Armistice Resources Ltd. - s. 144

Headnote

Section 144 -- application for partial revocation of cease trade order -- issuer cease traded due to failure to file with the Commission and send to shareholders annual and interim financial statements -- issuer has applied for a partial revocation of the cease trade order so as to permit the issuer to convert certain existing indebtedness into common shares, and to proceed with a limited financing to allow the issuer to fund the settlement of certain litigation, to reorganize the issuer's affairs, and to provide working capital -- potential investors to receive copy of cease trade order, partial revocation order, current financial statements and current technical report prior to making investment decision -- partial revocation granted subject to conditions.

Applicable Ontario Statutory Provisions

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

Applicable Ontario Rules

National Instrument 43-101 Standards of Disclosure for Mineral Projects.

OSC Rule 45-501 Exempt Distributions.

Applicable Ontario Policies

National Policy 46-201 Escrow for Initial Public Offerings.

IN THE MATTER OF

THE SECURITIES ACT,

R.S.O. 1990, C.S.5, AS AMENDED (THE "ACT")

AND

IN THE MATTER OF

ARMISTICE RESOURCES LTD.

ORDER

(Section 144)

WHEREAS the securities of Armistice Resources Ltd. (the "Applicant") are subject to a cease trade order issued by the Ontario Securities Commission (the "Commission") on June 6, 2003 (the "Cease Trade Order");

AND WHEREAS the Applicant has applied to the Commission pursuant to section 144 of the Act (the "Application") for a partial revocation of the Cease Trade Order;

AND WHEREAS the Applicant has represented to the Commission that:

1. The Applicant was incorporated by amalgamation under the Canada Business Corporations Act on December 1, 1998.

2. The Applicant is a reporting issuer under the securities legislation (the "Legislation") of the provinces of Ontario, British Columbia, Alberta and Québec.

3. The Cease Trade Order was issued due to the failure of the Applicant to file with the Commission its interim financial statements for the period ended March 31, 2003.

4. The Applicant is also subject to cease trade orders issued by the British Columbia Securities Commission on July 16, 2003, by the Alberta Securities Commission on September 26, 2003, and the Québec Securities Commission on June 10, 2003, all relating to the failure of the Applicant to file its financial statements for the period ended March 31, 2003.

5. The Applicant is not, to its knowledge, in default of any of the requirements of the Act, or the rules and regulations made pursuant thereto, other than the following:

(a) the Applicant failed to file audited annual financial statements for the year ended June 30, 2003 and interim financial statements for the periods ended March 31, 2003, September 30, 2003, and December 31, 2003;

(b) the Applicant failed to pay annual participation fees; and

(c) the Applicant has taken the following steps, one or more of which may constitute a contravention of the Cease Trade Order:

(i) the Applicant entered into the Omnibus Agreement described in paragraph 11 which, among other things:

(A) provides for the conversion of certain indebtedness into securities of the Applicant, as described in paragraph 13;

(B) pursuant thereto, the Applicant has entered into a loan agreement and general security agreement and has issued promissory notes as evidence of indebtedness to Mr. Todd Morgan for advances, also as described in paragraph 13;

(C) pursuant thereto, the Applicant has entered into a loan agreement and issued promissory notes as evidence of indebtedness to Steve Reiken and Greg Smith for advances, as described in paragraph 13; and

(D) pursuant thereto, the Applicant contemplates a proposed financing and the issuance of shares and warrants to potential investors and/or the litigation parties.

6. Prior to the date hereof, the Applicant had not remedied the deficiencies described in paragraph 5 (a) as it did not have sufficient funds to do so. The Applicant has undertaken to pay its annual participation fees within two (2) business days of the date hereof. To the extent that one or more of the actions described in paragraph 5(c) constitute a contravention of the Cease Trade Order, such contravention was inadvertent. The Applicant has apprised itself of the restrictions contained in the Cease Trade Order and its obligations under the Legislation generally to ensure future compliance with the terms of the Cease Trade Order.

7. The Applicant has not previously been subject to a cease trade order of the Commission or in any other jurisdiction.

8. The Applicant's authorized capital consists of an unlimited number of common shares (the "Common Shares"), of which approximately 96,504,911 Common Shares are issued and outstanding.

9. In 1984, the Applicant acquired an interest in a gold property near Virginiatown in the Larder Lake area of northeastern Ontario (the "Property"). During the 1980's and 1990's, the Applicant spent approximately $30 million in development work on the Property. The status of operations on the Property as of July 5, 2002 is set out in a report prepared in accordance with National Instrument 43-101 Standards of Disclosure for Mineral Projects entitled "Report on the Armistice Resources Ltd. Virginiatown Gold Project, McGarry Township, Ontario" by S.J. Carmichael and has been filed with the Commission as of the date hereof.

10. On June 4, 2002, Sheldon-Larder Mines, Limited, a royalty holder on the Property commenced legal action against the Applicant for arrears of advance royalty payments (currently in arrears of approximately $470,000). On June 4, 2003, Harvey Atkin, a former director exercised his rights in an ex-parte foreclosure action with respect to funds he had loaned to the Company, and by court order, all of the Applicant's properties were transferred into his name. Sheldon-Larder expanded its legal action to include Mr. Atkin, and is seeking an order to reverse the transfer of the properties to Mr. Atkin.

11. Mr. Todd Morgan, a shareholder of the Applicant holding 299,000 common shares of the Applicant (representing approximately 0.31% of the issued and outstanding share capital of the Applicant), has negotiated a "stand-still" agreement (the "Omnibus Agreement") amongst the Company and the parties to the litigation which agreement has been filed with the Commission as of the date hereof.

12. The purpose of the Omnibus Agreement is to enable the Company to proceed with a minimum $2 million financing (the "Proposed Financing") sufficient to fund the settlement of the litigation, the transfer of the Property back to Applicant, the re-organization of the Applicant's affairs, and to provide working capital.

13. Under the terms of the Omnibus Agreement, and pursuant to a loan agreement made in connection therewith, Mr. Morgan, a related company, and his father (collectively, the "Morgan Group") may advance up to $200,000 (the "Morgan Advances") to the Applicant to pay the legal and accounting expenses in connection with: negotiating the Omnibus Agreement; preparing and filing of financial statements; obtaining this Order; obtaining a final revocation order; and completing the Proposed Financing. As security, Mr. Morgan has a general security interest against the Applicant's assets (which do not include the Property). The Omnibus Agreement also provides that, conditional upon the revocation or partial revocation of the Cease Trade Order, the Morgan Group may convert its $200,000 indebtedness to common shares and warrants of the Applicant, as described hereinafter. In addition, Steve Reiken and Greg Smith, each a director of the Applicant, may each convert $10,000 of indebtedness to common shares and warrants of the Applicant, as described hereinafter. All such conversion of indebtedness shall be referred to as the "Debt Conversion".

14. The Applicant will undertake the following steps (the "Steps") in connection with the Omnibus Agreement, the Morgan Advances, the Debt Conversion and the Proposed Financing:

(a) Upon issuance of this Order, issue a press release and file a Material Change Report announcing the Omnibus Agreement, the Morgan Advances, the Debt Conversion and the Proposed Financing and this Order;

(b) Upon issuance of this Order, Morgan will make advances to the Applicant as contemplated in this Order;

(c) Upon issuance of this Order and from time to time prior to the Proposed Financing, issue the number of Units to members of the Morgan Group, Steve Reiken and Greg Smith at a price of CDN $0.01 per Unit in full settlement of the debts owed to them. Each Unit will consist of one common share and one-half of one common share purchase warrant. Each whole purchase warrant will entitle the holder to subscribe for one common share at the same exercise price and for the same duration and on the same terms and conditions as share purchase warrants to be issued to the Proposed Financing investors;

(d) Upon issuance of this Order, Todd Morgan will act as a "promoter" (as defined in the Act) of the Applicant to market the Proposed Financing and to provide information only to potential investors (the "Potential Investors") who qualify as "accredited investors" (as defined in OSC Rule 45-501 Exempt Distributions) in the Province of Ontario in accordance with the provisions of this Order and in accordance with the requirements of Ontario securities law; and

(e) To apply for a full revocation of the Cease Trade Order in due course which application shall include, without limitation, the filing with the Commission annual financial statements for the year ended June 30, 2003 as well as interim statements for September 30, 2003, December 31, 2003 and March 31, 2004, an updated technical report completed in accordance with National Instrument 43-101.

15. Proceeds from $150,000 of the Morgan Advances will be used solely to permit the Applicant to pay for:

(a) the preparation of interim financial statements for the periods ended September 30, 2003, December 31, 2003 and March 31, 2004;

(b) the preparation and audit of annual financial statements for the period ended June 30, 2003;

(c) the services of legal counsel with regard to the negotiation of the Omnibus Agreement, preparation of the Debt Conversion, preparation for the Proposed Financing and the application for this Order and the final revocation order;

(d) the preparation of a current technical report in accordance with National Instrument 43-101;

(e) the preparation of an independent auditor's report with respect to verification of amounts owing to one of the parties to the litigation;

(f) payment of the outstanding participation fees owing to the Commission;

(g) a portion of legal costs to complete the Proposed Financing (the remainder to come from proceeds of the Proposed Financing); and

(h) payment of outstanding annual participation fees.

The Applicant has recognized $50,000 of the Morgan Advances as being services "in kind" by Todd Morgan with respect to negotiations with the litigation parties and the Omnibus Agreement and with respect to preparing for the Proposed Financing.

16. Concurrent with the Debt Conversion, each member of the Morgan Group, Steve Reiken and Greg Smith shall:

(a) receive a copy of the Cease Trade Order;

(b) receive a copy of this Order;

(c) receive written notice from the Applicant, and acknowledge, in a form acceptable to the Commission, that all of the Applicant's securities, including any and all Common Shares issued in connection with the Debt Conversion, will remain subject to the Cease Trade Order following the Debt Conversion; and

(d) enter into separate agreements with the Applicant, and an escrow agent providing for the escrow of each of the shares issued upon the Debt Conversion in accordance with National Policy 46-201 Escrow for Initial Public Offerings.

17. Prior to the completion of the Proposed Financing, each Potential Investor approached by Todd Morgan shall receive:

(a) a copy of the Cease Trade Order;

(b) a copy of this Order;

(c) a copy of the audited financial statements for the year ended June 30, 2003 as well as interim statements for September 30, 2003, December 31, 2003 and March 31, 2004; and

(d) a copy of the June 2002 technical report prepared in accordance with National Instrument 43-101 and prior to closing of the Proposed Financing a copy of an updated 43-101 technical report.

18. Prior to the completion of the Proposed Financing, each of the Potential Investors who will be participating in the Proposed Financing will be required to execute and return to the Applicant a form of acknowledgement in a form acceptable to the Commission.

19. The Applicant has applied for a partial revocation of the Cease Trade Order so as to permit the Applicant, the Morgan Group and the directors to enter into the Steps on substantially the terms described in this Order.

20. The Applicant is not considering, nor is it involved in any discussion relating to a reverse take-over, merger, amalgamation or other form of combination or transaction similar to any of the foregoing (collectively, an "RTO").

21. Following the completion of the Steps, the Applicant intends to make a further application for a full revocation of the Cease Trade Order so as to permit trading of the securities generally at the time of completion of the Proposed Financing which is scheduled to be completed on or about June 15, 2004, but in any event no later than June 30, 2004. At the time of this subsequent application, the Applicant will file with the Commission and provide proof that the Potential Investors have been provided with copies of current financial statements and technical reports prepared in accordance with National Instrument 43-101.

22. Trades in the common shares of the Applicant were previously reported on the Canadian Unlisted Board. The Applicant has no securities, including debt securities, listed or quoted on any exchange or market.

23. Other than the common shares, the Applicant has no securities, including debt securities, outstanding with the exception of stock options granted to directors, which options will be cancelled as contemplated in the Omnibus Agreement.

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

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

IT IS ORDERED, pursuant to section 144 of the Act, that the Cease Trade Order be and is hereby partially revoked solely to permit the trades and the acts in furtherance of trades

(a) that are necessary for and are in connection with the Omnibus Agreement, the Morgan Advances, the Debt Conversion and the Proposed Financing; and

(b) that occur on or after the date of this Order.

May 6, 2004.

"Charlie MacCready"