Yukon Zinc Corporation (Re), 2015 BCSC 1219

IN THE SUPREME COURT OF BRITISH COLUMBIA Citation: Yukon Zinc Corporation (Re), 2015 BCSC 1219 Date: 20150626 Docket: S152166 Registry: Vancouver In The Matter of the Companies’ Creditors Arrangement Act , R.S.C., 1985, c. C-36 , As Amended And In The Matter of the Business Corporations Act , S.B.C. 2002, c. 57 And In The Matter of Yukon Zinc Corporation Petitioners Before: The Honourable Madam Justice Fitzpatrick Oral Reasons for Judgment Counsel for Petitioner: K.M. Jackson D. Toigo M.S. Oulton Counsel for the Monitor: M. Buttery L. Williams Counsel for P. S. Sidhu Trucking Ltd.: H.K. Siddall S.

Boucher Counsel for the Jinduicheng Canada Resources Corporation Ltd.: E. Wang Counsel for Hy’s North Transportation Ltd.: T.C. Louman-Gardiner Counsel for Transamine S.A.: D.K. Fitzpatrick Counsel for Maynards Financial Limited Partnership: C.D. Brousson Counsel for Henry Awmack, Mark Baknes and David Caufield: S. Stephens Counsel for Government of Yukon: J. Porter L. Henderson Counsel for Royal Gold Inc.: S.F. Collins Place and Date of Hearing: Vancouver, B.C. June 26, 2015 Place and Date of Judgment: Vancouver, B.C.

June 26, 2015 [ 1 ] THE COURT: These are proceedings under the Companies’ Creditors Arrangement Act , R.S.C. 1985, c. C-36 (the “ CCAA ”) relating to the petitioner Yukon Zinc Corporation (“Yukon Zinc”). [ 2 ] There are a number of applications before the court today; however, the principal contested application from which the others flow is an application by Yukon Zinc to extend the stay of proceedings to August 14, 2015.

If the extension is granted, Yukon Zinc also seeks various other orders, including an order increasing the role and oversight of the court-appointed monitor and initiating a claims and contract process order.

Background [ 3 ] These proceedings were commenced on March 13, 2015, at which time an initial order was granted.

PricewaterhouseCoopers Inc. was appointed as monitor (the “Monitor”). [ 4 ] Numerous orders were granted at the court application on April 17, 2015 including: extending the stay of proceedings to June 12, 2015; authorizing interim borrowings of up to $5 million; approving a sales process to be conducted by the Monitor; and establishing various charges as against Yukon Zinc’s property and assets. [ 5 ] Later still, on June 12, 2015, the court authorized further draws on the lending facility up to a certain limit and extended the stay of proceeding to today’s date, June 26. [ 6 ] During the June 12 hearing, the Monitor reported that it had recently become aware of a cash deposit of approximately US$4.4 million being held in an account at the Bank of Communications Co., Ltd. (“BCC”) in San Francisco.

In addition, Yukon Zinc’s counsel advised the court during the hearing that these funds had only become available to Yukon Zinc that very morning. These have come to be referred to as the “Excess Funds”. [ 7 ] On June 12, 2015, the disclosure of the Excess Funds caused concern amongst many of the stakeholders given the previous evidence from Yukon Zinc about its lack of funds to support its operations during this proceeding, which had led in large part to the earlier approval of the interim lending facility.

The Monitor indicated that it was undertaking an investigation concerning the circumstances relating to the Excess Funds, which the court endorsed. In addition, the court invited Yukon Zinc to provide an explanation as to the circumstances by which the Excess Funds arose.

It was thought at the time that these circumstances could be relevant in these proceedings and, indeed, they have become relevant in relation to the present application to further extend the stay of proceedings into August 2015. [ 8 ] The Excess Funds presently comprise approximately US$4.3 million, which have been recently recovered by Yukon Zinc and are now in its Canadian bank account. [ 9 ] There were complex arrangements by which the Excess Funds came into the possession of Yukon Zinc. In

summary, they arose from transactions between Yukon Zinc and Shaanxi Zinc Industrial Co. Ltd. (“Shaanxi Zinc”) relating to the sale or proposed sale of 60,000 wet metric tonnes (“WMT”) of zinc concentrate by Yukon Zinc to Shaanxi Zinc. Yukon Zinc and Shaanxi Zinc are related corporately in that they are both owned, at least in part, by the ultimate parent company in the People’s Republic of China.

These transactions ultimately led, through letters of credit and purchase invoices, to monies being transferred to BCC in San Francisco (“BCC San Francisco”). [ 10 ] By other agreements, a line of credit was in place with BCC San Francisco in favour of Yukon Zinc to provide Yukon Zinc access to credit secured against draws on the letters of credit relating to the purchase orders by which Shaanxi Zinc was to purchase the zinc concentrate.

As the Monitor notes in its Sixth report dated June 25, 2015 (the “Monitor’s Report”), this provided working capital to Yukon Zinc. [ 11 ] As of the filing date on March 13, 2015, Yukon Zinc had delivered only a fraction (20,000 WMT) of the zinc concentrate to Shaanxi Zinc. However, given the complex financing arrangements, Shaanxi Zinc had effectively overpaid in respect of the deliveries that it had received, by reason of the requirements to provide funds to BCC San Francisco. [ 12 ] Later events were as follows:

a) BCC San Francisco received the Excess Funds from Shaanxi Zinc through BCC’s Chinese bank on April 8 and 9, 2015. The Excess Funds were held in a “suspense” account and were not held in an account in the name of Yukon Zinc over which it had access or control;

b) the Monitor became aware of the Excess Funds when it was notified by BCC San Francisco on May 29, 2015;

c) the Excess Funds were eventually transferred from BCC San Francisco’s suspense account to Yukon Zinc’s bank account at BCC San Francisco on June 18, 2015; and

d) the Excess Funds, less some fees, were transferred to Yukon Zinc’s Canadian bank account on June 22, 2015.

The Excess Funds are being used to fund the operations of Yukon Zinc at this time. [ 13 ] The troubling aspects of these circumstances arise from various facts set out in the Monitor’s Report. [ 14 ] Firstly, the Monitor only became aware of the potential for receipt of the Excess Funds on May 29, 2015 as a result of direct communications between the Monitor and BCC San Francisco, and not from Yukon Zinc. [ 15 ] Secondly, by mid-April 2015, some employees of Yukon Zinc were aware that BCC San Francisco had received the Excess Funds which “may” be payable to Yukon Zinc.

However, on April 14, just a few days in advance of the April 17 court application when the interim lending was approved, senior management of Yukon Zinc directed corporate staff not to advise the Monitor of the Excess Funds until a final decision had been made on the return of the funds to Shaanxi Zinc, as it would “cause much trouble”. [ 16 ] Thirdly, on April 15, 2015, Yukon Zinc requested that BCC San Francisco return the Excess Funds to Shaanxi Zinc or hold them at the branch in the suspense account. [ 17 ] The Monitor concluded in its investigation that: 2.17 [Yukon Zinc] knew that Excess Funds of at least $2 million existed on or before April 14, 2015, and would likely be payable

to [Yukon Zinc]. 2.18 [Yukon Zinc] attempted to have the Excess Funds returned to Shaanxi Zinc as it believed that the Excess Funds were a result of an overpayment and not the rightful property of [Yukon Zinc]. 2.19 [Yukon Zinc] appears to have deliberately concealed from the Monitor the existence of the Excess Funds and its attempts to return the Excess Funds to Shaanxi Zinc. [ 18 ] Those are fairly damning comments by the Monitor, but they are met, at least to some extent, by the evidence of Jing You Lu. Mr.

Lu is the chief executive officer of Yukon Zinc and he provides an extensive affidavit as to the circumstances leading to Yukon Zinc’s receipt of the Excess Funds. [ 19 ] I will not deal with Mr. Lu’s evidence in detail. In brief, Mr. Lu acknowledges that neither he, nor anyone else at Yukon Zinc, advised the Monitor of the anticipated overpayment. By mid-April 2015, Mr. Lu instructed Yukon Zinc’s accounting department to take steps to confirm whether there had been an overpayment. That there was an overpayment was not confirmed to him until early May 2015.

He says that his reasoning for not advising the Monitor was that he believed that the overpayment belonged to and would have to be repaid to Shaanxi Zinc. During a visit to China in mid-May, a representative of Shaanxi Zinc also conveyed the same view to Mr. Lu. Mr. Lu acknowledges instructing Yukon Zinc staff to make efforts to return the Excess Funds to Shaanxi Zinc. [ 20 ] On June 1, 2015, the Monitor had contacted Yukon Zinc’s counsel about the Excess Funds, which stood as the only confirmation to Mr. Lu, beyond Shaanxi Zinc, that there had, in fact, been an overpayment. Mr.

Lu immediately agreed that Yukon Zinc would not seek to have the Excess Funds paid to anyone without the Monitor’s consent. [ 21 ] Mr. Lu’s explanation for this lack of disclosure to the Monitor is: In retrospect, and now having a better understanding of the process and, more specifically, the Company’s duties, it is apparent that I should have advised the Monitor of this matter. I had no intention of deceiving the Monitor; I was just of the view that any overpayment would not be the property of the Company. [ 22 ] In early June 2015, there were further discussions concerning the entitlement to the Excess Funds.

Ultimately, as mentioned above, on June 12, 2015, an agreement was reached between Yukon Zinc, Shaanxi Zinc and Yukon Zinc’s direct parent company, Jinduicheng Canada Resources Corporation Ltd. (“JDC Canada”). By this agreement, Shaanxi Zinc agreed to release any interest in the Excess Funds and JDC Canada agreed to guarantee the payment of the Excess Funds to Shaanxi Zinc, secured against JDC Canada’s assets. It was by this agreement that Yukon Zinc was able to gain access to the Excess Funds for the purpose of advancing its restructuring efforts and ongoing operations.

Discussion [ 23 ] Yukon Zinc’s application to extend the stay of proceedings is opposed. [ 24 ] The CCAA , ss. 11.02(2) and (3) set out the mandatory statutory requirements that must be met before the court may order an extension of the stay of proceedings: 11.02

(2) A court may, on an application in respect of a debtor company other than an initial application, make an order, on any terms that it may impose, (

a) staying, until otherwise ordered by the court, for any period that the court considers necessary, all proceedings taken or that might be taken in respect of the company under

an Act referred to in paragraph (1)( a ); (

b) restraining, until otherwise ordered by the court, further proceedings in any action, suit or proceeding against the company; and (

c) prohibiting, until otherwise ordered by the court, the commencement of any action, suit or proceeding against the company.

(3) The court shall not make the order unless (

a) the applicant satisfies the court that circumstances exist that make the order appropriate; and (

b) in the case of an order under subsection (2), the applicant also satisfies the court that the applicant has acted, and is acting, in good faith and with due diligence. [ 25 ] Accordingly, this Court may grant the further extension of the stay only if it is satisfied that the order is appropriate and that Yukon Zinc has acted and is acting with due diligence and in “good faith”. [ 26 ] The extension of the stay is opposed by two parties who are related in interest. They are Royal Gold Inc. and various individuals, being Henry Awmack, Mark Baknes and David Caufield.

All of these parties have interests pursuant to a royalty agreement or agreements arising from Yukon Zinc’s mine operations. All of the opposing parties contend that the circumstances relating to the Excess Funds are such that the court cannot conclude that Yukon Zinc has been acting in “good faith”. [ 27 ] Yukon Zinc’s application is supported by various stakeholders, including Maynards Financial Limited Partnership, the interim lender. [ 28 ] The Monitor has made substantial submissions on the issue arising from the Monitor’s Report.

The Monitor clearly notes that its investigation was a factual one and that Yukon Zinc’s explanation arises from Mr. Lu’s affidavit. In any event, the Monitor’s view is

that Yukon Zinc has been generally acting with sufficient good faith and it supports a further extension of the stay: With respect to the Company acting in good faith and with due diligence, the Monitor has grave concerns with the Company’s action regarding the Excess Funds. Notwithstanding that concern, the Monitor is of the view that, on balance, the Company is generally acting with sufficient good faith and due diligence and the relief sought is appropriate. This view is formed in part based on the increased powers of the Monitor being sought.

In any event, the Monitor believes that the relief being sought in the continuation of the Solicitation Process is in the best interests of the creditors generally. [ 29 ] Other support for Yukon Zinc’s position is found in the submissions of the Yukon government, which has been a reluctant and somewhat skeptical stakeholder in these proceedings. Counsel for Yukon supports the comments of the Monitor that there is sufficient good faith, both past and present, to justify a continuation of the stay.

He submits that there really is no reason to discontinue the good works that have been achieved in this restructuring to date, although Yukon continues to have concerns about the timeliness of steps in the proceeding. In any event, Yukon submits that there is ongoing stability in maintaining the stay and allowing things to play out in these proceedings.

Yukon agrees that, consistent with the conclusions of the Monitor, it is in the best interests of all of the stakeholders generally to continue the stay and allow the restructuring proceedings to continue. [ 30 ] That brings me to some points that require some emphasis. [ 31 ] Firstly, this issue arising from the Excess Funds can be termed an isolated incident. There is no suggestion that any of Yukon Zinc’s other actions to this point in time have been anything other than in good faith.

There has been substantial co-operation with the Monitor generally and, in particular, the Monitor points to the significant co-operation that Yukon Zinc has given it in respect of its investigation of the issue. [ 32 ] Secondly, it is proposed, without controversy, that the Monitor should be given an increased role and increased oversight in respect of these proceedings. The increased oversight arises from the review of proposed payments by Yukon Zinc, which was happening in any event.

In addition, the Monitor is to take control of the sales process in terms of seeing whether that process gives rise to the best alternative for the stakeholders. [ 33 ] Finally, it is also worth noting that, up until recently, the Excess Funds were in a suspense account and were not in a Yukon Zinc bank account. In that sense, these were not really funds that were available to Yukon Zinc in this restructuring until very recently and they only arose from the settlement agreement reached on June 12, 2015.

Accordingly, no one was prejudiced by the non-disclosure by Yukon Zinc. [ 34 ] Counsel have not referred me to any authorities on the point, in terms of a consideration of the meaning of “good faith”. [ 35 ] My own admittedly limited research during the break indicates that Madam Justice Topolniski considered the issue in San Francisco Gifts Ltd. , 2005 ABQB 91 . Topolniski J. points out that the duty of good faith is owed to the court and the stakeholders generally, and indicates that honesty is at its core. In that case, the debtor company was applying for an extension of the stay of proceedings.

The Alberta court found that, notwithstanding the fairly egregious circumstances where the debtor company had acted improperly in respect of its selling of goods, the greater concern was the effect it would have on the creditors generally in terms of providing the best option for some recovery in the circumstances: see paras. 30-32. [ 36 ] I accept the submissions of Yukon Zinc and the Monitor in terms of this being an isolated incident. It is a disappointing one and it is not entirely clear to me why Mr. Lu was in error in terms of the need to disclose these circumstances to the Monitor as soon as possible.

It is clear enough that it did not disclose the Excess Funds to the Monitor. It is an error that I consider to have been corrected to the extent that the duties of a debtor company were not evident to Mr. Lu at the time. In any event, I accept Mr. Lu’s explanation on its face. There is no reason not to do so as he has not been challenged in his evidence by way of cross-examination. However, I would temper that comment since, no doubt, no one has really had an opportunity to do so given the timing here. [ 37 ] I agree with Yukon Zinc’s counsel that perfection is not to be expected, much less achieved.

Overall, I am not prepared to find that this isolated incident constitutes Yukon Zinc having acted in bad faith which, of course, is the obverse of good faith. I accept the Monitor’s recommendations in terms of finding that, generally speaking, Yukon Zinc has acted in good faith, which does support the continuation of the stay in these circumstances. [ 38 ] In my view, it is appropriate to take a broad view in terms of the past and present actions of Yukon Zinc. This is in keeping with the need to give the CCAA a broad and liberal

interpretation consistent with its remedial purpose. That is not to condone the actions by Yukon Zinc, but to consider them in context and having those remedial purposes in mind. [SUBMISSIONS BY COUNSEL RE OTHER RELIEF] Disposition [ 39 ] THE COURT : In

summary, this is an application in these CCAA proceedings for an order that includes various relief: firstly, an extension of the stay of proceedings to August 14, 2015; secondly, approval of what has been called a claims and contract process order, which will identify various claims in the proceedings and also identify potential contract issues that may arise that are not already known; thirdly, an order increasing the role of the Monitor in providing more oversight of expenses and also empowering the Monitor to proceed with the sales process; and finally, an order approving what has been called the mine employee charge, which will trust up funds totalling $90,000 as security for the payment of certain bonus payments to the mine employees employed at the site, to incentivize their continued employment there. [ 40 ] I am satisfied that all of these orders are appropriate.

I have already addressed, to some extent, the stay application by finding that Yukon Zinc is acting in good faith. I similarly find that the order is appropriate and that Yukon Zinc is acting with due diligence by

which that aspect of the statutory test is satisfied. [ 41 ] The claims process order has been a bit of a work-in-progress. There are now parallel tracks in terms of proceeding with either a restructuring (on which point we should know fairly soon whether that is viable or not) or the sales process. In either event, it is appropriate to go forward with that claims process.

Arising from discussions with counsel, I am satisfied that adequate protections are in place in that process to afford parties a reasonable period of time in which to bring forward their claims. [ 42 ] I am also satisfied that it is appropriate to increase the powers of the Monitor as proposed. The approval of expenses by the Monitor is, as I have noted earlier, already happening.

In addition, the parallel sales process will hopefully provide parties with more comfort in that if the restructuring does not occur, and some of them have expressed some doubt about that, there will not have been any time wasted in terms of arriving at what is the other clear alternative. [ 43 ] Finally, I am satisfied that the mine employee charge is appropriate. The Monitor’s Report summarizes Mr. Lu’s evidence on this point in terms of the necessity for these employees to remain employed at the mine site.

The request for this charge does not arise in a vacuum in the sense that the mine employees have already expressed concern about their situation and work security, which is understandable. I am advised that one mine employee has already quit and it cannot be questioned that the continuing employment of these workers at the mine site is critical in terms of maintaining operations. That is particularly so from the environmental point of view. The amount is quite nominal in light of the overall circumstances.

No one has raised any objection to this charge or the amount of the charge. [ 44 ] Accordingly, the order as sought is granted. “Fitzpatrick J.”