CITATION: CanaSea Petrogas Group Holdings Limited (Re), 2014 ONSC 6116 COURT FILE NO.: CV CL DATE:

Transcription

1 CITATION: CanaSea Petrogas Group Holdings Limited (Re), 2014 ONSC 6116 COURT FILE NO.: CV CL DATE: SUPERIOR COURT OF JUSTICE - ONTARIO IN THE MATTER OF THE COMPANIES CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. C-36 AS AMENDED AND IN THE MATTER OF A PROPOSED PLAN OF COMPROMISE OR ARRANGEMENT OF CANASEA PETROGAS GROUP HOLDINGS LIMITED, CANASEA OIL AND GAS GROUP PTE. LTD., CANASEA INTERNATIONAL PTE. LTD., CANASEA PETROGAS INVESTMENT INC. and CANASEA OIL AND GAS LTD. COUNSEL: Greg Azeff, Brent McPherson and Martha Garland for the Applicants Kyla Mahar for the Monitor Shawn Irving and Andrea Lockhart for Equity Ventures International Holdings Limited Pamela Huff and Matthew Kanter for Blue Energy Holdings Limited HEARD: October 16, 2014 Overview ENDORSEMENT [1] This is a motion for an order varying my order of September 19, That order was an initial order made in the context of an ex parte application by the applicants for protection under the Companies Creditors Arrangement Act, R.S.C. 1985, c. C-36. The basis for the motion is that the Ontario Superior Court lacks jurisdiction over the applicant CanaSea Oil and Gas Group Pte. Ltd. (COGG). [2] The moving parties are Equity Ventures International Holdings Limited and Blue Energy Holdings Limited. Equity Ventures and Blue Energy are both creditors of COGG under convertible loans. They are owed approximately $13 million. Their loans constitute 90% of the debt obligations of COGG and 49% of the total debt obligations of the applicants, or the CanaSea group, as a whole. [3] These Convertible Noteholders oppose this proceeding. The Convertible Noteholders indicate they have no intention of supporting any plan of compromise that may be made. They wish to pursue their remedies in Singapore, where their loan documents provide that any dispute should be adjudicated.

2 - Page 2 - [4] The principal argument of the Convertible Noteholders is that COGG is not a company within the meaning of the CCAA because it has no assets in Canada and does not do business in Canada, as required by the provisions of the CCAA. The material filed, however, also raises a question about whether applicants which unquestionably have assets or do business in Canada, i.e., Canasea PetroGas Investment Inc. and Canasea Oil and Gas Limited are, in fact, insolvent and have debts of at least $5 million, also as required by the provisions of the CCAA. The Issues [5] The Convertible Noteholders motion raises three basic issues: (1) The adequacy of the financial disclosure; (2) Whether COGG has any assets in Canada; and Background (3) Whether COGG does business in Canada. [6] The applicant Canasea Petrogas Holdings Limited (CPGH) is a holding company incorporated under the Canada Business Corporations Act with its head office in Toronto. The other applicants are all subsidiaries of CPGH. CPGH owns 100% of the shares of Canasea Oil and Gas Group Pte. Ltd. (COGG), a Singapore company. COGG owns 100% of the shares of Canasea Investment Inc. (CPII), a CBCA company. CPII owns 100% of the shares of Canasea Oil and Gas Limited (COGL), the Saskatchewan operating company. Canasea International Pte. Inc. (CPIL), another Singapore company, is also wholly owned by CPGH. [7] The application for an initial order was brought ex parte. [8] The affidavit of Zhenyu Fang filed in support of the initial order purported, in para. 58, to attach unaudited financial statements for COGG, CPII and COGL at Exhibit V. Fang deposed that these unaudited financial statements showed that COGG, CPII and COGL are collectively and individually insolvent. [9] In paras. 60 and 61 of his affidavit, Fang deposed that COGG s assets of $15 million were comprised almost entirely of loans to COGL and other investments in its subsidiaries and that: COGG s assets are entirely comprised of its shares in CPII. Consequently, its value is dependent on that of CPII (which is insolvent). CPII s assets are entirely comprised of its shares in COGL. Consequently, its value is dependent on that of COGL (which is insolvent). COGL s most recent unaudited financial statements for the period ending July 31, 2014 (a copy of which is attached hereto as Exhibit W) indicate that it has assets valued at $12,245, and liabilities of $17,072, and is thus insolvent.

3 - Page 3 - [10] The Fang affidavit also states, in para. 72, that the Applicants are insolvent on both an individual and consolidated basis. The July 31, 2014 financial statements of COGL (copies of which are previously attached at Exhibit BB hereto), the operating company, show net year to date losses in the amount of $1,115, [11] The applicants factum on the application for an initial order stated, among other things: In the present case each of the applicants has liabilities in excess of $5 million and is clearly insolvent. Each of the applicants is unable to meet its obligations as they generally become due. The applicant s finances are also inextricably intertwined through intercompany advances. [12] On the strength of this evidence and these representations, I found, among other things, in my September 19, 2014 endorsement: Analysis Further, the applicants finances are inextricably intertwined through intercompany arrangements. Under the CCAA a debtor company includes a company which is bankrupt or insolvent. Each of the applicants has liabilities which exceed $5 million. Each of the applicants is, on the evidence, unable to meet its obligations as they fall due. Further, each of the applicants assets is less than the amount of their obligations due and owing. CPII and COGL received the benefit of these funds and are liable under intercompany loan arrangements. None of these companies can repay this indebtedness. I am therefore satisfied on the evidence available that the applicants are indebted for over $5 million and are insolvent. [13] Rule of the Rules of Civil Procedure permits a party who is affected by a judgment made ex parte to bring a motion before the judge who granted the judgment to set aside or vary the judgment on such terms as are just. In addition, paragraph 51 of my initial order (commonly referred to as the comeback clause ) permits any interested party to apply to the court to vary or amend the initial order on not less than seven days notice to any other party likely to be affected by the order sought. [14] Given that the hearing for the initial order was conducted ex parte and that the moving parties represent 90% of COGG s debt obligations, I have no hesitation in finding that the moving parties meet the requirements of the Rules and the comeback clause in order to bring this motion.

4 - Page 4 - Financial Disclosure [15] As noted above, the applicants evidence and submissions on the initial order were to the effect that, although COGG was the borrower under the Convertible Notes, as a result of intercompany obligations, COGG s subsidiaries, being CPII and COGL, were also liable or somehow on the hook for the Convertible Noteholders loans. It was this submission that allegedly brought the applicants other than COGG within the insolvency and $5 million thresholds required by the CCAA. [16] The cross examination of Fang and the further scrutiny of Fang s evidence by the Convertible Noteholders have convinced me that: (a) there is no evidence (apart from the conclusory assertions of Fang) that CPII or COGL are insolvent; (b) there is no evidence that CPII or COGL have debt obligations in excess of $5 million; and (c) there is no evidence of intercompany debt obligations which make CPII or COGL liable to COGG for its debt to the Convertible Noteholders. [17] The documents at Exhibit V of the Fang affidavit are, on closer inspection, not financial statements at all. Exhibit V is some kind of profit and loss statement as of December 31, It is unclear by whom or when it was prepared or for what purpose. It is, as it turns out, the only document which even hints at any obligation due from CPII or COGL and is, at best, ambiguous about what due means and to which entity the alleged amounts are due. In addition, the attachments to Exhibit V which are specific to CPII and COGL, record no obligations of these companies to COGG whatsoever. [18] Fang was, in my view, evasive in his cross-examination about whether these entries represented intercompany loans (p.71, qq. 257 to 259) and finally admitted (at p. 72 q. 261) that there were no intercompany loan agreements. In addition, Exhibit 2 to the Fang crossexamination lists COGL s creditors COGG is not among them. COGL is shown to have debts of only $108,000. [19] In fact, the CanaSea group has a financial advisor E&Y Singapore. It came out as a result of Fang s cross-examination that E&Y Singapore had prepared unaudited financial statements for the year end December 31, 2013 which were not filed with the application for an initial order. These were produced only at the return of the Convertible Noteholders motion. [20] There is no suggestion in these financial statements that CPII or COGL owe COGG any material amount. COGG is simply said to have a $13.8 million asset referred to as investment in subsidiaries.

5 - Page 5 - [21] Note 20 to these financial statements indicates that COGL was audited by E&Y Canada, although no audited financial statements of COGL were produced in evidence on the application or the motion. [22] Instead, what Fang purported to file, as Exhibit W to his affidavit on the application, was unaudited financial statements of COGL. Exhibit W is, however, plainly not a financial statement at all. Again, it is not clear for what purpose or by whom this document was prepared. It appears to be a general ledger of some sort. In any event, it discloses no evidence of material obligations owing by COGL to COGG. [23] Fang was, I find, again evasive during his cross-examination on Exhibit W. He refused to admit that Exhibit W was merely a ledger that might feed into the income statement. He then retreated into professed ignorance about what Exhibit W was at all, deferring any further questions to his accountants. [24] Fang s affidavit states that Exhibit BB is a COGL financial statement. This too is belied by a close inspection of the document. Exhibit BB is, on its face, nothing more than a profit and loss statement for COGL. It provides no evidence of any material obligations owing to COGG. Although the document shows COGL as having negative cash flow of over $1 million, there is no evidence of the value of COGL s assets, the underlying petroleum and natural gas licenses. This profit and loss statement therefore is no evidence of COGL s solvency, independent of COGG. [25] The evidence and submissions provided at the brief hearing of the application for an initial order led me to conclude that: (1) each applicant had liabilities in excess of $5 million and was clearly insolvent; (2) each applicant was unable to meet its obligations as they came due; and (3) each applicant s finances were inextricably intertwined through intercompany debt obligations. [26] The evidence now produced as a result of the Convertible Noteholders motion simply does not support those conclusions. These conclusions were, in fact, wrong on the basis of the evidence now available. The evidence only supports the conclusion that CPGH, CIPL and COGG have obligations in excess of $5 million and are insolvent. CPGH, although a Canadian company, essentially carries on no business it is a holding company. CIPL and COGG, the real debtors in this proceeding, are Singapore companies and have very little connection to Canada. [27] Section 10(2)(c) of the CCAA requires disclosure of all financial statements prepared during the year before the application. I cannot be satisfied, on the basis of my findings above, that the applicants have complied with this obligation. [28] More importantly, I have reached the conclusion that if I had been aware of the facts discussed above, as now found, I would not have issued the initial order. I am not satisfied that

6 - Page 6 - the applicants filled their high obligations of candor and disclosure on an ex parte application. For this reason, my initial order is terminated. I declare my order of September 19, 2014 void ab initio. Assets in Canada [29] Although, in light of this conclusion, it is not necessary for the disposition of these proceedings to review the second and third issues raised by the Convertible Noteholders on this motion, I shall do so briefly in deference to counsel s extensive submissions. [30] An asset is something that is owned and has value. It is conceded that even a modest bank account in Canada would meet the Canadian asset requirement. I tend to agree with the Convertible Noteholders that the mere fact that an entity holds any share in a Canadian corporation would not necessarily qualify as an asset in Canada for jurisdiction purposes. However, in this case COGG owns 100% indirect control of the company in Canada which owns the only underlying assets that all these parties are fighting about the Saskatchewan petroleum and natural gas licenses. [31] Accordingly, absent the problem dealt with above, I would have been inclined to the view that COGG owned an asset in Canada. Does Business in Canada [32] COGG is a Singapore company. According to Fang s evidence on cross-examination, it carries on no business. The applicants submitted, however, that Fang, as the directing mind of COGG, is active in Canada and, therefore, COGG must carry on business in Canada. [33] I do not think this argument gives adequate content to the concept of doing business in Canada. The applicants argument really amounts to the proposition that wherever Fang happens to be at any given time, all the corporations of which he is the directing mind are doing business. While there is some authority for the proposition that a company seeking the protection of the CCAA does not need to be carrying on active business in Canada, the weight of authority supports the proposition that doing business should be given its plain and ordinary meaning, which necessarily entails some form of commercial activity or active management. Passive ownership of shares does not constitute doing business. [34] For these reasons I would have concluded that COGG was not doing business in Canada. Conclusion [35] Notwithstanding my legal conclusion on jurisdiction under the CCAA, had the facts now available been known to me on September 19, 2014, I would not have issued the initial order. [36] The evidence does not support the conclusion that CPII or COGL qualify as applicants under the CCAA. On the evidence, the only entities which meet the insolvency and $5 million thresholds are at the COGG level or above. COGG is a Singapore company with a tenuous

7 - Page 7 - connection to Canada, whose loan agreements provide for the resolution of disputes in Singapore under Singapore law. [37] Had the evidence reviewed in this endorsement been brought to my attention earlier, my discretion would not have been exercised in favour of issuing the initial order. [38] Accordingly my September 19, 2014 order is terminated and I declare it to be void ab initio. Costs [39] Absent agreement among the parties, costs may be requested in brief written submissions, not to exceed two typed double-spaced pages, supported with a Bill of Costs, to be filed to my attention within two weeks. Any response to such a request, subject to the same page limit, shall be submitted within a further 10 days. Penny J. Date: October 21, 2014