Duel of the Forums – Court Declines Receivership Application in Favour of Existing Arbitration Process

In Alberta Finance & Mortgage Corporation v. Westana Asset Management Corp., the Court of King’s Bench of Alberta (Court) denied applications (Receivership Applications) by Alberta Finance & Mortgage Corporation (AFMC) for receivership orders against two groups of related entities (Companies). The Court distinguished the Supreme Court of Canada’s decision in Peace River Hydro Partners v. Petrowest Corp. (Petrowest) and concluded that it was not just or convenient to grant the Receivership Applications given, among other things, the existence of a binding Arbitration Agreement dealing with the wind-down of the Companies, significant factual disputes regarding the alleged indebtedness, and an incomplete evidentiary record.

This case illustrates the Court’s respect for binding arbitration agreements and deference to arbitrators where disputes are already subject to an agreed dispute-resolution process. The Court noted, however, that it remains available to assist in the arbitration where necessary for the proper administration of justice.

Background

At the centre of the disputes were two individuals — Cameron Quilliam and Robert Cramer — who each indirectly owned 50% of the Companies. The relationship between Quilliam and Cramer deteriorated into a quagmire involving multiple oppression actions, a foreclosure proceeding and an ongoing arbitration. Both agreed that the Companies needed to be wound down and liquidated, but there was disagreement on how this should occur. Quilliam wanted the entities placed into receivership, while Cramer believed the matter should be dealt with in an existing arbitration, as agreed in an earlier Arbitration Agreement.

Quilliam was also a director and shareholder of AFMC and used AFMC to bring the Receivership Applications, on the basis that the Companies owed substantial debts to AFMC.

Cramer raised various issues in opposing the Receivership Applications. In particular, he noted that there was an ongoing dispute as to how to wind down and liquidate the Companies, which was subject to an Arbitration Agreement. Cramer also raised several significant factual disputes regarding the alleged indebtedness of the Companies.

The Court explored the various factors militating for, or against, each proposed method of winding down the Companies, and whether it was “just and equitable” to grant the Receivership Applications.

Serious Disputes of Fact

The Receivership Applications were commenced by Originating Application, which is only appropriate where there is no substantial factual dispute. However, the core fact of the indebtedness and its extent were disputed. There were conflicting affidavits and a complete lack of questioning. There was an incomplete picture before the Court, which militated against granting the Receivership Applications.

Existence of an Arbitration Agreement

As a result of their ongoing dispute regarding the Companies, Cramer and Quilliam had entered into the Arbitration Agreement that bound them and the Companies, but not AFMC.

Cramer argued that the Receivership Applications were an attempt to circumvent the Arbitration Agreement. AFMC argued that it was not a party to and not bound by the Arbitration Agreement.

The Court noted that Alberta Courts have granted a stay of proceedings in favour of arbitration where parties to an action were not party to an arbitration agreement if (1) the arbitration issues were closely related to the litigation, (2) it was just and equitable to stay the action, or (3) it was not reasonable to separate the matters in dispute because the parties and non-parties were related to the same subject matter. Here the Court noted that AFMC was a related party to Mr. Quilliam and given the nature of its claims, it was just, equitable and reasonable to include AFMC in the arbitration process, notwithstanding AFMC’s status as a non-signatory to the Arbitration Agreement. The Court further held that any questions regarding the arbitrator’s jurisdiction over AFMC’s claims were matters for the arbitrator to determine.

Distinguishing Petrowest

Though neither side referred to Petrowest — which addressed the interaction between arbitration agreements and an existing court-ordered receivership — the Court felt it was necessary to do so. In Petrowest, the Supreme Court confirmed that parties should generally be held to their arbitration agreements notwithstanding ongoing insolvency proceedings. The Court held that arbitration agreements may become “inoperative” where enforcing them would compromise the orderly and efficient conduct of a receivership and undermine the objectives of the Bankruptcy and Insolvency Act (BIA). On the facts of that case, the Supreme Court declined to enforce the arbitration agreements because doing so would jeopardize the orderly resolution of the receivership.

The Court distinguished Petrowest for several reasons, including that:

1. In Petrowest, the debtor was already in receivership when the arbitrable dispute arose, whereas in the immediate case no receivership existed;
2. Arbitration between the parties appeared to be a more expedient and less expensive mechanism for resolving the disputes surrounding the wind-down of the Companies; and
3. It was not clear whether the BIA applied to the Companies, as the existence of debt and the validity of the security were themselves disputed.

The Court concluded that Petrowest did not support granting a receivership in circumstances where no receivership had yet been ordered and where arbitration provided an existing mechanism for resolving the parties’ disputes.

Ultimate Decision

In the result, the Court exercised its discretion to deny the Receivership Applications. There was too much factual uncertainty regarding the Companies’ debts and the security they may have granted. That AFMC was not party to the Arbitration Agreement was not an insurmountable obstacle, and it was for the arbitrator to determine whether they had jurisdiction over AFMC’s claims. The Court further concluded that it was not commercially reasonable to grant a Receivership Order in circumstances where arbitration had already been agreed to and provided a potentially more efficient means of resolving the parties’ disputes.

Key Takeaways

This decision underscores that Petrowest does not establish a general preference for receivership over arbitration. Rather, Petrowest addressed the circumstances in which an existing insolvency proceeding may render an arbitration agreement inoperative. Where no receivership has yet been commenced, material factual disputes remain unresolved, and the parties have already agreed to arbitrate those disputes, a court may conclude that arbitration is the more appropriate forum.

The decision also serves as a reminder that receivership is a discretionary remedy requiring a clear evidentiary foundation. Where the existence of the debt, the validity of the security and the appropriate process for realizing on assets remain genuinely contested, courts may be reluctant to appoint a receiver before those issues have been resolved.

For more information, please contact the authors or any other member of our Litigation & Dispute Resolution, Arbitration and Restructuring & Insolvency groups.