TECO (Re)

2012 BCSC 1583 TECO (Re) IN THE SUPREME COURT OF BRITISH COLUMBIA IN BANKRUPTCY AND INSOLVENCY Citation: TECO (Re), 2012 BCSC 1583 Date: 20121026 Docket: B111138 Estate No. 11-1546859 Registry: Vancouver IN THE MATTER OF THE BANKRUPTCY OF TECO NATURAL RESOURCE GROUP LIMITED Before: District Registrar Cameron Reasons for Decision Counsel for the Applicant, Harold Douglas Walker: H. J. Rusk Counsel for the Trustee, The Bowra Group Inc.: D. D. Nugent Place and Date of Hearing: Vancouver, B.C. October 10, 2012 Place and Date of Decision: Vancouver, B.C. October 26, 2012 [1] This is an appeal by Harold Douglas Walker (hereinafter "Walker") of the trustee's decision disallowing his claim as an unsecured creditor in the bankruptcy of TECO NATURAL RESOURCE GROUP LIMITED (hereinafter "Teco"). BACKGROUND [2] Walker was an employee of Teco for nearly sixteen years being employed initially in 1993 as a Resource Analysis manager in Teco's office in Edmonton, Alberta. Teco's principal business was the provision of consulting services relating to resource inventory and analysis, forest management and planning, mapping and related disciplines with the bulk of its work carried out in British Columbia. [3] In 1996 Walker was promoted to Teco's Executive Committee as Regional Manager of all of Teco's operations east of British Columbia. In 2001, he was promoted to Chief Operating Officer and in 2003 he became the President and Chief Executive Officer of Teco. By mutual agreement he left the employ of Teco on or about November 1, 2008. [4] During his tenure, Teco was a prosperous company and at the time of his departure from the company it operated sixteen offices in Canada as well as operations in Chile. [5] Upon first taking employment with Teco, Walker negotiated an entitlement to acquire shares of its parent company, Precision Software Ltd. ('Precision'). All the shares of Teco have been owned by Precision since its incorporation as a British Columbia company in 1980. Precision has not carried on any business and its only function was to hold the shares of Teco. Only employees of Teco were allowed to acquire shares of Precision. [6] Walker acquired shares of Precision during his employment with Teco and by October 2008 he owned 765 Class D non- voting common shares and 765 Class E voting common shares. [7] In October 2008, Walker advised the Teco Board of Directors that he wished to sell his shares as part of his retirement planning. Negotiations ensued and an agreement was reached that provided for Walker to resign as an employee on terms that included the sale of all of his shares in Precision. [8] The terms of Walker's departure from Teco, which was then named Timberline Natural Resource Group Ltd., being the company name after its name was first changed from Timberline Forest Inventory Consultants Ltd., and before its last name change to Teco, were confirmed in a letter dated December 1, 2008 from Walker's counsel addressed to counsel for Teco. The relevant terms of that letter providing for the repurchase of Walker's shares in Precision read as follows: 2. The parties would acknowledge that effective October 27, 2008 Mr. Walker has tendered his 765 shares at $635.00 per share or $485,775 which shall be paid to Mr. Walker or his RS Plan Trustee in five instalments as contemplated by Article 7.9(iv) of the Shareholders Agreement dated October 26, 2004; ... 4. Mr. Walker would tender his shares currently held by him to the Company's solicitor forthwith. We understand your firm currently holds any non RSP held shares; ... We have indicated to our client that he is to deal with you directly in dealing with his shares. [9] The Shareholder's Agreement referred to in the letter was made between Precision and its shareholders and Walker was a party to it. Article 7.9(iv) provided that Precision was to purchase the Class "D" shares of a departing employee/shareholder in five annual installments with interest payable quarterly. Walker tendered his shares to counsel for Teco as provided for in the letter. [10] At that time Teco was in the process of amalgamating to become a federally incorporated company and it was not permitted to own shares in the parent company, Precision, and as such Teco directed that the Walker shares in Precision be transferred to a British Columbia company that had been incorporated for the purpose of holding the shares. That company was named Timberline Forest Industry Consultants (2006) Ltd. (hereinafter "Timberline 2006"). [11] Timberline 2006 did not carry on any business and its function was to hold shares of Precision which were repurchased from the former employees of Teco for eventual resale to the current employees of Teco. [12] A Share Purchase Agreement was made effective November 1, 2008 that designated Walker as the vendor and Timberline 2006 .as the purchaser. The recitals to the Agreement read: A. The Vendor is the beneficial owner of 765 Class 'D' Non-voting, Common shares with a par value of $0.002 (the "D Shares") and 765 Class 'E' Voting, Common shares with a par value of $0.002 (the "E Shares") in the capital of Precision Software Ltd. ("Precision"). B. Pursuant to the terms of a settlement dated December 1, 2008 between the Vendor and Purchaser and Precision's 4th Amended and Restated Shareholders' Agreement dated October 26, 2004 (the "Shareholders' Agreement"), the Vendor has requested that Purchaser buy all of his shares held in Precision that being 765 D Shares and 765 E Shares (collectively, the "Shares") and the Purchaser has agreed to purchase the Shares. C. The Purchaser wishes to purchase the Shares for the purpose of reselling them to key members of its parent company, Timberline Natural Resource Group Ltd. ("TNRG"). D. As TNRG is now a federal company, it is not allowed to own shares in its parent company, Precision, and holds shares through its affiliate, the Purchaser. [13] The Agreement contained the following provisions respecting the purchase price for the shares: 2. PURCHASE PRICE 2.1. The total purchase price, net of any interest, for the Shares will be FOUR HUNDRED EIGHTY-FIVE THOUSAND SEVEN HUNDRED EIGHTY-TWO DOLLARS AND SIXTY-FIVE CENTS ($485,782.65) (the "Purchase Price") based on the following fair market values for the Shares as of the date of this agreement: (a) FOUR HUNDRED EIGHTY-FIVE THOUSAND SEVEN HUNDRED SEVENTY-FIVE DOLLARS ($485,775.00) for the D Shares, based on a price of SIX HUNDRED THIRTY-FIVE DOLLARS ($635.00) per share; and (b) SEVEN DOLLARS AND SIXTY-FIVE CENTS ($7.65) for the E Shares, based on a price of ONE CENT ($0.01) per share. 2.2. The Purchase Price will be paid by the Purchaser to the Vendor according to the following criteria: 2.2.1. E Shares (a) On the Closing Date, the Purchaser will pay, or cause to be paid, the sum of $7.65 to the Vendor for the portion of the Purchase Price attributable to the E Shares; 2.2.2. D Shares (a) The Purchaser will pay, or cause to be paid, the Purchase Price for the Class D shares, along with all shareholder loans, if any, due to the Vendor, in five (5) annual installments; (b) The Purchaser will pay interest, payable quarterly, on any unpaid portion of the Purchase Price, calculated from the Closing Date, at an annual rate equivalent to the prime lending rate at the Canadian Imperial Bank of Commerce as it may be from time to time (such prime rate to be that declared by the manager of the Main Branch in Vancouver of the Canadian Imperial Bank of Commerce (c) The Purchaser will direct the interest payments to the Vendor's RRSP account(s) and to the Vendor, proportionate to the outstanding principal balance attributable to each; (d) Principal amounts due for the D Shares held in the Vendor's RRSP account(s) will be paid in priority to and before any payments are made on the Vendors D Shares held outside of the RRSP account(s) after which, the remaining unpaid balance of the Purchaser Price outstanding and attributable to D Shares directly held by the Vendor outside his RRSP accounts will be paid directly to the Vendor; (e) The Purchaser will pay the first annual installment by no later than November 1, 2009, with each subsequent annual installment to be paid no later than November 1st of the succeeding years until 2013; (f) the Purchaser may make installment payments in advance of November 1s1 each year without penalty; (g) The amount of each installment payment will be determined by the Purchaser's board of directors, considering the financial situation of Precision and TNRG but in no event will an annual installment payment be less than the amount the Vendor would have received in that year as a bonus if he remained a shareholder of Precision; (h) If the Purchaser makes an installment payment in advance of November 1st in any given year and it is subsequently determined that the installment payment does not satisfy paragraph (g), then the Purchaser will make a supplemental payment within sixty (60) days of the bonus (as described in Article 5.5 of the Shareholders' Agreement) being declared such that the installment payment will equal the amount of the bonus the Vendor would have received; and (i) The Purchaser maintains the right to waive or moderate the terms set out in section 2.2 provided such waiver or moderation does not materially derogate the Vendor's position under this Agreement. [14] Walker and the Timberline companies (Precision, Timberline 2006, and Timberline Natural Resource Group Ltd) also signed a Mutual Release dated December 1, 2008. [15] The fortunes of Teco declined after 2008 and as matters transpired the only payments that Walker received for his shares were modest amounts towards the accrued interest pursuant to the terms of the Share Purchase Agreement. He did not receive any installment payments for the principal amount due for the shares. [16] Ultimately Teco made an assignment into bankruptcy with the Bowra Group Inc. as trustee on October 4, 2011. [17] On October 17, 2011 Walker delivered a Proof of Claim to the trustee in the amount of $549,345.61 claiming as an unsecured creditor for the amount due for his shares along with outstanding amounts due from Teco for Director's fees and an accrued shareholder bonus. [18] On May 8, 2012 the trustee issued a Form 77 of Notice of Disallowance relating to the shares amounting to $513,503.61. The trustee admitted the claim for the balance of $35,842.00 for the Director's fees and the shareholder bonus. In disallowing the claim for the balance due on the repurchase of the shares the trustee said to Walker: THE AMOUNT OF $513,503.61 YOU CLAIM AS BEING OWED IS OWED BY TIMBERLINE FOREST INVENTORY CONSULTANTS (2008) LTD.("TFIC")PURSUANT TO THE SHARE PURCHASE AGREEMENT BETWEEN YOU AND TFIC. [19] This appeal of the disallowance of the claim came on for hearing initially on July 23, 2012. Mr. Rusk had filed a Notice of Motion seeking a direction that Walker be allowed to introduce fresh evidence on the appeal beyond that which was considered by the trustee when he made the decision disallowing the bulk of Walker's claim. The evidence that was sought to be relied upon included the correspondence between counsel confirming the terms of settlement, the Share Purchase Agreement, and the mutual release. I gave oral reasons on July 27, 2012 allowing the application and the hearing proceeded on October 10, 2012 with the additional evidence to be considered as part of the record. THE STANDARD OF REVIEW [20] This is an appeal of the disallowance by the trustee, in accordance with s. 135(2) of the Bankruptcy and Insolvency Act ("BIA"), of the Walker claim. As such, the standard for review is correctness: Galaxy Sports Inc. (Re), 2004 BCCA 284, at paragraph 39. THE POSITIONS OF THE PARTIES [21] On behalf of Walker, Mr. Rusk submitted that while the trustee was correct in his determination that Timberline 2006 was obligated to pay for the shares that were redeemed he ought to have decided that Teco was also obligated as part of the settlement. He relies on the correspondence sent by counsel for Walker on December 1, 2008 and the contents of the mutual Release signed by all of the parties and submits that on a proper interpretation of those documents in addition to the terms of the Share Purchase Agreement between Walker and Timberline 2006 that Teco has assumed a liability to pay for the redeemed shares. [22] Mr. Rusk also placed some reliance on the post contractual dealings whereby the interest payments to Walker were made by Teco and not Timberline 2006. [23] On behalf of the trustee, Mr. Nugent submitted that the trustee's determination was correct in the first instance based upon the documents that he considered and that the decision should be found to still be correct even with the admission of the fresh evidence on this appeal. He submits that the amount outstanding for the redeemed shares do not comprise a debt or liability owing to Walker from Teco. He noted that Teco was not a party to the Shareholder's Agreement with Precision and not a party to the Share Purchase Agreement with Timberline 2006.and as such no contractual obligation was assumed by Teco for the shares that were redeemed. [24] Mr. Nugent continued with that same theme as it relates to the letter from counsel dated December 1, 2008 and the contents of the mutual Release. He submitted that on a plain reading of the letter there is no record of any agreement by Teco to pay for the redeemed shares and if that had been the intention of the parties the letter should have expressed it to be so. As for the mutual Release, it was submitted that the contents do not create or acknowledge any debt or liability from Teco to Walker for the purchase price of the redeemed shares. [25] As for the payment directly by Teco of interest due on the unpaid principal due from Timberline 2006 for the repurchased shares, Mr. Nugent submitted that this evidence should only be considered probative if there is some ambiguity in the contractual documents. He said there was none. ANALYSIS [26] For the purposes of this appeal the relevant provisions of the Bankruptcy and Insolvency Act are as follows: Claims Provable 121. (1) All debts and liabilities, present or future, to which the bankrupt is subject on the day on which the bankrupt becomes bankrupt or to which the bankrupt may be subject before the bankrupt's discharge by reason of any obligation incurred before the day on which the bankrupt becomes bankrupt shall be deemed to be claims provable in proceedings under this Act. Creditors shall prove claims 124. (1) Every creditor shall prove his claim, and a creditor who does not prove his claim is not entitled to share in any distribution that may be made. 135. (1) The trustee shall examine every proof of claim or proof of security and the grounds therefore and may require further evidence in support of the claim or security. Determination of provable claims (1.1) The trustee shall determine whether any contingent claim or unliquidated claim is a provable claim, and, if a provable claim, the trustee shall value it, and the claim is thereafter, subject to this section, deemed a proved claim to the amount of its valuation. Disallowance by trustee (2) The trustee may disallow, in whole or in part, (a) any claim; (b) any right to a priority under the applicable order of priority set out in this Act; or (c) any security. Notice of determination or disallowance (3) Where the trustee makes a determination under subsection (1.1) or, pursuant to subsection (2), disallows, in whole or in part, any claim, any right to a priority or any security, the trustee shall forthwith provide, in the prescribed manner, to the person whose claim was subject to a determination under subsection (1.1) or whose claim, right to a priority or security was disallowed under subsection (2), a notice in the prescribed form setting out the reasons for the determination or disallowance. Determination or disallowance final and conclusive (4) A determination under subsection (1.1) or a disallowance referred to in subsection (2) is final and conclusive unless, within a thirty day period after the service of the notice referred to in subsection (3) or such further time as the court may on application made within that period allow, the person to whom the notice was provided appeals from the trustee's decision to the court in accordance with the General Rules. [27] Mr. Nugent referred me to Honsberger and DaRae, Bankruptcy in Canada (4th Edition) at page 390 where the authors note: "A debt is a sum due by certain and express agreement, a specified sum of money owing to some person from another, including not only the obligation of a debtor to pay, but the right of a creditor to receive and enforce payment. To be a provable claim, a debt must be due, either at law or in equity, by the bankrupt to the person seeking to prove a claim and must be recoverable by legal process The meaning of the word "liability" is broader than that of the word "debt", including almost every character of hazard or responsibility and in particular, as provided in Section 121, includes all obligations to which the bankrupt is subject on the day on which he or she becomes bankrupt. [footnotes omitted] (Honsberger and Dalle. Bankruptcy in Canada, 4" ed, (Aurora: Canada Law Book, 2009) at p. 390. cited in Re South Beach Homes Ltd., 2010 SKQB 182 at. p. 11, para. 36)" [28] I have reviewed all of the documentary evidence relied upon by Walker in support of the disallowed claim and in my view there has not been any assumption of a debt or liability by Teco to Walker for the purchase price of the redeemed shares that would ground " a claim recoverable by legal process." [29] The mutual release does not include any enforceable promise by Teco to pay for the redeemed shares and it was conceded by Mr. Rusk that Teco was a necessary party to that release as it was providing consideration of its own to Walker consequent upon the termination of his employment. [30] That leaves for consideration whether Teco by virtue of its having made payments to Walker for some of the accrued interest on the unpaid purchase price of the shares redeemed by Timberline 2006 has after the fact acknowledged a debt or liability for those shares. In other words, can post contractual conduct modify the obligations of the parties? In Gilchrist v Western Star Trucks Inc., 2000 BCCA 70 at paragraph 17 the Court notes: [17] The goal in interpreting an agreement is to discover, objectively, the parties' intention at the time the contract was made. The most significant tool is the language of the agreement itself. This language must be read in the context of the surrounding circumstances prevalent at the time of contracting. Only when the words, viewed objectively, bear two or more reasonable interpretations, may the court consider other matters such as the post-contracting conduct of the parties: Delisle v. Bulman Group Ltd. (1991), 54 B.C.L.R. (2d) 343 (S.C), approved by Chief Justice McEachern in Bramelea Ltd. v. Vancouver School Board No. 39 (1992), 65 B.C.L.R. (2d) 334 (C.A.); Prenn v. Simmonds, [1971] 3 All E.R. 237 (H.L.); Eli Lilly and Co. v. Novopharm Ltd. (1998), 161 D.L.R. (4th) 1, (S.C.C). [31] In this case I do not find any other reasonable interpretation of the Share Purchase Agreement than that the only party assuming any liability for the purchase of the shares is Timberline 2006. In the circumstances, the interest payments made by Teco were gratuitous. [32] While with the benefit of hindsight it may have been advisable for Walker to have obtained a covenant from Teco to be jointly liable for the payment for the redeemed shares such an obligation does not exist. [33] The decision of the trustee to disallow the claim is upheld and the appeal is dismissed with costs. "District Registrar Cameron"