Does the issuance of shares create a debt? Can the corporate veil be pierced where one company does not have control over the other company? These are the central questions in an ongoing garnishing proceeding in Delizia Limited v. Sunridge Gold Corp. that has weaved its way through the Federal Court and the Federal Court of Appeal and is now the subject of a leave application to the Supreme Court of Canada.

Andrew Crabtree was counsel to Sunridge in all proceedings in the Federal Court with Bob Cooper, Q.C. We have been successful both at trial and on appeal.

Background

Delizia Limited entered into contracts with the state of Eritrea for the sale of various military equipment. Eritrea did not pay and Delizia obtained a default arbitration award for approximately US$4 million.

Delizia subsequently registered the judgment in Canada and initiated garnishing proceedings in the Federal Court against Sunridge, which had operations in Eritrea. A preliminary garnishing order (“PGO”) was issued and subsequently objected to by Sunridge.

Sunridge was developing a mine in Eritrea. Under Eritrean law, it was required to incorporate an Eritrean company (“AMSC”) to perform the development. The government of Eritrea was entitled to acquire up to 40% in AMSC at its election, which it elected to do. Shares from the treasury of AMSC were issued to a company wholly-owned by the Eritrean government, after the PGO. Sunridge owned the other 60% of the shares in AMSC through two foreign subsidiaries.

Sunridge and Eritrea subsequently entered into a joint venture agreement to share in the costs and decision-making process associated with AMSC and its mine. Pursuant to that agreement, Sunridge, directly or through its subsidiaries, did not have absolute control over the operations of AMSC.

Did the Issuance of Shares Create a Debt?

Deliza argued that the issuance of shares from the treasury of AMSC to a company owned by the government of Eritrea violated the terms of the PGO as those shares constituted a debt due and owing by Sunridge to Eritrea. In the circumstances, the AMSC shares could not have been issued directly to Eritrea.

Both the Federal Court and Federal Court of Appeal held that the issuance of shares did not create a debt due and owing as between Sunridge and Eritrea.

At trial, the court held that the shares were issued to the Eritrean company by AMSC, and thus the only way in which Delizia could succeed was for the court to pierce the corporate veil in order to attribute the actions of AMSC to Sunridge. The court found that there was no factual or legal basis to pierce the corporate veil, including the absence of conduct akin to fraud or complete control over AMSC by Sunridge.

At the Court of Appeal, Delizia argued that it was unnecessary to pierce the veil to hold that the issuance of shares created a debt between Sunridge and Eritrea. The Court of Appeal disagreed and held that the issuance of shares from the treasury of AMSC, even if for consideration that was less than fair market value of those shares, the transfer would not, in and of itself, create a debt owing from Sunridge to Eritrea that could be subject to the POG.