Saskatchewan – court-approved insolvency proposal eliminates tardy arbitral claim – #128

Invoking the integrity of the Bankruptcy and Insolvency Act, RSC 1985, c B-3 restructuring system and without the need to mention any arbitration legislation, in In Golden Band Resources Inc. (Re), 2018 SKQB 284, Mr. Justice G.A. Meschishnick stayed an arbitration filed by a creditor seeking post-proposal remedies. Meschishnick J. held that a party having both (a) a claim against an asset and (b) knowledge of insolvency proceedings which risks eliminating its claim must alert the debtor, creditors, trustee and the court of that claim, either formally by filing a claim or, at a minimum, giving notice of its position. Drawing parallels to earlier case law under the Companies’ Creditors Arrangement Act, RSC 1985, c C-36, the arbitration qualified as a “proceeding” within the meaning of the BIA and can be stayed.  

A former gold producer engaged in exploration, mine development and extraction of gold ore in northern Saskatchewan, Golden Band Resources Inc. (“Golden Band”) had various underground and open pit mines including the Greywacke mine (“Greywacke Deposit”). In 2013, Golden Band began to encounter higher operating costs and reduced ore grades from some of its mines, leading it in February 2014 to suspend all operations and place them indefinitely into a care and maintenance mode.

Around this period, Golden Band entered into a series of debt facilities and credit accommodations negotiated between August 2012 and June 2013 but eventually defaulted under its obligations to its primary secured creditor, Procon Resources Ltd. (“Procon”). On April 15, 2016, Golden Band filed a Notice of Intention to File a Proposal (“Proposal”) under Division I, Part III of the Bankruptcy and Insolvency Act, RSC 1985, c B-3 (“BIA”).

By May 13, 2016 order under the BIA, the Court (a) approved a Stalking Horse Credit Bid (“Bid”) by Procon for an asset or share purchase in the amount of the secured debt obligations and any financing or priority charges; and (b) authorized a process to sell the assets of Golden Band to qualified bidders willing to pay in excess of Procon’s Bid. The latter process produced no qualified bidders.

The Proposal was accepted July 22, 2016 by Golden Band’s creditors at a meeting of those creditors who had filed a proof of claim and attended that meeting in person or by proxy. The Court approved that Proposal on August 12, 2016 (termed the “Sanction Order” by Meschishnick J. in his reasons).

Meschishnick J.’s In Golden Band Resources Inc. (Re), 2018 SKQB 284 reasons related to a post-Proposal dispute regarding one of Golden Band’s assets. Listed on its balance sheet at all times in the insolvency proceeding, that asset was Golden Band’s interest in the Greywacke Deposit which Golden Band held in a joint venture with Masuparia Gold Corporation (“Masuparia”).

More than a year after the Proposal had been approved by the Sanction Order, Masuparia served a Notice to Arbitrate on Golden Band in which Masuparia sought:

1. a declaration that Golden Band had assigned and conveyed its interest in the Greywacke Deposit prior to the commencement of this insolvency proceeding; and,
2. an order directing Golden Band to sign an Assignment and Transfer Agreement allowing title to the mineral dispositions making up the Greywacke Deposit to be registered in Masuparia’s name in the Mineral Administration Registry in Saskatchewan.

In its arbitration, Masuparia claimed that Golden Band had been indebted to Masuparia for Golden Band’s share of the expenditures related to the Greywacke Deposit and that, by operation of their joint venture agreement, Golden Band had assigned and conveyed its interest in the Greywacke Deposit to Masuparia.

Golden Band, now owned and controlled by Procon following the Sanction Order, resisted Masuparia’s claims and applied for a stay of Masuparia’s arbitration. Procon argued that Masuparia ought to have advanced its claim for determination in the insolvency proceedings and, having failed to do so, its claim was extinguished by the Sanction Order.

The reasons disclose that Masuparia had received notice of key events in Golden Band’s insolvency proceedings and was aware, if not also in receipt, of Golden Band’s Notice of Intention, the Bid and the Proposal. Without attempting repetition, Meschishnick J. simply listed in various ways and at different points in his reasons, the many ways in which Masuparia had effective knowledge of the risk to its claimed interest in the Greywacke Deposit, the options open to Masuparia to alert the debtor, creditors, trustee and the court, and the failure or neglect of Masuparia to act on any one of those options.

Despite knowledge, Masuparia did not appear at the date of the application which lead to the Sanction Order. Meschishnick J. summarized Masuparia’s explanation for why it did not file a claim in the insolvency proceedings.

[20] Masuparia says that by the operation of certain provisions in the JVA, Golden Band had lost its interest in the JV and by extension the Greywacke Deposit before the NOI was filed. That being so, it had no reason to file a claim in the insolvency proceeding as it already owned the whole of the Greywacke Deposit. In other words, it had no claim against Golden Band at the time this insolvency proceeding began and the relief it seeks in the Arbitration Proceeding is simply in the nature of an order to compel production of a transfer document that will register ownership or title to the Greywacke Deposit in its name in MARS.

First, Meschishnick J. eliminated doubt as to whether Masuparia could rely on misunderstanding the consequences or the nature of the insolvency proceedings.

[23] Masuparia, if it was not, it should have been aware that the restructuring of Golden Band was proceeding on the understanding that Golden Band’s interests in the Greywacke Deposit were included in the assets that would be acquired by a purchase of Golden Band’s assets or were included on the balance sheet in the event that the Proposal proceeded by way of someone like Procon becoming the sole shareholder of Golden Band. For Masuparia to say it was not aware that Golden Band was asserting that the Greywacke Deposit was one of its assets and that it was proposing that any other claims to that property be barred could only result from a failure to read and understand the materials that were served and filed with this court.

Second, at paragraph 24, Meschishnick J. identified the importance of the interests served in a BIA proceeding and the court’s responsibilities. At paragraph 25, he underlined the critical role the balance sheet plays in restructuring.

Among the considerations that the court reviews when doing so is that there is no misunderstanding as to what the restructured company will own if a proposal is approved. What a restructured financial statement and in particular the balance sheet will look like is a key piece of information to all stakeholders. Creditors want to be assured that they are being treated fairly when making a business decision to vote for or against a proposal. The proponents of the proposal want to know what the asset base for the restructured entity will be as that fact will largely determine if the restructured entity will be able to operate as a going concern if the restructuring is successful. Knowing with certainty what a restructured balance sheet will look like will also guide the proponents in developing the terms of the proposal.

The reasons provide a numbering of different ways in which Meschishnick J. cautioned readers about the purpose of the BIA and the court’s corresponding role when applying its provisions.

Third, Meschishnick J. listed a variety of moments and opportunities by which Masuparia could and ought to have raised its claim in the Greywacke Deposit prior to the decision by creditors and the court on the Proposal. He found that Masuparia did not at any time alert Golden Band or the trustee for the Proposal that Golden Band did not own the Greywacke Deposit. Doing so “would no doubt have brought the process to a halt until that issue was resolved.” This failure or refusal to raise its claim in a timely manner was in and of itself sufficient to grant Golden Band’s application to stay the arbitration.

[44] In summary, an application was made to bar claims to ownership of property held by Golden Band. Masuparia had such a claim but did not at any time advance it or oppose the issuance of the order that would bar it from being made later. On this basis alone Golden Band’s application is allowed.

Meschishnick J. stayed the arbitration proceeding but did so without any reference to either of Saskatchewan’s The Arbitration Act, 1992, SS 1992, c A-24.1 or The International Commercial Arbitration Act, SS 1988-89, c I-10.2.  His reasoning and the resulting order to stay the arbitration rested on the provisions of the BIA and CCAA.

Meschishnick J. made a number of key determinations including the scope of the earlier court order on the Proposal and, why claims subject to arbitration qualify as “proceedings” subject to section 11 of the CCAA.

For the latter, he referred to Luscar Ltd. v Smoky River Coal Ltd. as precedent for qualifying arbitration as a “proceeding” caught by a stay application. That case should be of ongoing interest to arbitration practitioners. Acknowledging that the case dealt with provisions of the CCAA, he found it “in many ways similar to this case” and cited the following passage from that decision:

33 The above jurisprudence persuades me that “proceedings” in s. 11 includes the proposed arbitration under the B.C. Arbitration Act. The Appellants assert that arbitration is expeditious. That is often, but not always, the case. Arbitration awards can be appealed. Indeed, this is contemplated by s. 15(5) of the Rules. Arbitration awards, moreover, can be subject to judicial review, further lengthening and complicating the decision-making process. Thus, the efficacy of CCAA proceedings (many of which are time-sensitive) could be seriously undermined if a debtor company was forced to participate in an extra-CCAA arbitration. For these reasons, having taken into account the nature and purpose of the CCAA, I conclude that, in appropriate cases, arbitration is a “proceeding” that can be stayed under s. 11 of the CCAA.

Meschishnick J. acknowledged that Luscar Ltd. v Smoky River Coal Ltd. dealt with prior versions of key definitions of such terms as “creditor” and “claims” found in earlier versions of the BIA and CCAA. He also commented that, likely because of Luscar Ltd. v Smoky River Coal Ltd., those definitions had been adjusted and had prompted changes to other definitions in both pieces of legislation. His analysis of this evolution, at paragraphs 50-66, lent him support to conclude that the provisions of section 81 of the BIA applied in appropriate circumstances to insolvency proceedings.

On the particular facts involving Golden Band and Masuparia, the sprawling scope of the term “claim” appears in the definition of “claim” reproduced from the Proposal at paragraph 28.

Meschishnick J. drew attention to section 66(1) of the BIA which stipulated that “all the provisions” of the BIA apply “in so far as they are applicable” and “with such modifications as the circumstances require, to proposals”. His analysis is of practical importance to arbitration practitioners representing parties whose claims might be subject to an notice of intention.

To demonstrate the court’s embrace of flexibility, he excerpted a passage from Forest v. Hancor Inc., [1996] 1 FC 725, 1995 CanLII 3536 (FCA) which signaled that courts in bankruptcy and in insolvency proceedings must tailor the provisions of bankruptcy to those of insolvency “on a case-by-case basis” and “participate in a process of intelligent harmonization and adaptation, not one of blindly literal application.

Given all of the above, Meschishnick J. concluded that Masuparia did not contest that “in appropriate circumstances” section 81 of the BIA could operate in the insolvency proceeding in which Masuparia was now involved.

[81] The framework of the restructuring provisions of the BIA are designed to ensure that all claims and especially claims to the property which a proponent says it owns be ascertained and determined prior to a vote to approve a proposal and the sanctioning of it by the court. If they are not the proposal trustee they cannot fulfil its statutory mandate to report on the proposal and the stakeholders cannot make informed decisions.

[82] Allowing a claimant, who was aware that a proponent in an insolvency proceeding was purporting to sell an asset which the claimant believed it owned, to lay claim to that asset after a proposal was approved and implemented would be an absurd result.

[83] In this case, if Masuparia’s claim would be allowed to proceed and was successful, Golden Band’s new shareholder would not have acquired what it expected and I would have had to give consideration to rescinding the Proposal.

Meschishnick J. ordered that:

– any claim by Masuparia as set out in its notice to arbitrate was “fully, finally, irrevocably, and forever released, discharged, cancelled and extinguished by the Proposal and Sanction Order”;

– “Masuparia was barred and estopped from asserting the rights and claims” in its arbitration by the Proposal and Sanction Order; and,

– stayed the arbitration proceedings.