SUPERIOR COURT OF JUSTICE - ONTARIO

COURT FILE NO.: CL-13-10261-00CL

DATE: 20140319

RE: Petro-Diamond Incorporated, BioUrja Trading, LLC and Kolmar Americas Inc., Plaintiffs

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Verdeo Inc., Bioversel Trading Inc., Great Lakes Biodiesel Inc. (formerly Bioversel Sarnia Inc.), Einer Canada Inc. (formerly Bioversel Inc.), Arie Mazur and Sergey Ptushkin, Defendants

BEFORE: Mr. Justice H. J. Wilton-Siegel

COUNSEL: David E. Lederman and Julie Rosenthal, for the Moving Parties/Defendants

Lou Brzezinski and Catherine MacInnis, for the Responding Parties/Plaintiffs

HEARD: March 14, 2014

ENDORSEMENT

[1] The defendants Bioversel Trading Inc. (“BTI”), Great Lakes Biodiesel Inc. (“GLB”), Einer Canada Inc. (“Einer”) and Arie Mazur (“Mazur”) (collectively, the “Represented Defendants”) seek an order lifting the terms of paragraphs 1(a) and (b) of the order dated October 10, 2013 of Morawetz J. (the “Morawetz Order”). Capitalized terms that are not defined in this endorsement have the meanings ascribed to them in the Endorsement (as defined below).

Procedural History

[2] The Morawetz Order adjourned the plaintiffs’ motion for a Mareva injunction to December 20, 2013 on the condition that the Represented Defendants undertake in the interim not to dispose of or further encumber a property located at 1 St. Clair Drive, Welland, Ontario (the “Property”) or the equipment and machinery located on the Property.

[3] The Morawetz Order was extended on consent to January 30, 2014 by the order dated November 25, 2013 of Mesbur J. On January 30, 2014, after the hearing of the plaintiffs’ motion for a further adjournment, the Morawetz Order was again extended pending further order of the Court.

[4] On February 28, 2014, the Court advised the parties that the plaintiffs’ motion for an adjournment was denied for written reasons to follow, which were delivered on March 17, 2014 pursuant to an endorsement of the Court of that date (the “Endorsement”). Prior to that date, the within motion of the Represented Defendants was heard on March 14, 2014.

[5] It is agreed that the order of this Court dated January 30, 2014 extending the Morawetz Order was intended to do no more than preserve the status quo pending a determination of the plaintiffs’ motion for an adjournment. The parties disagree on the characterization of the status quo and argue such characterization has implications for the within motion.

The Characterization of the Restrictions in the Morawetz Order and the Applicable Legal Standard on this Motion

[6] The Represented Defendants characterize the Morawetz Order as a consent order that has lapsed as of January 30, 2014. They say that interim interim relief can only be granted if the plaintiffs establish the requirements for a Mareva injunction. The plaintiffs say that the Morawetz Order constitutes an undertaking to the Court that can only be discharged if one of the three requirements enumerated in Psychologists Association of Alberta v. Schepanovich, 1991 ABCA 11, at para. 11.

[7] I conclude that the Morawetz Order constitutes a consent order reflecting an agreement between the plaintiffs and the Represented Defendants. While the Morawetz Order contemplates an undertaking, such undertaking constitutes the consideration given by the Represented Defendants to the plaintiffs in return for an adjournment of the hearing of their motion for interim interim relief that would otherwise have been brought on October 10, 2013. As such, the undertaking was given to the plaintiffs rather than the Court.

[8] More significantly, it is clear that the undertaking that was given by the Represented Defendants expired on January 30, 2014, subject to extension by order of this Court until the further order which is being granted pursuant to this endorsement. On this basis, as of the date of expiration of the undertaking of the Represented Defendants, the parties are back in the position they were in on October 10, 2013 – namely, the plaintiffs are seeking interim interim relief pending a hearing of their motion for a Mareva injunction which is scheduled for April 3, 2013.

[9] The Represented Defendants argue that the applicable standard for any such interim interim relief is demonstration of the requirements of a Mareva injunction. This would appear to render the hearing of the motion redundant. I conclude, instead, that the applicable standard is the standard for injunctive relief. The following sets out my analysis and conclusions regarding the application of the three-part test for injunctive relief set out in RJR-MacDonald Inc. v. Canada (Attorney General), 1994 117 (SCC), [1994] 1 S.C.R. 311.

Serious Issue to be Tried

[10] The plaintiffs’ case is described in somewhat greater detail in the Endorsement. For present purposes, the plaintiffs have now narrowed their allegations of fraudulent conveyances under section 2 of the Fraudulent Conveyances Act, R.S.O. 1990, c. F.29 (the “Act”) to two matters: (1) the transfer of approximately U.S. $20 million from BTI or Einer to GLB to fund the construction of the plant on the Property (the “Plant”); and (2) the issuance of common shares in GLB to Orense Investments Limited (“Orense”), the sole shareholder of Einer, having the effect of rendering Orense the majority shareholder of GLB by a substantial majority.

[11] As currently expressed, the second alleged fraudulent conveyance does not appear to constitute a transaction giving a rise to a claim in this action. Insofar as the impugned transaction is an issuance of shares by GLB directly to Orense, it does not constitute a “conveyance” for purposes of the Act. Insofar as it may be suggested that the share issuance was originally to Einer which then transferred the shares to Orense, there is no evidence of any debts or liabilities of Einer to the plaintiffs that were hindered or defeated by any such transfer.

[12] Accordingly, the issue for the Court is the extent to which the plaintiffs have established a claim that BTI transferred approximately U.S. $20 million to GLB under circumstances that constitute a “conveyance” described under section 2 of the Act (herein, a “fraudulent conveyance”).

[13] The plaintiffs’ principal evidence is the testimony of Prakash Patel, the former chief financial officer of Einer, given on October 9, 2012 in the U.S. actions. Mr. Patel testified that approximately U.S. $20 million was invested by BTI in GLB by way of a loan that was incurred as BTI paid GLB’s expenses of construction of the Plant and acquisition of equipment for the Plant. Mr. Patel said this investment was funded out of a combination of funds received from the shareholder, understood to be Orense, and BTI’s active business income, which is understood to mean assets of BTI used and/or generated in its business activities, i.e. its working capital. Mr. Patel indicated that he thought approximately U.S. $8 million was funded by Orense and the balance, approximately U.S. $12 million, was therefore loaned by BTI from its working capital assets. The plaintiffs say there is no evidence this loan was either repaid or set up as a payable to BTI. They say this money was instead simple transferred to GLB and has disappeared from the financial statements of both BTI and GLB.

[14] In addition to the evidence of Mr. Patel, the plaintiffs rely on evidence that suggests that substantial funds were transferred to BTI by Verdeo Inc., although the transactions alleged to have had this result involved a three-way arrangement between Verdeo, BTI and Orense that has not been adequately explained. In addition, the plaintiffs rely on BTI’s 2011 tax return, which shows approximately $17 million in net assets at December 31, 2011 that have not been accounted for. BTI terminated active business operations in 2012 and currently is said to have no assets. As mentioned, the plaintiffs also rely on the absence of any loan payable to BTI currently on the books of either BTI or GLB, although this is only potential evidence of an intent to defeat creditors if indeed a loan was made as asserted by the plaintiffs. Lastly, the plaintiffs rely on the fact that Mazur was the sole director of BTI and a director of GLB at the time that the alleged transfers/loans were made by BTI to GLB.

[15] The Represented Defendants dispute the existence of any such loan. They say that the only loans from BTI to GLB were made between January 1 and December 31, 2011, that those loans totaled U.S. $4,024,794.05, and that they were repaid in full by December 20, 2013. They have tendered a copy of GLB’s sub-ledger account that appears to substantiate this position.

[16] Further, the Represented Defendants say that the construction of the Plant and the acquisition of equipment for the Plant was otherwise entirely funded by Orense by the subscription for shares in GLB referred to above. In this regard, the Represented Defendants have tendered three executed documents between GLB and Orense that appear to substantiate equity investments by Orense totaling $40,818,620. The unaudited financial statements provided by GLB only partially support this position, however, as the alleged equity investments cannot be reconciled with the capital table in the financial statements.

[17] The Represented Defendants also rely on the testimony of Barry Kramble, the former chief executive officer and current vice-president, business development, of GLB. Mr. Kramble testified that Orense had funded GLB to the extent of approximately $45 million for the construction of the Plant. He also testified with respect to BTI’s $4 million loan to GLB, described above.

[18] Mr. Mazur’s January 20, 2014 testimony also supports the Represented Defendants’ position respecting BTI’s $4 million loan to GLB. In his testimony, Mazur rejected the suggestion that BTI lent any amount larger than $4 million. In earlier testimony on October 10, 2012 in the U.S. actions, however, Mazur appears to suggest that Orense had invested $30 million in equity of GLB by that time, which he stated was invested through Einer.

[19] In addition, it is significant that, according to the record, Einer, BTI and GLB are wholly owned by Orense, directly or indirectly, and that Orense is at arm’s length from the other defendants in this action. The history of the relationship between Orense and Mazur and Ptushkin may illuminate the nature and purposes of the transactions between Verdeo and BTI and between BTI and GLB. However, apart from Mazur’s statements that he could not fund the construction of the Plant, which may have been his idea originally, and his sale of his interest in Einer/BTI/GLB to Orense prior to construction of the Plant, this history is not before the Court. There is, nevertheless, no evidence that Orense and Mazur were acting in concert to defeat the creditors of Verdeo or BTI. As mentioned, the only significant point of commonality is the fact that Mazur was a director of each of BTI, Einer and GLB at the time that BTI/Einer paid GLB’s construction costs.

[20] The foregoing evidence can be summarized as follows. There is some evidence that, in addition to the acknowledged $4 million loan, BTI transferred monies representing its own working capital assets to GLB, which could have constituted a fraudulent conveyance under the Act. On the other hand, there is evidence that suggests that the $4 million loan was BTI’s only contribution to GLB, that the loan was repaid, and that any other transfers from BTI to GLB were funded by Orense, their purpose being to fund the construction of the Plant rather than hinder or defeat BTI’s creditors.

[21] There is therefore conflicting evidence regarding the plaintiffs’ allegations of one or more fraudulent conveyances from BTI to GLB. Nevertheless, I conclude the foregoing is sufficient to establish a serious issue to be tried.

Irreparable Harm

[22] The plaintiffs do not suggest that there is a reasonable possibility of a disposition of the Plant or the related equipment within the period contemplated for a determination of the plaintiffs’ motion for a Mareva injunction. They do, however, suggest that there is a reasonable possibility of prejudice in the form of a mortgage or other charge being placed on the Property if relief is not granted. This mortgage could arise under two alternative scenarios.

[23] First, the evidence establishes a reasonable probability that GLB intends to charge or mortgage the Property to secure a new working capital line of credit in the amount of approximately $15 million. The time frame for such financing depends upon a number of factors, including completion of audited financial statements, the ability of GLB to interest more than one potential lender, and the urgency of GLB’s need for such a credit line, which is discussed further below.

[24] Whether such mortgage financing would constitute prejudice to the plaintiffs is not, however, clear. To the extent that GLB is not profitable at current levels of production, it is certainly arguable that working capital financing that permits GLB to attain profitability can only increase any equity in the Plant and is, therefore, beneficial rather than prejudicial to the plaintiffs. This is, however, dependent upon there being a reasonable probability of profitability in the current market. There is no evidence on this issue before the Court.

[25] Second, there is also a possibility that GLB would mortgage the Property or the related equipment to secure existing obligations in favour of Orense or a third party creditor. It is difficult to assess the risk of the creation of such an encumbrance given, among other things, an incomplete understanding of the relationship between Orense and the other defendants as well as the reliability of the GLB financial statements, which do however show substantial existing debt to its shareholders as well as other unnamed parties. There is also no basis for valuing the equity in the Plant, although it might be inferred that the value of a failed biodiesel fuel plant would not be substantial under a liquidation scenario.

[26] On balance, I am satisfied that there is a real possibility of irreparable harm to the plaintiffs under the latter scenario and a lesser possibility under the former scenario.

Balance of Convenience

[27] Based on an affidavit of Vik Kalra (“Kalra”), the chief financial officer of GLB, dated March 5, 2014, GLB asserts that it needs to raise $15 million in additional financing to increase production at the Plant to full capacity, at which it believes it would be profitable. It says it has incurred operating losses of $2,633,686.25 over the five-month period following commencement of commercial production at the Plant in October, 2013. Kalra also asserts that the existing restrictions in the Morawetz Order are damaging GLB in the eyes of its business partners and competitors and are impairing its ability to do business.

[28] The issue of the balance of convenience should be examined against the probability of a determination of the Mareva injunction by this Court by April 30, 2014 – a period of approximately six weeks.

[29] The evidence establishes a reasonable possibility that GLB requires additional financing to have the potential to achieve production at full capacity. I am not prepared to conclude, on the evidence, that it cannot obtain such financing within the time horizon described above and any period for an appeal. While it is perhaps surprising that GLB commenced commercial production without a working capital facility in place, such a facility is usually a necessary component of an operation of this nature. Further, as mentioned, it is possible that the plaintiffs will not suffer irreparable harm if GLB obtains the working capital financing contemplated by GLB.

[30] On the other hand, as mentioned, the plaintiffs can demonstrate a real possibility of a risk of irreparable harm if GLB were to place an encumbrance on the Property to secure existing liabilities rather than to secure a fresh advance of funds. Moreover, GLB does not suggest that it intends to take advantage of any lifting of the present restrictions for such purpose, or for the purpose of disposition of the Property. The only issue raised in this respect is the effect of continuing restrictions of any kind on GLB’s reputation in the market. In the absence of working capital arrangements permitting full production, it is not possible to assess the validity of this assertion. Moreover, even if the restrictions were lifted, the plaintiff’s action, and the uncertainty of the consequences of an adverse outcome for GLB in the action, would remain. It is therefore not possible to assess the extent to which the current restrictions, by themselves, are the cause of any reputational difficulties that GLB may experience in the market.

Conclusion

[31] Based on the foregoing, I consider that the balance of convenience favours continuation of the restrictions in paragraphs 1(a) and (b) of the Morawetz Order, as extended to the date hereof, subject to an exception to permit a mortgage, charge or other encumbrance on the Property and the Plant, and related equipment, to secure the principal and interest of any bona fide new financing to GLB for use by GLB in the ordinary course of its business.

Additional Issue

[32] In the event the restrictions in the Morawetz Order are not lifted in their entirety, GLB seeks an order requiring the plaintiffs to post security for their undertaking as to damages. Initially, GLB suggested the security should be quantified by reference to its alleged damages resulting from its inability to produce at full capacity. At the hearing, this request was modified to the amount of $400,000, representing the fixed costs of operating at a loss for one month. Given the Court’s determination that GLB should be permitted to obtain a working capital facility, there is no basis for requiring security for costs for lost profits on a “going-forward” basis. Given the fact that the plaintiffs made their intention to seek an exemption clear from the outset, I see no basis for requiring security for any past damages that might be asserted. GLB is at liberty, however, to revisit the issue of security for the plaintiffs’ undertaking on the motion for a Mareva injunction.

Costs

[33] The parties should arrange a 9:30 a.m. conference through the Commercial List Office to deal with the manner in which costs of this motion are to be addressed.

Wilton-Siegel J.

Date: March 19, 2014