent of the payment to Ms. Ho Lem or 607385 was to prefer them over other creditors. [54] In that regard, she cites St. Anne-Nackawic Pulp Company Ltd., 2005 NBCA 55 , [2005] N.B.J.

No. 204 (N.B.C.A.)KC Thermoglass Ltd., (1979), (BC SC), 16 B.C.L.R. 33 (S.C.), Re Boutique Euphoria Inc, [2008] Q.J. No. 14591(S.C.), Re Blenkarn Planer Ltd., (1958), (BC SC), 37 C.B.R. 147 (B.C.S.C.), and Appleby Estates Ltd., [1984] O.J.No 3337 (Ont. C.A.). [55] Finally, Ms. Ho Lem argues that she is entitled to set off her claims against PEC under the provisions of s. 97(3) of the BIA.That

section provides: 97(3) The law of set-off or compensation applies to all claims made against the estate of the bankrupt and also to all actions instituted bythe trustee for the recovery of debts due to the bankrupt in the same manner and to the same extent as if the bankrupt were plaintiff ordefendant, as the case may be, except in so far as any claim for set-off or compensation is affected by the provisions of this Actrespecting frauds or fraudulent preferences. [56] Ms.

Ho Lem’s contractual claims are equal to or exceed the amount paid on December 18, 2009, because of the terminationof the Consulting Agreement by Alger in August, 2010. [57] In supplemental argument, Ms. Ho Lem argued that the Trustee cannot make a claim against her or 607385, as neither hasbeen recognized as a creditor of PEC, in either the initial Statement of Affairs filed by Alger in December 2010, or in the subsequent onefiled just before the hearing recommenced in December, 2011, citing Empire Meat Co. (Trustee of) v. Saskatoon (City), [1989] S.J. No.448 (Q.B.). Mr. McMullen [58] The thrust of Mr.

McMullen’s argument is that PEC was not insolvent on December 18, 2009. In argument on September 9,2011 and in supplemental submissions reviewed on December 22, 2011, Mr. McMullen put forward calculations demonstrating that PECwas not insolvent, and that any financial difficulties were caused by the beneficiary of the trust, the Nation as represented by Chief andCouncil. [59] Mr. McMullen describes these proceedings as part of a continuum of attacks on him by various Chiefs and Councils.

He citesthe numerous attempts to remove him as a director and officer of PIC, and considers himself to be a “whistle-blower” on the variousChiefs and Councils as they have attempted to improperly divert money from the Piikani Trust to purposes not contemplated by theSettlement Agreement and the Trust.

[ 60 ] His evidence, and the brief filed on his behalf, relates what he describes as his and Ms. Ho Lem’s attempts to carry out the purposes of the Trust and to insist upon the “proper allocation of, and accountability for funds”. [ 61 ] Mr. McMullen complains that Alger has paid “scant attention” to the information he provided to Alger setting out the “history of the wrongdoing and interference by Chief and Council, and others”. He alleges that these proceedings have not been brought for a proper purpose. [ 62 ] According to Mr.

McMullen, many of PEC’s financial difficulties are the result of the original undocumented or vaguely documented understanding that PEC’s start up costs would be paid from the ATCO hydro-electric project.

When the ATCO joint venture interest was transferred to POHLP, with PEC being General Partner having only 1% of the equity, instead of being held by PEC outright, PEC was left without the ability to recover its start up costs not just with respect to the ATCO joint venture but for the other energy projects being investigated by PEC, namely the wind farm (Weather Dancer) and the transmission line (AltaLink). [ 63 ] Mr. McMullen points to a PEC “Business Plan” dated April, 2005 as support for his assertion that PEC was to recover various start up costs totalling nearly $2,000,000.00.

Because funds were borrowed by the Nation and PIC from PEC, and both have failed to repay these funds, PEC has been put in a position where it cannot pay its debt obligations to PIC, and PIC cannot honour its obligations to the Trust. [ 64 ] Mr. McMullen argues that PEC is entitled to recover all of its operating expenses (whether related to its General Partner role in POHLP or to its other activities) from the gross revenues PEC receives as General Partner from the ATCO joint venture. [ 65 ] Mr.

McMullen also argues that if the true value of POHLP’s interest in the ATCO joint venture were recognized (based on the initial investment of $7.8 million and annual returns of at least $1 million) and if it were recognized as PEC’s investment, PEC would easily satisfy any balance sheet test for solvency. [ 66 ] Following the investigation of PIC, the Nation terminated PEC’s role as General Partner of POHLP and appointed Piikani Resource Development Ltd. (“PRDL”) in its place.

Thus, all revenues from the ATCO joint venture have been diverted from PEC leaving it in a position where it cannot make any of its loan payment obligations to PIC and it has no ongoing source of funds. [ 67 ] Mr. McMullen urges that PEC’s efforts be looked at on a more global basis; looking at its successes rather than the financial position it has been put in by the actions of the Chief and Council. Those successes include the investment in the ATCO joint venture which Mr.

McMullen values at some $13,000,000.00 - $18,000,000.00, and the successful negotiations with AltaLink which resulted in the payment of some $7,000,000.00 to the Nation. [ 68 ] Mr. McMullen is highly critical of counsel for the Nation and of Alger and states that “by these proceedings, the Court has been asked to participate in that pattern of unlawful behaviour (relating to the machinations by the Chief and Council to give them direct access to the assets created by PEC - the ATCO joint venture interest and the AltaLink funds). [ 69 ] In his brief, Mr.

McMullen spends over 70 paragraphs detailing his criticisms of Alger’s investigation and reporting to the Court, under a series of headings: Alger & Associates Disregards Mr. McMullen’s Attempts to Assist; Proceedings Brought for Improper Purposes; PEC’s Financial Position and its Relationship with POHLP not yet Clear; Underlying Assets Have Significant Value; Admissions (by Mr. Alger) of Information Mis-reported to the Court, or Not Reported; Steps Not Taken; Inappropriate Impression of Wrong-Doing by Mr. McMullen and Ms. Ho Lem; Mr.

McMullen’s Attempts at Fiscal Responsibility Not Reported to the Court; Incorrect Allegations of Fact in Mr. Alger’s Reports; CIBC Trust Finds Error in his (Alger’

s) Report; Mis-Reporting of PEC’s Financial Affairs; Statement of Affairs Sworn Incorrectly; Allegations of Champerty and Maintenance Has no Basis; and Changes to Financial Reporting. [ 70 ] In support of his position that PEC was not insolvent at any material time, Mr. McMullen argues that: 1. The ATCO investment is worth significantly more than the $7,800,000.00 invested to acquire it;

1. The ATCO investment is worth significantly more than the $7,800,000.00 invested to acquire it; 2. The $7.8 million for the ATCO investment was borrowed by PEC in its capacity as General Partner for POHLP and is not a debtof PEC’s; 3. PEC is entitled to be indemnified with respect to the POHLP loan obligation; 4. The Chief and Council were attempting to attach PEC’s funds before it could pay its obligations by bringing the application tofreeze funds in December, 2009 and by removing PEC as General Partner of POHLP in December, 2009; and 5.

Alger has taken no steps to recover the $1 million debt owed to PEC by the Nation. [71] Mr. McMullen also points to the loan restructuring agreements between PIC and PEC and between PIC and POHLP in June,2008, whereunder PIC agreed to defer payments otherwise owed to it by PEC and POHLP until December, 2011. [72] Mr. McMullen submits that the burden of proof is on the Trustee to prove that the debtor was insolvent at the time of theimpugned payment. Mr.

McMullen argues that as PEC was entitled to receive all of the POHLP revenues in its capacity as GeneralPartner, and as it was entitled to recover all of its expenses from that cash flow, there was no insolvency at the time the payment wasmade to him in December, 2009. [73] He cites Keith G. Collins Ltd. v. Canadian Imperial Bank of Commerce, 2011 MBCA 41, for the point that the Trustee mustdemonstrate insolvency. That is not controversial here. Alger acknowledges that it bears the onus of proving that PEC was insolvent atthe time of the payments.

The parties differ as to whether Alger has met the burden on it. [74] Mr. McMullen adopts Ms. Ho Lem’s position and arguments with respect to arm’s length, and states that he was at allmaterial times at arm’s length to PEC. He argues that he was never a shareholder and never had any beneficial interest in PIC or PEC.His Employment Agreement was “independently negotiated”. The termination provisions in the Employment Agreement wereappropriate. [75] Mr.

McMullen alleges that his employment was terminated in December, 2009, and the termination letter honoured theprovisions of his Employment Agreement with respect to his termination. He has signed a release in favour of PEC. [76] Ultimately, Mr. McMullen argues that these proceedings are an abuse of process, having regard to the fact that the Nation (asrepresented by the Chief and Council) is the only material creditor and debtor of PEC, and that the Nation essentially controls all aspectsof these proceedings.

He urges the Court to exercise an equitable jurisdiction to refuse the relief being sought, citing Moss (Re), (MB KB), [1999] M.J. No. 261 (Q.B.), and Carlson (Re), 2010 ABQB 701. PEC [77] PEC’s board of directors is independently represented in these proceedings. In a brief filed on the board’s behalf, the boardnotes that the order putting PEC into receivership on May 20, 2010 made no finding of insolvency.

It was a consent order, and neitherthat order nor the order of November 24, 2010 permitting Alger to assign PEC into bankruptcy made any conclusive finding that PECwas at any time insolvent. [78] PEC’s board argues that PEC was solvent at all material times, having regard to the Business Plan allowing it to recover itsstart up costs by having them “capitalized as deferred start-up costs and repaid from the operating cash flows generated from PEC’sprofits”, including the ATCO joint venture and the wind farm (Weather Dancer). [79] The Business Plan states: There will be extensive costs incurred by Piikani Energy before the second major phase of operations commence.

Legal documentationand consulting fees will be the largest expense. As noted below, the costs for start-up are estimated at $2,000,000 with a material

portion allocated to purchasing a 50% interest in the Net Cash Flow from Weather Dancer1. These costs will be capitalized as deferredstart-up costs and repaid from the operating cash flows generated from Piikani Energy’s profits. [80] The Board urges that a commercial efficacy approach be taken to PEC’s activities, and that Alger’s approach which denies theability to capitalize start up costs and recover them from cash flow should be rejected. Ultimately, the Board argues that PEC was neverinsolvent, or alternatively that Alger has not met the burden of proof on it that PEC was insolvent.

Alger Reply [81] Alger cites Re Valewood Products Ltd., 1975 CarswellOnt 174 (S.C.), in support of its argument that Ms. Ho Lem is obligedto repay PEC the unearned portion of the pre-payment of her services contract. Director of Employment Standards v. Eland DistributorsLtd., (B.C.S.C.), is cited as authority for the proposition that severance pay to a terminated employee is a claimprovable in bankruptcy.

Re Harvey, 2004 ABQB 733 (M.C.), and 677960 Alberta Ltd., 2009 ABQB 50, deal with claims provable inbankruptcy. [82] In Re Mearns, 2000 ABCA 189, the Court of Appeal considered a claim that funds held by the bankrupt’s lawyer as a retainerwere exempt from execution. [83] Re Norris, 1994 CarswellAlta 353 (Q.B.), deals with rebutting the statutory presumption under s. 95 of the BIA. There, AgriosJ. held that the creditor could rebut the presumption by showing that it was a diligent creditor, or that the payment to it was made in theordinary course of business.

Re 1167970 Ontario Inc., 2003 CarswellOnt 3820 (S.C.J.), contains similar statements on the “ordinarycourse of business” exception to the s. 95 presumption. [84] Deloitte & Touche Inc. v. White Veal Meat Packers Ltd., (MB KB), 2000 CarswellMan 72 (Q.B.), holdsthat it is up to the creditor to establish that the payment made to it was made with a purpose other than giving a preference to thatcreditor.

Re Ramsey, 2006 ABQB 337, is cited as additional authority for that proposition. [85] Alger raises Re HOJ National Leasing Corp., 2007 CarswellOnt 3146 (S.C.J.), in response to the allegations of wrongfulconduct or impropriety made by Mr. McMullen against Alger and Mr. Alger himself. In that case, solicitor and client costs were awardedagainst the complaining creditor. Re Party City Ltd., 2002 CarswellOnt 1116 (S.C.J.), also comments on unfounded allegations againstthe trustee. Relevant Agreements [86] Several agreements are relevant to this application.

The important provisions of each are recited below: Consulting Agreement with Ms. Ho Lem and 607385 2. Term 2.1 This Agreement shall be effective as and from the first day that Consultant agrees to the Term. 2.2 The term of this agreement shall be for a period of thirty-six (36) months commencing January 1, 2009 and continuing toDecember 31, 2011 inclusive. 2.3 The Consultant shall work at the Piikani Energy Corporation office located on the Piikani First Nation or where the Corporationhas its business Interests.

5. Remuneration 5.1 The Consultant will be paid for Services according to the following protocol: Base Annual Retainer of $150,000.00 payable on the first day of each year or as agreed to by the parties (plus GST if applicable) during the term of this Agreement.

Compensation may include and is not limited to bonuses, options, equity participation and commissions. 5.2 The Corporation agrees to permit reasonable degree of flexibility in work hours. 5.3 The Consultant will be entitled to take on other consultant work but will give priority to the corporation in completing the work assignments. 5.4 The Consultant agrees to work a minimum of 46 weeks annually, based on a 35 hour week, excluding statutory holidays. 5.5 The Consultant agrees to work additional weeks if necessary without additional remuneration to complete the work assignments. 7.

Termination In the event Consultant initiates the termination for any reason other than non-payment, Consultant will assist in the transition of her work to another Corporation representative(s). In the event the Consultant is terminated, the Consultant has the option of purchasing the tools and equipment at a cost of $1.00 and the Corporation will be required to pay the Consultant the minimum of the balance of the 36- month term or the annual (twelve months) base retainer whichever is greater in addition to expenses incurred. Employment Agreement with Mr.

McMullen 6.0 Termination of Employment 6.1 The Employer may terminate the Employee’s employment under this contract with 90 days notice only for cause. Upon termination of Employment for any reason the Employee shall be entitled to be paid a minimum of the balance of the contract or one years annual salary as defined in

Section 3.1, plus any and all costs associated to collect the funds.

For greater clarity this amount is a minimum of $216,000 plus costs. 6.2 If the Employee wishes to terminate his employment with the Employer, the Employee will provide the Employer with 30 days notice. 6.3 Should the Employee terminate his employment pursuant to his Agreement, the Employee agrees to be reasonably available as a consultant for a maximum period of two weeks for the purpose of maintaining any projects or developments created while employed by the Employer. 6.4 The time specified in the notice by either the Employee or the Employer may expire on any day of the month and upon the date of termination the Employer will forthwith pay to the Employee any outstanding portion of the wage, accrued vacation and banked time, if any, calculated to the date of termination, including the amounts described in

Section 6.1 above. Loan Restructuring Agreements between PIC and PEC and PIC and POHLP [ 87 ] The Loan Restructuring Agreement between PIC and PEC dated June 12, 2008 was signed by Mr. McMullen on behalf of PIC in his capacity as Managing Director and Chief Executive Officer. It was signed on behalf of PEC by Stan Knowlton in his capacity as a director of PEC. At the time, Mr. McMullen was also a director of PEC. [ 88 ] That Agreement acknowledged that PEC owed PIC $6,172,585.43. The Agreement was to restructure two existing loans from PIC to PEC and to capitalize outstanding interest owed by PEC on those loans.

The new consolidated loan required annual payments of $500,000.00 per annum, commencing December 15, 2011. The effect of the Agreement was to restructure the loans, and defer any payments to December 15, 2011. Security was granted by PEC in favour of PIC with respect to this new loan, including a promissory note and a general security agreement granted by PEC as General Partner of the POHLP. The security was assigned to CIBC Trust as

Trustee of the Piikani Trust. The Assignment Agreement was not executed by CIBC Trust. There is no evidence that CIBC Trust even knew of the loan restructuring agreement until these proceedings were commenced. [ 89 ] A further loan restructuring agreement was entered into dated June 13, 2008 between PIC and PEC in its capacity as General Partner of POHLP and on behalf of the Limited Partner, the Piikani Nation. It was signed by Mr. McMullen on behalf of PIC, and by Mr. Knowlton on behalf of PEC.

That Agreement reflected a total debt by PEC of $11,505,500.00 which represented a $1,450,000.00 loan by PIC to PEC on September 15, 2008 and the $7,800,000.00 loan advanced to fund the purchase of the interest in the ATCO joint venture, plus accrued interest to December 15, 2011.

The Agreement reflected that the original payment date on the $7,800,000.00 loan was August 31, 2008, and interest accrued to that date, together with interest to December 15, 2011, were capitalized. [ 90 ] The effect of this Agreement was to restructure the existing $7,800,000.00 loan so that no payments would be due on this new loan until December 15, 2011. [ 91 ] That new loan was also secured by a promissory note and general security agreement, and the security was assigned to CIBC Trust as Trustee of the Piikani Trust.

CIBC Trust did not sign the Assignment Agreement, and there is no evidence that CIBC Trust knew of the existence of it until these proceedings were commenced. [ 92 ] Originally, Piikani Trust loaned $7,800,000.00 to PIC so that PIC could loan the funds to PEC for the ATCO joint venture purchase. That loan, dated June 6, 2006, required accrued interest to be paid by PIC on August 31, 2007, with regular payments commencing on August 31, 2008. Mr. McMullen and Ms.

Ho Lem signed the loan agreement on behalf of PIC. [ 93 ] If these loan restructuring agreements are valid and enforceable, PEC would not have been in default of any obligations to PIC on these loans as at December, 2009. Piikani Oldman Hydro Limited Partnership Agreement [ 94 ] The Limited Partnership Agreement has three provisions that bear on the arguments here.

Firstly is the description of the business of the Limited Partnership in para. 2.4. 2.4 The business of the Partnership is to enter into the Joint Venture Agreement for the purpose of holding, as Nominee of the Piikani Nation, a 25% joint venture interest in the Old Man River Dam hydro-electric power plant project, and such other activities as the Partners unanimously agree to undertake, and it shall have the power to do any and every act and thing necessary, proper, convenient or incidental to the accomplishment of that purpose. [ 95 ] Secondly is the obligation to reimburse the General Partner for its reasonable expenses, contained in para. 8.6. 8.6 The General Partner shall be reimbursed by the Partnership for all reasonable out-of-pocket expenses incurred in carrying out its duties herein specified, including a reasonable per diem rate for accommodation, meals, travel and promotion, provided that such expenses are in accordance with the Budget for the applicable Fiscal Year. [ 96 ] And thirdly is the indemnity provision relied on by Mr.

McMullen, found in para. 9.5. 9.5 Subject to the provisions of

Section 9.1, the Partnership shall indemnify and hold harmless the General Partner from and against any and all losses (other than loss of profits), expenses, claims or liability incurred by it out of any claims based upon any acts performed or admitted to be performed by it in connection with the Business of Partnership, provided that it has acted honestly, in good faith and in a manner consistent with the best interests of the Partnership and such act or omission does not constitute fraud, bad faith, gross negligence or wilful misconduct by or breach of fiduciary duty of such Person or entity.

Analysis [97] At the beginning of this analysis, it should be made clear that the term “fraudulent preference” is in many cases an overly-strong term. A fraudulent preference is a reviewable transaction, not necessarily a dishonest one. The term gives a highly pejorative toneto claims against parties who have been involved in transactions that would have been of no legal consequence had the debtor not gonebankrupt three or twelve months later. It is a term that relates to the intention of the debtor in making the payment, not the creditor inreceiving it.

Some creditors receiving payments are unfairly tarnished by the term. [98] For Alger to succeed on this application, it must establish that Ms. Ho Lem (and thus 607385) and Mr. McMullen were not atarm’s length to PEC, as the application was commenced nearly twelve months after the impugned transactions. Secondly, Alger mustestablish that PEC was insolvent at the time the payments were made. Thirdly, Alger must establish that the payments made to Ms. HoLem or 607385 and Mr. McMullen were made to them in their capacity as creditors of PEC. If those elements are made out, the onus isthen on the creditors, Ms.

Ho Lem, 607385 and Mr. McMullen, to prove that the transactions fall within one of the exceptions tofraudulent preferences and to rebut the deeming provisions of s. 95 of the BIA. Arm’s Length [99] The first issue to be determined is whether or not Ms. Ho Lem and Mr. McMullen (or either of them) were at arm’s length toPEC. If either was at arm’s length, the impugned transaction fell outside the time scope for fraudulent preferences under s. 95(1)(

a) ofthe BIA (3 months from the date of bankruptcy) as opposed to the12 month period for non-arm’s length creditors in s. 95(1(b). [100] “Arm’s length” is not defined in the BIA, and in Tremblay, the Quebec Superior Court held that the courts have a widediscretion in determining who is or who is not at arm’s length to an insolvent person. The BIA states that the determination of arm’slength is a question of fact. [101] The time for determining the arm’s length issue is the time of the impugned payment. [102] Ms. Ho Lem relies on McLarty v. R., 2008 CarswellNat 1380 (S.C.C.), Zameck v. Canada, [2000] T.C.J.

No. 873. and GestionYvan Drouin Inc. c. Canada, [2000] T.C.J. 872. These are all income tax cases. [103] Ms. Ho Lem cites Re Abou-Fached, 2002 BCSC 1022 , 2002 CarswellBC 1642 (S.C.) which follows the test inTremblay, Gingras, Robitaille, Marcoux Ltee. v. Beaudry, (1980), 36 C.B.R. (N.S.) 111 (Que.

S.C.), as follows: “... a transaction at arm’s length could be considered to be a transaction between persons between whom there are no bonds ofdependence, control or influence, in the sense that neither of the two co-contracting parties has available any moral or psychologicalleverage sufficient to diminish or possibly influence the free decision-making of the other. Inversely, the transaction is not at arm’slength where one of the co-contracting parties is in a situation where he may exercise a control, influence or moral pressure on the freewill of the other.

Where one of the co-contracting parties is, by reason of his influence or superiority, in a position to pervert theordinary rule of supply and demand and force the other to transact for a consideration which is substantially different than adequate,normal or fair market value, the transaction is questions is not at arm’s length.” [104] The arm’s length issue in Abou-Fached was whether a particular creditor was entitled to vote on the proposal becausedissenting creditors argued that the creditor was not at arm’s length to the bankrupt.

In finding the creditor to be at arm’s length, Ross J.focussed on “bonds of dependence, control, influence or moral pressure between Mr. Abou-Fached and SRI such that the ordinary rulesof supply and demand are not operative.” (At para. 47. [105] Tremblay, Gingras was a fraudulent conveyance case. Moisan J. notes that the jurisprudence on arm’s length determinations in

the context of the BIA are “virtually non-existent”. He also notes that the court has a broad discretion in this area. (At page 12.) [106] “Control” is, according to Houlden, Morawetz and Sarra, The 2012 Annotated Bankruptcy and Insolvency Act, (Toronto:Carswell, 2011) at

Chapter B49, “de jure” control, or the right of the majority to order the affairs of the company. [107] Gingras, Robitaille, Marcoux holds that the court has a wide discretion to determine whether persons who are not related toeach other are dealing at arm’s length with respect to a particular transaction. [108] McLarty is an income tax case dealing with arm’s length issues. The Supreme Court confirmed at para. 43 the basic incometax consideration being that transactions should “reflect ordinary commercial dealing between parties acting in their separate interests”.

The argument in McLarty was that the vendor and the purchaser were not at arm’s length to each other because the vendor was alsoacting as the purchaser’s agent. The Supreme Court restored the trial judge’s decision on their finding that the purchaser had not left thedealings entirely to the vendor.

The Supreme Court applied IT-419R2. [109] As noted in McLarty at para 43: It has long been established that when parties are not dealing at arm’s length, there is no assurance that the transaction “will reflectordinary commercial dealing between parties acting in their separate interests”. [110] The general purpose is “to preclude artificial transactions from conferring tax benefits on one or more of the parties” (at para.43). [111] The Supreme Court of Canada referred to

Interpretation Bulletin IT-419R2, but noted that “each case will depend on its ownfacts” (at para. 62). It cites a number of criteria to consider. [112] The criteria cited are (at para. 62): ∙ was there a common mind which directs the bargaining for both parties to a transaction; ∙ were the parties to a transaction acting in concert without separate interests; and ∙ was there “de facto” control? [113] In Gestion Yvan Drouin, Archambault T.C.J. was dealing with an issue under s. 160 of the Income Tax Act, involving atransaction without consideration or without adequate consideration.

At paras. 73 and following, he reviewed the case law to 2000. Atpara. 83, he held: As for the merits of the issue, I do not believe that, in the absence of other special circumstances, the fact that a taxpayer was at once ashareholder, a director and an officer of a corporation necessarily means that there was a de facto non-arm's-length relationship betweenthe taxpayer and the corporation. This view seems to be shared by Judge Bowman in Del Grande v. R. (1992), (TCC),93 D.T.C. 133 (T.C.C.).

Judge Bowman found that a shareholder, director and officer of a corporation holding 25% of the commonshares of that corporation with an option to purchase shares entitling him to increase his interest to 50% was not de facto dealing otherthan at arm's length immediately after the option was granted. This is how Judge Bowman describes the situation, finding that there wasan arm's length relationship (at page 141): ...I would have no hesitation in holding that the appellant, immediately after January 4, 1982, was at arm's length with Rust Check andLear. He held only 25% of the shares. He was one of four directors.

While he was a trusted, respected and influential member of theboard, I cannot find on the facts that he controlled these corporations or exercised so great a degree of influence that it could be said hewas not at arm's length with the corporations.A number of cases were cited in connection with the arm's length issue, including Peter

Cundill & Associates Limited v. The Queen, (FCA), 91 D.T.C. 5543, and Beaumont v. The Queen, 86 D.T.C. 6264,where the leading cases were reviewed. Ultimately the question resolves itself into one of fact, whether the relationship between Mr.

DelGrande and the two corporations was such that it could be said that he was the directing mind of the corporations or whether he and theMcCleery family acted so closely in concert that he exercised a degree of control over the corporations vastly disproportionate to hisminority position so as to be able to induce the corporations to confer benefits upon him that they would not otherwise have done. Theevidence falls far short of establishing such a relationship. Mr.

McCleery appeared to me to be a strong minded man who, while herespected the appellant, was very much in charge of the business and was not likely to be influenced by the appellant if he did not chooseto be. [114] In Zamek v. R., Archambault T.C.J. considered whether two shareholders, employees and directors of a corporation were atarm’s length to each other for the purposes of declaring dividends. Archambault T.C.J. applied his decision in Gestion Yvan Drouin, anddistinguished two cases, Gosselin v. R., (TCC), [1997] 2 C.T.C. 2830 (T.C.C.), and Fournier v.

Minister ofNational Revenue, (1991), 91 D.T.C. 746 (T.C.C.). Those cases held that the two principal shareholders (who were also directors) werenot at arm’s length when they jointly acted to declare dividends. Gosselin involved two shareholders with 50% of the shares each.Archambault T.C.J. rejected these decisions, preferring his reasoning to that of his colleagues. [115] S. 251 (1) of the Income Tax Act (“ITA”)provides: 251.

(1) For the purposes of this Act, (

a) related persons shall be deemed not to deal with each other at arm’s length; (

b) a taxpayer and a personal trust (other than a trust described in any of paragraphs (

a) to (e.1) of the definition “trust” in subsection108(1)) are deemed not to deal with each other at arm’s length if the taxpayer, or any person not dealing at arm’s length with thetaxpayer, would be beneficially interested in the trust if subsection 248(25) were read without reference to subclauses 248(25)(b)(iii)(A)(II) to (IV); and (

c) where paragraph (

b) does not apply, it is a question of fact whether persons not related to each other are at a particular timedealing with each other at arm’s length. [116] While not binding on the courts, it is instructive to review information bulletins issued by the Canada Revenue Agency withrespect to tax provisions. IT-419R2 dated June 8, 2004, deals with the “Meaning of Arm’s Length” as follows: 24.

The courts have held that when one person (or a group of persons) is, in fact, the bargaining agent, or the mind by which thebargaining is directed, on behalf of both (or all) parties to a transaction, then the parties cannot be dealing at arm’s length. The courtshave expanded this principle to include the concept of “acting in concert” with respect to an element of common interest.

Therefore, evenwhen there are two distinct parties (or minds) to a transaction, but these parties act in a highly interdependent manner (in respect of atransaction of mutual interest), then it can be assumed that the parties are acting in concert and therefore are not dealing with each otherat arm’s length. When a common purpose exists, a transaction is not necessarily a non-arm’s-length one when different interests (orindependent parties) are also present.

In this context, different interests are considered to exist when each party has an independentinterest from the other parties to a transaction, notwithstanding the fact that each party may have the same purpose, such as economicgain. [117] Having regard to the nature of the ITA’s interest in arm’s length transactions - to prevent artificial or somewhat sweethearttransactions from giving the participants a tax advantage - I am doubtful that the ITA provisions on arm’s length and the cases under theITA have much application to “arm’s length” in the context of fraudulent preferences. [118] The aim of s. 95 of the BIA is to prevent one creditor or group of creditors from getting an unfair advantage over other creditorswhen a debtor is insolvent.

The remedy is not to “punish” the benefiting creditor, but rather to require it to repay the monies received sothat payments out of the debtor’s estate can be made respecting priorities and shared properly amongst all creditors. [119] The purpose of differentiating between arm’s length creditors and non-arm’s length creditors by permitting transactions withnon-arm’s length creditors to be scrutinized as far back as a year from the date of bankruptcy as opposed to three months for arm’s length

creditors is undoubtedly related to the relationships the non-arm’s length creditors have with the debtor and the inclination of some debtors to try and see their family, friends and associates paid in preference to strangers. [ 120 ] In my view, there is a much closer connection between arm’s length for the purpose of the BIA and the concept of “insiders” under the Securities Act , R.S.A. 2000, C. S-4, than there is between the BIA and the ITA .

With respect to arm’s length for the purposes of the BIA , I see little relevance to that term as it pertains to an insolvent person’s creditors and arm’s length for the purpose of independence of transactions under the ITA . I do not find the cases considering arm’s length issues in an income tax context helpful to the determination here under s. 95 of the BIA .

The relationships are being considered for different purposes. [ 121 ] As a result, I do not need to choose between the decisions of Archambault T.C.J. and those of his colleagues in the Tax Court. [ 122 ] The Securities Act differentiates between trades by strangers to the corporation and by persons with a close relationship to the corporation: those with “inside” knowledge. “Insiders” are defined in s. 1(aa) as follows: (aa) “insider” means (

I) a director or officer of an issuer, (ii) a director or officer of a person or company that is itself an insider or subsidiary of an issuer, (iii) a person or company that has (

A) beneficial ownership of, or control or direction over, directly or indirectly, or (

B) a combination of beneficial ownership of and control or direction over, directly or indirectly, securities of an issuer carrying more than 10% of the voting rights attached to all the issuer’s outstanding voting securities, excluding, for the purpose of the calculation of the percentage held, any securities held by the person or company as underwriter in the course of a distribution, (iv) an issuer that has purchased, redeemed or otherwise acquired a security of its own issue, for so long as it continues to hold that security, (

v) a person designated as an insider in an order made under

section 10, or (vi) a person that is in a prescribed class of persons; [ 123 ] I can understand how a shareholder with 50% of the voting shares (and no casting vote) may be at arm’s length to the other 50% shareholder, so long as they are not otherwise “related” as that term is defined in the ITA . They may well negotiate with each other, each acting in his or her own best interests, and owing no duty to the other shareholder. They may also be directors of the corporation.

But as directors, they are fiduciaries to the corporation and owe duties of loyalty and good faith to the corporation, and must put their private interests behind the interests of the corporation. I have difficulty with the idea that directors, who owe duties of loyalty and good faith to the corporation, can be at arm’s length to the corporation.

But that is in their capacity as directors. [ 124 ] They may well be at arm’s length to the corporation in their capacity as shareholders, and the law recognizes, in some circumstances, the somewhat artificial concept of wearing different hats. [ 125 ] Under the BIA , it seems to me that the concept of arm’s length goes beyond relatives and control. Knowledge is an important component of fraudulent preferences in that s. 95 deems what is very difficult to prove: an intent to prefer.

It is extremely challenging to get into the minds of the decision-makers, especially three or twelve months after a particular transaction, to analyse the purposes and motives behind the transaction.

[ 126 ] It makes sense to differentiate between strangers to the debtor and the debtor’s friends and associates. At the end of the day, both groups have the opportunity to prove, on a balance of probabilities, that there was in fact no intent to prefer and that the transactions were regular and in the ordinary course of business, or otherwise an exception to being treated as a fraudulent preference. [ 127 ] There are undoubtedly people or classes of people who are automatically not at arm’s length to a debtor, such as controlling shareholders and other related parties. [ 128 ] It is clear that neither Ms.

Ho Lem nor Mr. McMullen are “related” to PEC as that term is defined in the BIA . Neither of them is a shareholder. [ 129 ] But that does not end the inquiry. For the purposes of the BIA and in particular for the purposes of s. 95 , it only makes sense that there are persons or classes other than related entities who are not at arm’s length. Those would logically include some decision makers. S. 95 talks about an intent to prefer. For there to be a payment, there has to have been a decision to make that payment.

Where the debtor is a corporation, the decisions must be made by people, acting for or on behalf of the corporation either as directors or employees. These decisions include who to pay, when to pay them, how much to pay them, and who not to pay, or to defer payment to.

I t is hard to think that such decision-makers could be at arm’s length to the corporation when they make payment decisions, especially to themselves. [ 130 ] The types of decision-makers contemplated in s. 95 would, in my view, generally include the directors of the corporation, senior officers of the corporation and senior employees of the corporation.

I cannot think that a director, officer, or senior employee who has authority to make payments (where that employee does not have “control” of the corporation, and is not related to the corporation) can make payments on behalf of the corporation to himself or his company or his spouse’s company (for example) and have those payments treated the same as payments made to total strangers to the corporation. [ 131 ] In any event, the analysis is an individual analysis in each case. As frequently noted in this area, each case turns on its own facts.

There may be directors who are at arm’s length to the corporation for the purpose of s. 95 of the BIA . I cannot think of a situation where that might be the case, and that is in my view not the case here. PEC had, so far as the evidence before me shows, four directors at the relevant time. Mr. McMullen and Ms. Ho Lem were two of the four. Mr. McMullen was also PEC’s chief executive officer and its senior employee. Ms. Ho Lem was the second in command, acting as its secretary.

Both appear to have been well compensated, especially by reason of the fact that neither was required to devote his or her full time efforts to the business of PEC. [ 132 ] There is no evidence of board meetings, resolutions or corporate actions in the making of the payments to Mr. McMullen and Ms. Ho Lem. Mr. McMullen resigned or was terminated as chief executive officer of PEC, triggering PEC’s obligation to pay him severance in accordance with his Employment Agreement. The offer from PEC to Mr.

McMullen on December 17, 2009 signed by director Kerry Scott containing notice of his termination explains his termination as CEO being necessitated because “PEC is unable to operate on a normal business basis as a result of the illegitimate, reckless and negligent conduct of a key shareholder, Piikani Investment Corporation (“PIC”) and its ultimate shareholder, the Piikani Nation Chief and Council”. [ 133 ] There is no evidence that Ms.

Ho Lem played a role in the decision to pre-pay the retainer under her Consulting Agreement. 607385 was entitled to be paid the retainer on January 1, 2010. 607385 was paid no more than it was entitled to be paid at that time, but it was paid some two weeks early. The monies paid to it were not yet due and owing, but would certainly become due and owing within a short time after the payment was actually made. [ 134 ] Mr. McMullen deposes that the early payment was made to Ms. Ho Lem’s company because Christmas was coming and it was a convenient time to make the payment.

It would appear that he made the decision to pay Ms. Ho Lem or 607385 early. If it is his state of mind that it relevant to the issue of the intent to prefer, the payment to 607385 must be viewed in the context of a CEO in the process of being terminated and being paid $240,000.00 because PEC was unable to continue to operate on a normal business basis. [ 135 ] It appears that there were already sufficient funds in PEC’s bank account to make payments of the magnitude of the total amounts actually paid to Mr. McMullen and Ms. Ho Lem’s company, without reference to the escrow funds recovered from Davis LLP.

Of course Ms. Ho Lem’s intentions as recipient are not particularly relevant to the analysis. [ 136 ] There is no evidence that she was involved as a decision-maker relating to the payments made to Mr. McMullen or to 607385,

although it is hard to see how decisions on the payments were made without Ms. Ho Lem being involved, as she was on PEC’s board and was one of two senior employees. Mr. McMullen had resigned or been terminated as an employee and was no longer chief executive officer but that was simultaneous to the payments. Ms. Ho Lem remained secretary, and in Mr. McMullen’s absence, appears to have been the senior employee. [ 137 ] In the absence of evidence of a directors’ meeting, it is difficult to piece together how the decisions to pay Mr. McMullen and pre-pay Ms.

Ho Lem’s company were made and it is inconceivable that Mr. McMullen was not directly and intimately involved in all aspects of the decisions as they related to himself, Ms. Ho Lem and 607385. It is difficult to see how Ms. Ho Lem could not have been directly involved in all aspects of the decisions as they related to Mr. McMullen in such a corporation with few employees and few directors.. There is no evidence before me from any other directors, officers or employees of PEC to shed light on the process. [ 138 ] Significant decisions could have been made only by the board of directors (of which Mr.

McMullen and Ms. Ho Lem comprised 50%) or by senior officers or employees (which Ms. Ho Lem was and Mr. McMullen was at least to the point on December 17 when his employment was terminated). [ 139 ] PEC was managed by a small group, of which Mr. McMullen and Ms. Ho Lem were key. I cannot conceive that they were at arm’s length to PEC in the context of making payment decisions affecting themselves, or either of them, or in receiving payments from PEC. [ 140 ] If I were to accept Ms. Ho Lem’s and Mr.

McMullen’s arguments, I would have to find everyone at arm’s length to PEC other than PIC (its shareholder) and possibly the Piikani Nation. That simply cannot be the case in the context of s. 95 . Key decision makers, especially those charged with making payment decisions, must surely be within the ambit of s. 95 . In many cases, those decision makers will be the directors, although there are undoubtedly circumstances where the directors may have delegated such authority to others, or have no such authority under the provisions of a unanimous shareholders agreement.

But those exceptions do not exist here. [ 141 ] Mr. McMullen and Ms. Ho Lem were key employees. They were directors. They could not be easily removed from their positions as directors. They had favourable termination provisions in their contractual relationships with PEC. Mr. McMullen participated in the payment decisions. Ms. Ho Lem may not have participated in the payment decision to pre-pay her contract, but that is immaterial. Regardless of the extent of participation, both (and by extension 607385) were the beneficiaries of the payments. [ 142 ] I find that for the purposes of s. 95 of the BIA , Mr.

McMullen and Ms. Ho Lem were not at arm’s length to PEC with respect to the impugned transactions. Accordingly, I find that the application with respect to the payments to them on December 18, 2009 was brought within the appropriate time period under s. 95(1) (

b) of the BIA . Solvency of PEC [ 143 ] Alger refers to Re Consolidated Seed Exports Ltd. , 1986 CarswellBC 481 (S.C.) , for the basic principle that “solvency is judged on a day to day basis and market prices from day to day establish a fair valuation. If all the bankrupt’s assets had been sold at a fair value on the day that the first of the impugned payments was made, the proceeds would not have covered its obligations due and accruing due.” (Headnote) [ 144 ] After Alger was appointed Conservator of PEC on December 21, 2009, it filed its first report on January 7, 2010.

That report concluded that PEC was insolvent at the time the payments to Mr. McMullen and 607385 were made. In coming to that conclusion, Alger had the benefit of its knowledge as Investigator of PIC. In that capacity, Alger had filed its first report as Investigator on November 30, 2009. [ 145 ] The financial affairs of PIC and PEC are significantly intertwined. Both are creditors and debtors of the other. PIC is PEC’s parent company. Both are beneficially owned by the same party: the Piikani Nation.

[ 146 ] One of Alger’s tasks as Investigator of PIC was to attempt to unravel the financial affairs of PIC and its related entities, including PEC, Piikani Land Corporation, Piikani Wind Farms and POHLP and attempt to understand PIC and PEC’s involvement in a myriad of lawsuits. Some of the lawsuits involved parties other than PIC and PEC, but were being funded by PIC or PEC. Whether any of these lawsuits was of any benefit to PIC or PEC is questionable, and is contested.

That concern need not be determined in these proceedings. [ 147 ] It is, in my view, an understatement to describe PIC’s and PEC’s affairs as a mess. Alger’s fourth report into PIC attempts to follow the flow of funds from the Piikani Trust into PIC, PEC and other Piikani related entities. Of over $14,000,000 paid out of the Trust, $7,800,000 is accounted for in the form of the investment in POHLP. The ATCO joint venture, in which POHLP participates, appears to be an excellent investment, and has already returned some millions of dollars to POHLP.

However, these revenues have not been used to repay the debt to the Piikani Trust, and PEC disputes that any portion of those revenues have been paid to the Nation as a return on the investment. Rather, PEC describes the payment to the Nation as a loan, repayable to PEC. Indeed, PEC had sued the Nation for the return of the monies before these events. [ 148 ] Alger has traced the remaining funds - more than $6,000,000.00 - to administrative expenses incurred by PIC, PEC, Piikani Land, directors’ fees, salaries, consulting costs, legal fees and inter-party loans. [ 149 ] Mr.

McMullen criticizes Alger for not paying more attention to what Mr. McMullen has told him about PIC and PEC and their rocky relationship with the Piikani Nation as represented by various Chiefs and Councils. He is also critical of Alger for mis-stating or not fully understanding PIC’s and PEC’s financial affairs. He is especially critical that Alger has not taken into account PEC’s interest in POHLP, its entitlement to be reimbursed all of its operating expenses from POHLP regardless of whether the expenses relate to POHLP and the ATCO joint venture or not.

He is also critical that Alger has not taken into account the $7,000,000.00 apparently paid to the Nation for the AltaLink arrangement, although it is not clear how either PIC or PEC had any interest in or entitlement to any portion of those funds as their role was apparently as negotiator for the Piikani Nation. The underlying asset being leased out was Piikani Nation lands, not any property of either PIC or PEC.

Absence of financial statements for PIC and PEC [ 150 ] One of the difficulties faced by Alger in its role as Investigator of PIC and later as Conservator of PEC is that at the time of its appointment (late 2009), neither PIC nor PEC had prepared financial statements for 2007 or 2008. Indeed, no financial statements had ever been prepared for PEC. [ 151 ] Draft financial statements were commissioned for PIC and PEC by the PEC board in mid-December, 2009. A new accounting firm had been hired by the PEC board.

The evidence on this application was that by the spring of 2010, the financial statements being worked on by the new accounting firm were about half complete. Having regard to the need for Alger to recreate PIC’s and PEC’s financial position in its capacity as Investigator and Conservator respectively, Alger’s decision not to pay the new accountants a further $28,000 to complete the financial statements in mid-2010 was in my view sound.

Continuation by the other firm would have been an unnecessary duplication of effort. [ 152 ] It is well documented in Alger’s reports involving PIC and PEC that the financial records of both corporations were sorely lacking. That may not be completely surprising having regard to the disputes that had gone on between PIC (and Mr. McMullen) and the Nation and the myriad of lawsuits involving PIC and PEC and others. Nevertheless, PIC had received over $14,000,000.00 from the Trust.

PEC began receiving funds from the Trust via PIC in 2005, and had received $7,800,000.00 from the Trust via PIC in 2007 to fund the purchase of the interest in the ATCO joint venture. By late 2009 PEC had received more than $2,000,000.00 from the ATCO joint venture as General Partner of POHLP. PIC and PEC each paid out millions of dollars in salaries, expenses, director’s fees, consulting fees and legal fees. It is not as if PIC and PEC had no financial transactions of any significance to keep track of, or report on. [ 153 ] Ms.

Ho Lem attempted to justify the failure of PIC and PEC to prepare financial statements in accordance with its obligations under corporate law on the notion that the Piikani Nation has an “oral tradition” and the directors and officers of PIC and PEC were discouraged from giving written reports to the Chief and Council. [ 154 ] With respect, such purported justification is nonsense. PIC and PEC were not small mom and pop corporations, or incorporated sole proprietorships. They were emanations of the Piikani Nation entrusted with management of millions of dollars of Piikani Nation

funds. PIC and PEC were run with boards of directors who owed fiduciary duties to these corporations. Ms. Ho Lem and Mr. McMullen were appointed to the boards of PIC and PEC because they were either experienced business people, or professionals, or both. Mr. McMullen was CEO of both corporations at relevant times. He is a chartered accountant and is well familiar with the requirements for corporations to prepare timely and proper financial statements. [ 155 ] Proper management of any corporation by its board of directors requires that there be proper financial accounting.

The CBCA and ABCA both require that corporations prepare financial statements annually and present them for approval by the shareholders at the annual general meeting. There is no exception created for corporations owned or controlled by Indian Boards. The fact that the ultimate shareholder or beneficial owner of shares is the Piikani Nation, an Indian Band under the Indian Act , is of no consequence and is irrelevant to a corporation’s obligations to comply with corporate law requirements. [ 156 ] I recognize that many corporations do not follow the practice of preparing financial statements in a timely way.

But the directors who run such corporations in such fashion do so at their peril. There is no reconciliation between corporate law requirements and sound financial management practices, and a so-called “oral tradition”. If the shareholders or beneficiaries do not want to look at written reports, and want any reporting to be done to them in an oral fashion, that is fine.

But that does not excuse the directors and management of the corporation from failing to prepare and file proper financial reports in accordance with corporate law requirements, income tax requirements and duties owed to third parties such as creditors. [ 157 ] I reject completely any suggestion that proper financial records and reports were not necessary, or that there is any valid explanation for the directors and senior management of PIC and PEC to have neglected to prepare proper financial statements in a timely way.

These were entities controlling millions of dollars of the Nation’s money - none of it their own. Alger’s work, and the cost of its investigations, were made more difficult and more expensive by the failure of PIC and PEC and their boards of directors and senior management to prepare proper financial records. Alger is hardly to blame for the difficulty it experienced, and continues to experience, in reconciling the books of these entities. Criticisms of Alger [ 158 ] I say this by way of background to many of Mr. McMullen’s complaints about Alger’s work and its reporting.

There is no question that Alger has changed its position with respect to some transactions, and has changed its analysis in some respects over the course of its reportings to the Court. Mr. McMullen has been able to point out some inaccuracies, inconsistencies, and errors. Ms. Ho Lem points out that Alger’s initial Statement of Affairs for PEC file shortly after PEC’s bankruptcy does not show Ms. Ho Lem or 607385 as creditors. The Statement of Affairs describes PEC’s shortfall between assets and liabilities as $8,961,753.10.

Alger’s updated Statement of Affairs filed when this application resumed in December 2011 still does not show Ms. Ho Lem or 607385 as creditors, despite these proceedings having been brought against them. [ 159 ] PEC’s financial position has changed between the two Statements such that the shortfall is now “only” $7,354,962.10. The more recent Statement of Affairs has also recharacterized some aspects of the POHLP investment from the earlier Statement, as well as from some of Alger’s reports as Interim Conservator and then Receiver of PEC. [ 160 ] Mr.

McMullen is critical of the way Alger has characterized the $7.8 million debt owed by PEC to PIC with respect to the acquisition of POHLP’s interest in the ATCO joint venture. Alger shows that as being the debt of PEC, even though PEC is only the General Partner of POHLP and has only a 1% interest as a Limited Partner in POHLP. Further, PEC is entitled to be indemnified by POHLP with respect to the debt owed to PIC. Now that PEC has been replaced as General Partner,

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