Executive Summary: Key Legal and Evidentiary Issues

• Novem Pharmaceuticals Inc., Phi Factor Inc., and Ocorp Holdings Ltd. applied to stay a fraudulent conveyance and preference claim in favour of arbitration under a unanimous shareholder agreement.
   
• Central to the dispute was whether Colin Davison, Big Air Inc., and Stealth Consulting Inc. qualified as "Shareholders" bound by the USA's arbitration clause through its definition of known associates, trustees, and beneficiaries.
   
• Ocorp's status turned on section 146(3) of the Canada Business Corporations Act, which deems a purchaser of shares subject to a unanimous shareholder agreement to be a party to it.
   
• Plaintiffs argued the arbitration agreement was inoperative because the fraudulent conveyance claim carried a representative character binding on all creditors.
   
• Another contested issue was whether the Fraudulent Preference Act's show cause procedure raised a pure question of law falling outside arbitral jurisdiction.
   
• Justice Forth also considered whether Ocorp's absence from the Submission Agreement affected the arbitrator's authority over the dispute.
   

Facts of the case

Colin Davison is a founder, a direct and indirect 30 percent shareholder, a director, and the former CEO of Novem Pharmaceuticals Inc. He is also the sole director and principal of the other two plaintiffs, Big Air Inc. and Stealth Consulting Inc., both Alberta corporations. Novem owns 100 percent of the shares of Phi Factor Inc., and Ocorp Holdings Ltd. was Novem's landlord under a written lease dated March 1, 2025, for premises in Kelowna. A unanimous shareholder agreement (the "USA") was entered into on March 12, 2021, with Novem and several signatories, including Veteran Express Secure Logistics Inc., Cevello Management Corporation (which appointed Cole Foullard [spelled "Fouillard" and "Foulliard" elsewhere in the source] and Darcy Dando to the Novem board), and 2217676 Alberta Ltd. ("CELAD"), which appointed Mr. Davison as its nominee director. The plaintiffs commenced three related actions in 2026: the Stealth Action, claiming Novem owed Stealth $800,000 plus accrued interest; the Big Air Action, claiming Novem owed Big Air $443,343 plus accrued interest; and the Wrongful Dismissal Action, in which Mr. Davison claimed he was wrongfully dismissed. On May 22, 2026, the plaintiffs commenced the "3833 Action," alleging that while the defendants were insolvent or on the eve of insolvency, Phi Factor transferred property at 1429 McLeod Road, Spallumcheen, B.C., to Ocorp on April 15, 2026, for inadequate consideration and with intent to defeat, delay, hinder, prejudice, or defraud Novem's and Phi Factor's creditors, including the plaintiffs. A notice of demand for arbitration was delivered April 14, 2026, and on June 5, 2026, the plaintiffs, CELAD, VEXSL, Cevello, JP19 Consulting Ltd., Mr. Fouillard, Mr. Dando, Novem, and Phi Factor entered into a Submission Agreement referring certain disputes to a single arbitrator; Ocorp was not a signatory. Novem and Phi Factor filed a stay application on June 9, 2026, and Ocorp filed its own stay application on June 18, 2026, seeking to stay the 3833 Action pending arbitration.

Policy and legislative provisions at issue

The defendants relied on section 7 of the Arbitration Act, which requires a court to stay proceedings brought in respect of a matter agreed to be submitted to arbitration unless the arbitration agreement is void, inoperative, or incapable of being performed, along with sections 8(2) and 10 of the Law and Equity Act, which permit a stay to avoid a multiplicity of hearings. Article 8.1 of the USA provided that "all disputes arising out of, or in connection with, this Agreement shall be referred to and finally resolved by a single arbitrator pursuant to the Arbitration Act." Article 1.1(aa) defined "Shareholder" to include the initial shareholders "and their known associates, trustees and beneficiaries," a phrase the parties disputed. The defendants also invoked section 146(3) of the Canada Business Corporations Act, under which a purchaser of shares subject to a unanimous shareholder agreement is deemed a party to it, to argue Ocorp was bound as a purchaser of Novem shares. The plaintiffs relied on section 9 of the Fraudulent Preference Act, which allows an application to the Supreme Court to show cause why a disposition should not be set aside, arguing this vested exclusive jurisdiction in the court.

Reasoning and analysis

Justice Forth applied the two-stage test from Peace River Hydro Partners v. Petrowest Corp., under which an applicant for a stay must first establish an arguable case that the technical prerequisites for arbitration are met, after which the burden shifts to the party resisting arbitration to show on a balance of probabilities that the agreement is void, inoperative, or incapable of being performed. On the first stage, the court found an arguable case that Mr. Davison, Big Air, and Stealth fell within the USA's expanded definition of "Shareholder," noting that plaintiffs' counsel had previously acknowledged in an April 23, 2026 letter that the definition captured Mr. Davison, and that Novem's securities register showed Stealth acquiring Class "G" preferred shares in 2024. The court likewise found an arguable case that Ocorp was bound by the USA under section 146(3) of the CBCA as a purchaser of Class C common voting shares, a position Ocorp itself advanced. Given the USA's broad arbitration language covering disputes "arising out of, or in connection with" the agreement, the court concluded the 3833 Action's underlying factual disputes, including the plaintiffs' creditor status and the alleged share issuances, fell within the scope of matters agreed to be arbitrated. On the second stage, the court rejected the plaintiffs' argument that the arbitration agreement was inoperative because the fraudulent conveyance claim was representative in character, distinguishing Guthrie v. Abakhan & Associates Inc. and accepting the defendants' submission that neither the Fraudulent Conveyance Act nor the Fraudulent Preference Act overrides contractual arbitration clauses. The court also rejected the argument that the stay application raised a pure question of law requiring resolution by the Supreme Court alone, relying on Clayworth v. Octaform Systems Inc. for the principle that a stay defers rather than displaces the court's jurisdiction. Finally, the court held that Ocorp's status as a non-signatory to the Submission Agreement did not preclude a stay, since it is within an arbitrator's jurisdiction to determine the proper parties to an arbitration.

Ruling and overall outcome

Justice Forth granted the defendants' application, finding that the technical prerequisites for a stay under section 7 of the Arbitration Act had been met and that the plaintiffs had not established that the arbitration agreement was inoperative or incapable of being performed. The 3833 Action was accordingly stayed pending arbitration, with Novem, Phi Factor, and Ocorp as the successful parties. Costs of the stay application were ordered to be "in the cause," meaning the amount was not fixed in this decision and will depend on the outcome of the underlying proceedings; no other monetary award was made.