Alberta Treasury Branches v COGI Limited Partnership, 2016 ABQB 43

Court of Queen ’ s Bench of Alberta Citation: Alberta Treasury Branches v COGI Limited Partnership, 2016 ABQB 43 Date: 20160121 Docket: 1501 12220 Registry: Calgary Between: Alberta Treasury Branches Applicant - and - COGI Limited Partnership, Canadian Oil & Gas International Inc., and Conserve Oil Group Inc. Respondents _______________________________________________________ Oral Reasons for Judgment of the Honourable Madam Justice K.M.

Eidsvik _______________________________________________________ Background [ 1 ] On January 14 and 15, 2016 I heard the applications of the receiver dated November 6, 2015 and January 4, 2016. [ 2 ] The November 6 application was to clarify and expand the receiver’s powers under the Receivership Order that was granted

on October 26, 2015 with respect to several subsidiaries of Conserve Oil Group Inc. (Conserve) including Conserve Oil 1 st Corporation (Conserve 1 st ) and Proven Oil Asia Ltd (POA). [ 3 ] On November 10, 2015 Justice Jeffrey allowed expanded powers with respect to several subsidiaries and adjourned the claims with respect to Conserve 1st and POA to November 27, 2015 and ordered further information to be disclosed. [ 4 ] Mr. Crombie, the President and sole director of POA, subsequently filed an Affidavit on November 23, 2015 and was cross- examined on it on November 24, 2015.

A supplemental, correcting Affidavit was filed on November 26, 2015. [ 5 ] The receiver filed a second report on November 27, 2015 outlining its concerns about the information that had been obtained including: 1) 100,000 shares had been issued and transferred to Arrow Point Oil and Gas Ltd. (Arrow Point) and then to Capital Asia Group Pte Ltd (CAGOM) thereby diluting Conserve’s 1000 shares and sole ownership position in POA; 2) Some oil and gas wells had transferred from COGI (a subsidiary of Conserve) to POA but COGI still holds the assets’ title and there were potential substantial abandonment liabilities in POA. [ 6 ] Therefore, the receiver sought an adjournment of the application set for November 27, 2015 to investigate further.

The adjournment application was allowed to January 14, 2016 by Justice Hawco, with deadlines about further material to be filed, and a standstill Order was granted wherein certain powers with respect to the assets, shares, and management of POA were detailed. [ 7 ] The second application filed January 4, 2016 seeks a receivership order of POA, and alternatively an order seeking certain rights and powers over POA and an order that net proceeds from the operation of assets of POA be paid into court. [ 8 ] The receiver seeks to be appointed pursuant to the oppression remedy under s.242 of the ABCA or s. 13(2) of the Judicature Act . [ 9 ] A third Affidavit was filed by Mr.

Crombie, along with a supplemental brief of POA and a brief by CAGOM on January 7, 2016 opposing the relief sought by the receiver. [ 10 ] Meantime, on January 6 th , 2016, Justice Horner determined that the Conserve subsidiary Conserve 1 st was bound by a guarantee of January 27, 2012, Debenture, Demand and Pledge Agreement and GSA in favour of ATB, and as such allowed the receiver to be appointed over Conserve 1 st ’s assets etc. pursuant to s.243(1) of the Bankruptcy and Insolvency Act .

The law [ 11 ] The parties did not disagree on the law with respect to appointing a receiver in these circumstances but did disagree about its application on the facts as they have slowly and confusingly emerged over the last couple of months. [ 12 ] As noted above, the receiver is bringing the application on the grounds of s 242 of the ABCA and s 13 (2) of the Judicature Act. The ABCA

section reads as follows: 242

(1) A complainant may apply to the Court for an order under this section,

(2) If, on application under subsection (1) the Court is satisfied that in respect of a corporation or any of its affiliates (

a) Any act or omission of the corporation or any of its affiliates effects a result, (

b) The business or affairs of the corporation or any of its affiliates are or have been carried on or conducted in a manner, or (

c) The powers of the directors of the corporation or any of its affiliates are or have been exercised in a manner that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer, the Court may make an order to rectify the matters complained of. [ 13 ] This Order may, according to 242 (3) (b), include an order for a receiver manager. [ 14 ] The Judicature Act s 13 (2) allows the Court wide discretion to appoint a receiver when it is “just and convenient”. [ 15 ] Oppressive conduct has been interpreted by the Supreme Court in BCE Inc v 1976 Debentureholders 2008 SCC 69 .

This case emphasises that the oppression remedy is an equitable discretionary remedy that must look to the fairness of the situation to all parties involved in the business in question. A two part test is outlined where the Court must determine the reasonable expectation of the parties and whether the conduct complained of amounts to a violation of those expectations. [ 16 ] A myriad of factors are set out in Bennett on Receiverships to aid in the decision about whether a receiver should be appointed. They are often repeated in decisions so I won’t do so now.

I have applied the relevant factors which I will detail shortly.

[ 17 ] In addition, it is said that applications brought by a person other than a security holder, is an extraordinary remedy which should only be used sparingly. It is compared to injunctive relief and the tripartite test that is used in those cases is recommended to be used here (see Murphy v Cahill 2013 ABQB 335 at para 7 ). Analysis . Serious issue to be tried [ 18 ] Is there a serious issue to be tried?

Or more specifically, is there evidence that the actions taken by POA in the last 10 months violate the reasonable expectations of Conserve and COGI that amount to oppressive conduct? [ 19 ] As noted above, the Receiver has two main concerns 1 . That shares in POA were issued without due notice, at the hands of directors who were in a conflict of interest and without evidence of fair value, and 2 . An asset purchase of wells from COGI by POA has left some potential liability to the AER in COGI’s hands. 1.

Share transaction [ 20 ] In my view, the transaction in questions does not violate what Conserve’s reasonable expectations of corporate and financial behaviour of POA should have been at the time, for the following reasons. [ 21 ] Conserve is a shareholder of POA wherein it paid $1000 for 1000 shares. It was the sole shareholder since its inception in 2012. There is no evidence that Conserve put any other funds into POA. [ 22 ] POA’s business involves the acquisition and operation of wells. In order to fund such acquisitions, POA uses funds raised and advanced by CAGOM.

CAGOM has security in the nature of guarantees and GSAs on POA’s assets. The funds are used to acquire properties, having those properties operated by third parties, including but not exclusively COGI, and receiving revenues from those properties which are then repaid to investors, who reside in Asia. [ 23 ] Conserve and COGI did some administration duties for POA, including managing most of its wells.

The terms of the administration and operating duties, and remuneration for such responsibilities, were not before me. [ 24 ] POA has regularly scheduled payments to its secured creditor CAGOM for distribution to its Asian investors. [ 25 ] Mr. David Crombie is the sole director of Conserve and POA and a shareholder of Conserve. He does not hold any personal shares in POA. Although Mr.

Crombie suggested that he was a director and officer of Arrow Point in questioning, his lawyer advised at the hearing that this was in error and that he had no relationship to Arrow Point. [ 26 ] The applicant ATB has security over Conserve and COGI’s assets.

The debt outstanding, as of October 20, 2015, was $300,000 and $34 M respectively. [ 27 ] However, ATB confirmed at the hearing that, contrary to the receiver’s belief, it did not have any security over any of POA’s assets. [ 28 ] In March 2015 POA entered into a secured demand loan agreement with Arrow Point wherein Arrow Point lent POA $7 M in return for 100,000 shares. Initially these shares were common shares but ultimately POA issued and transferred preferred shares to Arrow which could be redeemed into common shares.

The cost of the shares in the agreement was initially suggested to be $1 per share but this was corrected by Mr. Crombie subsequently to be $1 for all of the shares. [ 29 ] The loan was obtained since POA was required to make a substantial payment to investors in April 2015.

Funds were advanced on the loan by way of a payment on March 12 2015 in the amount of $4,823,000 and March 27,2015 of $4,000,000. [ 30 ] The receiver complains that there was not consideration for the shares, the issuance of the shares diluted Conserve’s shareholding to 1 %, and certain corporate requirements were not conducted. [ 31 ] The Affidavit filed by Mr. Crombie of January 7, 2016 answers many of the concerns. It is unfortunate that this detail was not forthcoming initially.

POA’s lawyer suggested that this was because oppression was not claimed by the receiver until the January 4 application so it did not know it needed this information. This excuse is somewhat hollow in my view considering that there is mention of this transaction in the initial Nov 23 affidavit and Mr.

Crombie was questioned on this but gave incorrect and confusing answers, not out of malice, but likely confusion on his own part. [ 32 ] The corporate structure in this case, which I’ve only outlined a small part which is relevant to these applications, is rather vast and convoluted, involves many of the same human players, and seems to be constantly changing.

Accordingly, it is no surprise that the receiver has had difficulties figuring it out, and as an officer of the court he has raised many reasonable questions of concern. [ 33 ] In my view, the evidence discloses that POA has its own separate financing structure in place which was in peril in early 2015.

It is reasonable to understand that it would try to get further financing. The deal made with Arrow Point appears to have allowed POA to continue on with its operations. To the extent that this meant diluting the share value and diluting Conserve’s position, this was likely a necessary evil. [ 34 ] The receiver complains that these shares have since been converted into common shares and transferred to COGAM from Arrow Point. The deal between these parties was not in evidence. In any event this transfer was not done by POA.

It is hardly surprising to me that COGAM, POA’s major creditor, would want to solidify its position further by controlling POA via its shareholding position. In this regard, the receiver has now had a chance to review the five guarantees granted by POA to COGAM between November 1, 2013 and March 1, 2015 which total approximately $70 M. Other credit documents have not yet been reviewed but CAGOM suggested at the hearing that it was open to cooperate in this regard. [ 35 ] Mr.

Crombie advised that the value of POA at the time the shares were issued to Arrow Point was either $35 or $30 M (another example of rather careless testimony).

In any event, on this evidence, the value of POA according to this testimony, and therefore of Conserve’s shares, would have been nil. [ 36 ] There has been far from forensic accounting dealing with the value of these shares, as pointed out by the solicitor of ATB, however, for this application’s purposes the evidence sets out what could be considered to be a reasonable transaction in terms of the issuance of these shares even though there was dilution of Conserve’s shareholding [ 37 ] The receiver complains that Conserve was not given due notice of the transaction. However, Mr.

Crombie, wearing dual hats for Conserve and POA was well aware of the transaction so notice was not necessary as the transaction was well known to Conserve through its director. [ 38 ] POA admits that it did not comply with all of its statutory obligations required under the ABCA i.e.holding the requisite shareholder meetings etc. However, in the whole of the circumstances, I do not find this to be oppressive conduct at the time.

Note that this transaction occurred well before the receiver was appointed in October. [ 39 ] Finally, I asked the receiver if he had another suggestion about how Conserve’s share position could have been better protected. The receiver suggested in its brief that Conserve was prevented from taking “preventative steps”. No concrete solution was forthcoming from the receiver about what these steps could have been. He suggested that there was no need for Arrow Point to have a shareholder position at the time. However, it appears that this was the deal.

Certainly if POA’s credit had been called at that time, it appears that Conserve’s shareholding may have been worthless in any event. [ 40 ] In sum, I agree that there are many details with respect to this share transaction which are missing and the veracity of the evidence given by Mr. Crombie has not been thoroughly tested. The receiver and ATB want the power to examine this transaction with the powers of a receivership.

There is a serious issue with respect to the dilution of the shares but there is also a very reasonable defence to this potentially oppressive conduct which, if found true, would answer the situation for the reasons I have outlined. [ 41 ] The other serious issue is the asset sale which I will now turn to. 2. Asset sale [ 42 ] POA purchased various well assets from COGI in 2015. A letter from COGI to ATB dated June 26, 2015 was put into evidence via Mr. Crombie’s January 7, 2016 Affidavit.

In it COGI advised ATB that POA was purchasing various interests for the purchase price of $3M, $5.7M and $11.9M approximately and that the funds received from POA would go to reduce COGI’s credit facility with ATB. The closing dates were July 15, August 5, and October14, 2015 respectively for the various sales. [ 43 ] The sale agreements were not put into evidence in this proceeding (although they were in evidence in the CCAA proceeding against COGI in late August 2015).

In any event, I am to understand that the beneficial title to these wells were transferred to POA and that the wells continued to be operated by, and remain on legal title to, COGI. COGI collects the oil sale production proceeds and pays them to POA. [ 44 ] The receiver was concerned that pursuant to the agreement, since COGI maintains legal title to the wells, it may face AER abandonment and reclamation liability if that were to occur to those wells.

According to the operating manager the receiver has put into place since the receivership of COGI in October, Niven Fischer Energy Services Inc., the net potential liability is almost $15 M. [ 45 ] The receiver argues that since COGI needs to pay the proceeds of these wells to POA and that these funds will be sent off to investors in Asia, COGI has a large liability from POA with no corresponding benefit. Accordingly, the receiver has been withholding payments to POA over the last few months. The gross revenue in September 2015 was $285,000 and in October it was $183,000.

Operational expenses can be deducted from these amounts however, as noted above, it was not in evidence what these amounts are. The receiver wants an order that the net funds be paid into Court as an alternative to a receivership order. [ 46 ] POA replies that the sale transactions represented full market value, they were approved by ATB, and that the revenue represents trust funds that the receiver is improperly withholding.

This withholding is to the prejudice of POA which has obligations to its own creditors and investors. [ 47 ] With respect to the potential AER liability, POA is attempting to deal with the problem. Indeed, contrary to Niven Fisher’s opinion that this situation is unlikely to change in the near future, AER’s counsel indicated at the hearing that they are working on solutions with Arrow Point and another purchaser of these wells. [ 48 ] It is difficult, without the appropriate documents, to comment extensively on this issue at this time.

However, for the purposes of the potential oppression claims as a basis to appoint a receiver, in my view, again, the transaction on the surface appears to have been made for a valid business purchase and for full market value. To the extent that the potential AER liability was not considered, ATB was notified of this transaction and could have stopped this transaction at the time. Instead it accepted payments (of gross $20.6 M

approximately – the net amount was not disclosed) and consented to the deal by way of No Interest notices. It is hardly fair then to say that they have been oppressed or that POA acted in an oppressive manner towards Conserve in these circumstances. [ 49 ] The suggestion that it is fair to hold the oil proceeds in this situation is problematic.

It is not clear that a set off is appropriate in these circumstances considering that the production revenue may be trust funds and that this contingent AER liability is very far from being crystallised. [ 50 ] In other words, there may be an issue to be tried about these sale transactions, however, on the limited evidence before me on this issue, it appears that POA may have a good defence that there is any oppression here.

Irreparable harm [ 51 ] The receiver suggests that it will suffer irreparable harm if it is not appointed a receiver for POA so that it can control its management and avoid further dissipation of the shares and any of its assets. It further argues that if the proceeds from the wells are not paid into Court it will be paid to foreign investors and the money will not be easily recoverable. [ 52 ] POA argues that loss of management control could have devastating effects on its business.

Further, that the lack of payments from its wells jeopardises its ability to maintain its obligations to COGAM and its investors which may cause irreparable harm to POA. There is no irreparable harm to the receiver here as the wells are still located in Alberta and should POA face liability to COGI, these assets can be called upon.

Further, it has no present plans to divest of further assets in any event. [ 53 ] COGAM, the secured creditor of POA, points out that the standstill Order in place by Justice Hawco answers any concerns of divestiture. [ 54 ] The Court’s concern in this case is the complicated corporate structure in place and the difficulty the receiver has had to untangle the web of transactions between non- arms length corporations without the powers of a receiver over POA.

However, considering the more recent informational disclosure by POA , and proposed cooperation by COGAM, and the standstill Order presently in place, at the present time, the receiver may well be able to get to the bottom of the issues without the powers of a receiver and therefore will not be irreparably harmed. [ 55 ] With respect to the oil proceeds, I agree with POA that the wells are some security presently for the potential AER liability.

In any event, on the evidence before me and the representations of the AER, the potential liability is legally uncertain and remote at this time so that the receiver has not met the onus to show that it will be irreparably harmed.

Balance of convenience [ 56 ] As mentioned, appointing a receiver is an extraordinary relief and should be granted cautiously and sparingly – especially in circumstances such as these where there is no outstanding debt from POA to ATB, no security arrangements between them, and that POA has its own secured creditors who oppose the appointment of this receiver. [ 57 ] I can understand the receiver’s concerns that have arisen since it started investigating into the corporate structure and its belief that a receiver order over POA is just and convenient and will enable it to carry out its duties more efficiently. [ 58 ] However, as I have analysed above, in my view, on the evidence as it stands, I am not presently “satisfied” as required under s 242 of the ABCA that the conduct in question can be considered to be oppressive.

It did not breach the reasonable expectations of Conserve that some sort of further financing was necessary to keep POA from reneging on its creditor’s obligations, and the wells sale agreements between COGI and POA appear to be reasonable business transactions. [ 59 ] The receiver may still consider starting an oppression action against POA if it wants to pursue this further.

Alternatively, if it turns out that the assumptions that I have had to make on the limited evidence before me are not accurate, a further application could be made at a later time. [ 60 ] With respect to the wells, I note that they are presently already being managed under the control of the receiver. I would also ask that it reconsider the position it has been taking over the proceeds from the wells by reviewing the agreements that were put into place and are attached to an affidavit in the CCAA proceedings to which it has access.

If these are indeed trust relationships that are being breached by the withholding of those funds, I recommend that this position be reconsidered by the receiver, failing which POA may bring a further application about this issue. Having not looked at these agreements, I am not in a position to say further on this topic.

But, to be clear, I will not order that the proceeds be paid into Court at this time. [ 61 ] In balancing the interests of POA and its secured creditor, vs those of ATB and Conserve, the latter as a shareholder in POA, an unsecured position, it seems that the fairer answer to this application by the receiver is to dismiss it at this time.

I would allow Justice Hawco’s standstill Order to continue for the time being, but would reconsider its continuance once further answers to outstanding questions about the interrelationship between these companies is answered. [ 62 ] Conserve continues to have its shareholdings in POA and so continues to enjoy those rights, even if it now is as a minority shareholder, which will have to be respected. [ 63 ] It is expected that POA and COGAM will continue to cooperate with the receiver to determine certain rights and obligations,

hopefully without formal litigation. I would also recommend in that regard that sensitive business documents can be kept confidential and if there are any issues in that regard you can seek further Court directions. Conclusion [ 64 ] There may be serious issues to be tried but the defences to an oppression action are also quite strong on the evidence before me. I am not satisfied that an oppression action would have success on the limited evidence presently before the Court. The receiver has also not convinced me that any harm would be irreparable if he was not appointed receiver over POA at this time.

There are other Orders and measures in place that will protect the companies in question under receivership. Further, on the balance of convenience, fairness in my view dictates that POA’s rights to self-determination and the secured creditor’s interests to POA prevail over those of the unsecured shareholder and ATB. [ 65 ] For these reasons, the applications of the receiver are dismissed. Heard on the 14th and 15 th days of January, 2016. Dated at the City of Calgary, Alberta this 20th day of January, 2016. K.M. Eidsvik J.C.Q.B.A. Appearances: G.B. Davison, Q.C. for the Receiver R. Algar R.

Zahara for ATB for the Applicant D. S. Nishimura for POA C. E. Hanert for COGAM A. C. Maerov for the Respondents