Petroflow Energy Ltd. -- s. 144

Order

Headnote

Section 144 -- application for variation of cease trade order -- issuer cease traded due to failure to file with the Commission annual financial statements -- issuer has applied for a variation of the cease trade order to permit the issuer to proceed with a Plan under Chapter 11 of the United States Bankruptcy Code -- partial revocation granted subject to conditions.

Applicable Legislative Provisions

Securities Act, R.S.O. 1990, c. S. 5, as am., ss. 127, 144.

IN THE MATTER OF

THE SECURITIES ACT,

R.S.O. 1990, CHAPTER S. 5, AS AMENDED

(the Act)

AND

IN THE MATTER OF

PETROFLOW ENERGY LTD.

ORDER

(Section 144)

WHEREAS the securities of Petroflow Energy Ltd. (the Filer) are subject to a temporary cease trade order issued by the Director on April 21, 2010 pursuant to subsections 127(1) and 127(5) of the Act and a further cease trade order issued by the Director on May 3, 2010 pursuant to subsection 127(1) of the Act (together the Ontario CTO), directing that all trading in the securities of the Filer cease until further order by the Director;

AND WHEREAS the Filer has applied to the Ontario Securities Commission (the Commission) for an order pursuant to section 144 of the Act (the Application) for a partial revocation of the Ontario CTO;

AND WHEREAS the Filer has represented to the Commission that:

The Filer

1. The Filer was continued under the Canada Business Corporations Act as Atlantic Gold Mines Limited on July 26, 1994 (and changed its name to Petroflow Energy Ltd. on September 22, 1997).

2. The head office of the Filer is in Tulsa, Oklahoma. Its registered office is in Calgary, Alberta.

3. The Filer is a reporting issuer under the securities legislation of Alberta, British Columbia and Ontario (the Reporting Jurisdictions). It is not a reporting issuer in any other jurisdiction in Canada.

4. The Filer is authorized to issue an unlimited number of common shares (Petroflow Common Shares) and preferred shares of which 29,549,894 Petroflow Common Shares and no preferred shares are currently issued and outstanding. There are also approximately 11,450,500 stock options to acquire Petroflow Common Shares outstanding. The Filer has no other outstanding securities (including debt securities).

5. The Petroflow Common Shares are held by shareholders in all of the jurisdictions of Canada, the United States and elsewhere.

Business and Operations of The Filer and Its Subsidiaries

6. The assets of the Filer consist almost exclusively of equity interest in its wholly-owned subsidiary, North American Petroleum Corporation USA (NAPCUS). NAPCUS has one wholly-owned subsidiary, Prize Petroleum LLC (Prize).

7. NAPCUS was incorporated in the state of Delaware in April, 2005. Prize is a limited liability company that was incorporated in Oklahoma in September, 2006.

8. The Filer, NAPCUS and Prize (jointly, the Debtors) operate an independent exploration and production company that is predominantly engaged in unconventional well drilling operations for natural gas extraction in Oklahoma. Virtually all operations of the Debtors were pursuant to a farmout agreement with an arms' length third party (Third Party).

9. As a result of disputes with the Third Party, the Debtors' revenues were withheld. This, together with a series of unforeseen events strained the Debtors' ability to comply with financial covenants under credit agreements with its secured bank lenders.

10. During the summer of 2008 through 2009, the United States oil and natural gas industry experienced a decline, with natural gas prices declining, which negatively affected the Debtors' profit margins.

11. In April 2011, NAPCUS reached a settlement with the Third Party and, effective June 1, 2011, transferred certain of its property to that party in exchange for cash, which was used to fully satisfy claims of secured creditors arising from its bank indebtedness.

12. NAPCUS retains certain oil and gas assets consisting primarily of shallow rights and net operating losses. The Debtors propose to conduct operations on these oil and gas assets going forward.

The Cease Trade Order

13. The Cease Trade Order was issued in response to the failure of the Filer to file with the Ontario Securities Commission annual audited financial statements, annual management discussion and analysis and certification of annual filings for the year ended December 31, 2009 (collectively, the Filings).

14. The Filer is also currently subject to cease trade orders issued by the Alberta Securities Commission on April 12, 2010 and the British Columbia Securities Commission on April 21, 2010.

15. As a result of the failure to file Filings, the Filer is not up to date in its continuous disclosure obligations and remains in default of the requirements of the Act and the regulations under the Act.

Delisting

16. The Petroflow Common Shares have been delisted from trading on the TSX and NYSE Amex. The securities of the Filer are not listed or quoted on any other exchange or marketplace in Canada or elsewhere.

The Plan Under The United States Bankruptcy Act and Recognition Under the Companies' Creditors Arrangement Act

17. In light of certain actions taken by the Third Party and the Debtors' then existing financial position, NAPCUS and Prize filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Bankruptcy Code (Bankruptcy Code) on May 25, 2010.

18. In order to fully restructure the Debtors' debt obligations and strengthen their going forward operations, the Filer filed a voluntary petition with the United States Bankruptcy Court for the District of Delaware (U.S. Court) under Chapter 11 of the Bankruptcy Code on August 20, 2010.

19. On September 14, 2010 the Filer applied to the Court of Queen's Bench of Alberta, Judicial District of Calgary, and obtained a recognition order of the Chapter 11 case of the Filer and certain other relief under section 47 of the Companies' Creditors Arrangement Act, Canada (CCAA).

20. On June 24, 2011, a joint Chapter 11 Plan of the Debtors was submitted for approval with the U.S. Court, together with a Disclosure Statement. The Debtors filed an amended Disclosure Statement and Plan on July 22, 2011.

21. On July 29, 2011, the Debtors obtained an order from the U.S. Court that, among other things, the Disclosure Statement (as amended) and other materials related to solicitation of acceptance of the Plan, including related solicitation materials, contain adequate information within the meaning of Section 1125 of the Bankruptcy Code.

22. The interests of holders of the Petroflow Common Shares are represented by the Official Committee of Equity Security Holders of the Debtors. This Committee has taken steps to ensure that shareholders of the Filer have access to the Chapter 11 Plan, the Disclosure Statement and solicitation documents in respect of the Plan.

23. The Chapter 11 Plan was approved by 100% of the creditors of the Filer and NAPCUS who voted on the Plan, with the deadline for voting being September 2, 2011.

24. The Chapter 11 Plan was approved by the Board of Directors of the Filer on June 22, 2011.

25. The Chapter 11 Plan was approved at a confirmation hearing held before the U.S. Court on September 14, 2011.

26. An application will be made on September 19, 2011 under the CCAA for recognition of the order obtained in the U.S. Court at the confirmation hearing.

27. On the Chapter 11 Plan becoming effective, NAPCUS, as reorganized in accordance with the Plan (reorganized NAPCUS) will be the surviving entity post-bankruptcy.

28. All of the securities of the Filer will be cancelled.

29. As part of the reorganization of the Debtors under the Chapter 11 Plan, the following securities of reorganized NAPCUS will be issued pursuant to the prospectus exemption in s. 2.11 of National Instrument 45-106 Prospectus and Registration Exemptions:

(a) series A convertible preferred shares will be issued to certain investors in reorganized NAPCUS;

(b) series B convertible preferred shares of NAPCUS or cash will be issued or paid, as applicable, to unsecured creditors of reorganized NAPCUS, although there is an aggregate limit of $500,000 of cash available for these claims;

(c) series C convertible preferred shares will be issued to unsecured creditors of the Filer;

(d) common shares of reorganized NAPCUS will be issued under a management equity plan;

(e) common shares of reorganized NAPCUS will be issued to holders of 250,000 or more Petroflow Common Shares; and

(f) all other shareholders of the Filer will be entitled to receive either common shares of reorganized NAPCUS or cash.

30. Immediately following the implementation of the Chapter 11 Plan, there will be fewer than 15 securityholders of reorganized NAPCUS in each jurisdiction in Canada and fewer than 50 securityholders of reorganized NAPCUS in total in Canada.

31. The shares of NAPCUS issued in accordance with the Plan will be subject to transfer restrictions.

32. On the Chapter 11 Plan becoming effective, no securities of reorganized NAPCUS will be traded on a marketplace in Canada or elsewhere.

33. All shareholders of the Filer will ultimately be entitled to receive the same value for their shares of the Filer, although value may be delivered at different times.

34. In accordance with the Plan, holders of 250,000 or more Petroflow Common Shares will receive one share of reorganized NAPCUS for each share of the Filer held, immediately upon the effectiveness of the Plan. The threshold number of shares may be adjusted to ensure that NAPCUS remains a private, non-reporting company, for purposes of United States' securities laws.

35. Pursuant to the Plan, holders of fewer than 250,000 Petroflow Common Shares (Petroflow Other Interests) will be entitled to receive, at the option of reorganized NAPCUS, no later than the second anniversary of the effective date of the Plan, either their share of reorganized NAPCUS common shares or cash.

36. The board of reorganized NAPCUS will be required to meet formally every six months to determine whether to continue to defer the distribution to holders of Petroflow Other Interests. Notice of the determinations of the board shall be communicated through the website of reorganized NAPCUS or by similar means.

37. If common shares of reorganized NAPCUS are issued to holders of Petroflow Other Interests in accordance with the Plan, reorganized NAPCUS will qualify the distribution of such shares under a prospectus filed in the Reporting Jurisdictions and in accordance with applicable securities law.

38. No significant objection has been raised with respect to the Chapter 11 Plan.

Investment Commitment

39. The Debtors have obtained commitments from certain investors to provide $3 million to reorganized NAPCUS, in accordance with the Plan, in exchange for the issuance by reorganized NAPCUS of series A convertible preferred shares.

40. The Filer believes it is in the best interest of shareholders and creditors of the Debtors to have the Chapter 11 Plan implemented and for reorganized NAPCUS to emerge promptly from Chapter 11, as emergence will preserve the going-concern value of the Debtors' remaining assets.

41. The Chapter 11 Plan cannot be implemented without a partial revocation of the Cease Trade Order, to allow for the cancellation of all securities of the Filer.

42. The Filer is concurrently seeking an order from the Reporting Jurisdictions that the Cease Trade Order applicable in the Reporting Jurisdictions be partially revoked to permit:

(a) The cancellation of the Filer's outstanding securities in connection with the implementation of the Chapter 11 Plan; and

(b) All other acts in furtherance of the Chapter 11 Plan that may be considered to fall within the definition of "trade" within the meaning of the Act.

43. Upon implementation of the Chapter 11 Plan, NAPCUS will become a reporting issuer in Ontario, British Columbia and Alberta on the exchange of its securities with holders of Petroflow Common Shares. NAPCUS intends to subsequently make an application to cease to be a reporting issuer in each jurisdiction in which it is a reporting issuer.

AND UPON considering the Application and the recommendation of the staff of the Commission;

AND UPON the Director being satisfied to do so would not be prejudicial to the public interest;

IT IS ORDERED, pursuant to section 144 of the Act, that the Ontario CTO is partially revoked solely to permit trades in securities of the Filer (including for greater certainty, acts in furtherance of trades in securities of the Filer), being the cancellation of all securities of the Filer in connection with the Chapter 11 Plan, provided that a recognition order under the CCAA is issued in respect of the order of the U.S. Court approving the Chapter 11 Plan.

DATED at Toronto this 20th day of September, 2011.

"Jo-Anne Matear"
Assistant Manager, Corporate Finance