The difference between debt and equity claims can cause confusion among lenders, creditors, and insolvency professionals alike. In Tudor Sales Ltd. (Re), the British Columbia Supreme Court provided further judicial guidance on this distinction. In this case, non-arms-length secured loans were determined to be in substance equity contributions and were subordinated to all other creditors despite the existence of a General Security Agreement (“GSA”). In reaching this conclusion, the court emphasized the importance of assessing the substance of a transaction over its form.
Background of the Case
Tudor Sales Ltd. (“Tudor”) was a steel distributor in British Columbia. Mr. Eggerston, one of the company’s shareholders and its sole officer and director, advanced approximately $1.37 million to Tudor in 2005 and 2006 with the GSA in favour of Mr. Eggerston executed in March 2006.
On November 20, 2013, Tudor made an assignment in bankruptcy. The bankruptcy trustee reported that there would be no funds available for unsecured creditors after payment of Mr. Eggerston’s secured claim. One of the unsecured creditors challenged the validity of Mr. Eggerston’s security and sought an order expunging or subordinating it to the claims of other unsecured creditors. Read more…