Seizure and redemption of shares successfully used by lender to thwart guarantor's fraudulent conveyance of assets

A recent decision of the Alberta Court of Queen's Bench has confirmed that a creditor can require a redemption of shares seized from a guarantor in order to satisfy a debt claim, and has highlighted the broad authority and discretion given to courts and civil collection agencies under Alberta's Civil Enforcement Act.¹

The decision in 1815471 Alberta² concerned an application for summary judgement by a lender (the "Lender") to enforce a judgement it had previously obtained against a guarantor (the "Guarantor") in another action. The Guarantor had been a shareholder and manager of a borrower corporation, Creamery Inc. ("Creamery"). The Guarantor had provided a limited guarantee of the debts of Creamery to the Lender. In April 2014 Creamery experienced financial difficulties, leading to a loan payment being returned for nonsufficient funds (the "Default"). In May 2014, the Lender demanded payment from, amongst others, the Guarantor. Proceedings were commenced later that month and summary judgement was obtained in November 2014.

Unknown to the Lender, shortly before the Default, the Guarantor performed an "estate freeze". On the pretext of an intended move to the United States, and on the basis of alleged tax planning arising therefrom, a corporation, 1815471 Alberta Ltd. ("181") had been incorporated on behalf of the Guarantor.³ A week before the Default, the Guarantor transferred most of his significant assets to 181, including approximately $2,000,000 in cash, real property, high-end motor vehicles, and shares of other companies.⁴ In return, the Guarantor was issued preference shares in 181 (the "Shares")

At some point after obtaining their initial judgement, the Lender became aware of the estate freeze and in July 2015 instructed a civil enforcement agency to seize the Shares. In August 2015, the civil enforcement agency, in an attempt to redeem the shares, delivered a letter to 181 requesting the redemption. The letter was not answered,⁵ which led to subsequent applications by the Lender seeking, among other things, to set aside the transfer of assets pursuant to the estate freeze and to require 181 to redeem the Shares, culminating in the present application.

In argument, the Guarantor raised in defence - and for the first time - that the letter requesting redemption had not required a response, (as it did not indicate when the Shares were to be produced or how many were to be redeemed⁶) and also alleged other deficiencies in the Lender's claims.

The court was required to determine a number of issues, including whether the estate freeze amounted to a fraudulent conveyance, and whether the Lender was entitled to a redemption of the Shares.⁷

The court found that the estate freeze did amount to a fraudulent conveyance.⁸ Given the value of the conveyance ($2,000,000 plus) compared to the debt owing ($73,389.82 including costs previously awarded), the Lender was content to rely on the seizure and redemption of the Shares⁹ rather than a complete unwinding of the fraudulent conveyance. There was no issue as to the solvency of 181 at the time of the request for redemption of the Shares given the extensive liquid assets transferred to 181.

The court also confirmed that as redemption was a statutory right arising pursuant to Section 62 of the Civil Enforcement Act¹⁰, it was not necessary to specifically plead the redemption of the Shares. The court found that Section 62 requires only that an application be brought - typically it would be brought within the original action - but the Lender was entitled to bring such application in a separate proceeding, as it had in this instance.¹¹

With respect to the redemption of the Shares, the court found that by not responding to the letter requesting redemption, the Guarantor and 181 had ignored 181's statutory obligations under Section 58 of the Civil Enforcement Act.¹² The court found that section imposed a positive obligation on 181 to respond and to provide certain information to the civil collection agency. Not responding was not permissible. As a result, given the broad authority granted to the civil enforcement agency under the Act, the court ordered that 181 was required to redeem a sufficient number of Shares to satisfy the debt owing to the Lender.¹³

Given that the remedy arises by operation of statute, it follows - though not as a finding of the court - that the Lender would have been entitled to the redemption even had the estate freeze not been found to have been a fraudulent conveyance. If 181 and the Guarantor failed to redeem the Shares as directed, the Lender was entitled to further remedies related to the unwinding of the estate freeze¹⁴.

This decision provides comfort to lenders in Alberta that debtors and guarantors will not be able to escape their liabilities. The ability to apply for and obtain a court order requiring the redemption of shares of solvent companies is a powerful enforcement mechanism for lenders.