Northern Transportation Company Limited (Re), 2016 ABQB 522

Court of Queen’s Bench of Alberta Citation: Northern Transportation Company Limited (Re), 2016 ABQB 522 Date: 20160922 Docket: 1601 05256 Registry: Calgary In the Matter of the Companies’ Creditors Arrangement Act , R.S.C. 1985, c.C-36, as amended And In the Matter of a Plan of Arrangement of Northern Transportation Company Limited _______________________________________________________ Memorandum of Decision of the Honourable Madam Justice C.

Dario _______________________________________________________ [ 1 ] This action arises due to a delay in payments by the Applicant Northern Transportation Company Limited (“ NTCL ”) to the respondent ITB Marine Group Ltd. (“ ITB ”) owing pursuant to a Charter Party and Equipment Lease Agreement (“ Lease Agreement ”). Under the Lease Agreement, NTCL charters 19 vessels and related assets (collectively, the “ Assets ”) primarily located in the Northwest Territories to service remote communities. ITB treats the delay in payment as a default under the Lease Agreement.

It seeks to enforce its rights under the Lease Agreement and a related purchase agreement (“ Purchase Agreement ”) between the parties, requiring NTCL to make immediate payment of the balance of the purchase price for the Assets.

NorTerra Inc. (“ NorTerra ”), the 100% owner of voting shares in NTCL, entered into letter agreements with ITB in which NorTerra agreed to be jointly and severally responsible for the payment of the monthly lease payments and also for the balance of the purchase price in the event of a default by NTCL. [ 2 ] ITB notified both NorTerra and NTCL of the event of default and its intent to enforce its rights. NTCL paid the outstanding monthly lease payments within 10 days of such notice and argues it made the delayed payments within the grace period as set out in the Lease Agreement.

ITB continues to consider the delayed payments an event of default.

While the parties were engaged in contractually mandated dispute resolution, NTCL came under Companies’ Creditors Arrangement Act , RSC 1985, c C-36 (“ CCAA ”) protection. [ 3 ] The Assets are central to NTCL’s operations; NTCL argues that ITB’s enforcement of its contractual remedy – requiring NorTerra to make immediate payment of the balance of the purchase price - would defeat the purpose of the protection afforded by the CCAA . [ 4 ] NTCL seeks an order from this Court: 1) declaring that the Lease Agreement is not in default, either on its own terms or due to the right of reinstatement under the applicable PPSA , 2) reinstating the Lease Agreement, or 3) granting an order extending the stay of proceedings to NorTerra.

A. Declaring the lease is not in default [ 5 ] NTCL states that the Lease Agreement is not in default, either by virtue of its own terms or due to the right of reinstatement under the applicable Personal Property Security Act provisions.

Contract Terms: [ 6 ] The parties entered into the Purchase Agreement to purchase the Assets in October 2013. This purchase was structured as a charter and lease for a period of time, with monthly lease payments followed by a Closing Date of the purchase and sale on May 31, 2018 (at which time the balance of the purchase price was due). The Lease Agreement was entered into by the parties contemporaneously with and in furtherance of the Purchase Agreement. The completion of the purchase is subject to an earlier closing date under certain circumstances, including upon an event of default by NTCL under the terms of the Lease Agreement. [ 7 ] The Lease Agreement defines an event of default at

section 12.1, including ss. 12.1(a) - a failure to make punctual monthly payments, provided that if such failure is: …due to oversight, negligence, errors or omissions on the part of [NTCL] or its bankers, [ITB] shall give [NTCL] ten (10) days in which to rectify the failure, and when so rectified within such period following [ITB’s] notice, the [monthly lease] Payment shall stand as regular and punctual. (Emphasis added.) [ 8 ] NTCL did not make the regular lease payments on February 29 and March 31, 2016, when due. [ 9 ] There is some dispute about the timing and nature of the communications the parties had after the missed payments.

NTCL states it believed ITB was granting it a stay in enforcing its rights under the agreement, and that steps would not be taken as long as discussions were ongoing. ITB denies any such representation. The evidence supports a finding that the parties had a discussion about the late payments on March 31; however, there is no evidence of a prior communication that NTCL could be relying upon for its belief that a stay had been granted.

Subsequent letters back and forth between the parties suggest they had a different impression of what ITB had agreed to in the March 31 meeting. [ 10 ] On April 8, 2016, ITB advised both NorTerra and NTCL that it considered the non-payments as an event of default.

ITB demanded immediate payment of outstanding lease payments by NorTerra on NTCL’s behalf, while reserving its rights to exercise other remedies under the agreements and under the NorTerra guarantee pertaining to the lease payments. [ 11 ] On April 14, ITB confirmed that it was electing to set an early closing date pursuant to s.13 of the Purchase Agreement, and provided confirmation of its intention to enforce security under the agreement. [ 12 ] NTCL made the delayed payments on April 18; ITB received those delayed payments under protest and placed the payments in trust with its counsel.

Pursuant to the terms of the related Purchase Agreement, the parties entered a 30-day period of dispute resolution. During that period, on April 27, 2016, NTCL went into CCAA protection. [ 13 ] NTCL argues that it paid the outstanding amount on April 18, which is within 10 days of the notice demanding repayment of April 8, 2016. It argues that only upon receiving the demand notice of April 8 did it realize that ITB was not granting a stay during the negotiations. By paying within the 10 day period, NTCL argues it is within the terms of s.12.1(

a) of the Lease Agreement. [ 14 ] The respondent (ITB) counters that by the time of the March 31discussion and the April 8 demand notice, NTCL was already in default of the February 29 payment and therefore could not have been relying on any subsequent discussion for a stay relating to that default, nor could the March 31 discussion be the basis of any mistake or error when the February 29 payment was due.

Also, ITB argues that the Lease Agreement contains a provision requiring any amendment to the agreement to be in writing; therefore, NTCL could not rely on a representation that payment could be suspended unless NTCL obtained it in writing from ITB, which it did not. [ 15 ] To fit within the provision of s.12.1 (a), the Court must determine whether the acts of NTCL in not paying the two missed lease payments could be considered due to “oversight, negligence, error or omission”. [ 16 ] In this context, these terms are to be interpreted by looking and their plain and ordinary meaning, unless there is ambiguity or if doing so would create an absurd result.

As noted in the CED 4 th (online),

Interpretation of Contract , “General Principles” (IX.1) at §552: The objective of interpreting a contract is to discover and give effect to the parties' true intention as expressed in the written document as a whole at the time the contract was made. In the absence of ambiguity, the plain, ordinary, popular, natural, or literal meaning of the words, read in light of the entire agreement and its surrounding circumstances, should be adopted, except where to do so would result in a commercial absurdity or create some inconsistency with the rest of the contract.

See also Freyberg v Fletcher Challenge Oil & Gas Inc , 2005 ABCA 46 , 252 DLR (4 th ) 365 at para 65 , leave to appeal to SCC refused, [2005] SCCA No 167): ...reliance on the plain and obvious meaning of the words has the advantage of certainty and is to be preferred unless an absurd result would ensue. Error [ 17 ] NTCL asserts that the delay in payment was caused by an error (or misunderstanding) arising from the communications between NTCL and ITB, therefore bringing it within s.12.1(

a) of the Lease Agreement. In its April 18, 2016 letter, it notes it was under the impression ITB was prepared to wait until mid-April for NTCL to provide an update on plans to make outstanding lease payments. In the same letter, and as confirmed by statements by its principal in support of this application, NTCL noted that during the withheld payments period it had been “looking to rationalize its operations, and has in recent weeks been considering various options in this regard”.

ITB counters that the withheld payments were a tactic to put NTCL in a better position as it attempted to negotiate new contract terms with ITB. This view is supported by affidavit evidence of ITB’s Vice President, Finance that a verbal offer was made by NTCL on April 15, 2016, to make the delayed payments subject to ITB consenting to reduced payments through to November 2016. ITB declined

that offer. [ 18 ] The evidence regarding the acts of NTCL supports the contention that it intended not to pay the two delayed lease payments in an attempt to rationalize its operations. NTCL knew the payments were due and chose not to pay at the designated time. It is not possible to characterize these intentional acts as an error in this context. In particular, any mistake or error arising from an understanding that came out of a discussion from the March 31 conference call does not retroactively bring the February 29 delayed payment within the confines of

section 12.1(

a) of the agreement. There is no evidence of discussions suggesting a stay of enforcement prior to March 31, nor is there a commitment to this effect in writing as required under the Lease Agreement. [ 19 ] While NTCL’s actions resulting in the delayed payments may have been an error in judgment or in its understanding of NTCL’s rights under the agreement, I find that this is not within the meaning of “error” in s.12.1(

a) of the agreement. Oversight [ 20 ] Similarly, based on the ordinary and natural meaning of the word, these intentional acts cannot be considered an “oversight”. Omission [ 21 ] Applying the principle of ejusdem generis (words of general meaning take their color from the words that precede it) , an omission in this context in my view similarly cannot be an intentional act of choosing to not make timely payment, as this is not consistent with the unintentional element contained in the other words listed in that portion of the provision. Further, it would render specific words in s.12.1(

a) superfluous. If so interpreted, any failure to pay (whether intentional or not) would require notice and a 10 day grace period within which NTCL could remedy the default; there would be no need to enumerate error, oversight or negligence as reasons for the failure.

Negligence [ 22 ] The meaning of negligence in this contract is also to be understood in its ordinary sense, being the “failure to take the care that a responsible person usually takes: lack of normal care or attention”: Merriam-Webster Dictionary (online), sub verbo “negligence”. [ 23 ] This is similar to our legal understanding of the word, which is defined in Black’s Law Dictionary is as follows: The failure to exercise the standard of care that a reasonably prudent person would have exercised in a similar situation; any conduct that falls below the legal standard established to protect others against unreasonable risk of harm, except for conduct that is intentionally, wantonly, or wilfully disregardful of others' rights. … The term denotes culpable carelessness .

Black’s Law Dictionary, 10th ed, sub verbo "negligence"; as applied in Cambridge Realty (Ottawa) Ltd. v. Aviva Insurance Co. of Canada , [2008] O.J. No. 3090 , at para31. [Emphasis added] [ 24 ] In the context of this provision, NTCL’s intentional conduct does not fit within this definition either. NTCL was not careless when it failed to make payments on time, but intentionally chose not to.

Similar to an “omission”, in the context of this provision, to give effect to the words “error, oversight, negligence or omission”, negligence could not be the result of a deliberate decision to not pay as required. [ 25 ] In light of the circumstances in which NTCL failed to make timely lease payments, I find s.12.1(

a) of the Lease Agreement is not applicable. Based on the terms of the contract, at a minimum the delayed payment of February 29, 2016, constitutes an event of default. Statutory Right of Reinstatement [ 26 ] NTCL alternatively argues that the lease is not in default, as the statutory regime allows debtors to reinstate the lease by making up the overdue payments, which it now has done. Specifically, s.63(1) (

b) of the Alberta Personal Property Security Act , RSA 2000, c P-7 (“ Alberta PPSA ”) allows a debtor to reinstate the agreement by paying the amounts actually in default together with reasonable expenses incurred by the secured party. [ 27 ] The parties treat the Lease Agreement as a “security lease” as it secures payment or performance of an obligation, namely the payment of the purchase price: per s.1(tt) and s.3(1)(

b) Alberta PPSA and s.1 and s. 2(1) (

b) British Columbia Personal Property Security Act , RSBC 1996, c 359 (“ BC PPSA ”) . The Lease Agreement was registered on both the Alberta and Northwest Territories Personal Property Registries as a Security Agreement. [ 28 ] An issue in question is which PPSA legislation applies in this case. ITB disputes that the Alberta PPSA applies, as both the Lease Agreement and the Purchase Agreement contain a choice of law provision designating that the agreements be governed and construed in accordance with the laws of British Columbia, where ITB carries on its operations.

NTCL argues that it has relied upon the Alberta statutory provisions to reinstate the lease, and such provisions supersede the contract provisions. [ 29 ] The BC PPSA right of redemption or reinstatement for non-consumer goods differs from the Alberta legislation. Under the Alberta PPSA , a debtor may reinstate the security agreement by merely paying amounts outstanding ( exclusive of the operation of any acceleration clause, but including reasonable expenses of the secured creditor): Alberta PPSA s.63(1)(b).

Under the BC PPSA , however, for non-consumer collateral, or if the debtor is a corporation, the debtor is only entitled to redeem the collateral by tendering fulfillment of the obligations secured by the collateral: BC PPSA s.55(4) and s.62(1) (a); the redemption right is also available per Alberta PPSA s.63(1)(a). Appling the BC PPSA provisions to the present case would require NTCL to make full payment of the purchase price upon which NTCL would redeem (or here retain) the Assets. That is the same relief that ITB is now demanding.

[ 30 ] Alberta and BC PPSA legislation require that procedural issues involved in the enforcement of the rights of a secured party against tangible collateral be governed (for B.C.) by the law of the jurisdiction in which the enforcement rights are exercised, or (for Alberta) where the collateral is located at the time of exercise of enforcement rights. On the other hand, “substantive issues involved in the enforcement of the rights of a secured party against collateral are governed by the proper law of the contract between the secured party and the debtor”: section 8(1) (

c) Alberta PPSA ; 8(1)(

b) BC PPSA . ITB asserts, and NTCL does not contest, that the right of reinstatement after default of a contract is a substantive issue: in essence, this is the finding in Houle v BMW Financial Services , 2012 ABCA 333 , 539 AR 27. [ 31 ] NTCL states that despite the “applicable law” provisions contained in s.8 of the respective PPSA provisions, the parties are prohibited from contracting out of certain debtor protections, including the right of reinstatement contained in s.63 of the Alberta PPSA .

It argues that inequality of bargaining power requires the court to apply the more favorable debtor protection legislation. [ 32 ] ITB argues that this position is only appropriate where the secured party is pursuing enforcement measures (e.g. attempting to seize the collateral in the domicile of the debtor). [ 33 ] The authority for NTCL’s proposition that the more favorable debtor protection legislation applies is based on provisions in the legislation that preclude waiver — by agreement or otherwise — of certain debtor rights and secured party obligations.

These provisions, subsection 56(2) of the BC PPSA and 56(3) of the Alberta PPSA address the parties rights and remedies, and specifically reference the redemption and reinstatement provisions of the respective acts: Except as provided in [various sections including in the Alberta PPSA s. 63, and in the BC PPSA s.62], no provision of [various sections including in the Alberta PPSA ,s.63, and in the BC PPSA s.62], to the extent that it gives rights to the debtor or imposes obligations on the secured party, can be waived or varied by agreement or otherwise.

Sections 63 and 62 of the Alberta and BC legislation respectively provide that the debtor can agree otherwise (which means it can waive the right of redemption (BC) or reinstatement (AB)) but only after the default has occurred. [ 34 ] The phrase “by agreement or otherwise” in the provision suggests that the waiver may occur otherwise than by the parties necessarily having intentionally addressed the issue specifically by agreement - even through the unintentional consequence of a choice of law provision. This broad wording is in keeping with consumer protection.

One might argue, however, that the application of s.8 of the respective PPSA is not a waiver of the debtor rights, rather it is a determination of what rights the debtor has.

As such, the function of the non-waiver provision of s. 56 is not to undermine the clarity or application of s.8. [ 35 ] While there is a concern that parties may use the choice of law provision to contract out of the debtor protection, it also does not seem appropriate that the debtor is entitled to benefit from being able to pick from the most favorable legal regime (e.g. under the law of the contract, or where the debtor is located) in every instance. [ 36 ] The present case highlights a tension between two conflicting policies: debtor protection on the one hand (especially consumer debtor protection), and on the other, freedom of contract, which allows the parties to create greater certainty in understanding the legal regime which governs their agreement. [ 37 ] If debtor protection policy is applied in this case, it would mean that NTCL would be entitled to benefit from the reinstatement rights permitted under the Alberta PPSA notwithstanding the choice of law provision in the contract, and the statutory recognition of that designation as it applies to substantive issues per s.8(1)(c).

Arguments in favor of application of debtor protection include the express wording of s.56, including a specific reference to the reinstatement provision.

Section 56 in effect states that no provision of s.63 (and other sections) that gives rights to NTCL or imposes obligations on ITB can be waived by agreement of the parties or otherwise (except where the waiver occurs after the default).

Clearer still would have been to clarify within s.56 hoe s. 8 applies. [ 38 ] There is also some authority for the proposition that the PPSA legislation in the debtor’s domicile applies and the parties are not allowed to override the protective provisions of that PPSA regime when the debtor and collateral are both located in a jurisdiction with greater debtor protection legislation, notwithstanding the choice of law provision in the [security] agreement to the contrary: Ronald CC Cuming, Catherine Walsh, & Roderick Wood, Personal Property Security Law, 2d ed (Toronto: Irwin Law, 2012) at 229.

See also for example Cahoon, Re, 2006 NSSC 30 , 17 CBR (5 th ) 234, and Cardel Leasing Ltd. v. Maxmenko , (1991), 2 PPSA C (2d) 302 , although these cases are highly distinguishable on the facts and issues in question. [ 39 ] In favor of the freedom of contract perspective in this case is the clear wording of s.8, that there is some nexus to the jurisdiction chosen in the contract (the secured party operates its business in B.C.) and the fact that the debtor and collateral are not in the same jurisdiction.

The debtor is located in Alberta; the collateral is in neither BC nor Alberta, but in the Northwest Territories. Professor Cuming notes that this type of circumstance is less clear and there is little or no authority on the issue: supra at pages 230, 231. Instead, the author cautions against over-broad application of debtor protection principles. Speaking generally about the reach of debtor protection provisions, Cumming states at pages 230-231 . The discussion to this point has involved a scenario in which the only out of province element is the extra-provincial identity of the secured party.

Where the connecting factors are more diffused, it may be appropriate for a court to take a more nuanced and restrained approach to determining the extra-territorial reach of mandatory debtor protection rules....

In addition, not every mandatory debtor protection rule necessarily implicates the fundamental public policy of the enacting legislature to the extent of commanding application even in secured transactions with an extra-provincial connection. ... if the consequences of non- compliance do not have a similarly substantive impact on the debtor’s rights or liabilities, a case can be made for their non-application in transactions involving an out of province secured party or other extra-provincial element. [ 40 ] A further consideration is that the debtor protection in this case is not consumer in nature.

While this distinction is not addressed in the Alberta PPSA , the non-consumer nature of the collateral and the corporate identities of the parties alleviates some of the concern around consumer protection. For example, the BC PPSA distinguishes between consumer and non-consumer collateral in setting

out the redemption and reinstatement rights in s.62 of that act. This presumably is because the statutory protection is considered to bemore necessary for consumer goods transactions where an inequality of bargaining power is more likely to be present than fortransactions between parties dealing with non-consumer goods, as more often than not they are transactions between two sophisticatedcorporate entities, such as in this case.

Similarly, the BC PPSA distinguishes between corporate and non-corporate actors, the latter ofwhich cannot rely on the reinstatement right: BC PPSA s.55(4). [41] Regarding the argument of unequal bargaining power, the relevant time to consider the parties’ relative positions is at the timeof entering into the agreement - not the time of enforcing it. In the present case, it is not clear that ITB, a family owned operation, hadgreater bargaining power in negotiating the agreements than NTCL and its numerous related entity corporations.

Arguably, where theparties are of equal bargaining power, it makes less sense to allow a debtor to rely on the more favorable legislative regime of itsdomicile when the parties have agreed to something else, particularly where the collateral is in a different location than the debtor. [42] In the factual matrix presented by this case, the policy interests served by enforcing freedom of contract are more compellingthan affording the debtor the additional statutory protections. [43] I find that determining the applicable legislation on substantive issues based on the location of the corporate debtor,independent of the location of the non-consumer good collateral, and in conflict with the governing law chosen by the parties in thecontract, absent other factors, cannot be the result of the statutory regime.

The debtor’s rights in this case are determined by s.8 of therespective statutes. The BC PPSA provisions apply in this case to determine whether the debtor can reinstate the lease. [44] Although the right to reinstate a lease is more limited under the BC PPSA provisions, the legislation does give the court theability to intervene, upon application by the debtor, to relieve the debtor from the consequences of the default, or to stay enforcement ofany payment acceleration provision of a security agreement that triggers upon default: BC PPSA ss. 62(3).

NTCL urges this Court toexercise such discretion in this case given that it has paid all of the arrears and has offered to pay for interest or costs arising from the latepayment. [45] While contracting parties should be held to the bargains they have agreed to, this judicial discretion should be exercised wherejust and fair to do so: CTF Holdings Ltd. v Flint Motors Ltd.(1995), (BC SC), 14 BCLR (3d) 82, [1995] BCJ No2305 (BCSC) at para 11 [CTF Holdings].

Given that this is a form of equitable relief, the conduct of the parties, and particularly thedefaulting party, is a primary factor to be considered: CTF Holdings at para 11. [46] Current case law on this issue deals with circumstances that lie at the ends of the spectrum: on one end, where the creditoragrees with the reinstatement: MacDonald v Searle, [1992] BCJ No 2865 ( BCSC); or where the default was unanticipated and beyondthe control of the debtor (relief was granted to a mortgagor who defaulted when it failed to pay property taxes on time due to investmentsthat would have been used to pay the taxes being tied up in the unanticipated bankruptcy of the company in which it invested): VohraEnterprises Ltd. v Creative Industrial Corp (1988), 47 BCLR (2d) 120, 47 RPR 243, (BCSC); or when relief was granted to a debtorwho missed an instalment payment because of a bank error in clearing her cheque: Sloan v Dierden, (1984), (BC SC),52 BCLR 193, [1984] BCJ No. 2897 (BCSC); to the other end where there has been a flagrant and contemptuous disregard of the partiescontractual obligations.

This was the case in CTF Holdings, where the conduct of the debtor in granting security to three other creditorsin contravention of its security agreement with the plaintiff was considered flagrant and contemptuous disregard of contractualobligations, even though the plaintiff could have secured itself through registering its interest on the PPSR.

The Court found there wereno conditions it could impose to return the parties to their pre-breach positions. [47] In Bank of Montreal v Amar Enterprises Ltd., [1994] B.C.J No. 648 (BCSC) [Amar], the Court granted relief fromacceleration despite numerous acts that constituted breaches under the mortgage agreement. The Court considered that the breach wasnot against payment of principal and interest in the mortgage itself, rather the breaches were in relation to other covenants under theagreement. It also noted that most of the defaults that could be rectified had been by then.

This finding may seem at odds with thewording of s. 62(1)(

a) of the BC PPSA (as if full or partial rectification were the only basis for granting this relief, there would be noreason for the difference in the redemption and rectification language between the Alberta and BC PPSA legislation). It is possible,however, that a central consideration in that decision was the fact that the breach was not against the mortgage payment itself but withrespect to breaches of obligations to third parties - and thus the Court may have reasoned that it had greater jurisdiction to exercise itsdiscretion.

The Court did find the behaviour close to the line, noting “[c]learly the respondent corporation's conduct has been imprudentand acutely lacking in diligence but I think it falls just short of constituting flagrant and contemptuous disregard of contractualobligations”, at para. 7.

Even under the specific circumstances as found in Amar, the granting of this relief is discretionary. [48] In deciding when to exercise this discretion, one may consider whether the circumstances leading to the default are a flagrantand contemptuous disregard for contractual obligations, or if instead they are a result of an unanticipated event outside the debtor’scontrol (or at least intent) or are circumstances that otherwise make it fair and just for a court to intervene.

The difference in the wordingof the legislation suggests that something more than just payment of the default amounts outstanding and associated costs should bepresent to justify court intervention. A court must further consider whether, in granting such relief, the conditions of such relief could putthe parties back in their pre-breach positions (even in circumstances where such default may be innocent). There will be cases that fall inthe middle of this spectrum.

In the present case, however, there was an intentional act which - unlike Amar - I find falls over the line; thecourt will not intervene to remedy an intentional disregard of a primary contractual obligation of the Lease Agreement. [49] As such, this is not an appropriate case in which the court should intervene, and the event of default remains; NTCL remainsin breach of the Lease Agreement. B. An order reinstating the lease [50] In the event this Court finds that the lease is in a default position, NTCL asks the Court to provide an order reinstating thelease.

NTCL notes that, given how much has already been paid by it to ITB in consideration of the $12,900,000 purchase price (plusinterest), it would be unjust to allow ITB to enforce its rights over what amounts to a six week delay in the payment of lease installments.

Specifically, NTCL has already paid in excess of $7,339,500 toward the purchase price of the Assets and has less than $8,788,000 left topay. [51] While NTCL argues it has also made two subsequent payments that were not protested, ITB notes that these payments wereelectronic transfers and could not be refused, that ITB was not even immediately aware that the payments had been made, and once theywere aware of a payment, provided it to their counsel to be held in trust consistent with ITB’s prior communication to NTCL regardingpayments received. [52] The Applicant argues that the court historically grants relief from forfeiture in cases where there has been a fully cured defaultof the lending agreement; and that in this case, the default has been fully cured. [53] Pursuant to

section 13 of the Purchase Agreement, ITB had two contractual entitlements upon an event of default of the LeaseAgreement: ITB could elect to

a) terminate the Lease Agreement and repossess the vessels and additional Assets, or

b) trigger an earlyclosing for the purchase transaction, requiring payment of the balance of the purchase price for the Assets. It chose to exercise the latter. [54] As such, there is no forfeiture in this case. The consequence of the default is not to retain the payments while the debtor losesall interest in the underlying Assets, rather it is to accelerate payment of the balance of the purchase price. NTCL loses the ability to paythe purchase price over time, but remains entitled to use and retain the Assets.

Thus, the debtor is not being deprived of real or personalproperty: Raven Holdings Ltd. v Lastiwka (1980), 28 AR 199, [1980] AJ No. 800 at para 13, (ABQB) [Raven Holdings]. Anacceleration clause requiring, where payment due is not made, the full principal outstanding with interest to the date when the principalis paid does not constitute forfeiture: Emerald Christmas Tree Co. v Boel & Sons Enterprises Ltd. (1979), (BC CA),105 DLR (3d) 75, 8 RPR 143, [1979] BCJ No. 542 at para 16 (BCCA) [Emerald Christmas cited to QL]; Bradford Bachinski Ltd. vMerchant Capital Group Inc., [2003] O.J.

No. 3947 (ONSC) [Bradford Bachinski] at para 44. [55] As there is no forfeiture, the Court cannot grant relief against it. [56] NTCL points to some authority for striking the acceleration clause when it is considered a penalty (as opposed to liquidateddamages): S M Waddams, The Law of Contracts, 6th ed (Aurora Ontario: Canada Law Book Inc., 2010) 336 at para 463. In the presentcase however, we are not addressing the distinction between a penalty and liquidated damages.

Even if we were, the agreements heredeal with payment for the balance of the purchase price, which is similar to liquidated damages and not a penalty. [57] In any event, similar to its treatment of forfeiture, courts have found that acceleration clauses, where the creditor merelyclaims the amount of debt owing, are not a penalty; that it is impossible to hold that money due by contract can be converted into apenalty: Raven Holdings at para 11, citing Thompson v Hudson, 4 E. & I. App.1 (HL) at p 28.

Stated another way, if a larger sum is tobe paid upon default, it may constitute a penalty, however, a stipulation to pay upon default a sum not larger than the total amountinitially intended is not a penalty: Raven Holdings at para 12; see also Emerald Christmas at para 16; Bradford Bachinski at para 44. Inthe present case, all that NTCL is required to pay is the balance of the purchase price and in exchange it receives the Assets.

The factorsa court might rely upon to strike such a clause as a penalty are not present in this case. [58] Additionally, ITB argues that granting this equitable relief is not justified in this case. Here, the conduct of the Applicant wasintentional and it has not come to seek relief with clean hands. C. An order extending the stay of proceedings to NorTerra [59] In the final alternative, NTCL requests that the Court extend the stay of proceedings to NorTerra, arguing that if ITB pursuesNorTerra as guarantor the CCAA proceedings will be frustrated.

NTCL has been granted a stay of proceedings by order dated April 27,2016, and the stay was extended by orders dated May 26, 2016 and September 20, 2016. That extension expires on October 31, 2016. Byseparate order of May 27, 2016 ITB was stayed from taking any steps with respect to its claims against NTCL or NorTerra pending thedisposition of this application. [60] Relevant to seeking an extension of the stay to NorTerra is the debt structure of NTCL and its related companies. NTCL is asubsidiary of NorTerra, a holding company, which is in turn owned by Inuvialuit Development Corporation (“IDC”).

NorTerra hasborrowed in excess of $150 million, including $72 million under a credit agreement pursuant to which NTCL and other NorTerrasubsidiaries are guarantors, from a lending syndicate (the “Syndicate”). The Syndicate has subsequently entered into a forbearanceagreement with NorTerra.

If the NorTerra letter agreement commitment is invoked, obligating it to pay approximately $9 million to ITB,NorTerra would be in breach of the credit agreement and/or the forbearance agreement (assuming NorTerra is not in a position to paythat amount within 15 days per the terms of the credit agreement), which could potentially cause the Syndicate to enforce its security. [61] Representatives of the Syndicate, present at the application, did not comment on what the Syndicate’s response would be inthat eventuality. [62] ITB argues the Court must consider whether NTCL and NorTerra are so interrelated that enforcement against NorTerra wouldfrustrate the CCAA proceeding. [63] If a default by NorTerra under the credit and/or forbearance agreement were to occur, NTCL argues that as a guarantor of thatdebt, the restructuring of NTCL would be directly and imminently threatened; cratering NTCL’s attempt at recovery.

While the creditagreement was made available to this Court for review, the parties did not provide more detail around NorTerra’s financial position andwhether it could fund the purchase price balance (although it is acknowledged that the existence of the forbearance agreement, and thefinancial thresholds set out within the credit agreement, are fairly strong indicators).

NorTerra is not seeking to be added to the CCAAproceedings generally, but only with respect to the Letter Agreement pertaining to the payment of the balance of the purchase price. [64] IDC is the Debtor-in-Possession Lender (“DIP Lender”) under the CCAA proceedings, and has provided additional credit

financing to NTCL. IDC is the parent company that owns NorTerra, and owns the non-voting shares of NTCL. It is not clear what IDC’sfinancial situation is and whether a default by NorTerra would affect IDC and its ability to continue as the DIP Lender. [65] NTCL notes that the prejudice to its restructuring plan resulting from ITB’s enforcement could be extreme, while theprejudice to ITB in the 6-week delay in payment is immaterial.

Further, NTCL argues that ITB has first priority security against thevessels, limiting prejudice to ITB as the CCAA process is conducted. [66] In evaluating whether to extend the stay to NorTerra, I must consider the provisions of the CCAA governing stays. Section11.02 is the provision authorizing the court to issue a stay of proceedings in respect of the debtor company on an initial application, andsection 11.04 specifically discusses the non-application of stays to letters of credit and guarantees: 11.04 No order made under

section 11.02 has affect on any action, suit or proceeding against a person, other than the company in respectof whom the order is made, who is obligated under a letter of credit or guarantee in relation to the company. [67] Preliminary issues then are whether the letter agreements of NorTerra constitute guarantees, and if so, whether the legislationprohibits or permits the stay to extend to a guarantor. [68] ITB argues that the letter agreements are guarantees, and that

section 11.04 specifically precludes the court from extending astay to guarantor such as NorTerra. NTCL argues that the letter agreements are not guarantees. Additionally, it argues that

section 11.04is not a prohibition, but merely clarifies that an initial stay granted under s. 11.02 does not extend automatically to guarantors.

NTCLsubmits that courts can extend stay of proceedings to guarantors in appropriate circumstances. [69] Addressing first whether the letter agreements are guarantees, I note the features of a guarantee include that there is primaryand secondary liability, and only after the primary debtor defaults on some covenant or obligation is the secured party entitled to turn tothe guarantor to make good on the guarantee: The relationship thus created fits the classic definition of guarantee [as outlined in McGuinness, The Law of Guarantee (Toronto:Carswell, 1986) at 1]: ... a guarantee is a promise by one person to answer for the due performance of the obligation of another person(whether imposed by law or contract) in the event that the other person fails to perform that obligation as required.

Canada (Attorney General) v. Becker, 1998 ABCA 283, 64 Alta. LR (3d) 292, at para. 53 Hunt J.A. (partially concurring) [70] The nature of a contract of guarantee is that the primary debtor will perform his contract and the guarantor has to answer forthe consequence of the primary debtor's default: Schell v. McCallum & Vannatter (1918), (SCC), 57 SCR 15 (SCC),[1918] 2 WWR 735, at paras 50, 51 Brodeur J. (dissenting). [71] Alternatively, typically where parties are jointly and severally liable for a debt, it is not a guarantee as there is no primary andsecondary liability: Bank of Montreal v.

Burns (1986), (AB KB), 76 A.R. 220, 1986 CarswellAlta 672, (ABQB) atparas 21, 25 and 26. [72] NTCL argues that the letter agreements are not guarantees because the joint and several liability constitutes a primaryobligation to each of NTCL and NorTerra, and there is no condition which has to occur before the guarantee obligation of NorTerra canbe invoked (as it can be drawn upon without proof of default). [73] In this case, although neither of the NorTerra letter agreements specifically use the term “guarantee” in the document, and theletters state that NorTerra will be jointly and severally liable with NTCL for the lease payments and the purchase price, the agreementsalso provide that “ITB must first take reasonable steps to seek recourse against and payment from NTCL before being entitled to seekpayment from NorTerra” under that letter agreement.

As such, there is a guarantor structure to the NorTerra letter agreements; theprimary obligation is that of NTCL, and only in its failure to pay after reasonable steps have been taken could ITB turn to NorTerra forpayment. [74] Given this structure, I find NorTerra is the guarantor of specified NTCL’s payment obligations under the Lease Agreementand the Purchase Agreement. [75] As I have found the letter agreements constitute a guarantee, the language of s. 11.04 of the CCAA is particularly relevant; itstipulates s. 11.02 has no affect on any action, suit or proceeding against a person (other than the debtor) who is obligated under aguarantee in relation to the company. [76] Even though I find NorTerra a guarantor, NTCL posits that the Court may nonetheless extend the stay to NorTerra.

Itsposition is that the language of s. 11.04 of the CCAA only clarifies that the initial order does not automatically extend to guarantors; it isnot a prohibition.

NTCL argues that courts may exercise their inherent jurisdiction to extend the CCAA stay of proceedings to guarantorsin appropriate circumstances; essentially, when such guarantor and the company in the CCAA proceedings are inextricably linked andrefusing to extend the stay would frustrate the purposes and objects of the CCAA. [77] NTCL states the determination of whether to exercise such jurisdiction requires a balancing of interests, citing Houlden,Morawetz & Sarra, The 2016 Annotated Bankruptcy and Insolvency Act (Toronto: Thompson Reuters, 2016) at 1328: In deciding whether to exercise its jurisdiction, the court must weigh the interests of the debtor company against the interests of the thirdparties who will be affected by the stay.

If the prejudice to the third parties is greater than the benefit that will be achieved by the debtorcompany, the court should decline to exercise its authority: Re Woodward’s Ltd (1993), 17 CBR (3d) 236, 79 BCLR (2d) 257 (S.C.) Stay orders have been made against third parties who are not creditors of the debtor corporation where the actions of the third partiescould potentially prejudice the success of the plan: Re Lehndorff General Partner Ltd. (1993) 17 CBR (3d) 24, 9 BLR (2d) 275 (Ont GenDiv [Commercial List]); Norcen Energy Resources Ltd. v Oakwood Petroleums Ltd (1988), (AB KB), 72 CBR (NS)

1, 63 Alta LR (2d) 361, 92 AR 81(QB); Re T. Eaton Co. (1997), (ON SC), 46 CBR (3d) 293 (Ont Gen Div). [78] While a court may weigh the interests of the parties and consider whether the actions of third parties could potentiallyprejudice the success of the plan, none of the referenced cases dealt with a situation of the third party being a guarantor to the debtor.

Onits plain reading as well as the existing case law, I do not find that the language of 11.04 is to be applied as NTCL suggests. [79] Instead I agree with the position of ITB that courts have been reluctant in the past (even prior to the enactment of s.11.04) togrant stays of proceedings against guarantors, and that s. 11.04 (enacted in 2009), reflects that position. In Keddy Motor Inns Ltd. (Re)(1991), (NS SC), 107 NSR (2d) 419, [1991] N.S.J. No. 381 (NSTD) [Keddy Motors cited to QL], the Court heard anapplication to stay proceedings against guarantors of the debtor company. It reviewed

section 11 (similar to the present 11.02), and foundthe

section does not authorize a court to issue a stay against a guarantor, at pg. 4: Since s-s. (

a) deals with "proceedings ... in respect of the company under the Bankruptcy Act and the Winding-up Act or either of them",since s-s. (

b) deals with "any action, suit or proceeding against the company", and since s-s. (

c) deals with ordering that no suit, action orproceeding shall be commenced or proceeded with "against the company", it is clear that there is nothing in s. 11 which authorizes acourt to stay in respect of or against any entity other than the debtor company. It does not authorize a court to stay in respect ofor against a guarantor of any indebtedness of the company. [Emphasis added] [80] The Court in Keddy Motors affirmed the decision in Browne et al v Southern Canada Power Company Limited (1941), 23CBR 131, 1941 CarswellQue 14 (Que.

CA) [Browne et al cited to WL], which notes that the purpose of a guarantee to assure thesolvency of the debtor, as stated by Barclay J, at para 21: In my opinion, this argument loses sight of the fact that the Companies’ Creditors Arrangement Act can only be invoked by a debtorcompany, which, under the terms of the Act, means ‘any company which is bankrupt or insolvent or which has committed in

an act ofbankruptcy’. It is a somewhat startling proposition that a surety can avail himself of the bankruptcy of his principal debtor to avoid ormodify his own obligation.

A contract of commercial suretyship, such as under the consideration in the present case, is generally for thevery purpose of guaranteeing the solvency of the principal debtor. … [81] In Browne et al, Barclay J. further stated at para 22 that under such circumstances it is not even material whether theguarantor actually consented to the compromise, as it would not change their relations with respect to the sureties. [82] In addressing the public policy objectives of the Act to keep the debtor company in operation and to treat the creditors fairly,the Court in Keddy Motors further held at p. 5 that: “[s]uits against guarantors who are principles ought not to have any adverse effectupon the operations of the company; indeed, satisfaction of debts by realization of guarantee should enhance the financial position of thecompany.

The principles -- not the company -- will suffer the effect.” [83] As noted, these cases were the position in the common law prior to the enactment of s. 11.04 of the CCAA; see also Guardian Trust Co v Gaglardi (1989), (BC SC), 64 DLR (4th) 351, [1989] BCJ No. 2274 (BCSC).

I do not see the enactmentof s.11.04 as enhancing the court’s ability to extend the stay to a guarantor. [84] NTCL however notes the comments of the Supreme Court of Canada in Centuries Services Inc. v Canada (AttorneyGeneral), 2010 SCC 60, [2010] 3 SCR 379, at paras 57-58 that the CCAA is skeletal in nature and related decisions are often based ondiscretionary grants, and at para 59 that: “[j]udicial discretion must of course be exercised in furtherance of the CCAA’s purposes.” Thismay be true, but in that same decision, at para 65, the Court notes that in interpreting the CCAA, “…the most appropriate approach is ahierarchical one in which the courts rely first on an

interpretation of the provisions of the CCAA text before turning to inherent orequitable jurisdiction to anchor measures taken in a CCAA proceeding [citations omitted]. … when given an appropriately purposive andliberal

interpretation, the CCAA will be sufficient in most instances to ground measures necessary to achieve its objectives…” [85] NTCL submits that the cases of Re Target Canada Co., 2015 ONSC 303, [2015] O.J.

No. 247, [“Target”] and Charles Morissette Inc., Re., 2014 QCCS 385, 30 CLR. (4th) 73 [translated] [“Charles Morissette’], which were both released after theenactment of s. 11.04, are relevant and bolster its position that the stay should be extended. [86] NTCL argues that Target is as an example of a case where the Court extended the stay of proceedings to Target Canada’s USparent in relation to claims that are derivative of the primary liability against the Canadian entities (those seeking CCAA protection). [87] Justice Morawetz’ decision in that case contained limited background or information regarding the scope of these derivativeclaims.

His entire decision on this point is contained at para 50: I am satisfied that the Court has the jurisdiction to grant such a stay. In my view, it is appropriate to preserve the status quo at this timeand the stay is granted, again, subject to the proviso that affected parties can challenge the broad nature of the stay at a comeback hearingdirected to this issue. [88] He goes on to note at para 81, many aspects of the initial order granted go beyond the usual first-day provisions in such cases,but he provided such broad relief to ensure the status quo is maintained.

At para 82, he also clarified: “[t]he comeback hearing is to be a‘true’ comeback hearing. In moving to set aside or very any provisions of this order, moving parties do not have to overcome any onus ofdemonstrating that the order should be set aside or varied.” [89] Although the case does not specify the nature of the derivative claims, NTCL suggests the US parent had guaranteed leaseobligations under the Canadian leases.

At an earlier point in Target, Justice Morawetz extended the stay proceedings to the landlordswho may have been exposed to claims by other tenants resulting from the anchor tenant becoming insolvent. The purpose of the staybeing extended to these landlords was to provide time for the debtor party (the Canadian Target entities) to sublease the tenancies to newtenants. Depending on the identity of such new tenants, it may have affected the nature of the other tenants’ claims (or at least theirdamages).

It is not clear to me based on this information whether the “guaranteed” obligation could be remedied during the stay.

[ 90 ] In any event, the fact that the stay was extended to the US Target parent company in the initial order suggests that Justice Morawetz had not intended the stay to apply to the that parent company in respect of an enforceable letter of credit or guarantee made for the benefit of the Canadian Target entities, as this would be in conflict with the clear wording of

section 11.04 of the CCAA . [ 91 ] NTCL states that in the present case, the claim against NorTerra is wholly derivative, as it is only by NTCL’s failure that the payment obligation of NorTerra would become enforceable. Therefore, this guarantee obligation is similar to the nature of the claim which the Court in Target deemed fit for an extension of the stay. Under this definition of derivative claim, however, virtually every guarantee would qualify for an extension of the stay to the guarantor. This

interpretation would render

section 11.04 meaningless. Even though they may be a subset of derivative claims, guarantees are specifically addressed in the legislation and are dealt with differently. I note that Target contains no actual discussion of

section 11.04, nor of guarantees, suggesting the issue before this Court may not have been expressly considered by Justice Morawetz. [ 92 ] Unlike the very general stay provided to the parent company in Target , ITB argues that this Court cannot extend the stay to protect just one party’s claim (ITB) against a third party (NorTerra) where that claim is in the nature of a guarantee. Absent other considerations, I agree. [ 93 ] NTCL also cites the decision of the Superior Court of Quebec in Charles Morissette in support of the proposition that a stay may extend to a guarantor.

The facts of that case are unclear, particularly in terms of the obligation to which the “surety” had committed. It appears that such party provided a letter of suretyship, and was prepared to assist the debtor company to continue operating during the CCAA proceedings, so long as it was not forced to defend itself in other matters arising out of the suretyship issued for the debtor company. [ 94 ] That Court considered whether s. 11.04 applied to the surety.

In doing so, it distinguished suretyship from a letter of guarantee based on the use of the term “surety” by the legislature in s. 179 of the Bankruptcy and Insolvency Act , RSC 1985, c B-3: An order of discharge does not release a person who at the time of the bankruptcy was a partner or co-trustee with the bankrupt or was jointly bound or had made a joint contract with the bankrupt, or a person who was surety or in the nature of a surety for the bankrupt. Given that the BIA uses a different term, that Court reasoned that the reference to guarantee in s. 11.04 of the CCAA must mean something different.

Based on this finding, the Court found s. 11.04 did not pertain to a suretyship, and therefore did not apply. [ 95 ] To the extent a difference was intended by parliament in the drafting of this legislation (a conclusion of which I am less certain than the court in Charles Morissette ), the granting of a stay in Charles Morissette is not relevant to the present case. In Charles Morissette , the surety had clearly signed a letter of suretyship. Here, the obligation of NorTerra is in the nature of a guarantee.

NorTerra’s obligation is provided by separate agreement, liability is ancillary and derivative: ITB must first attempt to collect the debt from NTCL before looking to NorTerra for payment, and it is the creditor (ITB) who is obligated to inform NorTerra of a default by NTCL; ITB cannot attempt to collect the debt from either party independently of the other. As stated already, I find the obligation of NorTerra to be a guarantee.

Thus, the finding excluding application of s. 11.04 to sureties (as distinguished from guarantees) in Charles Morissette has no application here. [ 96 ] While that Court found it could exercise its discretion when the stay being extended to a third party is necessary for the success of the plan of arrangement under the CCAA , that determination was made after noting that s.11.04 did not apply to the surety. As the prohibition in s. 11.04 was not a consideration, it was perhaps easier for the Court to exercise its inherent jurisdiction.

In any event, I have considered whether a stay is similarly necessary for the success of NTCL’s plan of arrangement in this case, however, I was not provided with sufficient evidence to come to such conclusion. [ 97 ] Finally and in contrast to NTCL’s position that the NorTerra obligation is an independent claim (rather than a secondary liability), NTCL also suggests that, since NTCL went into CCAA protection during the contractually mandated thirty-day dispute resolution period, the stay halts the expiry of that 30-day period.

As the passage of time is “stayed”, ITB has no claim against NorTerra until the passage of time can resume and the thirty-day period comes to an end. [ 98 ] No case or statutory authority was provided to support this view and the applicant bears the onus of establishing the basis for its claim in this matter. ITB argues that a stay is against the steps or proceedings taken - not against time. ITB’s position is more consistent with the wording of the initial order granting the stay, as well as s.11.02 of the CCAA . Further, NTCL’s

interpretation could create a disincentive to parties agreeing to a dispute resolution period in contracts, which would not necessarily be beneficial to the efficient resolution of disputes. All that the NorTerra letter agreement requires is that “ITB must first take reasonable steps to seek recourse against and payment from NTCL”.

It has done so and clearly cannot take further steps against NTCL during the CCAA stay. [ 99 ] In conclusion, this Court is concerned that in allowing enforcement of the present claim against NorTerra, the secured lenders that have granted a limited forbearance agreement in favor of NorTerra may enforce their security should NorTerra be unable to pay, the result of which could possibly fully frustrate the purpose of the CCAA protection granted to NTCL in this case.

Given NTCL, NorTerra and the parent entity IDC’s roles in providing essential products to remote Northern communities, the consequence of a disorderly wind down or failure to restructure could negatively affect many people.

It is not possible, however, based on the information in front of this Court to know whether payment of the purchase price as guaranteed would cause such a result. [ 100 ] While the potential consequences of not extending the CCAA protection in this case is troubling and possibly even devastating to NTCL and all associated parties for which the plan of arrangement pertains, the consequences of neutralizing a related company guarantee when the debtor seeks CCAA protection (and without more information) is far more troubling.

Such a determination could significantly negatively impact the ability of entities to obtain necessary financing with the assistance of a parent or related company guarantee. [ 101 ] I am not prepared to foreclose fully the possibility that this Court could exercise its inherent jurisdiction in exceptional cases to ensure that the intent and purpose of the CCAA proceedings are not frustrated. Sufficient evidence to establish the presence of such circumstances is however not present in this case for the Court to take such extraordinary measures in light of the clear wording of

s.11.04 . Conclusion [ 102 ] In conclusion, I find that there was a breach of the Lease Agreement, which triggers payment by NTCL (or NorTerra as its guarantor) of the balance of the purchase price for the Assets under the Purchase Agreement. [ 103 ] I do not find that the right of reinstatement applies in this case. The BC PPSA provisions apply, and the default has not been remedied.

It is not be appropriate for the Court to exercise its discretion to relieve the debtor of the consequences of its default in this case. [ 104 ] Similarly, this is not an appropriate case in which the Court should grant an order reinstating the lease. [ 105 ] Finally, the Court is not able in in this case to extend the stay of proceedings to NorTerra in respect of this one contract. [ 106 ] As such, NTCL’s application is dismissed. [ 107 ] Should the parties be unable to come to an agreement on costs of this application, they may apply to me within 45 days of this decision.

Heard on the 9 th day of August, 2016 Dated at the City of Calgary, Alberta this 22 nd day of September, 2016. C. Dario J.C.Q.B.A Appearances: Ken Lenz, Q.C. Bennett Jones LLP for the Applicant Northern Transportation Company Limited Kibben Jackson Fasken Martineau DuMoulin LLP for the Respondent ITB Marine Group Ltd. Frank Lamie

Gowling WLG (Canada) LLP For the Respondent Banking Syndicate