Upstream Water Management Ltd. (Re)

2014 BCSC 159 Upstream Water Management Ltd. (Re)

IN THE SUPREME COURT OF BRITISH COLUMBIA Citation: Upstream Water Management Ltd. (Re), 2014 BCSC 159 Date: 20140131 Docket: B131506 Registry: Vancouver In Bankruptcy and Insolvency In the Matter of the Bankruptcy of Upstream Water Management Ltd. Before: The Honourable Mr. Justice Pearlman Reasons for Judgment Counsel for Direct Transport Ltd.: G. Plottel Counsel for Upstream Water Management Ltd., Canadian Sands Inc. and 1604766 Alberta Ltd.: G. Buck Place and Date of Hearing: Vancouver, B.C. January 17, 2014 Place and Date of Judgment: Vancouver, B.C. January 31, 2014

INTRODUCTION [1] The application creditor, Direct Transport Ltd. ("Direct") commenced these proceedings on October 29, 2013 by filing its application for an order that Upstream Water Management Ltd. ("Upstream") be adjudged bankrupt and that Grant Thornton Ltd. be appointed as Trustee. [2] Direct claims that Upstream is indebted to it in the amount of $142,380 and pleads that Upstream has within the six months prior to the filing of the application committed an act of bankruptcy by ceasing to meet its liabilities generally as they have become due. [3] On this application, Upstream, Canadian Sands Inc. ("Canadian Sands"), a shareholder of Upstream, and 160477 Alberta Ltd. ("160"), which claims to be a shareholder in Upstream, seek leave to rely on four affidavits on the hearing of Direct's application for the bankruptcy order. Those affidavits were sworn and delivered after Direct had served Upstream with its affidavit in response to the affidavits previously filed on behalf of Upstream and the other respondents. Direct's affidavit in response was sworn by Sara Gordon-Bull. She is a director and shareholder of Direct, and a director of Upstream. [4] Upstream, Canadian Sands and 160 also apply for an order for the cross-examination of Ms. Sara Gordon-Bull on her affidavit.

BACKGROUND Upstream's grounds for opposing bankruptcy application [5] Upstream, Canadian Sands and 160 oppose the application for the bankruptcy order on grounds that: (a) The financial affairs of Upstream are the subject of an unresolved shareholders' dispute. Before Direct had brought its bankruptcy application, Upstream, Canadian Sands and 160 commenced an action against Direct and its directors, Danny Allen and Sara Gibson-Bull in the Alberta Court of Queen's Bench. In the Alberta action, Upstream, Canadian Sands and 160 claim that Direct and its directors Danny Allen and Sara Gibson-Bull misappropriated funds owing to Upstream in the amount of $1.63 million. (b) Any amounts that may be owed to Direct, Mr. Allen and Ms. Gibson-Bull are subject to a set-off against the claims of Upstream, Canadian Sands and 160 in the Alberta action. (c) The application for the bankruptcy order is brought for an improper purpose, namely: (i) it is a collateral attack on the Alberta action; (ii) it has been brought to gain an advantage in the shareholders' dispute; (iii) it has been brought to defeat the claims of the respondents advanced in the Alberta action. (d) The respondents deny that Upstream has failed to meet its liabilities as they became due. Issues on hearing of bankruptcy application [6] On the hearing of the bankruptcy application, under ss. 43 (1) and (7) of the Bankruptcy and

Insolvency Act, R.S.C. 1985, c. B-3 ("BIA"), the issues will be: (a) whether the debt owing to the applicant creditor amounts to $1,000; (b) whether Upstream has committed an act of bankruptcy within the six months preceding the filing of the bankruptcy application; and (c) whether the bankruptcy application has been brought for an improper purpose. Relief sought by respondents on this application [7] The application for the bankruptcy order was set for hearing on January 17, 2014. However, on that day, the parties agreed to adjourn the hearing of the bankruptcy application and to proceed with the hearing of this application by Upstream, Canadian Sands and 160 for orders that: (1) the applicants have leave to rely on the four affidavits identified in their Notice of Application as the "Responding Affidavits"; (2) alternatively, if the applicants are denied leave to rely on the Responding Affidavits, that affidavit #1 of Sara Gibson-Bull sworn December 10, 2013 be excluded from evidence in this proceeding, either in whole or in part; (3) the applicants have leave to cross-examine Sara Gibson-Bull before a court reporter on her affidavit #1 at a date and time to be agreed by counsel or at such other date as the court may direct. Background Facts [8] Direct and Canadian Sands are equal shareholders in Upstream. Each holds 50 shares in Upstream. While Upstream, Canadian Sands and

160 maintain that 160 also owns 50 shares in Upstream, Direct disputes that 160 holds or is entitled to any shares of Upstream. [9] Mr. Danny Allen and Ms. Sara Gibson-Bull are the two directors of Direct. [10] Ms. Annie German is the sole director and shareholder of Canadian Sands. [11] Ms. Gibson-Bull and Ms. German are the two directors of Upstream. [12] Upstream was incorporated to provide water management services to oil and gas exploration and development companies operating in northeastern British Columbia. Upstream engaged in that business for about eight months from November 2011 to July 2012, when it ceased operations. [13] In support of Direct's application for the bankruptcy order, Mr. Danny Allen swore his affidavit of verification on September 24, 2013. [14] Mr. Allen deposed that in addition to the $142,380 debt alleged to be owing to Direct, Upstream was indebted to other creditors as follows: (a) Ally Credit Canada for $22,792.77; (b) Northfield Oilfield Hauling (2009) Inc. for $3,192; (c) Mr. Allen personally for on-site supervision services, for $41,347.97; (d) Ms. Gibson-Bull for management and bookkeeping services in the amount of $31,500 and for an additional $2,258.84 she paid to Ally Credit Canada; and (e) Canada Revenue Agency for "an undetermined amount of unpaid income taxes and goods and services tax". [15] Ms. Annie German filed an affidavit in

response to Direct's application in which she alleged that: (a) Direct had acted as a third party billing agent on behalf of Upstream for several clients until Upstream was able to bill on its own account; (b) Direct had not transferred all the profits from work performed by Upstream but billed and collected by Direct as Upstream's agent to Upstream's bank account; (c) Ms. Gibson-Bull had closely controlled the finances and books of Upstream and had denied Canadian Sands and 160 access to those records; (d) the affairs of Upstream were the subject of an unresolved shareholders' dispute and that Upstream had commenced the Alberta action against Direct, Mr. Allen and Ms. Gibson-Bull; (e) she disputed the amounts claimed by Direct, Mr. Allen and Ms. Gibson-Bull as owing from Upstream, or that Upstream had failed to meet its liabilities as they became due in the six months before the filing of the bankruptcy application; and (e) no documents had been produced by Direct relating to any of the alleged debts of Upstream, and Ms. Gibson-Bull had refused to provide access to the books and records of Upstream. [16] Ms. Jeanette Tymofichuk also swore her affidavit #1 filed November 20, 2013 in opposition to Direct's application for the bankruptcy order. Ms. Tymofichuk deposed that she is the sole director and shareholder of 160 and that 160 is a shareholder of Upstream. Ms. Tymofichuk

swore that 160 had become a shareholder in Upstream as a result of the involvement of her fiancé in Upstream's business. She also denied that Upstream was indebted to Direct for $142,380. Ms. Tymofichuk repeated Ms. German's complaint that Direct had not produced any documents verifying the amounts allegedly owed by Upstream to its creditors, and that Ms. Gibson-Bull had refused to give 160 access to Upstream's books and records. [17] In response to the affidavits of Ms. German and Ms. Tymofichuk, Ms. Gibson-Bull swore a 204-page affidavit on December 10, 2013 which was delivered to the applicants on December 19, 2013. By her affidavit # 1, Ms. Gibson-Bull: (a) alleged she never agreed to 160 becoming a shareholder in Upstream; never authorized shares to be issued to 160; and did not authorize a central securities register to be made showing 160 as a shareholder; (b) provided a breakdown and explanation of the amounts alleged to be owing to Direct and Mr. Allen by Upstream; (c) provided an explanation of her claim for a debt due from Upstream for management and bookkeeping services; (d) provided particulars of the amounts allegedly owed by Upstream to the other creditors identified in Mr. Allen's affidavit of verification; (e) alleged Upstream had never prepared financial statements or filed income tax or GST returns; (f) stated that she as a director of Upstream had not

authorized the commencement of the Alberta action, or authorized Upstream to oppose the bankruptcy application; (g) alleged that Ms. Annie German had misappropriated funds from Upstream's bank account; and (h) identified three companies which she said were the only customers of Upstream, and stated two other companies, Penn West Exploration and Quicksilver Resources were existing clients of Direct, rather than Upstream. [18] Ms. Gibson-Bull attached as exhibits to her affidavit copies of the records kept in Upstream's Minute Book, bank statements for Upstream's bank account, invoices, field tickets and contracts relating to debts owed by Upstream and the invoices issued by Upstream to its clients. [19] The documents exhibited to Ms. Gordon-Bull's affidavit included copies of the financial, banking and corporate records of Upstream that the respondents, Ms. German and Ms. Tymofichuk complained Ms. Gibson-Bull had previously withheld from them. [20] On January 15, 2014, Upstream filed the four affidavits on which it seeks leave to rely at the hearing of Direct's application for the bankruptcy order. Those affidavits are affidavit #2 of Ms. Annie German, affidavit #1 of her husband, Calvin German, affidavit of #2 of Jeanette Tymofichuk, and affidavit #1 of Nathan Bauder, the lawyer who incorporated Upstream. [21] By her affidavit #2, Annie German: (a) responded to Ms.

Gibson-Bull's assertion that Upstream had only three customers and that Penn West Exploration and Quicksilver were not customers of Upstream; (b) disputed Ms. Gibson-Bull's allegations that she had misappropriated funds from Upstream; (c) responded to Ms. Gibson-Bull's statement that all of Upstream's profits were paid into its bank account; (d) responded to Ms. Gibson-Bull's statement that she had not authorized the issuing of shares in Upstream to 160; and (e) responded to Ms. Gibson-Bull's statements and the documents attached to her affidavit concerning Upstream's alleged indebtedness to Ms. Gibson-Bull for bookkeeping and management services. [22] By his affidavit, Mr. Calvin German responded to Ms. Gibson-Bull's evidence concerning the formation of Upstream, the respective contributions of Direct and Canadian Sands to the business of Upstream and Ms. Gibson-Bull's assertion that Penn West Exploration and Quicksilver were not customers of Upstream. Mr. German also responded to Ms. Gibson-Bull's claim for unpaid bookkeeping and management services. [23] Ms. Tymofichuk's affidavit #2 deals entirely with the dispute about whether 160 is a shareholder in Upstream. [24] By his affidavit #1, Mr. Bauder provides evidence concerning the instructions he received from Ms. Gibson-Bull concerning the incorporation of Upstream. He deposes that initially Ms. Gibson-Bull instructed him

that the shares of Upstream would be divided equally between Canadian Sands and Direct, and that the directors of Upstream would be herself and Ms. German. According to Mr. Bauder, about two weeks after the incorporation of Upstream, he received instructions from Ms. Gibson-Bull to change the shareholding structure of Upstream by adding 160 as an equal shareholder of Upstream, along with Direct and Canadian Sands. Mr. Bauder has sworn that in accordance with Ms. Gibson-Bull's instructions, his office prepared a Director's Resolution authorizing the issuance of 50 shares in Upstream to 160, a share subscription agreement, and the share certificate, and that he forwarded those documents to Ms. German for execution by herself and a representative of 160.

DISCUSSION Leave to rely on the "Responding Affidavits" [25] Direct submits that the affidavits of Annie German, Calvin German, Jeanette Tymofichuk and Nathan Bauder filed on January 15, 2014 address collateral matters, including the question of whether 160 is a shareholder in Upstream, and are irrelevant to the issues before the court on the bankruptcy application. [26] Under Rule 8-1(14) of the Supreme Court Civil Rules, the court has a discretion to permit additional affidavit evidence that is material and relevant. That discretion may be exercised in favour of receiving the additional affidavit evidence where the affidavits relate to information that originates from the objecting party: P.K.K. v. A.M.K., 2003 BCSC 1056 at paras. 33, 34. [27] Direct first disclosed the documents it relies upon to prove the alleged debts of Upstream through the affidavit of Ms. Gibson-Bull. That affidavit also provided new particulars about the alleged debts of Upstream. The affidavit of Ms. Gibson-Bull also contains new allegations of wrongdoing by the respondents, including the allegation that Ms. German misappropriated funds from Upstream's bank account that would otherwise have been available to pay its debts. [28] The respondents are entitled to respond to the information and documents relating to the alleged indebtedness of Upstream first disclosed in Ms. Gibson-Bull's affidavit.

Affidavit #2 of Annie German and affidavit #1 of Calvin German, in addition to responding to allegations of misconduct first made against them in Ms. Gibson-Bull's affidavit, also provide relevant and material information relating to the amount of Upstream's indebtedness to Direct and to the issue of whether or not the bankruptcy application was brought for an improper purpose. [29] Paragraphs 4 through 7 of affidavit #2 of Annie German, relate to the dispute about whether 160 is a shareholder in Upstream. Similarly, the affidavit #2 of Jeanette Tymofichuk and the affidavit of Mr. Bauder address only the issue of whether 160 is a shareholder in Upstream. Information about whether 160 should be recognized as a shareholder in Upstream is neither material nor relevant to the matters in issue on the application for the bankruptcy order. Accordingly, the respondents are not entitled to rely upon affidavit #2 of Jeanette Tymofichuk or affidavit #1 of Mr. Bauder on the hearing of the bankruptcy application. [30] Subject to any further direction from the judge hearing the application for the bankruptcy order, the respondents will be permitted to adduce and rely upon the affidavit of Calvin German, and affidavit #2 of Annie German, other than paragraphs 4 through 7. Cross-examination of Ms. Gibson-Bull on her Affidavit [31] Section 3 of the BIA General Rules states: In cases not

provided for in the Act or these Rules, the courts shall apply, within their respective jurisdictions, their ordinary procedure to the extent that that procedure is not inconsistent with the Act or these Rules. [32] Section 14(2) of the General Rules specifically provides for the examination of a deponent on his or her affidavit: 14(2) A party to any court proceeding may, with leave of the court, require the attendance of any person for examination on an affidavit that the person filed with the court. [33] The court may exercise its discretion to order cross-examination on an affidavit where the evidence to be elicited is relevant to an issue on the application: Mancini, Re (1987), 63 C.B.R. (N.S.) 249 (Ont. S.C.) at para. 30. [34] The court has a discretion to order cross-examination, which must be exercised on proper principles. Normally, where the affidavit on which cross-examination is sought includes facts that are in issue, the deponent will be ordered to attend for cross-examination: Associated Respiratory Services Inc. v. Universal Medical Services Inc. et al, 1993 CanLII 2070 (B.C.S.C.) at para. 5; Brown v. Garrison (1967), 63 W.W.R. 248 (B.C.C.A.). [35] Here, there are conflicts on the affidavits about both the validity and the amounts of the debts alleged to be owed by Upstream to Direct, Mr. Allen, Ms. Gibson-Bull, Northfield Oilfield Hauling, Ally Credit Canada and

the Canada Revenue Agency. There is also a dispute about whether Upstream has a claim against Direct, Ms. Gibson-Bull and Mr. Allen which, if successful, would reduce the liability of Upstream to the petitioning creditor and its principals to less than $1,000. Whether the application for the bankruptcy order was brought for an improper purpose is also in issue. These conflicts in the affidavits relate to the material issues on the bankruptcy application. [36] Further, as counsel for the respondents submits, Ms. Gibson-Bull has not explained in her affidavit why she did not pay the Northfield Oilfield Hauling invoice while she was providing bookkeeping services to Upstream and had control of Upstream's finances, or why she did not prepare financial records or cause GST to be remitted to the Canada Revenue Agency while she was providing bookkeeping and management services to Upstream. [37] I am persuaded this is an appropriate case for the court to exercise its discretion to allow cross-examination of Ms. Sara Gibson-Bull on her affidavit. The cross-examination will be limited to the issues raised in the statements contained in paragraphs 20 through 28 of Ms. Gibson-Bull's affidavit dealing with the customers and accounts of Upstream, paragraphs 29 through 35, dealing with Upstream's debts to Direct Transport and Mr. Allen, paragraphs 36 through 40, dealing with the alleged

misappropriation of funds from Upstream's bank account, paragraphs 41 through 47 dealing with Upstream's debts to Ms. Gibson-Bull, Ally Credit Canada Ltd., Northfield Oilfield Hauling and Canada Revenue Agency, and paragraphs 48 through 55, which relate to the question of whether the bankruptcy application was brought for an improper purpose. There will be no cross-examination respecting the dispute about whether 160 is a shareholder in Upstream. That matter is irrelevant to the issues raised on the bankruptcy application. The right to cross-examine Ms. Gibson-Bull on her affidavit does not extend to collateral matters, including matters pertaining solely to credibility: Associated Respiratory Services Inc., at pp. 5-6. [38] The applicants have leave to cross-examine Ms. Gibson-Bull before a court reporter on her affidavit #1, sworn December 10, 2013 for one day. The examination will take place in Vancouver, unless otherwise agreed by counsel.

CONCLUSION [39] The applicants have leave to adduce and rely upon affidavit #2 of Annie German and affidavit #1 of Calvin German on the hearing of Direct's application for the bankruptcy order. The applicants have also succeeded on their application to cross-examine Ms. Gibson-Bull on her affidavit. [40] The applicants will have the costs of this application as costs in the cause. "PEARLMAN J."