The corporate restructuring of Questerre ("QEC") and its wholly owned subsidiary, Questerre Beaver River Inc. ("QBR") was precipiated by the cost overruns of the A-5 well at the Beaver River Field in British Columbia.
Questerre engaged a reputable drilling consultant to plan and manage the drilling of this well. The cost estimate
prepared by this consultant was $5.3 million based on a multi-well program and $6.5 million based on a single
well program. The total project costs, including completion, testing and tie-in, were over $19 million, or almost
three times the original cost estimate. Despite raising a total of $11.5 million in cash net of financing and
administrative costs, over $9 million remained unpaid to unsecured trade creditors.
Accordingly, on April 1, 2004, QBR applied for and was granted an order by the Court of Queen’s Bench of Alberta providing for creditor protection under the Companies’ Creditors Arrangement Act (“CCAA”).
Subsequent to QBR filing for protection under CCAA, several parties who provided goods and services in respect of the A-5 well filed statements of claim against QEC with respect to those services. Several other parties indicated that they intended to advance similar claims, either jointly against QEC or as an alternative to settlement from QBR. Although QEC disputed liability for most of the claims advanced by parties who worked on the A-5 well, and in some cases both QEC and QBR disputed the amounts claimed, QEC believed that the cost of defending the actions could exceed its available cash resources. As well, the existence of claims and the possibility of further potential claims against QEC seriously restricted QEC’s ability to raise capital in the public markets.
On June 22, 2004, QEC sought and was granted protection under the CCAA and was added as a petitioner in QBR’s CCAA proceedings.
On August 9, 2004, the Company filed Plans of Compromise or Arrangement for QEC and QBR (the “Plans” or “Plans of Arrangement”) under the CCAA for the settlement of all outstanding claims. Pursuant to the Plans proposed
by QEC and QBR, unsecured creditors would receive either the lesser of the amount of their claim or $2,000.
Alternatively, unsecured creditors could elect instead to receive a cash dividend of $0.05 plus one Common Share
of QEC for each dollar of their claim. The Common Shares of QEC would be subject to a contractual escrow
and released in two equal installments on the four and eight month anniversary of the date the Plans received
final Court approval.
In addition to the proposed settlement, QEC arranged for a liquidity option for interested creditors. Under this
liquidity option, unsecured creditors would still receive $0.05 for each dollar of their claim, and would also receive
an additional $0.07 for each dollar of their claim in exchange for foregoing each Common Share of QEC they
would have otherwise received. This would result in a cash settlement of $0.12 per dollar of claim outstanding.
The Common Shares that would otherwise have been issued to these unsecured creditors would be issued to
Terrenex Acquisition Corporation (“Terrenex”) pursuant to the terms of a Liquidity Option Agreement. Under the
Liquidity Option Agreement, Terrenex would establish a fund to finance the liquidity option up to a maximum
of $668,500, representing the maximum number of Common Shares of QEC to be issued under the Plans of
Arrangement multiplied by $0.07. In consideration for providing this liquidity option, Terrenex would receive 300,000
Common Shares of QEC. It will also be issued Common Shares of QEC that, but for the election of the unsecured
creditors to participate in the liquidity option, would have been issued to the creditors of QBR and QEC. These
Common Shares that would be issued to Terrenex, are subject to the same hold obligations were they issued to
the creditors of QBR and QEC.
The Plans were approved by the requisite majority of unsecured creditors at meetings of creditors of QBR and
QEC held on August 31, 2004. The Plans were subsequently sanctioned by the Court of Queen’s Bench of Alberta
on September 9, 2004. A total of $0.56 million in cash and 9,623,012 Common Shares of QEC were issued on
the implementation of these Plans. QEC and QBR subsequently emerged from Court protection on October 8,
2004.