On application by a successful arbitral party, Mr. Justice Brian O’Ferrall in Pacer Holdings Construction Corporation v. Richard Pelletier Holdings Inc, 2020 ABCA 47 lifted a stay imposed by the appeal filed by the losing arbitral party against the order putting it in bankruptcy. The successful arbitral party challenged certain transactions by the losing arbitral party which “stripped” the latter of all its assets. O’Ferrall J.A. was “not yet convinced” to interpret the Bankruptcy and Insolvency Act, RSC 1985, c B-3 to mean that a “dormant shell” corporation was not a “debtor” or “insolvent person”. Lifting the stay enabled the trustee to exercise powers ordinary creditors do not have, including collection of information relevant to ordering transferees of property of the bankrupt arbitral party to pay to the difference between the value of the consideration the bankrupt gave and the value transferees received.
In 2014, a U.S. corporation, MasTec Inc., entered into a share purchase agreement for the acquisition of Pacer Holdings Construction Corporation (“Pacer”). Richard Pelletier Holdings Inc (“RPHI”) and Mr. Richard Pelletier (“Mr. Pelletier”) were the sellers, among others.
Disputes arose regarding various representations and warranties made by the sellers. Pacer, RPHI, Mr. Pelletier and others entered into a March 2016 agreement to submit to arbitration. Following arbitration on the merits, an arbitral tribunal in a March 2019 award (“Award”) held RPHI and Mr. Pelletier jointly and severally liable for certain representations made and issued several monetary awards against them in favour of Pacer.
That Award was confirmed as a judgment of the court on April 30, 2019 (unreported) (“April Order”). At the time of hearing before O’Ferrall J.A., RPHI’s indebtedness totalled $33,535,285.10. Prior to that April Order, RPHI was “stripped of all of its assets” and was currently “a dormant shell corporation” with “no exigible assets in Alberta” or “any current or prospective business activities”.
After that April Order, Pacer filed a September 25, 2019 application to put RPHI into bankruptcy (“Application”). The court granted that application on November 26, 2019 and placed RPHI into bankruptcy effective September 25, 2019 (“Bankruptcy Order”). To do so, the court determined that RPHI had committed an act of bankruptcy in the six (6) months preceding that Application.
Section 96 of the BIA permits a court to order the transferee of the property of the bankrupt (the “debtor” or “insolvent person” at the time of the transfer) to pay to the bankrupt’s estate the difference between the value of the consideration given by the transferee and the value the transferee received. Section 96 applies (i) to transfers made within five (5) years of the date of bankruptcy and (ii) to transferees dealing at arm’s length with the bankrupt.
RPHI appealed the Bankruptcy Order pursuant to section 193 and, in doing so, triggered a stay of proceedings under the BIA pursuant to section 195. That stay lasted until the order issued on the appeal, subject to an order of the Court of Appeal or of a judge of the Court cancelling the stay.
Pacer applied for (i) an order lifting the stay of the Bankruptcy Order and (ii) an order requiring RPHI to pay security for costs for RPHI’s appeal of the Bankruptcy Order. O’Ferrall J.A. dealt with each application separately.
Lifting the Stay (paras 12-20) – O’Ferrall J.A. described the test applied by Alberta courts as “a variation” of the tripartite test for cancelling a stay identified in Manitoba (A.G.) v. Metropolitan Stores Ltd., 1987 CanLII 79 (SCC),  1 SCR 110 and RJR-MacDonald Inc. v. Canada (Attorney General), 1994 CanLII 117 (SCC),  1 SCR 311 namely “whether there is a serious issue to be appealed, whether the applicants would suffer irreparable harm if the stay is not lifted and whether the respondents would suffer greater harm than the applicants if the stay is not lifted (relative prejudice)”.
O’Ferrall J.A. was underwhelmed by the merits of RPHI’s arguments on appeal, though he expressly did not decide them.
“ With respect to the merits of RPHI’s appeal, on the basis of the material put before me on this application, I am not persuaded that there is a serious issue to be appealed. This test is, admittedly, a low one; but the appellant’s arguments that RPHI was not a “debtor” or an “insolvent person” residing or carrying on business in Alberta at the time the act or acts of bankruptcy were committed are not particularly convincing given the facts of this case. The argument seems to be inconsistent with the fundamental purposes of the Bankruptcy and Insolvency Act. In assessing the merits of this argument, without deciding it, I say no more than I am not yet convinced that the Bankruptcy and Insolvency Act should be interpreted such that an Alberta corporation can be left as a dormant shell and thereby not be considered a “debtor” or an “insolvent person” for the purpose of the Act”.
Regarding prejudice, O’Ferrall J.A. listed seven (7) factors at para. 17 of his reasons, four (4) of which apply to arbitral parties seeking to execute on monetary awards issued in their favour:
“(b) The applicant has demonstrated that there is a risk that if the trustee is not permitted to commence its investigation of the bankrupt immediately, there will be a further loss of relevant financial information. The principal of RPHI, Richard Pelletier, in an affidavit taken in response to this application, concedes that he is uncertain whether certain relevant files of RPHI still exist, which implies that some documents have already been removed, lost or destroyed, potentially to the prejudice of the applicant. The appeal is not scheduled to be heard until June of this year. In the meantime, there is the potential for more documents to be removed, lost, destroyed or misplaced to the further prejudice of the applicant.
(c) The need to preserve the books and records of RPHI arises out of the fact that there have already been significant transfers of assets to related parties which may or may not be preferences or transfers for less than fair market value.
(d) If the stay is not lifted, the trustee in bankruptcy will be prevented from investigating the bankrupt company and the transfer of assets which may become the subjects of challenges to those transfers. The trustee will also not be in a position to compel transferees of the bankrupt company’s assets to preserve those assets and/or preserve any relevant documentation with respect to those transfers in the transferees’ possession. …
(f) The magnitude of the judgment sought to be enforced is significant – in excess of $30 million”.
Despite argument by RPHI that the information sought would be provided by “normal civil enforcement remedies of the creditors”, O’Ferrall J.A. chose to enhance that collection by enabling the trustee to exercise its powers under the BIA.
“ The bankrupt argues that the normal civil enforcement remedies of the creditors will provide the creditors with all the information the trustee seeks. The answer to that argument is that to date the civil enforcement process has not provided the creditor with the information they seek. Furthermore, the trustee possesses powers which are not possessed by ordinary, unsecured creditors of the bankrupt, especially when it comes to compelling answers or the production of documents by those to whom the bankrupt’s assets were transferred”.
O’Ferrall J.A. expressly closed his reasons by identifying the main reason for which he ordered that the stay be lifted: “in order to ensure that the trustee has access to necessary corporate documents in order to allow the trustee in bankruptcy to do its job”.
Security for Costs (paras 21-25) – O’Ferrall J.A. determined that an order for security for costs was appropriate but, to balance interests, set the costs at a level lower than that sought by Pacer.
“ Costs incurred by successful creditors are typically paid out of the estate of the bankrupt. But if there’s nothing in the estate and the appeal is unsuccessful, the usual rule could leave the creditors bearing the costs of an appeal brought by the bankrupt. If the appeal is successful, the security may not be called upon. All that is at issue here is security for costs. No cost award is being made in connection with the appeal”.
urbitral note – First, the decision outlines options for a creditor of an arbitral award wishing to execute on the award despite the bankruptcy of its arbitral debtor.
Second, the approach followed by O’Ferrall J.A. expressly enabled the trustee to exercise powers which ordinary creditors do not possess and to exercise them against non-parties who possess assets capable of satisfying part of the monetary awards which issuing in the arbitration.