Arbitration vs. receivership

Mayfield Investments Ltd (Re), 2025 ABKB 326
Should a dispute concerning the renewal of a lease be decided through arbitration or within receivership proceedings?

Summary: In this case, the court considered whether an agreement to arbitrate in a unanimous shareholders agreement should be upheld, or whether an issue as to the renewal of a lease should be determined within the company’s receivership proceedings. The party seeking to enforce the arbitration clause had participated in the receivership proceedings and had delayed the commencement of the arbitration, despite knowing about the issue for several months. This precluded him from relying on the arbitration clause. The court also emphasized that it would be unfair, disruptive and prejudicial to the receivership to allow the proposed arbitration to derail the SISP at this stage. As a result, it ruled that the issue should be determined within the receivership proceedings.

Mayfield Investments Ltd. (“Mayfield”), which was the subject of a Receivership Order, together with Albert Stark (“Stark”) and Cameron Christianson (“Christianson”), had an indirect ownership interest in the Copper Coulis Casino located in Medicine Hat, Alberta (the “Casino”). The Casino operated out of leased space attached to the Medicine Hat Lodge, which is owned by Mayfield.

On January 14, 2025, the Court granted an order approving a sales and investment solicitation process (“SISP”) over Mayfield’s assets, including its ownership interest in the Casino. Several months later, after the SISP was underway, Stark served the Receiver with a Notice to Arbitrate several issues relating to the Casino’s lease pursuant to the terms of a Unanimous Shareholders Agreement (“USA”) between Mayfield, Stark and Christianson.

Around the time of the signing of the USA, the parties were discussing a proposal which could see the Casino eventually moving from its leased space at the Medicine Hat Lodge to a new building owned by Stark. Stark and Christianson claimed that they first became aware of Mayfield’s financial difficulties and the receivership application in late August 2024. They became concerned about the effect that might have on the operations of the Casino and the proposed move from the Medicine Hat Lodge. Just before the receivership application, Christianson circulated a proposed Director’s Resolution which purported to direct the renewal of the lease for a further 5 years (the “Directors’ Resolution”). The Directors’ Resolution was not signed by Stark. Stark subsequently argued that the Directors’ Resolution and the Casino’s lease renewal were invalid despite the approval of the other Directors, and gave notice that he wished to resolve the issues by arbitration.

The Receiver argued that Stark’s Notice to Arbitrate was invalid given the provisions of the Receivership Order and the Bankruptcy and Insolvency Act (“BIA”), and sought declarations that the issues raised ought to be determined within the context of the receivership proceedings. Generally, the Receiver’s position was that the Notice to Arbitrate was stayed by the operation of the Receivership Order and the provisions of the BIA, and that the Directors’ Resolution and the Casino’s lease renewal were valid and enforceable. Stark disagreed and argued that the arbitration ought to proceed to allow the parties to fully address the validity of the Directors’ Resolution and the lease renewal, as they agreed to do by signing the USA.

Generally, arbitrators should be allowed to rule first on their own jurisdiction. The principle of competence is not absolute, however, and in a dispute governed by an arbitration agreement with an insolvent counterparty, there is tension between arbitration law and insolvency as to what forum the dispute ought to be resolved in. Generally, judicial intervention in commercial disputes governed by a valid arbitration agreement should be the exception, not the rule. On the other hand, insolvency proceedings are creatures of statute subject to close judicial oversight. The role of courts in ensuring the equitable and orderly resolution of insolvency disputes is reflected in the single proceeding model, which favours the enforcement of stakeholder rights through a centralized judicial process. Sections 183 and 243 of the BIA give courts authority to enforce stakeholder rights through a centralized judicial process, precluding arbitration, but that authority should only be exercised in certain circumstances.

The Supreme Court’s decision in Petrowest requires the Court to engage in a very fact-driven two-part analysis before reaching a conclusion as to which proceedings ought to take precedence. The first part of the analysis is concerned with determining whether the arbitration agreement at issue “engages the mandatory stay provision in the applicable provincial arbitration statute”—referring to a mandatory stay of civil proceedings and giving primacy to the arbitration agreement. The four prerequisites to reliance upon the mandatory stay in s 7(1) of the Arbitration Act are:

1. an arbitration agreement exists;

2. court proceedings have been commenced by a party to the arbitration agreement;

3. the court proceedings are in respect of a matter that the parties agreed to submit to arbitration; and

4. the party applying for a stay does so before taking any step in the court proceedings.

The first three prerequisites were met. There was an arbitration agreement contained in provision 11.01 of the USA. The Receiver was party to Mayfield’s pre-receivership Arbitration Agreement, and the Court concluded that the phrase “court proceedings” included the receivership proceedings. In the receivership proceedings, issues were raised which engaged Stark’s interests and Stark had standing, as an interested party, to challenge the Receiver’s actions. The issue of the validity of the Directors’ Resolution and the Casino’s lease renewal was also clearly governed by the arbitration provision within the USA.

However, the fourth prerequisite could not be met. The Director’s Resolution and the Casino’s lease renewal had been in motion since early September 2024. Stark waited until April 2025 to file his Notice to Arbitrate, and in the meantime, participated in the receivership proceedings. Having done so, he pursued a course of action which would preclude a party such as him from relying upon an arbitration agreement. The Court concluded, therefore, that the mandatory stay provided for in s 7(1) of the Arbitration Act was not engaged in this case.

The Court noted that the BIA is remedial legislation that is intended, in part, to provide for an orderly and efficient distribution of a bankrupt’s funds to various creditors. As such, it is to be given a liberal interpretation to facilitate its objectives. Section 243(1)(c) of the BIA permits the Court to do not only what justice dictates but what practicality demands. Here, practicality demanded that the issue of the validity of Directors’ Resolution and the Casino’s lease renewal be determined within the context of the receivership proceedings.

Stark had delayed the commencement of the arbitration proceedings despite the fact that he took issue with the validity of the Director’s Resolution and the Casino’s lease renewal around the time that the receivership proceedings were commenced. He did nothing until several months had passed, during which the receivership proceedings had advanced to a critical stage. Stark exercised his right to participate in the receivership proceedings and it was not until well after his bid to force the sale of Mayfield’s shares to him and Christianson failed that he sought arbitration.

Other parties, including the Receiver, relied upon the processes established by the Receivership Order to assess the risks and to proceed with the SISP. Stark’s Notice to Arbitrate undermined the integrity of the SISP process and risked the collapse of the SISP and devaluation of Mayfield’s assets. The Court held that it would be unfair, disruptive and prejudicial to the receivership to allow Stark’s proposed arbitration to derail the SISP at this stage. For that reason, the issue of the validity of the Directors’ Resolution and the Casino lease renewal ought to be determined within the context of the receivership proceedings alone. The arbitration against Mayfield was therefore stayed pursuant to s 9 of the Receivership Order.

Judge: Justice Harris

Professionals involved:

• Kelly Bourassa and Claire Hildebrand of Blakes for EY as receiver

• Pantelis Kyriakakis of McCarthy Tetrault for ATB Financial

• Terry Czechowskyj, K.C. of Miles Davison for Albert Stark

• Darren Bieganek, K.C. and Edward Feehan, K.C. of Duncan Craig for Howard Stark