Stone Mountain Resources Holdings Ltd. v. Stone Mountain Resources Ltd., 2012 ABQB 534

Court of Queen ’ s Bench of Alberta Citation: Stone Mountain Resources Holdings Ltd. v. Stone Mountain Resources Ltd., 2012 ABQB 534 Date: 20120827 Docket: 1201 04796; BK01 094296 Registry: Calgary

Docket: 1201 04796 Between: Stone Mountain Resources Holdings Ltd. Plaintiff - and - Stone Mountain Resources Ltd. Defendant Docket: BK01 094296 And In the Matter of The Bankruptcy and Insolvency of Stone Mountain Resources Between: NOVA Gas Applicant - and - Stone Mountain Resources Holdings Ltd. and Stone Mountain Resources Ltd. Respondent _______________________________________________________ Reasons for Judgment of the Honourable Madam Justice C. A. Kent

_______________________________________________________ [ 1 ] This application originally came before me on the commercial list in early July. Part of the application was to petition the Respondent, Stone Mountain Resources Ltd. into bankruptcy and the other part was to have the transaction dealt with below declared void. The date of the transaction was July 29, 2011 so that the application for bankruptcy needed to be made on or before July 29, 2012.

Because counsel were not ready to argue the issue in early July and to fit this into the commercial calendar, I directed that the application heard on August 17, 2012 was to be treated as if it was heard before July 29, 2012. As well, because there had been no bankruptcy order, the application under s. 95 was brought by NOVA, a creditor, not a trustee in bankruptcy. [ 2 ] The application is, for the most part, made pursuant to s. 95 of The Bankruptcy and Insolvency Act ( Act ), RSC, 1985, c. B-3 as amended. While it will be necessary to examine the components of the

section to determine whether or not the transaction is void, as with all cases, the facts govern the application of the legislation. Before reviewing those facts in detail, however, it is helpful to describe the narrative that each side offered in support of its position. That narrative along with each side’s description of the facts informs their

interpretation of s. 95. Some basic facts help understand those narratives. NOVA had a gas transmission services agreement with Stone Mountain Resources Ltd. (Resources). Resources is an oil and gas exploration company dealing primarily in gas. It was put into receivership on April 23, 2012 on application of Stone Mountain Resources Holdings Ltd. (Holdings). Holdings was incorporated on June 29, 2012 as part of a complex transaction which gave Holdings security over the assets of Resources. Holdings is the parent of Resources. [ 3 ] NOVA applies to set aside the transaction between Resources and Holdings.

The amendment to s.95 which distinguishes between arm’s length and non-arm’s length transactions was remedial legislation which should be given a broad, purposive

interpretation. NOVA says that the reason for the amendment to s. 95 was to prevent related entities, whether they be related corporations, husbands and wives, parents and children, from essentially taking assets away from the pool of assets available to the creditors at large. The rationale for this rule is that related entities will have insider knowledge about the prospects for the debtor in terms of the debtor’s continued viability. In this case, the insider was the parent company, Holdings. When it took security from Resources, it did so with the knowledge that Resources was in a precarious state.

Resources was gambling on gas prices and it lost that gamble. Holdings knew that Resources could lose so it set up a transaction which preferred Holdings over other creditors. If the transaction is permitted, it essentially allows Holdings to acquire the assets of Resources through a stalking horse credit bid for the assets of Resources. NOVA says that is precisely what s. 95 is intended to prohibit. NOVA says that Holdings and Resources could have structured the transaction so that it did not fall within s. 95 .

It could have borrowed from an arm’s length entity or it could have injected sufficient funds to keep the company in operation. [ 4 ] Holdings says that when the facts are examined carefully, the transaction does not fall within s. 95 . Fundamental to the transaction was the injection of new money by an arm’s length company. The fact that Holdings was created to be the vehicle to get that money to Resources should not be the end of the story.

The evidence shows that an arm’s length private investment company, MatlinPatterson (MP) was willing to invest at a time when it appeared that gas prices would result in Resources breaking even in the short term and eventually making a profit. MP was not going to invest without being provided security. The deal was structured as set out below. There was nothing nefarious about the transaction. The investment was made by applying reasonable business judgment which did not anticipate the drastic fall in gas prices which began almost immediately after the transaction was completed.

That was the commercial reality of the transaction. S. 95 should be interpreted in a common sense manner, recognizing the commercial reality of investing in the risky gas business. The Facts [ 5 ] In considering the facts, it is helpful to identify what facts the parties consider relevant. As with the narrative, the characterization of the facts informs each side’s analysis of the law. NOVA starts on July 29, 2011, the day that Holdings was incorporated and took the security at issue. Holdings was the parent company to Resources.

On July 29, 2011 Holdings loaned $75,588,891.93 to Resources pursuant to a promissory note. As security, Resources granted a security interest on all its present and future personal property and mortgaged and charged that property. The two agreements which granted that security were a General Security Agreement (GSA) and a Demand Debenture. The steps which were involved in the July 29, 2011 transaction are relevant to NOVA’s argument. Some particulars of those steps are highlighted below.

NOVA says that those are the relevant facts, and given that Resources was insolvent on July 29, 2011, the transaction fits squarely with s. 95 . [ 6 ] Holdings says that those are not the only facts. The evidence consisted of two affidavits of Michael Watzky and questioning on those affidavits. Mr. Watzky is a partner in MP. Mr. Watzky specializes in investments in oil and gas. Prior to the transaction at issue here, Mr. Watzky had not been involved in any investments in Western Canada. As part of this transaction, Mr. Watzky became a director in both Resources and Holdings.

[ 7 ] The facts that Holdings say are relevant go back to 2007. The shareholders of Resources were FR Luxco, Q Luxco and a group of minority investors. Resources entered into a partnership with Ramshorn Canada Investments Ltd. to explore for gas in Western Canada. Quintana, an affiliate of Q Luxco and a limited partnership established by the minority investors of Resources was granted a small investment in the Resources/Ramshorn partnership. From 2007-2011, the partnership carried on exploration activities. During that period, the partnership had a $15 million demand operating facility with the Bank of Montreal.

As security the partnership granted a $100 million fixed and floating charge debenture and a pledge covering all of its assets. In December 2009, Resources and Ramshorn began discussions to sell the partnerships assets because Ramshorn would not approve the 2010 budget. The 2010 drilling program was cancelled. The assets of the partnership were marketed. In Fall 2010, the partnership entered into a $30 million credit facility with the Royal Bank of Canada and retired the Bank of Montreal security. The partnership granted the Royal Bank security over all of its assets.

FR X Offshore L.P. (an affiliate of FR X Luxco) guaranteed the partnership’s obligation to the Royal Bank. [ 8 ] In January, 2011, Resources and Ramshorn began discussions to dissolve the partnership and they agreed on a tentative split of partnership assets. Quintana Energy Partners (QEP), an investment partnership which owned a portion of Q Luxco and FR X Canada, an affiliate of FR Luxco, loaned $13, 288,109.90 to Resources. That money and money from Ramshorn was used to retire the Royal Bank facility. The QEP/FRX money was secured by demand debentures and secured promissory notes.

The QEP demand debenture was for $100 million, had no maturity date, granted security over all of the assets and was interest free until default. Between April 25 and July 13, 2011, QEP loaned an additional $8,600,000, and between July 15, 2011 and July 29, 2011 it added an additional $807,138. As a result, the total amount of secured shareholders loans as of July 29, 2011 was $22,695,247.90. In April, 2011, FR X paid out an unsecured debt owed to Ramshorn by Resources in the amount of $9.2 million [ 9 ] Resources continued to market the assets that it would retain after splitting the partnership assets.

In April, 2011, it made a presentation to MP. Resources was looking for an investment in the range of $100 million. MP decided to invest approximately $100 million into Resources. Mr. Watzky says that that amount was required to fund a drilling program in areas worked by Resources. MP had concluded that Resources would break even if gas prices remained above $3.50/mcf. The projection for gas prices at that time was for gas prices to rise above $4.00/mcf after 2011. The structure which was chosen to fund the investment was to incorporate Holdings as the 100% shareholder and secured lender of Resources.

MP paid approximately $102 million in cash to Holdings. That replaced the QEP demand debenture. MP paid QEP $807,138 in return for an assignment of the loan which MP then transferred to Holdings. MP became a 78% shareholder in Holdings. QEP transferred its share of the secured shareholders loans and the $9.2 million Ramshorn unsecured debt to Holdings in exchange for 19% of the Holdings shares.

Other investors obtained a total of 1.4% of the Holdings shares. [ 10 ] In the result, as of July 29,2011, the debts which Resources owed to Holdings were: - the QEP debt of $11,257,621.98 - the $807,138.10 QEP debt - the $9.2 million Ramshorn debt. - a demand debenture in favour of Holdings for $102 million on terms similar to the QEP debenture. The FR X debt of $10,630,487.92 remained. [ 11 ] From July 29, 2011 until April 9, 2012, Holdings advance approximately $63 million of the money loaned to Holdings from MP, making the total owing by Resources at April 9, 2011 $75,588,891.93. Mr.

Watzky said that the $9.2 million Ramshorn debt remained unsecured, although in a draft financial statement, it is identified as secured. [ 12 ] Gas prices plummeted beginning in August, 2011. As of June, 2012, the price was $1.723/mcf. Because of take or pay transportation, processing and shipping obligations that Resources had, production became unprofitable. Mr. Watazky testified that by January, 2012 Resources was losing money on every mcf of gas that it produced. Before that, he said that it was not clear whether the drop in gas prices in the Fall was because of seasonal effects only.

Because it was unable to renegotiate its largest take or pay contract, by March 31, 2012, all the gas wells were shut in. The receivership order was granted on April 23, 2012. [ 13 ] Mr. Watzky testified that during the negotiations to advance the MP loan, a series of documents were drafted to create the structure whereby the money would come into Holdings who would advance secured loans to Resources. Those negotiations occurred between April and July 29, 2011. The people negotiating the structure were MP, and Quintana groups. Quintana controlled Resources at the time.

From MP’s perspective, the offer to invest was to make Resources a going concern. He described the investment as follows:

The core of the development plan was to drill enough wells and get enough production so that we would be able to pay all of our contracts in an orderly and timely manner...And we drilled four very expensive wells. We frac’d two of them. Management put in enormous time and effort to implement on this development plan....Well, if gas had gone from 3.50 to $3, we would have had much more time for there to be a rebound in gas prices, right. So the board may have taken a different course. It wasn’t like we made this investment thinking gas prices couldn’t go down.

I just didn’t think gas prices were going to collapse to new historical lows almost in a straight line from the day we made our investment, right.

SECTION 95 [ 14 ] In 2009, s. 95 of the Act was amended. S. 95 (1) reads: 95.

(1) A transfer of property made, a provision of services made, a charge on property made, a payment made, an obligation incurred or a judicial proceeding taken or suffered by an insolvent person (

a) in favour of a creditor who is dealing at arm’s length with the insolvent person, or a person in trust for that creditor, with a view to giving that creditor a preference over another creditor is void as against - or, in Quebec, may not be set up against - the trustee if it is made, incurred, taken or suffered, as the case may be, during the period beginning on the day that is three months before the date of the initial bankruptcy event and ending on the date of the bankruptcy; and (

b) in favour of a creditor who is not dealing at arm’s length with the insolvent person, or a person in trust for that creditor, that has the effect of giving that creditor a preference over another creditor is void as against - or, in Quebec, may not be set up against - the trustee if it is made, incurred, taken or suffered, as the case may be, during the period beginning on the day that is 12 months before the date of the initial bankruptcy event and ending on the date of the bankruptcy. Previously, any attack based on s. 95 required the attacker to prove an intent to prefer the creditor.

Now, if the transaction is between non-arm’s length parties, proof of intent is not necessary. All that needs to be shown is that the transaction has the effect of preferring a creditor. There are no exceptions, either in the legislation or the common law. THE POSITION OF THE PARTIES Is Holdings a creditor of Resources? [ 15 ] Holdings argues that ‘creditor’ in the

section refers to existing creditors. NOVA says that that is too narrow. If a party becomes a creditor by virtue of the impugned transaction, the transaction falls. As remedial legislation, NOVA argues that I must interpret s. 95 broadly. By amending the section, Parliament was attempting to assist unsecured creditors from non-arm’s length creditors who have an unfair advantage. Moreover, if the legislation was intended to cover only existing creditors, it would have said so. Finally, the phrase ‘an obligation incurred’ suggests

an act of establishing a new transaction. NOVA cites three cases - In re Goldstein 1922 CarswellOnt 67 (rev’d on other grounds at 1922 CarswellOnt 80 ), Pikani Energy Corp. (Trustee of) v. 607385 Alberta Ltd. [2012] A.J. No. 313 and 677960 Alberta ltd. v. Petrokazakhstan Inc. 2009 ABQB 50 for the proposition that ‘creditor’ should be construed broadly in insolvency legislation. Only Goldstein addresses the word ‘creditor’ in the context of a preference. [ 16 ] Holdings argues that s. 95 applies only to existing creditors with equal rights where one of those creditors takes a preference.

Holdings refers to British Columbia Bond Corp. v. Lang , 1931 CarswellBC 1 (BCSC) where the Court said at para 3: ...everyone knows that the purpose of Bankruptcy Acts is to secure the distribution of the debtor’s assets pari passu among the creditors. That purpose is not involved in the case of one who, not being a creditor, becomes such for the first time when he makes his advance and takes security for such advances.

Cases must indeed arise from day to day where a debtor in financial distress obtains a loan, gives security and is thereby enabled to weather the storm and in the end to proceed successfully in his business. [ 17 ] Holdings also cites Jones & MacLean v. All-Temp Trailer Service Ltd. (Trustee of), 1994 CarswellNB 13 (NBCA) , a case where a law firm received a retainer from a client who became bankrupt the same day. The trustee argued that the money was paid

within one year of the bankruptcy and therefore the payment was void. The court held that the payment was not a preference, noting that not all payments made to a bankrupt within the prohibited time were void. Only those that preferred one creditor over other creditors. [ 18 ] Moreover, Holdings argues that the words of s. 95(1)(

b) support their

interpretation. The words ‘in favour of a creditor’ are used. If a party not yet a creditor was included, the wording would need to be ‘in favour of a non-creditor’. Holdings argues that the decision in Goldstein on appeal leaves it questionable whether the appellate court agreed with the Registrar that a new creditor fit within the legislation. [ 19 ] Holdings says that this case is exactly what British Columbia Bond refers to.

This is a case where $100 million of new money was injected by a new party, MP, in a good faith attempt to rehabilitate the company. [ 20 ] Finally, Holdings argues that everything about this transaction was agreed to before July 29, 2011. There may have been various reasons including tax planning why the transaction was structured the way it was. Whatever the structure, it was all agreed to before July 29, 2011. Did the transaction have the effect of giving Holdings a preference over other creditors? [ 21 ] NOVA says that Holdings had an unsecured debt at the time the GSA was signed.

The $9.2 million Ramshorn debt was not secured before July 29, 2011. The terms of the GSA are very broad so that it catches the $9.2 million. NOVA points out that a draft of the 2011 Financial Statements, the Ramshorn debt is referred to as a secured note. Just because Holdings’ lawyers would now like to characterize that debt as still being unsecured, that does not make it so. By elevating the Ramshorn debt from unsecured to secured, there is a preference. NOVA argues that the tacking cases which Holdings relies upon to say that the Ramshorn debt could never become secured do not apply.

Those are cases where a creditor in the third or lower position attempts to jump a higher-placed security. The cases say that such a creditor cannot do that. Here, there was no pre-existing security that the Ramshorn debt was attempting to attach to. It was new security. [ 22 ] Holdings says that the evidence shows that the Ramshorn debt remained unsecured. The

schedule of advances of money attached to the Secured Promissory Note to Resources from Holdings lists the advances by date, starting on July 29 with the existing debt of $12,064,760.08 and then continuing on from time to time with further advances. The Ramshorn debt is not included in that amount. The demand letter sent by Holdings on April, 2011, the Notice of Intention to Enforce Security and the Statement of Claim do not include the Ramshorn debt. Holdings says that the draft financial statement is simply that, a draft so it has no meaning. Finally, Mr.

Watzky testified that that debt was unsecured, both before and after July 29, 2011. Did the steps taken to implement the transaction themselves create the necessary requirements for the application of s. 95? [ 23 ] NOVA argues that regardless of any other facts, the step-by step process by which the July 29, 2011 transaction was implemented itself had the effect of giving Holdings a preference. The Quintana debt of $11, 257, 622 was transferred through Q Luxco to Holdings. MP transferred the $807,138 debt to Holdings in exchange for shares. Q Luxco sold the $9.2 million Ramshorn debt to Holdings for shares.

Holdings took the notes on an unsecured basis and registered new security. Resources issued a replacement secured note for the $12,064,760 ($11, 257,622 plus $807,138). The security documents were then registered. As a result of that process, all three debts were unsecured for a short period of time because Holdings did not take a transfer of the security. It took a transfer of the notes which it registered. When the new security was taken and registered, unsecured debt became secured. That, NOVA says, is a preference. [ 24 ] Holdings says that the evidence of Mr. Watzky is that the security was always there.

As well, pursuant to s. 43(2) of the Personal Property Security Act , R.S.A. 2000 p-7, registration may occur before a security agreement is made and in this case, a PPSA search shows registration occurred on July 28, 2011. Finally, Holdings says that an analysis of the steps memo which concludes that the debt was unsecured for only a moment is too arbitrary. Was Resources an insolvent person on July 29, 2011?

[25] The parties agree that there are three different tests by which Resources can be found to be insolvent: it is unable to meet itsobligations as they become due, it ceases paying current obligations in the ordinary course of business as they become due or its propertyin aggregate is not sufficient if disposed of at a fairly conducted sale under legal process to enable it to pay its obligations, due oraccruing due. [26] NOVA says that Resources was insolvent using any of the tests. By July 29, 2011, Resources had two debts, the $9.2 millionRamshorn debt and a $954,091 debt owing to Tenergy that were unpaid.

There was no money in the bank to pay those debts. Likewise,no payments had been made on those debts so that it had ceased paying current obligations. The final test requires an assessment ofResources not as a going concern. Rather all of the property is valued on a forced sale value. The obligations both due and accruing dueare totalled. If the obligations cannot be paid, the company is insolvent.

Looking at the draft financial statements and taking into accountthe ongoing obligations to NOVA and Spectra Energy under servicing contracts into the future, the obligations outstripped the assets. [27] Holdings replies that the evidence, particularly the draft financial statements, is equivocal and does not prove that any of thetests have been met. Is the entire GSA void? [28] Holdings argues that if all of the other requirements of s. 95(1)(

b) are met and if I find that the $9.2 million Ramshorn debtwas elevated to a secured debt, the only part of the security that is void is the $9.2 million debt. NOVA relies on Re: Titan InvestmentsLtd. Partnership 2005 ABQB 637 to argue that there can be no splitting of the security. In Titan, the debtor ran a Ponzi scheme. Thedebtor advised investors that he was winding up Titan. He distributed funds to some investors to cover not only their initial investmentbut some profit. Other investors received nothing or a partial return on their investment.

The investors who received some profit arguedthat while the profit portion was a preference, the amount paid on the initial investment was not. The court disagreed, finding that theFraudulent Preferences Act did not provide that the preference was void only to the extent of the profits. [29] Holdings argues that Titan is not applicable. All of the money in Titan was a preferential payment whereas here, only the$9.2 million is a preference; the balance are present or future advances.

SECTION 140.1 [30] S. 140.1 reads: A creditor is not entitled to a dividend in respect of an equity claim until all claims that are not equity claims have been satisfied. [31] NOVA argues that the Holdings’ advance of funds to Resources was really contributions to capital and not loans.Accordingly, s. 140.1 comes into play and Holdings’ claim is postponed until non-equity claims are satisfied. Holdings was incorporatedon July 29, 2011 and over the period of about 9 months, it advanced $63 million of new money to Resources. NOVA says that thisshould be characterized as an equity claim for several reasons.

First, the promissory note suggests an equity investment. The noteprovides that Resources agreed to repay on demand an unspecified amount of money as recorded on a

schedule attached. There is no duedate or maturity date. There is no interest rate prior to demand. Resources is not obligated to pay any interest on the advances untildemand. No payments are contemplated until demand. No payments were made. There were no minutes of either Holdings or Resourcesregarding making or accepting a loan, nor were there any directors’ resolutions. Likewise the GSA and the Investment Agreement areambiguous about whether the advances are debt or equity.

In addition to the lack of terms, on a more general level, the advances weredirect contributions to Resources working capital in accordance with a development plan intended to last through 2016. [32] NOVA says that this is akin to Laronge Realty Ltd. (BC CA), 1986 CarswellBC 496 (BCCA), where therehad been advances of money to the debtor by shareholders. On the books, the advances were shown as loans. There was no agreementfor repayment of the money or payment of interest, nor was any security given. The advances were simply called loans.

After thebankruptcy, the shareholders entered into an agreement setting out the manner in which moneys received from the trustees would bedivided amongst the shareholders. The court found that that agreement was more in keeping with capital advances rather than loans.

[ 33 ] NOVA says that the advances here are like in Laronge . In addition to the lack of terms as set out above, Resources and Holdings had identical boards of directors and Holdings had 100% control over Resources. So, Holdings could call the advances what it wanted. To find that the advances were in fact loans would be unfair to other creditors. [ 34 ] Holdings says that unlike the Laronge case, there are agreements evidencing the loans as debt transactions. The intent of the parties is to be determined from the words of the contract: Gainers Inc. v. Pocklington Holdings Inc. , 2000 ABCA 151 .

Neither is this a situation where the agreement contains elements of debt and equity. There are no elements of equity in the agreements. As well, the three agreements do contain specifics that NOVA says are lacking. The promissory note has a

schedule entitled ‘Advances and Payments of Principal’. The demand debenture has an interest rate. The loan is payable on demand.

SECTION 137 [ 35 ] S. 137 reads:

(1) A creditor who, at any time before the bankruptcy of a debtor, entered into a transaction with the debtor and who was not at arm’s length with the debtor at that time is not entitled to claim a dividend in respect of a claim arising out of that transaction until all claims of the other creditors have been satisfied, unless the transaction was in the opinion of the trustee or of the court a proper transaction. [ 36 ] NOVA acknowledges that claiming a dividend is a matter in the bankruptcy. However, if I find that the GSA is void under s. 95, that makes the transaction improper.

NOVA says that I ought to find that the GSA is void and hence the claim of Holdings should be subordinated under s. 137 or under the doctrine of equitable subordination. NOVA uses the doctrine of equitable subordination as defined in Oppenheim v. J.J. Lacey Insurance Limited 2009 NLTD 148 and Re Fabricators , 926 F.2d 1458 as a guide in determining whether there has been inequitable conduct. First, Holdings must have engaged in some inequitable conduct.

Second the misconduct must have resulted in some injury to the creditors of the bankrupt or conferred an unfair advantage on Holdings and equitable subordination must not be inconsistent with the provisions of the Act .

NOVA says that Holdings inequitable conduct consisted of causing Resources to grant the GSA knowing what assets Resources had and that Holdings could recover its capital by use of a stalking horse credit bid, advancing capital under the guise of loan documents, causing Resources to grant a GSA when it was insolvent, continuing to advance capital as the losses increased, again knowing it could recover by way of a stalking horse credit bid and elevating the Ramshorn debt from unsecured to secured debt.

Moreover, Holdings advanced funds when Resources was undercapitalized which also constitutes a form of inequitable conduct. All of this was done by a party - Holdings - who completely controlled Resources and was an insider. [ 37 ] Holdings says that the deal was structured by arm’s length’s parties, MP, Resources and Resources’ shareholders and creditors. The evidence of Mr. Watzky is that MP concluded that $100 million would be sufficient to permit Resources continue in operation. ANALYSIS [ 38 ] It is not my intention to decide each of the issues identified above.

It is important to identify what the issues are because they assist in the decision that I do make. They provide the context which I will address below. I do have some impressions about some of those arguments. Resources was probably insolvent. The argument that only existing creditors are contemplated by s. 95(1)(

b) makes some sense in light of the reasoning in British Coumbia Bond , but it does leave unanswered the question why that is not made clear in the legislation. I agree that Titan is a different kind of case so that even if the Ramshorn debt became a preference, it may not have made the entire transaction void. [ 39 ] The application pursuant to s. 95 fails for two reasons. First, there was no preference. There are three categories of debt: the $9.2 million Ramshorn loan, the existing secured debt and the $63 million in advances from MP through Holdings. Dealing first with the Ramshorn debt, that debt was unsecured both before and after the transaction. The most telling evidence is the

Schedule of Advances and Payments attached to the Secured Promissory Note. The $9.2 million debt is not included. The transaction did not make it secured. The fact that the GSA has broad wording does not go far enough. If the parties to the transaction had no intention to make the debt secured and treated it as unsecured, it is unsecured.

[ 40 ] Dealing next with the existing secured debt, the debt before July 29, 2011 was exactly the same as it was after July 29, 2011. The transaction did not ‘have the effect of giving a creditor a preference’. Moving the secured debt around does not elevate it above other creditors. The priorities remained the same. [ 41 ] Finally, there is the injection of new money by MP to Holdings, who in turn advanced $63 million to Resources. The demand debenture that Holdings took as part of that injection was the same as the demand debenture that QEP had previously.

Again, noone’s position changed. [ 42 ] The second reason why this application must fail is because the transaction simply does not fit within s. 95(1)(b). I said above that in determining how s. 95 fits within this case, it is helpful to review the arguments of each side on several of the components that make up s. 95. NOVA takes a very formalistic approach. If I adopt that approach, for example, by using the steps memo to find a preference, s. 95 probably applies to the transaction. However, it is necessary to look at the substance of the transaction, not simply what happened on July 29, 2011.

In April, 2011, MP was a stranger to oil and gas operations in Western Canada. It entered into an arm’s length arrangement with the parties who subsequently became Holdings for a legitimate purpose: to take a struggling gas exploration company with good prospects so long as gas prices remained strong and make that company profitable. I refer to Mr. Watzky’s evidence set out above. MP had a plan. MP made the investment with the expectation that it would be profitable for MP’s investors. MP was not part of a scheme to prefer itself. MP was always an arm’s length investor.

To begin and end the analysis on July 29, 2011 ignores the reality of the transaction. It is an overly formalistic

interpretation of s. 95 which cannot have been the intention of Parliament. Without the kind of investment that MP was willing to make, the risky business of oil and gas development would come to a standstill. The appropriate analysis is to examine the transaction as it came together in the months before July 29, 2011. MP was an arm’s length creditor. Its intention was to invest in Resources with the expectation of making a profit on that investment. S. 95 (1)(

b) does not apply. [ 43 ] Because I have found that the transaction was for a proper purpose, neither s. 137 or the doctrine of equitable subordination apply. [ 44 ] Turning to s. 140.1, above I refer to MP’s injection of capital as an investment. From their perspective it was. They structured it as a loan. That is what the documents say. There are indicia of a loan. I cannot call it an equity investment when MP did not intend it to be one. That application fails as well. [ 45 ] In the result, the substantive application fails.

Given the process that I put in place in July, the bankruptcy application also is denied. Moreover, there is a receiver in place so that having a trustee in bankruptcy would be unnecessary duplication. Heard on the 17 th day of August, 2012. Dated at the City of Calgary, Alberta this 27 th day of August, 2012. C. A. Kent J.C.Q.B.A. Appearances:

Alex Kotkas Arif Chowdhury Kyla Stott-Jess Fasken Martineau LLP for the Applicant Chris D. Simard Kelsey J. Drozdowski Chelsea Hermanson Bennett Jones LLP for the Respondents Walker W. Macleod McCarthy Tetrault LLP for the Creditor FR X