Tiamat Resources Inc v Procyon Resources Corp, 2021 ABQB 509

Court of Queen’s Bench of Alberta Citation: Tiamat Resources Inc v Procyon Resources Corp, 2021 ABQB 509 Date: 20210625 Docket: 1601 16471 Registry: Calgary Between: Tiamat Resources Inc Plaintiff/Applicant/Cross-Respondent - and - Procyon Energy Corp Defendant/Respondent/Cross-Applicant _______________________________________________________ Reasons for Decision of the Honourable Mr. Justice J.T.

Eamon _______________________________________________________ Overview [ 1 ] In late 2016, Tiamat filed a claim for damages against Procyon arising from Procyon’s alleged breach of a farmout agreement between the parties. Procyon denied liability. [ 2 ] The claim worked its way through the Court. On August 26, 2020 the Court granted a consent judgment to Tiamat against Procyon for $350,000.

[ 3 ] Tiamat sought to enforce its judgment. It seized funds from Procyon’s bank account. Shortly after, Procyon applied to stay enforcement because it decided to voluntarily wind up under

section 212 of the Business Corporations Act , RSA 2000, c B-9 (“ ABCA ”) and the company’s funds are subject to claims of secured creditors. [ 4 ] Among the list of secured creditors prepared by Procyon are two of its three directors, Mr McKellar and Mr Pratt, and Mr Pratt’s company 286322 Alberta Ltd.

Procyon claims these lenders were collectively owed $1,438,181.01 in shareholder loans that are secured by general security agreements dated “effective as of” November 8, 2019. [ 5 ] Tiamat applied for a declaration that the general security agreements are fraudulent preferences under the Fraudulent Preferences Act , RSA 2000, c F-24 (“ FPA ”) and void, and an order lifting the interim stay on execution of its judgment imposed by Court order dated November 17, 2020. [ 6 ] Procyon applied for a permanent stay of Tiamat’s enforcement of its judgment, release of the garnished funds from Court, and a declaration that the shareholder lenders have priority over Tiamat. [ 7 ] The issues that the parties disputed are: (

a) Was Procyon insolvent, unable to pay its debts in full or on the eve of insolvency when the transaction occurred? (

b) Was Tiamat a creditor or did it have standing under the FPA , at the material time? (

c) Was there an intent to prefer or can Tiamat rely on the effect of the transaction under

section 3 of the FPA ? (

d) If the general security agreements are caught by sections 2 or 3 of the FPA , are they saved by sections 6 or 9 of the FPA ? [ 8 ] Both sides agreed that determining these issues in chambers, without oral evidence, was fair and reasonable. Neither side wants to incur the expense of an oral hearing or trial. Consideration must be given to the parties’ procedural preferences. Nevertheless, I must be satisfied that I can fairly and justly resolve the issues on the record provided.

Given the amount involved and considerations of proportionality, the need for a quick resolution and the ongoing potential for delay, that each side had a fair opportunity to put forward such evidence or explanations they saw fit, and that the matter can be resolved primarily through presumptions and inferences rather than findings of credibility, I am satisfied that the matter can be fairly and justly resolved on the record and I can give effect to the parties’ procedural preferences. [ 9 ] A key issue in this case is whether Tiamat has standing under the FPA .

I have concluded that Tiamat does not meet this requirement. I have addressed the other issues, in the event that there are further proceedings challenging this legal conclusion. [ 10 ] Procyon’s cross-application leaves open a number of questions, some of which might require notice to creditors. I set out in para 83 the issues that need clarification before I would grant relief on the cross-application. For example, Procyon’s claim for a continuing stay against Tiamat’s enforcement efforts arises from its plan to voluntarily liquidate under the ABCA .

Given Procyon’s evidence that it is unable to pay all its debts, I do not see how it can liquidate under the ABCA (see sections 207 and 212(7) ) and I have granted leave to the parties to make further submissions on these points if needed. Applicable legislation [ 11 ] Tiamat relies on sections 2 and 3 of the FPA : 2 Subject to sections 6 to 9 , every gift, conveyance, assignment, transfer, delivery over or payment of goods, chattels or effects or of bills, bonds, notes or securities or of shares, dividends, premiums or bonus in any bank, company or corporation, or of any other property, real or personal, made (

a) by a person at a time when the person is in insolvent circumstances or is unable to pay the person’s debts in full or knows that the person is on the eve of insolvency, and (

b) to or for a creditor with intent to give that creditor preference over the other creditors of the debtor or over any one or more of them, is void as against the creditor or creditors injured, delayed, prejudiced or postponed. 3 Subject to sections 6 to 9 , every gift, conveyance, assignment, transfer, delivery over or payment of goods, chattels or effects or of bills, bonds, notes or securities or of shares, dividends, premiums or bonus in any bank, company or corporation, or of any other property, real or personal, made (

a) by a person at a time when the person is in insolvent circumstances or is unable to pay the person’s debts in full or knows that the person is on the eve of insolvency, and (

b) to or for a creditor and having the effect of giving that creditor a preference over the other creditors of the debtor or over any one or more of them,

is, in and with respect to any action that within one year after the transaction is brought to impeach or set aside the transaction, void asagainst the creditor or creditors injured, delayed, prejudiced or postponed. [12] Granting of security such as a debenture or general security agreement can be a fraudulent preference (Canadian ImperialBank of Commerce v Grande Cache Motor Inn Ltd, (AB QB); Myers v AlanRidge Homes Ltd, 2017 ABQB 631 atparas 61 and 62, app dism 2018 ABCA 419).

Whether Procyon insolvent, unable to pay debts in full or on theeve of insolvency [13] The parties differ over the effective date of the general security agreements or whether Procyon was insolvent when theywere made. [14] Tiamat claims the general security agreements were made and therefore effective in June 2020. It submits that Procyon wasinsolvent or on the eve of insolvency by then. Procyon claims the general security agreements were made effective November 8, 2019and updated in July 2020 to reflect additional loans.

Procyon denies it was insolvent or on the eve of insolvency at any time before thetransactions were made. [15] The general security agreements are dated “effective as of” November 8, 2019. Each agreement contains two loan schedules.The first

schedule lists the loan advances to November 7, 2019. The second, amended

schedule lists the loan advances to July 31, 2020. [16] A directors’ resolution dated “effective as of” November 8, 2019 recognized that Mr McKellar, Mr Pratt and Mr Pratt’snumbered company had made shareholder loans to Procyon.

It continues: WHEREAS it was the intention of the Lenders and the Corporation that the Loans and any future shareholder loans from the Lenders tothe Corporation be made on a secured basis and that the Corporation grant security by way of a general security agreement datedNovember 8, 2019, between the Corporation and each of the Lenders in the form presented to the board of directors (each a “GSA”or the“GSAs”), to the Lenders; (Underlining added.) [17] The resolution purported to approve the GSAs as defined therein and authorize any director to execute and deliver thedocuments. [18] The general security agreements recite: WHEREAS it was the intention of the Secured Party and the Corporation that each Loan Agreement[1] and any future shareholderloans from the Secured Party to the Corporation be secured by that [sic] assets of the Corporation but the parties overlooked finalizing ageneral security agreement at the time of the Initial Loan Agreement[2] and wish to rectify the issue; (Underlining added). [19] An undertaking response to Mr McKellar’s cross-examination states that on November 8, 2019 Procyon decided to “proceedwith securing the shareholder loans ...” and the Board decided to grant “a security interest”. [20] Procyon’s non-management director, Mr Eastly, deposed that “The documents were dated to reflect the point in time whenProcyon intended to grant the security interest.” Mr Eastly further stated that such dating is consistent with industry practices.

However,he was not qualified as an expert to speak to industry practices and his opinion is not admissible as evidence of actual industry practices. [21] The directors signed a second directors’ resolution “effective as of” July 5, 2020.

This resolution recites that Procyon grantedGSAs on November 8, 2019 which provide security for payment of any future indebtedness between each lender and Procyon, andauthorizes amending the loan schedules to reflect loan advances from November 8, 2019 through July 2020. [22] None of Procyon’s directors or management provided evidence of when the form of general security agreements werepresented to the Board for authorization as contemplated in the November 8, 2019 directors’ resolution.

None of them suggested theform was actually presented to the Board in 2019 for approval or was actually approved for execution at that time. There is no evidencethat the Board actually reviewed and approved the form of the written agreements in November 2019 as contemplated in the Boardresolution[3]. [23] The record is sufficient to make a fair and just determination on the date the general security agreements were agreed to,without the cost and delay of a trial or oral hearing.

Based on Mr McKellar’s cross-examination and undertaking responses, there is noreason to think that if the matter were deferred to a trial, better evidence of the actual date the general security agreements were approvedand agreed to would be forthcoming. Two of the three directors have provided sworn evidence and neither provided any clarification onthis key point. Procyon could have obtained or compelled evidence from the third director, Mr Pratt, if he had any favourable to Procyonto provide on this point.

I infer he did not. [24] There is a single document that states the GSAs were granted on November 8, 2019 -- a recital in the July 5, 2020 directors’resolution. However, Procyon admits the agreements were signed in June 2020. [25] It is fair to infer from the record that the terms of the security interest were not agreed to in November 2019. [26] The Board resolution effective November 8, 2019 was obviously signed in June 2020 along with the general security

agreements. The resolution contemplated that a written “GSA”, presented to and approved by the Board, was required to constitute anenforceable security interest. The terms of the security interests had to be worked out, written down, and approved. [27] It is not plausible that the parties approved a form of GSA in November 2019 then overlooked signing it for 8 months whilethey continued to advance and receive hundreds of thousands of dollars in loans.

The only potential inferences are that the parties neverdiscussed a security interest in November 2019, or Procyon intended to grant some type of general security interest but the parties did notdefine and seek corporate approval of the security interest until June 2020. [28] The former inference conflicts with sworn evidence that the parties contemplated a security interest in October or earlyNovember 2019.

The latter inference is plausible, consistent with the recitals in the first directors’ resolution and general securityagreements and with Mr Eastly’s evidence that Procyon intended to grant a security interest in November 2019. [29] I find that the parties discussed in November 2019 that Procyon intended to grant a security interest in consideration ofcontinuing loan advances and the lenders’ agreement not to call the loans until June 1, 2020, but that Procyon did not grant a securityinterest at that time.

The agreements containing the material terms of the interests still had to be worked out and authorized, ascontemplated in the first Board resolution. The Board authorized the general security agreements in June 2020, and that is when theagreements became effective within the meaning of

section 4 of the FPA. Whether Procyon insolvent or on the eve of insolvency in June2020 [30] Mr McKellar deposed that Procyon had been subject to extra-ordinary challenges over the past several years due to extremevolatility of commodity process and the pandemic of Covid-19 disease. [31] At year end March 31, 2020, Procyon recorded over $4.5M in accounts payable, $1.3M in shareholder loans classed as currentliabilities, and about $500,000 in current assets. Its net operating cash flow after removing non-cash items, was $248,274. Its accountspayable substantially exceeded this amount.

The company’s financial condition continued to erode through the end of the next quarter.At June 30, 2020 Procyon recorded almost $4.8M of accounts payable, only about $409,000 in accounts receivable, and no cash. Duringthat quarter, the company suffered a cash deficit from operations of $13,685. The deficit would have been over $210,000 had Procyonnot deferred $197,000 of accounts payable. At the end of both periods, the financial statements recorded a deficit in the shareholdersequity account in the millions of dollars.

There is no evidence that the fair market value of the company’s assets was anywhere near asmuch as the company’s total debt. Procyon had ample opportunity to provide additional evidence of value. [32] Mr Eastly deposed that Procyon was a viable, operating company up to and through July 2020. In the summer of 2020, it wasin the process of acquiring a “sure thing” revenue producing asset known as the Kaiser well.

He said that despite ample evidencedemonstrating viability of the Kaiser well, at the time Procyon acquired it in July 2020 it failed to produce revenue after acquisition, andthis event pushed Procyon into a position where it was no longer able to manage its debts. [33] In order to acquire assets in July 2020, Procyon received investments from two investors. They were to receive a grossoverriding royalty on the Kaiser well in return for their investment.

To acquire revenue producing assets, Procyon had to increase itsliability management rating with the Alberta Energy Regulator, and paid $329,000 to the regulator on August 4, 2020 to bring its LMRaccount up to date. [34] Procyon did not provide any evidence of anticipated net cash flows or profit from any proposed asset acquisitions in or aboutJuly 2020. [35] In order for a transaction to be impeached under the FPA, the debtor must have been insolvent, on the eve of insolvency, orunable to pay its debts in full at the time that the transfer was made (FPA,

section 2(a); Re Titan Investments Limited Partnership,(Judicature Act), 2005 ABQB 637 at para 15; Servus Credit Union v JRD Investments Inc, 2020 ABQB 249 at para 37). [36] Insolvency under the FPA means inability to pay one’s liabilities; the condition depends both on assets and liabilities. The factthat one does not pay one’s debts is not proof that one cannot pay (Clarke (Plaintiff) Appellant v Sutherland and Imperial TrustCompany, Limited (Defendants) Respondents, , 13 Alta LR 132 at p 135 (ABSC AD); Servus Credit Union at paras37-41).

The claimant must prove sufficient facts to warrant a reasonable inference of insolvency, mindful that the facts necessary to proveinsolvency on specific dates may not necessarily be within the claimant’s knowledge (ibid at p 136; Krumm v McKay, 2003 ABQB 437at para 42; Titan Investments at para 15; Westcorp Inc v H & H Stucco & Siding Ltd, 2016 ABQB 650 at para 22; Servus Credit Unionat para 37). [37] The evidence satisfies me on the balance of probabilities that Procyon was at least on the eve of insolvency and was unable topay its debts in full in the ordinary course as they became due throughout June 2020: (

a) The financial statements for the first quarter ended June 30, 2020 include comparative figures for the fiscal year endedMarch 31, 2020. At both dates, Procyon had no significant current assets, was incurring significant operating losses, and had accumulateda shareholder’s equity deficit in the millions. (

b) Mr McKellar testified that Procyon deferred significant amounts of accounts payable ($197,000) as at June 2020. This fact isconsistent with the company’s aged accounts payable list at September 30, 2020 which disclosed a large number of creditors whoseaccounts were over 90 days (ie, unpaid at June 30, 2020). I infer that the company ceased meeting many of its current obligations duringJune 2020.

(

c) The company was heavily reliant on the shareholder loans from its related parties to carry on. None of these loans wererepaid after February 2018, and they continued to increase through July 2020. The lenders intended to defer calling their shareholderloans until June 1, 2020 and there is no evidence that they extended this deadline. (

d) The company’s bank account statement for the entirety of June 2020 shows insignificant cash resources in comparison to thecompany’s current liabilities at March 31, 2020 and June 30, 2020. (

e) There is no evidence of the fair market value of Procyon’s assets, but as between Procyon and Tiamat, the values andprospects for the assets would only be known to Procyon. If the value substantially exceeded the book values in the financial statements,it was open to Procyon to provide that evidence. (

f) Procyon generally said that it was pursuing asset acquisitions in July that would improve its financial condition. As betweenProcyon and Tiamat, the prospects for restoring viability through contemplated asset acquisitions would only be known to Procyon.However, Procyon did not provide any meaningful evidence of the contemplated cost, financing, revenue, or net profit concerningproposed asset acquisitions, or even the chances, in June 2020, of successfully acquiring such assets. (

g) Mr Eastly’s evidence was expressed in generalities and partly as opinion, unsupported by any company financial records.Procyon did not provide any additional information concerning the Kaiser well including cost to acquire, cost to operate, or anticipatedrevenue and profit (after the investors’ gross overriding royalty interest). (

h) Mr Eastly’s evidence included his opinion that Procyon was viable in June 2020. If that opinion is admissible, I am notbound by it and on the basis of all the evidence, I reject it. Was Tiamat a creditor or did it have standing, at the materialtime? [38] Tiamat’s claim against Procyon was that Procyon breached the farm out agreement by failing to spud a test well on or before acontractual deadline. It claimed that it suffered loss and damage not less than the cost of drilling the test well. Tiamat filed a statement ofclaim in late 2106. Procyon filed a defence in January 2017.

The matter was ready for trial by late 2019. On December 18, 2019, theCourt set the matter down for trial commencing September 8, 2020. On August 26, 2020, Procyon consented to judgment for $350,000. [39] Tiamat must establish that it was a creditor of Procyon in June 2020 when the general security agreements were granted.

Icharacterize Tiamat’s claim, until the consent judgment was granted, as unliquidated damages arising from alleged breach of contract.The issue is whether the holder of an unliquidated claim is a creditor for the purposes of the FPA. [40] There are different meanings of the word “creditor”, depending on the context. The term “creditor” was discussed in thecontext of the oppression remedy under the Business Corporations Act in First Edmonton Place Ltd v 315888 Alta Ltd, (AB QB), appeal adjourned 1989 ABCA 274, and is often the starting point in Alberta case law when construing the meaning of“creditor”.

DC McDonald J discussed a number of authorities, from which I take the following propositions: (

a) The term “creditor” takes its meaning from the context. (

b) The ordinary meaning of “creditor” is one to whom a debt is payable; ie, an obligation to pay a “certain or ascertainablesum”. Claims for unliquidated damages do not fall within this definition. (

c) In its largest sense, a “creditor” is one who has a right to require the fulfilment of an obligation or contract. [41] The FPA does not explicitly define “creditor”, other than to provide that the following are a creditor: 5 In sections 2 to 4, “creditor” includes (

a) a surety, and the endorser of a promissory note or bill of exchange, who would, on payment by the surety or endorser of the debt,promissory note or bill of exchange in respect of which the suretyship was entered into or endorsement was given, become a creditor ofthe person giving the preference within the meaning of sections 2 to 4, and (

b) a cestui que trust or other person to whom liability is equitable only.

[42] The FPA and the similar fraudulent preference statutes of other provinces were enacted and have been interpreted by theCourts against the backdrop of a much older statute concerning frauds on creditors, the Statute of Elizabeth, 1571 (13 Eliz.

I) c. 5. Caselaw interpreting the meaning of “creditor” under the fraudulent preferences statutes reflects the difference in wording between the Statuteof Elizabeth (which applies to conveyances made against the interests of “creditors and others”) and the FPA and similar legislation inother provinces (which apply to conveyances and preferences against the interests of “creditors”). [43] Dunlop and Buckwold described the influence of this backdrop as follows: ...

Any reading of “creditors” in the FPA takes place against the backdrop of the more generous formula “creditors and others” used inthe [Statute of Elizabeth] and the numerous cases which have granted standing to future creditors in fraudulent conveyance cases underthat Act. When the drafter of the FPA rejected the “creditors and others” formula and limited standing to “creditors”, the choice dictateda narrower

interpretation than might have been appropriate without the peculiar history of fraudulent conveyances and preferences. ... (Dunlop and Buckwold, Debt Recovery in Alberta (Carswell, 2012) at p 1088). [44] Consequently, a long line of cases in Canadian law holds that a “creditor” under the FPA is narrower than the “creditors andothers” under the Statute of Elizabeth: under the FPA one must be a holder of a debt, meaning an obligation to pay a sum certain or a sumreadily ascertainable with certainty (Dunlop, Creditor-Debtor Law in Canada (2d ed, 1985) at pp 16, 626-627 and cases cited therein;Dunlop and Buckwold, at pp 1084-1094 and cases cited therein).

With very few exceptions[4], this longstanding line of authority acrossCanada is uniform. [45] In contrast, claimants with claims for unliquidated amounts such as damages claims did not qualify as creditors under theprovincial preferences statutes. This distinction arose at least by 1890 (Ashley v Brown (1890), 17 OAR 500 (CA) and Hopkinson vWesterman (1919), (ON CA), 45 OLR 208 (CA)). A more recent appellate authority accepting this long-standingdistinction is Hamm v Metz, 2002 SKCA 11 at para 30. [46] Alberta case law provides many recent examples.

In Faulhaber v Ulseth, (ABSC TD) at para 28, Steer Jfollowed Ashley and Hopkinson, and interpreted the meaning of “creditor” under Rule 383 of the 1968 Alberta Rules of Court(providing a

summary means of challenging fraudulent conveyances under the Statute of Elizabeth) to exclude tort claimants who did nothold a judgment at the time of the impugned transaction. In Massey v Brost, (AB QB) at para 103, Phillips J foundthat the claimant was not a creditor at the time of the preference transaction because his action for fraud or conversion against thedefendants was not reduced to a judgment. In Titan Investments (2005) at para 18, Hawco J held that claimants seeking reimbursementfor equity investments in partnerships that were fraudulently induced were not creditors in the ordinary meaning of the word (thoughthey were creditors under the extended meaning in

section 5 of the FPA). The more restricted scope of the FPA in comparison to theStatute of Elizabeth was also acknowledged in Krumm v McKay, 2003 ABQB 437 at paras 29, 36-40; Builders’ Floor Centre Ltd vThiessen, 2013 ABQB 23 at paras 76-78; and Servus Credit Union (2020) at paras 34-35. [47] The Alberta Court of Appeal summarized the effect of this line of cases in Impact Industries (Western) Ltd v Barritt, 2000ABCA 44. The trial judge dismissed a suit to set aside transfer of land from a son to his father, finding that the parties to the transactiondid not have any improper intent. On appeal, the Appellant did not challenge the trial judge’s finding concerning intent. Instead, it reliedon

section 3 of the FPA which provides a remedy even if fraudulent intent is not proved. The Court of Appeal responded as follows: [5] However, there are two problems with s. 3: the plaintiff must be a “creditor”, and s. 6 gives some defences. [6] Many courts have held that in legislation like the Alberta statute, “creditor” refers to someone with a liquidated claim suchas a debt.

It does not cover someone with an unliquidated damage claim not yet (at time of transfer of assets) reduced to judgment.Counsel for the appellant did not challenge that long line of authority. [48] Tiamat relies heavily on Krumm and submits that contingent or subsequent creditors may have standing under the FPA. [49] Krumm does not go nearly as far as Tiamat suggests.

To the contrary, the similar purposes of the fraudulent conveyances andfraudulent preferences legislation do not appear to have led the Courts to apply an extended meaning to “creditor” in the FPA similar tothat of “creditors and others” in the Statute of Elizabeth. [50] In Krumm, Romaine J recognized the similar purposes of the statutes as follows: [13] The purpose of the Statute of Elizabeth and the Fraudulent Preferences Act is to strike down all conveyances of propertymade with the intention of defrauding creditors, except for conveyances made for good consideration and bona fide to persons nothaving notice of fraud.

The legislation is to be interpreted liberally, and includes any kind of transfers or conveyances made with therequisite intent to defraud or hinder creditors, no matter what the form: C.R.B. Dunlop, Creditor-Debtor Law in Canada (2nd Edition)Carswell, at page 598. [51] Nevertheless, Romaine J accepted the more traditional definition of a creditor in finding that for the purpose of the FPA, adebt was “an obligation to pay a sum certain or a sum readily reducible to certainty” (Krumm at paras 29, 36-40).

The question beforeher was whether the holder of an obligation to pay sums of money on fixed dates was a creditor in the period before the paymentsbecame due. This point had not been previously decided. She concluded that a holder of such a debt obligation, though not yet payable,was a creditor.

She quickly distinguished the tort claimant cases, which have almost invariably held that holders of unliquidated claimsdo not qualify as creditors. [52] Tiamat also relies on Forsey v Hydro Kleen Systems Inc, 2011 ABQB 14 at para 95: [95] It matters not that Forsey and Blackfalds did not become a judgment creditor until October 27, 2008 when their judgment wasentered in this Court. I follow the authority of Kent, J. in this Court in Proprietary Industries Inc. v Workum, 2005 ABQB 610 whereshe considered the reasoning of Romaine, J. in Krumm v McKay, 2003 ABQB 437 , 342 A.R. 169. Both decisions gave a broad

meeting to the word “creditor”. Both cases define that a creditor is a person to whom a debt is payable in accordance with the generalcommercial understanding of the word. I agree with Kent, J. and Romaine, J. that to require a creditor to perfect its claim by the entry ofa final judgment against the debtor would prevent a creditor from availing itself of the benefits of the legislation of the Statute ofElizabeth or the Fraudulent Preferences Act. Here Forsey and Blackfald’s debt became payable as soon as it occurred as set out in thepleadings under the Counterclaim.

It continued to be due and owing during the continuance of the ensuing litigation and it continues tobe due and owing today. They were creditors under

section 5 of the Fraudulent Preferences Act before the cash sale of the assets of the 4Enforcement Debtors took place. [53] Forsey is not authority that an unliquidated claimant is a creditor under the FPA. Park J merely cited the Krumm andProprietary Industries for the proposition that a “creditor” need not be a judgment creditor.

It appears from Park J’s reasons that theclaims (which he described as commissions, salary, expenses and bonuses owing from the claimant’s employment with one or more ofthe debtors) probably included liquidated claims. [54] Proprietary Industries Inc v Workum, 2005 ABQB 610 also does not go as far as Tiamat’s situation. In that case theplaintiff’s claims included a claim against Ms Workum to set aside an alleged fraudulent conveyance to her. The alleged transferor wasMr Workum, a co-defendant. The plaintiff did not hold a judgment against him. Ms Workum sought to strike this claim out.

However,she did not argue that the plaintiff was not a creditor of the transferor Mr Workum. Instead, she made procedural arguments, that theplaintiff must first be a judgment creditor of Mr Workum before it could sue her for the alleged fraudulent conveyance. [55] In rejecting the transferee’s argument, Kent J noted the difference in wording between the Statute of Elizabeth and the FPA.She stated: [16] With respect to the Fraudulent Preferences Act, the

interpretation given to the difference in wording cannot be supported byany underlying rationale. As Romaine, J. said in Krumm, an

interpretation which gives a broad meaning to the word “creditor” accordswith the general commercial understanding of the term. Moreover, as stated above, requiring PPI to wait until its claim against Mr.Workum is perfected would give a hollow remedy to PPI if Ms. Workum chose to transfer the property in such a manner that woulddefeat PPI’s claim against her. [17] To the extent that the statements of Phillips, J. in Massey v Brost (AB QB), [1996] A.J. No. 424 (Q.B.)conflict with Krumm, I prefer the reasoning in Krumm.

In Massey, Phillips, J. said the following at paragraph [103]: [...]“It is interesting to note that under the Statute of Elizabeth, the Courts have consistently stated that a creditor need not have reducedhis claim to judgment in order to have status as a creditor under the Statute. That in itself is usually one of the principal reasons forbringing an action under the Statute of Elizabeth, as opposed to the fraudulent conveyance provisions of The Fraudulent Preferences Act.From the facts of this case and following this line of reasoning, Mr.

Massey was not a creditor in the strictest terms at the time of theconveyance of the Eldorado home, since as at that time his action for fraud and/or conversion against Mr. [Brost] and Exactor was notreduced to a judgment.”[...] No authority is cited for the proposition that under

Section 1 of the Fraudulent Preferences Act, the creditor must be a judgment creditor.Furthermore, Phillips, J. qualifies her finding later in the paragraph which leads me to conclude that the statement is obiter dicta at best. [56] It is apparent from Kent J’s reasons that she did not address whether or not the plaintiff’s claims against the alleged transferor were entirely unliquidated; the point that Tiamat raises simply was not argued[5]. [57] I recognize that Krumm, Proprietary Industries and Forsey are authority that “creditor” should be given a broad meaning,consistent with the general commercial understanding of the word.

But do they permit me to go as far as applying the FPA in favour of aclaimant for unliquidated damages? [58] There are some contextual considerations that would support an extended definition. [59] A creditor defined in the Bankruptcy and Insolvency Act, RSC 1985, c B-3, sections 1 (“creditor”) and 121, includesunliquidated claimants where liability is incurred before the bankruptcy[6].

The purposes of the FPA would be advanced by a similarlybroad definition, that would reflect the expectations of participants in commercial dealings that on insolvency, the creditors – widelydefined – are to be protected and dealt with on an equal basis. [60] It might also be said that the Legislature intended a wider meaning of creditor than case law acknowledges.

Section 5 of theFPA provides that “creditor” (whether the recipient creditor or the prejudiced creditor) includes sureties. Sureties are not liable untildefault by the principal debtor.

Section 5 also includes as a creditor, “a cestui que trust or other person to whom liability is equitableonly”. The language of inclusion suggests the Legislature intended a wider meaning, though not necessarily that it intended the definitionto extend as far as unliquidated claims. [61] Despite the possible inadequacies in the scope of protection of the legislation, the Courts’

interpretation developed on thebasis that the Legislature chose to protect only “creditors” against the backdrop of the existing Statute of Elizabeth that protected“creditors and others”. The Legislature also chose to qualify the statutory protection with a number of exceptions set out in sections 6through 9 of the FPA. It is plausible that the Legislature chose to limit protection to creditors narrowly defined, with the specificexceptions set out in

section 5. [62] Extending the application of the FPA to unliquidated claimants is a matter of law reform, not statutory

interpretation. It wasand is plausible that the Legislature intended to limit the ambit of the FPA when enacting it against the backdrop of the Statute ofElizabeth. It is not my role to depart from 130 years of case law authority, including at the appellate level, by opening the door tounliquidated claims simply because the existing scope of the FPA might be inadequate. It is a matter for the Legislature to decide[7]. [63] Therefore, Tiamat was not a creditor of Procyon under the FPA when the general security agreements were made.

Was there an intent to prefer or can Tiamat rely on the effect of the transaction under

section 3 of the FPA? [ 64 ] The general security agreements had the effect of giving the lenders a preference over all the unsecured creditors of Procyon, including (if it were a creditor) Tiamat. The application to set aside was filed and served within 12 months of June, 2020. Sections 3 and 4(1) of the FPA apply. [ 65 ] Procyon submitted that if the transactions were preferences, they were saved by sections 6 or 9 of the FPA . [ 66 ]

Section 6(

b) excepts transfers etc by way of security for a “present actual bona fide advance of money ... if the money paid or the goods or other property sold or delivered bear a fair and reasonable relative value to the consideration for it.” [ 67 ]

Section 6(

b) does not apply to the numbered company’s general security agreement. It did not make any loan advances in June 2020 or give any commitments to make loans. [ 68 ] Mr McKellar and Mr Pratt each made loan advances in June 2020 of less than $10,000. The loans were deposited into Procyon’s account on June 29 and 30, 2020.

If we assume the general security agreements were made in return for the advances in late June and the prospect of further advances at the lenders’ discretion, the next question is whether the value of receiving the security bore a fair and reasonable value to the actual advance of money. [ 69 ] Procyon bears the onus to prove that the value of the security bears a fair and reasonable value to the consideration. The value of the security is not in evidence. Was it fair and reasonable to secure over $1M of previous loan advances in return for present advances of about $14,700 of cash?

Procyon has not discharged its onus to show the fairness and reasonableness aspect. [ 70 ]

Section 9 provides that the FPA does not “invalidate a security given to a creditor for the pre-existing debt when, by reason or on account of the giving of the security, an advance is made in money to the debtor by the creditor in the bona fide belief that the advance will enable the debtor to continue the debtor’s trade or business and pay the debtor’s debts in full.” [ 71 ] Procyon argues that the creditors believed the advance would enable Procyon to continue in business and pay its debts in full. There is no evidence of how the money was intended to be spent or how it was spent.

Procyon’s witnesses did not depose that the lenders or debtor believed the advances in June (whether alone or together with the advances in July) would enable Procyon to continue its business and pay its debts in full. [ 72 ] To the contrary, in or around the time the related parties were taking a general security agreement they also deferred payment of a much larger amount of accounts payable, purported to secure their previous six years of advances, and knew that Tiamat’s claim would be going to trial in about four months.

Procyon’s directors also signed a directors’ resolution in July 2020 stating the general security agreements were “granted” in November 2019, which was not true. [ 73 ] In these circumstances, I am not prepared to infer the necessary belief. Procyon and the lenders would need to provide direct evidence of their beliefs, so that their evidence could be tested in cross-examination. They have not done so. They have not discharged their onus to demonstrate that

section 9 applies. [ 74 ] If I had found that Tiamat was a creditor, I would have found that the general security agreements were void as against Tiamat under

section 3 of the FPA . Fraudulent intent [ 75 ] Any allegation of fraudulent intent is a serious one and should not be found as a fact without the presence of substantial evidence on which to base such a finding ( Servus Credit Union at para 47 ). [ 76 ] The parties’ intentions should be assessed when the security was granted. Procyon intended in November 2019 to grant security, but it did not do so for whatever reason. The general security agreements were made in June 2020.

That was the time that Procyon’s board of directors had to decide whether and how to proceed. [ 77 ] The purported agreement not to call the loans expired June 1, 2020. Procyon was on the eve of insolvency. It had or shortly would defer about $197,000 of accounts payable. It knew of Tiamat’s law suit, and that the action would proceed to trial in early September 2020. The general security agreements purported to secure years of unsecured lending. That may have been in return for the prospect of additional shareholder loans, but there was no commitment to advance any loans.

Advances were totally discretionary in the hands of the lenders. [ 78 ] The lenders knew everything about Procyon’s financial circumstances. Procyon’s management were the lenders or, in the numbered company’s case, the directing mind of the lender. [ 79 ] A preferential transaction under

section 2 of the FPA may well be found legitimate if made to generate income or remain in business.

The issue in this case is whether to infer such an intention, or whether to infer that the security was really granted with the intention of giving a preference to management and Mr Pratt’s company for the years of unsecured shareholder loans. [ 80 ] The explanation for this security is that in October 2019, “management of Procyon determined that it was appropriate to provide security for shareholder loans of Mr McKellar and Mr Pratt”, and that “the primary purpose of securing the shareholder loans was to provide assurance to Mr McKellar and Mr Pratt as lenders that the loans were protected and to ensure that Procyon would

continue to have access to shareholder loans for its capital needs.” [ 81 ] Yet, the lenders continued to advance loans without approving or executing security agreements. The evidence does not explain why the agreements were not granted when the issue arose in November 2019 or what the purpose for the agreements was in June 2020, immediately on or after the expiry on June 1, 2020 of the purported covenant not to call the shareholder loans.

However, the claimant bears the onus, and it did not press Mr McKellar in cross-examination to explain these matters. [ 82 ] Tiamat must prove the necessary intention to prefer the shareholder lenders. On the present record, I cannot exclude the realistic possibility that Procyon and the shareholder lenders thought they were legitimately arranging to induce the lenders to make additional loans for Procyon’s benefit. Their motivations were not seriously challenged on Mr McKellar’s cross-examination. Mr Eastly was not cross-examined on his affidavit.

Although his evidence of industry practice is not admissible to establish such a practice, it still should be read that he believed he was conforming to a norm. Procyon’s actions may have been imprudent, negligent, unfair or inappropriate but I am not prepared to infer fraud on the present record. Directions sought by Procyon [ 83 ] The parties focussed on the fraudulent preference issue and did not address Procyon’s claims for directions. Some of the claims may engage the interests of third parties who do not have notice of these proceedings. The following issues arise: (

a) In view of my foregoing conclusions, does either side object to a declaration that the shareholder lenders’ security interests have priority over Tiamat, subject to any successful actions by creditors to set aside the security ( Civil Enforcement Act , RSA 2000, c C- 15 , s 35(2); Personal Property Security Act , RSA 2000, c P-7 , s 35(6), 96(4))? (

b) Are there any competing claims to the monies in Court by other creditors who have a security or other interest in the funds superior to the shareholder lenders ( Civil Enforcement Act , s 96(4)), or are there actual or pending claims by creditors who have standing to set aside the general security agreements? (

c) Is there any evidence or consideration that would justify the Court issuing an advance restraint against Tiamat from enforcing its judgment, including: obtaining information from the debtor under civil enforcement procedures; seizing property, if any, that is not subject to security; or taking other steps such as participating in bankruptcy proceedings or objecting to ABCA winding up proceedings? (

d) Mr McKellar deposed to his belief that Tiamat could, in seeking to have its judgment paid, “disrupt” Procyon’s ability to wind up under

section 212 of the ABCA . Is Procyon entitled to wind up under the ABCA if, as Mr McKellar deposed, it is unable to pay all its creditors ( ABCA , sections 207 and 212(7) )? [ 84 ] Procyon and Tiamat may address these points by written submissions within 21 days if they have anything further to say, but I would expect Procyon to address Mr McKellar’s evidence that there are not sufficient funds to discharge secured debt and Procyon’s other liabilities on dissolution, and the provisions of the ABCA that prohibit an insolvent corporation from liquidating under the ABCA ( sections 207 and 212(7) ).

Conclusion [ 85 ] Tiamat’s application is dismissed on the ground that it was not a creditor when the general security agreements were made. [ 86 ] The parties may agree on appropriate consequential directions concerning the interim order that do not engage the interests of other interested parties, and failing agreement they may apply in writing for further directions within 21 days of this decision.

That said, I will not grant an order tending to acknowledge the legitimacy of any plan for Procyon to liquidate voluntarily under the ABCA unless Procyon can satisfy me (if necessary on notice to interested parties) that

section 207 of the ABCA does not apply. [ 87 ] Costs are reserved and the parties may provide written submissions within 21 days if they are unable to agree on costs. Heard on the 28 th day of April, 2021. Dated at the City of Calgary, Alberta this 25 th day of June, 2021. J.T. Eamon J.C.Q.B.A.

Appearances: M B Niven QC for the Applicant S Chimuk for the Respondents