Directors beware: Alberta Court of King’s Bench imposes personal liability for improper insider payments

The Alberta Court of King’s Bench (the Court) has delivered an important decision in the insolvency proceedings of Wolverine Energy and Infrastructure Inc. (WEI), voiding insider payments and imposing personal liability on a former executive. The ruling highlights the significant risks associated with insider transactions during financial distress and clarifies how courts apply statutory remedies under the Bankruptcy and Insolvency Act (BIA), the Fraudulent Preferences Act (FPA), and the Statute of Elizabeth (SOE). It also reinforces that corporate separateness will not shield directors where related entities act as conduits for personal benefit.

What you need to know

• Heightened scrutiny and governance obligations for insider transactions during financial distress. Courts apply rigorous scrutiny to payments made when a company is insolvent or approaching insolvency, particularly those involving directors or related entities. Transactions lacking a clear business purpose, formal board approval or contractual entitlement are especially vulnerable to challenge. This decision underscores that strong governance practices—such as documented board resolutions, clear contractual arrangements and compliance with disclosure obligations—are essential safeguards. Failure to maintain these standards can result in the clawback of payments and, in some cases, personal liability for directors.
• Badges of fraud can establish intent without direct evidence. The Court reaffirmed that intent to defraud, defeat or delay creditors can be inferred from circumstances such as unusual haste, magnitude of payment, lack of board authorization or absence of contractual entitlement. These indicators significantly increase litigation risk for insider payments.
• Corporate veil can be pierced on an agency basis. Where related entities act as conduits for personal benefit, courts may disregard corporate separateness and impose personal liability on directors. This decision confirms that agency relationships can justify veil-piercing.

Background

The Court recently ruled on an application made by the trustee in the bankruptcy of WEI and its affiliates to set aside payments totaling over $1 million made in July 2023 to entities controlled by WEI’s founder, Jesse Douglas, who at the time was a director and Executive Chairman of WEI.

The trustee advanced two distinct claims:

1. To void the transactions as against the estate under the BIA, FPA and SOE.
2. To hold Mr. Douglas personally liable by piercing the corporate veil of the recipient entities, Wolverine Management Services Inc. (WMSI) and 1586329 Alberta Ltd. (158).

The Court found in favour of the trustee on both fronts.

Analysis

Part one: transactions voidable as against the trustee

Insolvency: the threshold question

Each of the statutory regimes—section 96 of the BIA, section 2 of the FPA, and the SOE—requires that the debtor be insolvent or in insolvent circumstances.

Under section 2 of the BIA, insolvency is established if the debtor is unable to meet obligations as they generally become due (cash-flow insolvency) or if its property at fair valuation is insufficient to cover liabilities (balance-sheet insolvency).

The Court found WEI was cash-flow insolvent in July 2023:

• It owed approximately $70 million to secured creditors and had only $2.4 million in cash and $9 million in other current assets.
• It had sustained continuous operating losses, including a $65 million net loss for the quarter ended June 30, 2023.
• It faced a looming repayment deadline and covenant breaches with secured creditors, with no realistic ability to cure defaults.
• WEI admitted insolvency in its Companies' Creditors Arrangement Act filing four months later, confirming the liquidity crisis was already acute.

Applying the principle from Stelco Inc., Re¹, the Court held that insolvency exists where a corporation reasonably expects to run out of liquidity within a short period of time compared to the time needed to restructure. On this basis, the Court held that WEI was insolvent when the payments were made.

Intent to defraud, defeat or delay creditors

Under the FPA, a payment is void if it is made in insolvent circumstances with intent to give one creditor preference over others. Under section 96 of the BIA and the SOE, a transfer or conveyance is void if it is made with the intent to hinder, delay or defraud creditors.

The Court inferred intent from surrounding circumstances—also known as “badges of fraud”—as endorsed by the Supreme Court of Canada in Aquino v. Bondfield Construction².

The following badges of fraud were identified by the Court:

• Financial distress. Payments were made during a liquidity crisis and imminent insolvency.
• Magnitude of payments. Over $1 million was paid to entities controlled by Mr. Douglas, representing a large proportion of WEI’s current assets.
• Timing and haste. Payments were processed within one day of invoices being issued, while most trade payables were aged over 60 days.
• Lack of formal approval. No formal board resolutions or minutes authorized the payments.
• Absence of contractual obligation. There were no signed agreements or clear legal basis for the amounts claimed.
• Unusual and informal process. Documentation was inconsistent with public company standards and lacked backup for claimed amounts.

The Court concluded that WEI intended to prefer Mr. Douglas and/or his companies over other creditors and to defraud, defeat or delay other creditors—particularly secured lenders who had signaled imminent repayment demands.

Transfer at undervalue and SOE: why the Court found the value was nil

Section 96 of the BIA defines a transfer at undervalue as a disposition of property for which no consideration is received or for which the consideration is conspicuously less than fair market value. Similarly, under the SOE, a conveyance is void if it is made for nominal or no consideration.

The Court held that WEI received no present valuable consideration for the payments:

• Nature of the payments. The July 2023 payments reimbursed Mr. Douglas and/or his companies for historical claims (salary, bonuses, and expenses) allegedly incurred in prior periods.
• No present or future benefit. There was no evidence that WEI received any present or future consideration for making these payments. The Court noted there was no suggestion that the payments were necessary to keep the business operating or to secure ongoing services.
• Lack of documentation. The Court emphasized the absence of signed agreements, board approvals or backup for the amounts claimed. Even taking the evidence “at its highest”, the payments were for old, unsecured obligations at best.
• Context of insolvency. At the time of payment, WEI was insolvent and unable to pay its secured creditors. Diverting $1 million to insider-controlled entities provided no value to the estate and prejudiced other creditors.

The Court therefore accepted and held that the value received was nil, satisfying the statutory test.

Part one findings

• Transfers at undervalue under the BIA. All elements were satisfied—disposition for no consideration, within one-year look-back, insolvency, and intent to defraud.
• Preference under the FPA. Payments were made while insolvent, with intent to prefer certain creditors.
• Transfer under the SOE. Conveyances for no consideration were made with intent to hinder, delay or defraud creditors.

Part two: corporate veil and personal liability

The Court considered whether Mr. Douglas should be personally liable for the impugned payments. Applying the framework from Yaiguaje v. Chevron Corporation³, veil-piercing is permitted only where:

1. it is required by statute or contract;
2. the corporation is a mere façade concealing the true facts; or
3. the corporation acts as an authorized agent of its controller.

The Court rejected the first two grounds but found the third satisfied. Relying on 1196303 Inc. v. Glen Grove Suites Inc.⁴, the Court held that WMSI and 158 acted as receiving agents for Mr. Douglas, noting:

• WEI paid WMSI and 158 to discharge claims asserted by Mr. Douglas personally.
• Both WEI and Mr. Douglas treated these companies as authorized to accept payments on his behalf.
• Evidence included reconciliations and ledger entries showing WEI repaid Mr. Douglas’s personal Visa charges through one of his companies, and invoices describing payments as “consulting services” or “settlement of wages and expenses” despite no supporting agreements.

As a result, Mr. Douglas was held personally liable for the total amount of the impugned payments.