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Perpetual Energy Inc shares lost a quarter of their value Tuesday after the family-controlled company was targeted in a lawsuit that threatens to unwind a major asset deal or else recoup hundreds of millions of dollars in damages.

PricewaterhouseCoopers launched the action on behalf of creditors of Sequoia Resources Corp., which filed for bankruptcy last March after taking on distressed assets in a series of acquisitions that included thousands of sapped wells and related facilities from Perpetual, controlled by Calgary’s Riddell family.

The lawsuit amounts to an extraordinary setback for Perpetual, whose market capitalization of just $31-million is a fraction of the $217-million in damages sought by the trustee as an alternative if it fails to get a judge to annul to two-year-old sale of Alberta gas wells.

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The action has broad implications for the energy industry, not least the potential to upend rules that govern asset deals and establish who is responsible when companies are unable to fund the eventual cleanup of old sites.

“This case will ultimately offer potentially wide-ranging legal precedent for determining the party responsible for the cleanup of wells and other related infrastructure on asset transactions in [Western Canada],” GMP FirstEnergy analyst Robert Fitzmartyn said in a note to clients.

Perpetual, once a formidable natural gas producer with a share price that topped $100, in 2016 sold thousands of aging gas wells it no longer considered economically viable to Sequoia in an effort to rid itself of cleanup obligations the company pegged at $133.6-million. The stock tumbled nearly 25 per cent to 49 cents in Tuesday’s session on the Toronto Stock Exchange.

The trustee names Perpetual, its subsidiaries and chief executive Susan Riddell Rose as defendants in the action. It alleges Ms. Riddell Rose failed to act in good faith and gained personally when she engineered the sale of the aging properties to a subsidiary called Perpetual Energy Operating Corp. (PEOC), later renamed Sequoia.

Perpetual denies any wrongdoing and says the claim is without merit. The company’s biggest shareholder is Clayton Riddell, Ms. Riddell Rose’s father, with a 41.7-per-cent stake. Ms. Riddell Rose has a 4.8-per-cent stake, according to Bloomberg.

The tangled structure of the deal surfaced in an August, 2016, presentation to Perpetual’s board of directors. The presentation, portions of which are labelled confidential and privileged, is attached to the affidavit that Paul Darby, senior vice-president and licensed insolvency trustee with PwC, filed last week in Calgary court.

The presentation listed as a strategic goal for the year a $50-million reduction in cleanup obligations and set out a restructuring plan to achieve it.

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According to the trustee, the plan took effect in October, 2016, with the transfer of cash-flow negative, high-liability wells and facilities from an unincorporated trust to a subsidiary, PEOC, for a “nominal” sum of $10. The affidavit says Ms. Riddell Rose, as the sole director of the unit, signed off on the transaction on behalf of both parties.

In a related agreement, the documents show, Perpetual Energy sold 100 per cent of its shares in PEOC to a numbered firm controlled by Chinese-Canadian financier Wentao Yang, also for a “nominal” sum. Mr. Yang did not respond to messages seeking comment on Tuesday.

The structure meant the deal was not subject to a toughened financial stress test for buyers imposed by the Alberta Energy Regulator.

Ms. Riddell Rose resigned as a director of PEOC on Oct. 1, 2016, according to the affidavit. She was replaced by Mr. Yang and Hao Wang. The company changed its name to Sequoia Resources two days later.

In a June 26, 2018, letter to Ms. Riddell Rose, Mr. Darby called the Sequoia deal “a non-arm’s length transfer at undervalue" and wrote that Sequoia “was insolvent at the time or was rendered insolvent by the transaction.”

Ms. Riddell Rose did not respond to a request for comment on Tuesday.

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In a statement late Monday, the company said it sold the shallow gas assets in question “to an arm’s length third party at fair market value at the time after an extensive and lengthy marketing, due diligence and negotiation process.”

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