In what circumstances may a general security agreement (GSA) be declared void as against other creditors pursuant to section 2 of the Fraudulent Preferences Act, RSA 2000 c F-241 (1) (FPA)? Is a remedy for oppressive conduct under section 242 of the Alberta Business Corporations Act, RSA 2000 c B-92 (2) (BCA) available against a party who is a fiduciary vis-à-vis a corporation but not a director thereof? Both of these questions are considered in the recent Alberta Court of Queen’s Bench decision in Valstar v Vstar Enterprise Ltd, 2022 ABQB 10. This particular decision occurred against the backdrop of wider litigation between Mr. and Mrs. Valstar, the joint owners of VSTAR (a logging firm), as well as the breakdown of the parties’ marital relationship.
The circumstances giving rise to this part of the wider litigation involved the execution of a loan agreement and a promissory note in favour of both VSTAR’s bookkeeper, Ms. Tessmer, and a numbered corporation controlled by her (1958984 Alberta Ltd.), as well as the execution of a GSA in favour of 1958984 alone. The execution of these instruments occurred on the eve of an auction of all VSTAR’s chattel property, and most importantly occurred at a time when VSTAR’s insolvency ought to have been apparent to Ms. Tessmer and others. As such, grounds appeared to exist for Ms. Valstar’s submission that the GSA should be set aside as a fraudulent preference, and be held ‘void’ as against VSTAR’s creditors.
The Court agreed that there was a strong case for the claim that the GSA amounted to a fraudulent preference pursuant to s.2 of the FPA as there was seemingly “no other rational explanation for granting of the GSA” besides as an “attempt to propel Ms. Tessmer’s unsecured claims ahead of other creditors.” Further, granting security in the face of insolvency without any new funds being advanced was said to be “highly questionable” and apt to attract the Fraudulent Preferences Act. Unfortunately for Ms. Valstar however, this finding was of little practical use with respect to her interests in VSTAR, as she was a shareholder and not a creditor of VSTAR, and thus could only recover equity in the corporation after the satisfaction of all creditors’ claims regardless of whether said claims were secured.
Ms. Valstar also challenged the decision to grant the GSA in favour of 1958984 Alberta Ltd. on the basis that it amounted to oppressive conduct by both Mr. Valstar and Ms. Tessmer. The Court concluded that these acts may have been oppressive conduct on the part of Mr. Valstar that added to the already strong case for an oppression remedy against him in light of his earlier unilateral transfer of VSTAR’s business to a new numbered corporation (2306749 Alberta Ltd.) owned by him in order to deprive Ms. Valstar of her share of the business.
The oppression claim against Ms. Tessmer, however, floundered despite her position as a fiduciary vis-à-vis VSTAR (being its bookkeeper, safety manager, and performing other important services). In the Court’s opinion “… being a fiduciary [alone] does not make her liable to oppressive conduct remedies under the BCA.” And in point of fact, it was true that despite Ms. Tessmer’s importance to the business, she was never an appointed director (nor an officer) of VSTAR, and in the Court’s opinion the powers granted by s.242 of the BCA simply did not allow remedies to be ordered against non-directors or other third parties. As such, even if Ms. Tessmer’s conduct constituted a breach of her fiduciary duties owed to VSTAR, this could not lead to an oppression remedy for Ms. Valstar
(1) The Manitoba equivalent is found in The Fraudulent Conveyances Act, CCSM, c F160 s. 2.
(2) The Manitoba equivalent is found in The Corporations Act, CCSM, c. C225 s. 234
By Ty Schmidt – Supervised by Professor Maharaj
The views and opinions expressed in the blogs and case reporter are the views of their authors, and do not represent the views of the Desautels Centre for Private Enterprise and the Law, the Faculty of Law, or the University of Manitoba. Academic Members of the University of Manitoba are entitled to academic freedom in the context of a respectful working and learning environment.