Is a bankruptcy court an appropriate forum to resolve a shareholder dispute?
In 2013, Street and Sather purchased a cattle ranch from Sather’s family. A company was incorporated in Alberta for that purpose, with each of Street and Sather beneficially owning 50% of the shares in the company through their respective corporations. All of the assets and business dealings of the Company related to the operation of the cattle ranch.
Street was responsible for overseeing the day-to-day operations of the ranch. Over the last five years, he arranged to have another one of his companies perform work and make improvements to the ranch for an amount in excess of $800,000. Sather was a silent partner, uninvolved in the ranch’s day-to-day operations. Street and Sather had a falling out over the management and operations of the ranch.
Street claimed that he has been funding the ranch’s operations through his personal resources, with no assistance from Sather. The Applicants argued that as a consequence of the Company’s inability to fund the ranch operations, they lent monies to the Company from time to time, some of which remains unpaid. Sather disputed the accuracy of the Company’s books and argued that Street had no authority to incur such debts and payables without his permission.
On August 7, 2018, the Applicants commenced an action against the Company for judgment in the sum of $44,306.63 plus interest. No response to the civil claim was filed. Consequently, the Applicants sought and obtained a receivership order against the Company on September 17, 2018. The terms of the receivership order were negotiated between Sather and Street. The mechanism for resolving disputed claims between them was designed to quickly identify and resolve, among other things, the legitimacy of the Applicants’ alleged debt. The negotiations have since broken down.
The Applicants sought an order pursuant to s. 43(1) of the Bankruptcy and Insolvency Act (the “BIA“), adjudging the debtor company bankrupt and appointing a trustee in bankruptcy. Sather opposed the application. In order to obtain an order adjudging the Company a bankrupt, the Applicants had to establish on a balance of probabilities that the Company had committed an act of bankruptcy as defined under s. 43 of the BIA within six months immediately prior to filing of the application.
The Applicants argued that by failing to pay their advances, the Company has committed acts of bankruptcy by ceasing to meet its liabilities as they generally become due. Sather denied that the Company was indebted to the Applicants and claimed that any alleged acts of bankruptcy were set up in a deliberate attempt by Street to take over the ranch.
Other than a fully secured debt owed to the Bank of Montreal, the Company’s only indebtedness was to either its shareholders, their family or corporations owned by them. It was not clear what, if anything, was legitimately owed to any of these parties. The specific question for the Court on this application was whether Sather’s allegations gave rise to a bona fide dispute such that the Applicants’ debt claims totalling almost $50,000 were in question. In other words, the Court was tasked with assessing whether Sather had provided persuasive evidence that his allegations had a realistic prospect of success.
The Court found that this case was a shareholder dispute between the Company’s two 50/50 shareholders. The receivership order, which was effectively a standstill arrangement between Sather and Street to allow them an opportunity to work out their differences, was unsuccessful. The Court could not conclude, on the evidence before it, whether the Applicants’ advances were legitimate debts or, as Sather had alleged, motivated by an improper intention to assist Street in taking over the cattle ranch. The dispute was complicated, and not one that could be fairly dealt with in a summary fashion.
While the Court was satisfied that the Company was unable to pay its debts as they become due, it was not satisfied that the Applicants had proven that the Company owed them the money they alleged. For example, the Company’s shareholder loan accounts were recorded to be in Sather’s and Street’s names, even though the shareholders were corporate entities. As such, it was not clear that these transactions could withstand the scrutiny of review, or whether they were part of what Sather alleged was improper conduct on Street’s part.
The Court held that this case was not about a winding up of a clearly insolvent enterprise that is unable to satisfy its obligations as they become due. Rather, the application was a tactical move by Street, acting through the Applicants, to use the BIA to his advantage. The bankruptcy court is not the proper forum for the resolution of such shareholder disputes.
The Court dismissed the application with costs.
Counsel: Steven Dvorak of Rush Ihas Hardwick LLP for the Applicants, Marielle Brule and Profectus Financial Ltd. and J.D. Flannigan and E. Scrimshaw for Sather Ranch Ltd. and AMX Real Estate Inc.