Alberta Court Of Appeal Confirms That Directors Can Be At Arm's Length With Their Companies

There are several factors one must consider when determining if payments made are fraudulent preferences under section 95 of the Bankruptcy and Insolvency Act, RSC 1985, c B-3 (the "BIA"). Fortunately the Alberta Court of Appeal has recently handed down a decision that may be of interest to bankruptcy practitioners. In Piikani Energy Corporation (Re), 2013 ABCA 293, the Court of Appeal had to determine if certain payments made by an energy corporation were fraudulent preferences, and in coming to its conclusion the Court touched on the issue of arm's length transactions with directors.

Background

The Piikani Nation (the "Nation"), located in the south-west corner of Alberta, agreed to allow a portion of its lands to be used for the development of the Oldman River Dam. The Piikani Nation received $36.3M in return for entering into the Settlement Agreement. This money was going to flow to other Piikani Business Entities, such as Piikani Energy Corporation (PEC).

On January 1, 2009, PEC entered into a consulting agreement with 607385 Alberta Ltd ("607") pursuant to which 607 would receive an annual fee of $150,000 payable in advance. 607's consulting business is run by Stephanie Ho Lem.

On February 1, 2009, Dale McMullen entered into an employment agreement with PEC.

There were ongoing legal battles between the Nation, PEC and Piikani Investment Corporation (PIC). In October 2009 the Nation applied for the appointment of Alger & Associates Inc. ("Alger") as investigator for PIC. On December 18, 2009, PEC paid 607 its annual retainer for 2010, as well as McMullen's severance payment pursuant to the employment agreement. Three days later the Nation's application to have Alger named as PEC's Interim Conservator was granted by a chambers judge. Alger terminated 607's consulting agreement in July of 2010, and demanded that Ho Lem pay back her unearned portion of 607's 2010 retainer. On November 20, 2012, Alger assigned PEC into bankruptcy.

Alger was successful in its application to have the payments made to 607 and McMullen voided as fraudulent preferences. The chambers judge held that PEC was insolvent when it made the payments to Ho Lem and McMullen, and that they were not at arm's length to PEC. 607 and McMullen appealed.

Issues and Reasoning

At issue on appeal was whether Ho Lem and McMullen were at arm's length to PEC, and whether PEC was insolvent when the payments were made. The term "arm's length" is not defined in the BIA.

Section 95 of...