Business Development Bank of Canada v Sood, 2016 ABQB 429

Court of Queen ’ s Bench of Alberta Citation: Business Development Bank of Canada v Sood, 2016 ABQB 429 Date: 20160805 Docket: 1401 13566 Registry: Calgary Between: Business Development Bank of Canada Plaintiff - and - Ravi Sood and 1815471 Alberta Ltd. Defendants _______________________________________________________ Memorandum of Decision of A. R. Robertson , Q.C., Master in Chambers _______________________________________________________ Overview [ 1 ] This application for

summary judgment is brought by the Bank in an attempt to enforce a judgment that it previously obtained against Ravi Sood in other proceedings. The claim here is for the redemption of shares in a company owned by Mr. Sood. [ 2 ]

Summary judgment was granted against Mr. Sood on November 21, 2014 for $103,442.03. He was sued as a guarantor of a debt owed by Creamery Inc., along with two other guarantors. Partial recovery was obtained from the other guarantors in the amount of $40,000. The balance outstanding is $73,389.82, including an award of costs in the previous proceedings. [ 3 ] The issues involve the impact on collection proceedings of an “estate freeze” that involved the transfer to 1815471 Alberta

Ltd. (“181”) of most, if not all, of his assets of significance. [ 4 ] I have concluded that (

a) the estate freeze was effected to delay or hinder the Bank as creditor, (

b) Mr. Sood received the shares of 181 for that purpose, (

c) a civil enforcement agency has tendered all of them for redemption for value, (d) 181 has not responded as it is required by

section 58 of the Civil Enforcement Act, and (e) 181 must respond appropriately by buying back an appropriate number and paying the proceeds to the civil enforcement agency for distribution under the Civil Enforcement Act , RSA 2000, chap. C-15. [ 5 ] If 181 does not redeem the shares to pay the debt, other steps will follow, detailed at the end of this memorandum of decision. The Background [ 6 ] Mr. Sood was a shareholder, and the day-to-day manager, of a corporation called Creamery Inc. Along with others, he had guaranteed the debt of Creamery Inc. to the Business Development Bank of Canada. [ 7 ] Mr.

Sood’s guarantee was dated November 6, 2010 for a debt of $150,000 which specifically provided that his liability was “as principal debtor for all of the borrower’s covenants contained in the loan security…”. That is, the obligation under the guarantee did not arise only upon the default of the principal debtor, but rather it was a continuing obligation throughout. [ 8 ] Since October or November 2013, Mr. Sood had been looking after the day-to-day operations of Creamery Inc. Its major creditor was the Bank. [ 9 ] In April 2014, Creamery Inc. had significant financial difficulties.

A loan payment to the Bank on April 21 was returned for nonsufficient funds. The Bank contacted Mr. Sood after April 25, and on May 12, 2014, the Bank demanded payment from, amongst others, Mr. Sood. [ 10 ] Debt proceedings in the previous action were commenced May 29, 2014, and

summary judgment was obtained November 21, 2014. [ 11 ] But a week before the payment was due, and just before the Bank called on the guarantee, Mr. Sood transferred all of his assets of significant value to 181, a corporation that he had just acquired, at about the same time as the business was failing. His accountant describes this as an “estate freeze”, and it is said to have been done for tax reasons just before Mr. Sood moved to the United States. [ 12 ] The Bank later learned that on April 14, 2014 someone incorporated181. Mr.

Sood is now the sole director of the corporation, but the Notice of Change of Directors reflecting him as director was not filed until much later. On April 15 - the day after incorporation - Mr. Sood swore a statutory declaration that was relied upon by his chartered accountant, Mr. Sanjay Naicker, to create an “estate freeze” whereby Mr. Sood transferred most, if not all, of his significant assets of value to 181.

These included almost $2 million in cash, two parcels of land, a condominium unit, shares in four companies (including Creamery Inc., to which he attributed a fair market value of $1.00), a Mercedes Benz, a Land Rover, and a Ducati motorcycle, as well as other miscellaneous items. The consideration was the issuance to Mr. Sood of preference shares in 181. [ 13 ] Mr. Sood’s evidence is not before the Court. All that has been filed in reply is an affidavit from the accountant, Mr. Naicker, to which is attached a copy of Mr. Sood’s statutory declaration. [ 14 ] Mr.

Sood’s Statutory Declaration said that he had disclosed all of his assets and liabilities in

Schedule A. It also said, “To the best of my knowledge, information and belief, I do not have any contingent liabilities.” But

Schedule A did not mention the guarantee to the Bank. [ 15 ] Counsel for Mr. Sood asserts that the estate freeze was done in anticipation of Mr. Sood’s upcoming move to New York State, and in support of this assertion there is in Mr. Naicker’s affidavit a copy of Mr. Sood’s “I-797, Notice of Action” provided by the Department of Homeland Security of the US Citizenship and Immigration Services. It indicates a receipt date of May 8, 2014 and a “priority date” of May 8, 2014. May 8 is the earliest date that appears in any document indicating when Mr.

Sood decided to move to New York State and leave behind the business that he was running, whose debts he had guaranteed. Collection Proceedings [ 16 ] In July 2015 a civil enforcement agency seized the preference shares obtained by Mr. Sood in 181, and in August 2015 the civil enforcement agency delivered a letter in an attempt to redeem those shares. The address of the corporation is the address of the law firm representing both Mr. Sood and 181. [ 17 ] There was no response provided to the letter sent by the civil enforcement agency - by 181, Mr.

Sood, or their legal counsel. [ 18 ] On March 30, 2015 the Bank filed an application for

summary judgment including a declaration that the Bank has an interest as a judgment creditor of Mr. Sood, an order setting aside the transfer of the non-land assets, as well as the two lands that were only registered in the name of 181 long after the “estate freeze”, and an order directing the Registrar of Land Titles to re-register the two parcels in the name of Mr. Sood. [ 19 ] On January 4, 2016 the Bank brought another application asking for a judgment against 181 in the amount of $68,489.11 plus interest, based on 181’s failure to respond and honour the redemption request. [ 20 ] Counsel for Mr.

Sood argues that the letter sent by the civil enforcement agency, to which 181 did not respond, did not call for a response. The letter did not say when the shares were to be produced, and it did not specify how many shares. However, this

explanation for the non-response was first raised in response to this application. It also ignores 181’s obligations under

section 58 of the Civil Enforcement Act . After receiving the notice of seizure, paragraph 58(

a) required 181to “send to the agency any documents and allow the agency to inspect any records that the enforcement debtor, as the registered holder of the security, is entitled to receive or inspect”. Not responding at all is inappropriate. If a shareholder attempted to redeem shares, would the corporation simply ignore the request? Suspicious Circumstances: Burden of Proof [ 21 ] In the circumstances, the Bank says that in April 2014 Mr.

Sood clearly must have known that the business affairs of Creamery Inc. were failing and that its cheque to the Bank was NSF, or would be NSF, and that the circumstances are at least extremely suspicious. It is impossible to demonstrate with direct evidence the intention of a debtor to defraud, hinder or delay his creditors; the evidence of intention must come from the surrounding circumstances. The Bank says that the surrounding circumstances do that, and therefore the onus to demonstrate the propriety of the conveyance falls on Mr. Sood. I agree. The Evidence in Reply [ 22 ] Mr.

Naicker deposes that he was a chartered accountant who was the personal accountant for Mr. Sood and 181 “at all material time”. However, there is no indication that Mr. Naicker even knew Mr. Sood prior to April 15, 2014, and there is no corroborating evidence as to when Mr. Sood and his family first decided to leave Canada and move to New York. The earliest date corroborating that decision is the Notice of Action presented in Mr. Naicker’s affidavit. As mentioned, the earliest date – the only date – on that document is May 8, 2014. That is about two weeks after Mr.

Sood signed the statutory declaration relied upon for the estate freeze. [ 23 ] When 181 was incorporated on April 14, 2014, its sole director was John Robert MacDonald as shown in a corporate search done September 3, 2014, about 4 1/2 months after the date of the estate freeze. However, when another search was done December 11, 2015, it showed the sole director to be Mr.

Sood, and it indicated that a Notice of Change of Directors was filed October 29, 2014, about 6 ½ months after the date of the estate freeze. [ 24 ] Although the estate freeze purported to transfer the real estate to 181, registration of two of the three parcels listed did not occur at the Land Titles Office until November 26, 2014, which I note was 28 days after the Notice of Change of Directors of 181 was filed, or about 7 ½ months after the date of the estate freeze. [ 25 ] Mr. Naicker’s affidavit is deficient in many respects.

It is self-serving – it purports to state conclusions, but it does not provide any of the detail that would be required to reach those conclusions. In response to an application such as this, where the burden is on Mr. Sood to explain the suspicious circumstances where he divested himself of his assets on the eve of proceedings by the Bank, in an admitted plan to leave the country and apparently abandon the business he was managing, some basic information is required to respond other than conclusions about value and purpose. [ 26 ] Here are some of the deficiencies: (

a) As mentioned, Mr. Naicker’s affidavit does not indicate when Mr. Naicker first met Mr. Sood. Did they first meet the day before the “estate freeze”? (

b) It does not state when the estate freeze was first discussed. (

c) Mr. Naicker relies on a statutory declaration of Mr. Sood declared April 15, 2014 for his conclusion that the asset transfer took place for market value and that Mr. Sood received fair market value from 181. (

d) There is no evidence of any actual contemporaneous transfer of the assets. We know that the real estate was not transferred until much later. Where are the registrations of the Mercedes Benz, Land Rover, and Ducati motorcycle? Where is the cheque or other means of transfer of the $2 million, and the bank records showing actual deposit? (

e) He lists the estate planning goals that Mr. Sood desired to achieve by implementing the estate freeze, but the goals are stated in very broad terms and offer no details whatsoever. (

f) Mr. Naicker deposes that, “there were no existing obligations to pay the plaintiff [the Bank] before or at the time of the transfer.” This is obviously what he was told by Mr. Sood (his statutory declaration lists various debts but not the guarantee obligation to the Bank), but it was patently not true. The guarantee provided that Mr. Sood was “liable as principal debtor”. The Bank was “not bound to seek recourse against the Borrower before requiring payment from the Guarantor”. (

g) The statutory declaration of Mr. Sood, on which Mr. Nicker relied, deposed to the fair market value of his assets with no details – it just said that he had “made a bona fide effort to determine the fair market value” of the lands. Was there an appraisal done of either of the lands? Was (at least) the most recent municipal tax assessment considered? (

h) Although Mr. Naicker was his chartered accountant and the chartered accountant for 181, no income tax return for 2014 is attached. It would have disclosed capital gains or losses in the assets resulting to Mr. Sood, and how this was all declared to Canada Revenue Agency.

No return for 2015 is produced either, nor is an income tax return for 181 for 2014 produced. (The income tax return of 181 for 2015 was not yet done at the time of the application.) [ 27 ] Most importantly, although the statement of assets and liabilities notes the shares in Creamery Inc., valued at $1.00, there is no indication whatsoever in Mr. Sood’s statutory declaration of the guarantee that Mr. Sood had given to the Bank. This was a time when Mr. Sood was looking after the day-to-day operations of the business operated by 181. This was just before 181 wrote the NSF cheque. Apparently Mr.

Sood did not tell Mr. Naicker of the guarantee and impending business collapse. At best, Mr. Naicker was operating on inadequate information.

[ 28 ] Corroborating evidence here is important in light of the suspicious circumstances. There is no third party document to support the allegation that the estate freeze was actually done when it is said to have been done. The documents that are produced to support the estate freeze in April all follow the date it is said to have occurred. The Application Process [ 29 ] Mr. Sood says that the relief sought by the Bank now is not consistent with the relief sought in the statement of claim; the Bank now seeks a judgment for something different than it sued for.

The statement of claim referred to the alleged fraudulent conveyance of the land now focused upon, as well as the transfer of the non-land assets the day after the incorporation of 181, the judgment, the assertion of its entitlement to rely on the fraudulent conveyance statute, being the Statute of Elizabeth , 13 Eliz. 1,

Chapter 5. [ 30 ] The Bank responds that the claim specifically referred to what Mr. Sood calls the “estate freeze”. Also, since the two parcels of land are worth far more than the judgment held by the Bank, there is no need to set aside the transaction in its entirety. The claim and the application ask for judgment against 181 for the judgment debt and costs, based on the fraudulent conveyance. [ 31 ] Furthermore, the Bank points out that the relief it primarily seeks (arising from 181’s failure to redeem the shares, or even respond at all) arises out of

section 62 of the Civil Enforcement Act and it need not have been pled in the statement of claim. This kind of relief is normally sought within the original action, after judgment is granted. The pleadings would not have mentioned the collection steps.

Section 62 simply requires that an “application” be brought, and it could have been brought either in the original proceedings, or in a new application brought by originating application, or in these proceedings. The Bank chose to bring them in these proceedings. There was no need for it to be referred to in the statement of claim. [ 32 ] In the brief filed by Mr.

Sood and 181 in reply to these applications, they claimed, for the first time, that the redemption of the shares was not successful because the letter from the civil enforcement agency did not specifically state the date when the redemption should occur and the number of shares to be redeemed. The Bank argues that no date was required because the demand clearly required the redemption as soon as possible, and the number of shares to be redeemed would have been whatever were required so as to provide sufficient funds to pay the judgment. That number would be within the knowledge of 181 - which is controlled by Mr.

Sood. Furthermore,

section 58 of the Civil Enforcement Act does not contemplate no response at all. [ 33 ] I note that there is no direct evidence as to the value of the shares of 181, and we cannot rely upon the affidavit of Mr. Naicker for that information. He was relying completely on the statutory declaration of Mr. Sood, who is not an expert and is certainly not a disinterested party. Furthermore, Mr. Sood’s statutory declaration is not properly before the court. It is merely an exhibit to Mr. Naicker’s affidavit. It is tendered to explain Mr. Naicker’s actions as accountant.

It is not evidence in these proceedings except as hearsay, and we know that at least part of it is not true. Issues [ 34 ] There are a number of issues: 1. Is there sufficient evidence to support an assertion of a fraudulent conveyance? 2. Given that the burden shifts to the debtor or if there is a prima facie case of fraudulent conveyance, has the burden of proof of intention shifted in this case? 3. If the burden has fallen on the defendants to explain the conveyances, has the burden been met by the affidavit of Mr. Naicker or the evidence generally, including the cross-examination of the Bank’s deponent? 4.

Is there a deficiency in the pleading that is fatal to the Bank’s application, or does

section 62 of the Civil Enforcement Act support the application in respect of the claim against 181? 5. Is the Bank entitled to the redemption of the shares by 181 under the Civil Enforcement Act ? Analysis Fraudulent Conveyance [ 35 ] In connection with the assertion of a fraudulent conveyance under the Statute of Elizabeth , the Court of Appeal has told us what the tests are: 1.

There must be a conveyance of real or personal property; 2. for no or nominal consideration; 3. with intent to defraud, delay or hinder creditors; 4. the party challenging the conveyance must be someone who is a creditor at the time of the conveyance or someone with a legal or equitable right to claim against the transferor; and 5. the conveyance must have had the intended effect. See: Palechuck v Fahrlander 2006 ABCA 242 at para. 31 , the Statute of Elizabeth , and Royal Bank of Canada v McLaughlin , 2016 ABQB 80 at para. 39-40 . [ 36 ] In my view, tests 1, 4 and 5 are beyond debate here.

As to consideration, where the applicant (here, the Bank) is able to show

that the transferee was privy to the fraud, the exception for bona fide transfers for consideration is not applicable: Krumm v McKay , 2003 ABQB 437 at para. 15 . Mr. Sood is the only director of 181 and we are told that he was at the time of the estate freeze, despite the late filing of the Notice of Change of Directors. He is both the transferor and the controlling mind of the transferee. Since the only consideration was the shares in the company that holds only the assets transferred, in my view the “no or nominal consideration” test is not applicable. [ 37 ] That leaves the question of intent.

In the absence of an admission from the transferor, the determination of the transferor’s intent is made after considering the “badges of fraud”. Here, the badges of fraud include: (

a) the close relationship between the transferor and transferee; (

b) the timing of the “estate freeze” coinciding with the collapse of Creamery Inc.’s business and the NSF cheque to the Bank; (

c) the incorporation of 181 only the day before the transfer; (

d) the fact that there is no evidence suggesting that the accountant handling the estate freeze had any prior association with Mr. Sood; (

e) the sudden plan to move to the United States, thus abandoning the business whose debt Mr. Sood had guaranteed; (

f) the fact that the evidence said to corroborate the planned move to the U.S. post-dates the estate freeze; (

g) the fact that the Notice of Change of Solicitors was only filed months later; (

h) the fact that the transfer of real estate said to have been integral to the estate freeze did not occur until months later; (

i) the absence of any records of the transfer of the money or the vehicles; (

j) the lack of any opinion evidence from someone qualified as to values, and the complete reliance by the accountant on Mr. Sood’s assertions; and (

k) the false information provided in Mr. Sood’s affidavit provided to Mr. Sood. [ 38 ] All of these things taken as a whole (or most of them, or even only a few, in my view), create a rebuttable presumption that the transferor was intentionally transferring the assets to “defraud, delay or hinder creditors”. That is, the burden shifts to Mr. Sood in light of these factors. [ 39 ] Mr. Sood did not provide any of his own evidence. The evidence provided by his accountant contributed to the number of badges of fraud because of questions it raised.

That affidavit does not meet the burden. [ 40 ] Accordingly, the inevitable and only conclusion is that the transfer was a fraudulent conveyance. The Bank is entitled to have it set aside. [ 41 ] However, for the time being it is content to rely on the seizure of shares and the entitlement to redeem them. Deficiency in Pleading? [ 42 ] For the reasons argued by the Bank, I see no deficiency in the pleading. The application for the redemption of the shares arises from the Civil Enforcement Act and did not require a new action.

It would normally be brought in the original action after judgment as the judgment creditor attempted to enforce the judgment it had obtained. The judgment creditor would have to have been able to see the future to have included that in the statement of claim, long before judgment was even obtained. Here, the Bank chose to apply in this action. Civil Enforcement Remedy [ 43 ] In these circumstances, including the failure of 181 even to respond to the attempted redemption of the shares, it is clear that the reasons given for not redeeming are merely shams.

The preference shares are now lawfully in the possession of the civil enforcement agency. The agency’s authority under

section 57.1 is broad. This application was brought to enforce its rights under the Civil Enforcement Act , and

section 62 provides that the Court “may make any order that the Court considers appropriate regarding the method of liquidating seized shares, including ... directing that the Alberta private company be liquidated and its proceeds disposed of according to law”. [ 44 ] In the circumstances, the Bank acknowledges that as far as it knows the assets within 181 are worth far more than the amount it is attempting to collect. For this reason, they ask primarily for the redemption of enough shares to satisfy its claim. [ 45 ] That is my direction.

The details are as follows: 1. 181 is directed to redeem its shares in a sufficient amount to pay the Bank’s outstanding debt claim (after the appropriate credits from other debtors who were liable), including interest thereon and costs awarded under the debt action and this action, including subsequent costs. 2. Following payment in full, the civil enforcement agency is to return any remaining (unredeemed) shares to Mr. Sood. 3. If 181 fails to redeem shares as set out in

section 1 within 2 weeks of the finalization of the costs awarded in this application, then (

a) the Bank shall be entitled to apply to have 181 liquidated, the costs of which shall be borne entirely by 181 and Mr. Sood, jointly and

severally, and the assets of 181 shall be subject to a charge in favour of the Bank for its claim; and (

b) The transfer of real estate to 181 as part of the “estate freeze” is hereby declared void, provided that the declaration that the transfers to 181 are void is stayed pending the expiry of the two week period; 4. The Bank shall forthwith (without waiting for the redemption of shares) be entitled to register notice of the order granted herein against the certificates of title to the said lands by way of caveat. [ 46 ] In light of the steps taken by Mr. Sood to avoid payment, including the false statutory declaration, this case is appropriate for an elevated level of costs.

If the parties cannot agree, they may approach the Court to have costs established. Heard on the 2 nd day of June, 2016. Dated at the City of Calgary, Alberta this 4 th day of August, 2016. A. R. Robertson, Q.C. M.C.C.Q.B.A. Appearances: Russell N. Avery Bishop & McKenzie LLP for the Applicant Mohamed A. Amery Shea Nerland LLP for the Respondents