Executive Summary: Key Legal and Evidentiary Issues

• Allegations arose from a secret side agreement (the “Mayfair Loan Repromise”) linked to an earlier court-approved bankruptcy proposal.

• Mr. Botham Jr., a member of the Creditors Committee, failed to disclose this agreement, breaching his fiduciary duty under the Bankruptcy Act.

• The agreement was never documented and was deliberately kept hidden from the Trustee and other creditors.

• Conflicts of interest were created due to the financial alignment between Archer Ltd. and Mr. Skalbania, to the detriment of other creditors.

• The court found the illegality of the non-disclosure closely tied to the claim, invoking the ex turpi causa doctrine.

• The counterclaim by Archer Ltd. to enforce the side agreement was dismissed due to these legal breaches.

Facts and Background

The case revolved around a long-standing financial dispute between Nelson Skalbania and 0055498 B.C. Ltd., formerly known as Archer Investments Ltd. The dispute originated from a $750,000 loan provided in 1981 to N.M. Skalbania Ltd., guaranteed by Mr. Skalbania personally. When financial difficulties arose during the 1982 market downturn, Mr. Skalbania and his company filed a joint proposal under the Bankruptcy Act. This proposal was later amended and approved by the court in 1983.

Archer Ltd. participated as a general creditor in the bankruptcy proceedings. At the time, Mr. William Botham Sr., a key figure at Archer Ltd., was closely allied with Mr. Skalbania. He helped influence other creditors to support the proposal. According to affidavits, Botham Sr. and Jr. privately negotiated a verbal side deal—the "Mayfair Loan Repromise"—where Mr. Skalbania would repay Archer Ltd. separately from the formal proposal terms. This deal was never disclosed to the bankruptcy Trustee or the other creditors.

After the court-approved proposal was implemented, Archer Ltd. continued funding Skalbania's ventures through additional loans, later formalized in the "Seed Capital Loans Agreement" of 1985. The amended joint proposal included specific powers for a Creditors Committee, one of whom was Mr. Botham Jr. His fiduciary responsibilities included full disclosure of material agreements that could influence the administration of the proposal.

Legal Analysis and Findings

The central legal issue was whether Mr. Botham Jr. breached his fiduciary duty by not disclosing the Mayfair Loan Repromise. The court determined that as a committee member with inspector-level powers under the Bankruptcy Act, he had a fiduciary duty to all creditors, not just Archer Ltd. The court emphasized that this duty required transparency and disclosure of any potential conflicts of interest.

The judge found multiple examples where the hidden agreement undermined the fairness of the bankruptcy proceedings. These included influencing how profits were shared, the potential manipulation of asset valuations, and the failure to report a significant financial agreement that could alter creditor behavior. The arrangement effectively created a financial incentive for Mr. Skalbania to act contrary to the interests of the general creditor pool.

Furthermore, the court found that the Trustee and the approving court had been misled due to this non-disclosure, affecting the integrity of the entire bankruptcy process. Applying the legal doctrine ex turpi causa non oritur actio, the court concluded that a party cannot base a legal claim on their own illegal or immoral conduct. As such, Archer Ltd.’s counterclaim to enforce the Mayfair Loan Repromise was dismissed.

Outcome

The Supreme Court of British Columbia dismissed Archer Ltd.'s counterclaim. The court ruled that the Mayfair Loan Repromise could not be enforced due to the fiduciary breaches and the undisclosed, improper nature of the agreement. The judgment underscores the importance of full disclosure and fiduciary responsibility in bankruptcy proceedings and affirms that private arrangements made in contravention of these principles will not be upheld by the courts.