Deferring to a security opinion prepared by counsel?

Atlantic Sea Cucumber Ltd. (Re), 2025 NSSC 234
Should the court defer to a security opinion prepared by counsel?

Summary: In this case, the court considered whether a related party held valid and enforceable security against a bankrupt, or whether the related party was merely an unsecured or equity claimant. The dispute was raised by a judgment creditor, which contested the related party’s security as illegitimate, arguing it was a late-stage attempt to leapfrog other creditors. The court ultimately concluded the related party was an unsecured creditor. In so doing, the court considered the relevance of a legal opinion provided by “experienced and professional” review counsel, which the trustee relied on to reach its validity and priority decisions. The court noted that the opinion contained numerous caveats and flawed assumptions, including as to the solvency of the bankrupt at the time of granting the security, and that a close reading of the opinion revealed that the trustee and counsel were in effect talking at cross-purposes. As such, the conclusions reached by both were built on faulty premises, and the court refused to defer to them.

The trustee in bankruptcy of Atlantic Sea Cucumber Ltd. applied under s. 38 of the Bankruptcy and Insolvency Act to determine the validity of certain security granted by Sea Cucumber in favour of a related company, Atlantic Golden Age Holdings Inc. The dispute was raised by a judgment creditor, Weihai Taiwei Haiyang Aquatic Food Co. Ltd. (“WTH”), which contested Golden Age’s security as illegitimate, arguing it was a late-stage attempt to leapfrog other creditors in Sea Cucumber’s bankruptcy.

In 2018, Sea Cucumber granted security to Golden Age on account of supposedly having borrowed money from Golden Age. Sea Cucumber submitted that it did so under documentation not prepared by counsel, said to be downloaded from some unspecified online resource. This security purported to secure most, but not all, of Sea Cucumber’s assets. According to Golden Age, the intention was for this purported security to secure revolving facilities, which would wax and wane as cash flow demanded. In fact, the 2018 advances were repaid in full, and further post-2019 advances were also made by Golden Age. After encountering financial difficulties, in March and April 2023, Sea Cucumber issued “new and improved” security with the assistance of counsel which generally, but not precisely, purported to encumber the same assets. 

The key issue was whether Sea Cucumber’s 2018 unregistered loan agreement with Golden Age created a valid and perfected security interest, and whether that interest extended to funds advanced later and purportedly secured by the more formal 2023 documentation. Golden Age argued the 2023 documents merely formalized and perfected the 2018 agreement. WTH countered that the 2023 security was a new and invalid preference under section 95 of the BIA, while the 2018 security was unperfected and therefore void as against the trustee.

The Court concluded that the 2018 security was valid as between the parties, but that only the items noted in it were covered; to the extent the 2023 documentation purported to extend the security’s reach, it was of no effect as against the Trustee. It was clear that the 2018 transactions contemplated a secured transaction at least as between the parties and not only was there an expectation of repayment, it actually occurred. There was documentation; repayment was not tied to a percentage or formula; the funds appeared to have been treated for accounting purposes as loans and reported on the corporate balance sheets as such; the funds were not the exclusive source of capital, although they later were used at least in part to replace outside capital; and although Golden Age and Sea Cucumber were under common control, Golden Age was not a common shareholder of Sea Cucumber.

The Court determined that while the 2018 loan was indeed a debt (not equity) and a “proper transaction” under section 137 of the BIA, it did not secure subsequent advances made after 2019. The 2018 agreement had been fully repaid by late 2020, and later advances were found to be separate transactions. The judge concluded that the 2023 security documents were not just formalizations of the 2018 deal, but distinct transactions done during Sea Cucumber’s financial distress and within the preference window. As such, the 2023 security was void under section 95 of the BIA, and the 2018 security, being unregistered and not covering the newer advances, could not be enforced against the trustee.

Interestingly, in reaching its decision, the Court considered the relevance of a legal opinion provided by “experienced and professional” review counsel, which the Trustee relied on to reach its validity and priority decisions. The Court noted that the opinion contained numerous caveats and flawed assumptions, including as to the solvency of Sea Cucumber at the time of granting the 2023 security. The Court stated that while it was reluctant to criticize either the Trustee or review counsel, a close reading of the opinion revealed that the Trustee and counsel were in effect talking at cross-purposes. As such, the conclusions reached by both were built on faulty premises in fact and in law, and were not conclusions which compelled Court deference.

Judge: Raffi A. Balmanoukian, Registrar in Bankruptcy

Professionals involved:

• Gavin MacDonald and Meaghan Kells of Сox & Palmer for Weihai Taiwei Haiyang Aquatic Food Co. Ltd.

• Joshua Santimaw of BOYNECLARKE for msi Spergel Inc. as Trustee

• Darren O’Keefe of O'Keefe & Sullivan for Atlantic Sea Cucumber Ltd.

• Christopher Isnor and Mel Norton of Lawson Creamer for Atlantic Golden Age Holdings Inc.