TCRRF Terrace Energy Corporation (CE)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

AMENDMENT NO. 1

TO

FORM T-3

FOR APPLICATIONS FOR QUALIFICATION OF INDENTURES

UNDER THE TRUST INDENTURE ACT OF 1939

TERRACE ENERGY CORP.

(Name of applicant)

Suite 1012, 1030 West Georgia Street, Vancouver, British Columbia, Canada V6E 2Y3

(Address of principal executive offices)

SECURITIES TO BE ISSUED UNDER THE INDENTURE TO BE QUALIFIED

*The actual aggregate principal amount of 8.0% Convertible Unsecured Notes due 2018 to be issued pursuant to the Indenture (as defined below) may be less and depends upon the actual aggregate amount of Old Notes (as defined herein) that are exchanged as described in Item 2.

Approximate date of proposed public offering:

Upon the effective date of the Arrangement (as defined herein)

Name and address of agent for service:

Keith R. Godwin

Terrace Energy Corp.

Suite 1012, 1030 West Georgia Street

Vancouver, British Columbia, Canada V6E 2Y3

With a copy to:

H.S. Sangra

Sangra Moller LLP

1000 – 925 West Georgia Street

Vancouver, British Columbia V6C 3L2

Applicant hereby amends this application for qualification on such date or dates as may be necessary to delay its effectiveness until: (i) the 20th day after the filing of a further amendment which specifically states that it shall supersede this application for qualification, or (ii) such date as the Securities and Exchange Commission, acting pursuant to Section 307(c) of the Trust Indenture Act of 1939, as amended, may determine upon the written request of the Applicant.

EXPLANATORY NOTE

The Plan of Arrangement of the petitioner named therein, dated September 11, 2014, was approved on October 10, 2014 by the Supreme Court of British Columbia.  This Amendment No. 1 to Form T-3, initially filed with the Securities and Exchange Commission on September 17, 2014 (File No. 022-29000), is being filed on behalf of Terrace Energy Corp. to, among other things, file the Exhibit that is filed herewith.

GENERAL

1.                                      General Information.

(a)                                 Form of organization:  Terrace Energy Corp. (the “Issuer”) is a corporation.

(b)                                 State or other sovereign power under the laws of which organized: The Issuer is organized under the laws of the Province of British Columbia.

2.                                      Securities Act exemption applicable.

Pursuant to the terms and subject to the conditions set forth in the Plan of Arrangement dated September 11, 2014, the Issuer plans to effect an arrangement (the “Arrangement”) under the provisions of Division 5, Part 9 of the Business Corporations Act (British Columbia), S.B.C., 2002, c.57, as amended.  Pursuant to the Arrangement, the Issuer’s outstanding 8% convertible unsecured notes due April 2, 2018 (the “Old Notes”) will be exchanged for up to $38,640,000 aggregate principal amount of new convertible unsecured notes (the “New Notes”).

The New Notes will be issued under the indenture (the “Indenture”) to be qualified by this Application for Qualification (this “Application”). For more detailed information on the Indenture, see Item 8 of this Application.

The New Notes will be issued by the Issuer in reliance upon an exemption from the registration requirements of the U.S. Securities Act of 1933, as amended (the “Securities Act”), afforded by Section 3(a)(10) thereof. Section 3(a)(10) of the Securities Act provides an exemption from the registration provisions of the Securities Act for, in relevant part: “. . . any security which is issued in exchange for one or more bona fide outstanding securities, claims or property interests . . . where the terms and conditions of such issuance are approved, after a hearing upon the fairness of such terms and conditions at which all persons to whom it is proposed to issue securities in such exchange shall have the right to appear, by any court . . . .”

The three main elements of the Section 3(a)(10) exemption are: (a) an exchange of outstanding securities, claims or property interests, (b) a fairness hearing, and (c) court approval of the issuance and exchange. As described in the management information circular of the Issuer dated September 15, 2014 (the “Circular”), incorporated by reference herein as Exhibit T3E, each of these elements will be satisfied in connection with the issuance of the New Notes.

(a) Exchange of Securities: The New Notes will be issued in exchange for the Old Notes in the Arrangement.

(b) Fairness Hearing: At a fairness hearing held on October 10, 2014, the Supreme Court of British Columbia (the “Court”) considered, among other things, the fairness and reasonableness of the Arrangement to the holders of the Old Notes (the “Noteholders”). Any Noteholder or other interested party who wished to participate, or to be represented, or to present evidence or argument, had the opportunity to do so, subject to filing with the Court and serving upon the solicitors of the Issuer a notice of appearance and satisfying any other requirements of the Court.

(c) Court Approval: The Court approved the Arrangement on October 10, 2014. The Court was advised that its ruling will be the basis for claiming an exemption from registration under the Securities Act by reason of the exemption afforded by Section 3(a)(10) thereof.

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AFFILIATIONS

3.                                      Affiliates.

(a) For purposes of this Application only, as of the date of this Application, the officers and directors of the Issuer named in response to Item 4 hereof may be deemed affiliates of the Issuer by virtue of the positions held by such persons with the Issuer.

(b) The following diagram sets forth the affiliates of the Issuer as of the date of this Application.  All subsidiaries are wholly-owned, directly or indirectly, by the Issuer, unless otherwise indicated.

MANAGEMENT AND CONTROL

4.                                      Directors and executive officers.

The following table sets forth the names of, and all offices held by, all directors and executive officers (as defined in Sections 303(5) and 303(6) of the Trust Indenture Act of 1939, respectively) of the Issuer. The mailing address for each director and executive officer listed below is c/o Terrace Energy Corp., Attention: Deborah Cotter, Suite 1012, 1030 West Georgia Street, Vancouver, British Columbia, Canada V6E 2Y3.

5.                                      Principal owners of voting securities.

The Issuer furnishes the following information as to each person owning 10 percent or more of the voting securities of the Issuer as of September 15, 2014:

(1)         Information based on a report generated using the System for Electronic Disclosure by Insiders (SEDI). Includes 250,000 common shares which are issuable upon exercise of options currently exercisable within 60 days.

(2)         Computed in accordance with Rule 13d-3(d)(1) under the Securities Exchange Act 1934, as amended. As of September 15, 2014, there were 87,832,321 common shares outstanding.

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UNDERWRITERS

6.                                      Underwriters.

(a)                                 The following chart sets forth the name and mailing address of each person who within three years prior to the date of filing this Application, acted as an underwriter of securities of the Issuer which are outstanding on the date of filing this Application:

(b)                                 No person is acting as an underwriter of the New Notes proposed to be offered pursuant to the Indenture.

CAPITAL SECURITIES

7.                                      Capitalization.

(a)                                 As of September 15, 2014, the authorized and outstanding share capital of the Issuer consisted of the following:

(1)                                     As of September 15, 2014, there were 500,000 outstanding warrants to purchase common shares of the Issuer. These warrants have an expiration date of June 21, 2016 and exercise price of C$0.18 per common share.

(2)                                     As of September 15, 2014, there were incentive stock options to purchase 2,900,000 common shares of the Issuer. These options have expiry dates ranging from June 2016 to July 2017 and exercise prices ranging from C$0.12 to C$1.35. The Issuer’s Stock Option

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Plan permits the Issuer to issue options equal in number to up to 10% of the issued and outstanding common shares of the Issuer at the time of grant.  Options do not confer on the holder any right to vote at a meeting of the Issuer’s shareholders.

(3)                   As of September 15, 2014, there were 1,200,000 restricted share units (“RSUs”) outstanding. The RSUs are governed by the Issuer’s Restricted Stock Unit Plan (the “RSU Plan”). Each RSU, upon vesting, gives the holder the right to receive one common share of the Issuer. Unless otherwise approved by the Issuer’s board of directors, all of the RSUs will vest upon the occurrence of a “change of control transaction,” as such term is defined in the RSU Plan and in individual RSU award agreements entered into prior to the adoption of the RSU Plan, as applicable. In the absence of a change of control transaction or other acceleration of vesting by the Issuer’s board of directors, unvested RSUs will expire five years from the date of grant. Vested RSUs will be settled, at the election of the Issuer, by way of: (i) issuance of common shares of the Issuer from treasury; (ii) payment to the RSU holder of an amount of cash equal to the market price of the common shares of the Issuer on the vesting date; or (iii) any combination thereof.

(4)                                     As of August 11, 2014, being the current record date for the Meeting, there were C$38,640,000 Old Notes authorized and outstanding.

(b)                                 Holders of the Issuer’s common shares, no par value per share, are entitled to one vote per common share registered in such holder’s name.

INDENTURE SECURITIES

8.                                      Analysis of Indenture Provisions.

The New Notes will be issued under the Indenture, to be dated as of the effective date of the Arrangement, among the Issuer, Computershare Trust Company of Canada, as trustee (the “Trustee”), and Computershare Trust Company, N.A., as U.S. co-trustee (the “U.S. Trustee”). The following is a general description of certain provisions of the Indenture, and the description is qualified in its entirety by reference to the form of Indenture filed as Exhibit T3C hereto. All capitalized and otherwise undefined terms shall have the meanings ascribed to them in the Indenture.

(A)                               Events of Defaults; Withholding of Notice.

The following events will be defined in the Indenture as “Events of Default” with respect to the New Notes:

i.                  the Issuer fails to make an interest payment on or before the cure deadline in respect of two consecutive interest payment dates;

ii.               the Issuer defaults in the payment of any principal on the New Notes when the same becomes due and payable, whether at maturity or any other date fixed for prepayment pursuant to the terms of the New Notes and the Indenture;

iii.            the Issuer defaults in the performance of or compliance with any term, condition or covenant contained in the New Notes or Indenture and such default shall not have been remedied and the Issuer shall not have taken timely steps to diligently remedy such default within thirty days after such failure shall first have become known to any officer of the Issuer or written notice thereof shall have been received by the Issuer;

iv.           any representation or warranty of the Issuer made in writing by or on behalf of the Issuer in the New Notes or the Indenture shall prove to have been false or incorrect in any material respect on the date as of which made;

v.              the Issuer (i) files, or consents by answer or otherwise to the filing against it of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or otherwise takes advantage of any bankruptcy or insolvency law of any jurisdiction, (ii) makes an assignment, an arrangement or a compromise for the benefit of its creditors, (iii) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers of itself or of any substantial part of its property, or (iv) takes corporate action for the purpose of any of the foregoing; and

vi.           a court or governmental authority of competent jurisdiction enters a final order appointing, without the consent of the Issuer, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or a final order for relief is entered in any case or proceeding for liquidation or reorganization or otherwise to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of the Issuer, or any petition for any such relief is filed against the Issuer and such petition is not dismissed within ninety days.

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In each and every such event, the Trustee may, in its discretion, but subject to the provisions of the Indenture, and shall, upon prior funding and indemnity and receipt of a request in writing signed by the holders of not less than 25% in principal amount of the New Notes then outstanding, subject to the provisions of the Indenture, declare the principal of, premium, if any, on and interest on all New Notes then outstanding and all other monies outstanding under the Indenture to be due and payable and the same will become immediately due and payable to the Trustee, and the Issuer will pay to the Trustee for the benefit of the holders of the New Notes such principal (and premium, if any), accrued and unpaid interest and interest on amounts in default on such New Notes (and, where such a declaration is based upon a voluntary winding-up or liquidation of the Issuer, the premium, if any, on the New Notes then outstanding which would have been payable upon the redemption thereof by the Issuer on the date of such declaration) and all other monies outstanding under the Indenture, together with subsequent interest at the rate borne by the New Notes on such principal (and premium, if any), interest and such other monies from the date of such declaration until payment is received by the Trustee, such subsequent interest to be payable at the times and places and in the monies mentioned in and according to the tenor of the New Notes.

Noteholders may not enforce the Indenture or the New Notes except as provided in the Indenture. Subject to certain limitations, holders of 662/3% of the principal amount of the then outstanding New Notes may direct or authorize the Trustee and the U.S. Trustee in their exercise of any power, right, remedy or authority given to them by the Indenture or to refrain from exercising any such power, right, remedy or authority, provided that such direction shall not be in conflict with any rule of law or with the Indenture, expose the U.S. Trustee to personal liability or be unduly prejudicial to the holders not joining therein. The Trustee may withhold from Noteholders notice of any continuing Event of Default if it determines that withholding notice is in their interest, except an Event of Default relating to the payment of principal or interest or unless the Trustee shall have been requested to give such notice by the holders of at least 25% of the principal amount of the New Notes then outstanding.

The holders of a majority in aggregate principal amount of the New Notes then outstanding by notice to the Trustee may on behalf of the all of the Noteholders waive any existing Event of Default and its consequences under the Indenture except a continuing Event of Default in the payment of interest or the principal of, the New Notes.

(B)                               Authentication and Delivery of the Securities under the Indenture and Application of Proceeds Thereof.

Any New Notes issued under the Indenture in certificated form must be executed on behalf of the Issuer by a director or officer of the Issuer. The signature of any of the officers on the New Notes may be manual or facsimile. New Notes bearing the manual or facsimile signatures of an individual who was at any time the proper director or officer of the Issuer will bind the Issuer, notwithstanding that the individual has ceased to hold such office prior to the certification and delivery of such New Notes or did not hold such offices at the date of the New Notes. Each New Note will be dated as of the date of the closing of the Arrangement, or such other date or dates of issuance as provided in the Indenture.

No New Note shall be entitled to any benefit under the Indenture or be valid or obligatory for any purpose until it has been manually certified by or on behalf of the Trustee substantially in the form provided for in the Indenture, in the relevant supplemental indenture, or in some other form approved by the Trustee. Such certificate upon any New Note shall be conclusive evidence that such New Note is a valid obligation of the Issuer and the holder is entitled to the benefits thereof.

The Issuer will not recognize any proceeds from the issuance of New Notes in exchange for the Old Notes.

(C)                               Release of any Note Collateral Subject to the Lien of the Indenture.

None.  The New Notes are unsecured.

(D)                               Satisfaction and Discharge of the Indenture; Redemption of the Securities.

The Indenture will be discharged and will cease to be of further effect with respect to the New Notes when:

i.                  the Issuer has deposited or caused to be deposited with the Trustee as trust funds or property in trust for the purpose of making payment on the New Notes, an amount in money or common shares, if applicable, sufficient to pay, satisfy and discharge the entire amount of principal of, premium, if any, and interest, if any,

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to maturity, or any repayment date or Redemption Dates, or any Change of Control Payment Date, or any Sale Payment Date, or upon conversion or otherwise as the case may be, of such New Notes;

ii.     the Issuer has deposited or caused to be deposited with the Trustee as trust property in trust for the purpose of making payment on such Notes an amount in Canadian dollars of direct obligations of, or obligations the principal and interest of which are guaranteed by, the Government of Canada or common shares, if applicable, as will be sufficient to pay and discharge the entire amount of principal of, premium, if any on, and accrued and unpaid interest to maturity or any repayment date, as the case may be, of all such New Notes; or

iii.    all New Notes authenticated and delivered (other than (A) New Notes which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 2.9 of the Indenture and (B) New Notes for whose payment has been deposited in trust and thereafter repaid to the Issuer as provided in Section 8.3 of the Indenture) have been delivered to the Trustee for cancellation;

so long as in any such event:

iv.    the Issuer has paid, caused to be paid or made provisions to the satisfaction of the Trustee for the payment of all other sums payable or which may be payable with respect to all of such New Notes (together with all applicable expenses of the Trustee in connection with the payment of such New Notes) and all amounts due to the Trustee and the U.S. Trustee under the Indenture; and

v.     the Issuer has delivered to the Trustee an Officers’ Certificate stating that all conditions precedent herein provided relating to the payment, satisfaction and discharge of all such New Notes have been complied with.

(E)                               Evidence of Compliance with Conditions and Covenants.

The Issuer will be required to deliver to the Trustee and the U.S. Trustee, within 120 days after the end of each calendar year (and at any reasonable time upon demand by the Trustee), an Officers’ Certificate as to the knowledge of such officers of the Issuer who execute the Officers’ Certificate of the Issuer’s compliance with all conditions and covenants in the Indenture, certifying that after reasonable investigation and inquiry, the Issuer has complied with all covenants, conditions or other requirements contained in the Indenture, the non-compliance with which could, with the giving of notice, lapse of time or otherwise, constitute an Event of Default thereunder, or if such is not the case, setting forth with reasonable particulars the circumstances of any failure to comply and steps taken or proposed to be taken to eliminate such circumstances and remedy such Event of Default, as the case may be.

9.                                      Other Obligors.

None.

CONTENTS OF APPLICATION FOR QUALIFICATION.

This Application comprises:

(a)                                 Pages numbered 1 to 8, consecutively;

(b)                                 The statement of eligibility and qualification on Form T-1 of the Trustee under the Indenture to be qualified (filed herewith as Exhibit 25.1); and

(c)                                  The following exhibits in addition to those filed as part of the statement of eligibility and qualification of the Trustee:

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* Previously filed.

** Filed herewith.

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SIGNATURE

Pursuant to the requirements of the Trust Indenture Act of 1939, the applicant, Terrace Energy Corp., a corporation organized and existing under the laws of the Province of British Columbia, has duly caused this application to be signed on its behalf by the undersigned, thereunto duly authorized, and its seal to be hereunto affixed and attested, all in the City of Houston and State of Texas, on the 10th day of October, 2014.

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EXHIBIT INDEX

* Previously filed.

** Filed herewith.

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Exhibit T3D

IN THE SUPREME COURT OF BRITISH COLUMBIA

IN THE MATTER OF SECTIONS 288 AND 291

OF THE BUSINESS CORPORATIONS ACT, S.B.C. 2002, c. 57

AND AMENDMENTS THERETO

AND

IN THE MATTER OF A PROPOSED ARRANGEMENT

BETWEEN TERRACE ENERGY CORP. AND

THE NOTEHOLDERS OF TERRACE ENERGY CORP.

TERRACE ENERGY CORP.

PETITIONER

ORDER MADE AFTER APPLICATION
(FINAL ORDER)

ON THE APPLICATION of the Petitioner, Terrace Energy Corp., coming on for hearing at Vancouver, British Columbia on the 10th day of October, 2014 and on hearing Evan Griffith, counsel for the Petitioner;

AND UPON READING the Petition herein, the Interim Order of Master Bouck, pronounced September 15, 2014, Affidavit #1 of William McCartney sworn September 11, 2014 and Affidavit #1 of Deborah Cotter sworn October 8, 2014;

AND UPON the requisite approval of the holders (the “Noteholders”) of the aggregate of $38,640,000 outstanding 8% convertible unsecured notes of the Petitioner due April

2, 2018, having been obtained at the special meeting of the Noteholders of the Petitioner held on October 8, 2014;

AND UPON IT APPEARING that adequate notice of the time and place of Hearing of this application was given to the Noteholders of the Petitioner;

AND UPON IT APPEARING that all Noteholders of the Petitioner had a right to appear and be heard at the Hearing and make submissions, and none did so;

AND UPON CONSIDERING the fairness to the parties affected thereby of the terms and conditions of the arrangement provided for in the amended plan of arrangement attached hereto as Schedule “A” (the “Arrangement”) and of the transactions contemplated by the Arrangement;

AND UPON IT APPEARING that the terms and conditions of the Arrangement may properly be approved by this Honourable Court;

AND UPON BEING ADVISED by Counsel for the Petitioner that this Honourable Court’s approval of the Arrangement and its determination that the Arrangement is fair to the persons to be issued securities or to have securities made issuable to them pursuant to the Arrangement will serve as the basis of a claim to an exemption from the registration requirements of the United States Securities Act of 1933, as amended, pursuant to Section 3(a)(10) thereof, regarding the issuance and exchange of unsecured convertible notes of the Petitioner to the Noteholders.

THIS COURT ORDERS AND DECLARES that:

1.                                                                                      pursuant to section 291(4)(c) of the Business Corporations Act, S.B.C. 2002, c. 57, as amended (the “BCBCA”), the Arrangement as provided for in the Plan of Arrangement attached hereto as Schedule “A”, including the terms and conditions thereof and the distributions, issuances, exchanges and/or adjustments of securities contemplated therein, is procedurally and substantively fair and reasonable to the Noteholders of the Petitioner;

2.                                                                                      pursuant to section 291(4)(a) of the BCBCA, the Arrangement as provided for in the plan of arrangement attached hereto as Schedule “A”, including the terms and conditions

thereof and the distributions, issuances, exchanges, and/or adjustments of securities contemplated therein, be and is hereby approved by this Court; and

3.                                                                                      the Petitioner shall be entitled, at any time, to seek leave to vary this Order, to seek the advice and direction of this Court as to the implementation of this Order or to apply for such further Order or Orders as may be appropriate.

THE FOLLOWING PARTIES APPROVE THE FORM OF THIS ORDER AND CONSENT TO EACH OF THE ORDERS, IF ANY, THAT ARE INDICATED ABOVE AS BEING BY CONSENT:

APPROVE AS TO FORM:

SCHEDULE “A”

PLAN OF ARRANGEMENT

UNDER DIVISION 5 OF PART 9 OF

THE BUSINESS CORPORATIONS ACT (BRITISH COLUMBIA)

S.B.C. 2002, c.57

ARTICLE 1
DEFINITIONS AND INTERPRETATION

1.1                               Definitions: In this plan of arrangement, unless there is something in the subject matter or context inconsistent therewith, the following capitalized words and terms shall have the following meanings:

(a)                                 “Arrangement” means the arrangement under the Arrangement Provisions pursuant to which the Company is proposing to distribute to the Terrace Noteholders the New Notes in exchange for the Old Notes, and which is set out in detail in this Plan of Arrangement;

(b)                                 “Arrangement Provisions” means Division 5 of Part 9 — Arrangements of the BCBCA;

(c)                                  “Arrangement Resolution” means the resolution of the Terrace Noteholders approving the Plan of Arrangement which is to be considered at the Meeting;

(d)                                 “BCBCA” means the Business Corporations Act (British Columbia), S.B.C. 2002, c.57, as may be amended, restated or replaced from time to time;

(e)                                  “Terrace Noteholder” means a holder of Old Notes as of the Effective Time;

(f)                                   “Board” means the board of directors of Terrace;

(g)                                  “Business Day” means a day which is not a Saturday, Sunday or statutory holiday in Vancouver, British Columbia;

(h)                                 “Circular” means the notice of the Meeting and accompany management information circular, including all schedules, appendices and exhibits thereto and enclosures therewith, to be sent to the Terrace Noteholders in connection with the Meeting, as amended, supplemented or otherwise modified from time to time;

(i)                                     “co-Trustee” means Computershare Trust Company, N.A. as United States co-trustee;

(j)                                    “Court” means the Supreme Court of the British Columbia;

(k)                                 “Effective Date” means the date upon the Arrangement becomes effective;

(l)                                     “Effective Time” means 12:01 a.m. (Vancouver time) on the Effective Date (or such other time on the Effective Date that the Board determines);

(m)                             “Final Order” means the final order of the Court, after a hearing upon the fairness of the terms and conditions of the Arrangement, approving the Arrangement, as such order may be amended by the Court at any time prior to the Effective Date or, if appealed, then, unless such appeal is withdrawn or denied, as affirmed or amended on appeal (provided that any such amendment is acceptable to the Company);

(n)                                 “Indenture” means the indenture to be entered into between the Company and the Trustee pursuant to which the New Notes are to be issued, which shall contain the terms and conditions governing the New Notes including those set forth in Schedule “A” hereto and such other terms and conditions customary for such indentures in a form and substance satisfactory to Terrace and the Trustee and as set forth in the Circular;

(o)                                 “Interim Order” means the interim order of the Court made pursuant to section 291 of the BCBCA, providing for, among other things, the calling and holding of the Meeting;

(p)                                 “Letter of Transmittal” means the letter of transmittal to be forwarded by the Company to the Terrace Noteholders together with the Circular;

(q)                                 “Liens” means any hypothecs, mortgages, pledges, assignments, liens, charges, security interests, encumbrances and adverse rights or claims, other third party interest or encumbrance of any kind, whether contingent or absolute, and any agreement, option, right or privilege (whether by law, contract or otherwise) capable of becoming any of the foregoing;

(r)                                    “Meeting” means the special meeting of Terrace Noteholders, including any adjournment(s) or postponement(s) thereof, to be called and held in accordance with the Interim Order to consider the Arrangement Resolution;

(s)                                   “New Notes” means the aggregate of $38,640,000, or such lesser amount as is equal to the outstanding principal amount of Old Notes immediate prior to the Effective Time, new 8.0% convertible unsecured notes of the Company due April 2, 2018 to be issued under the Indenture and having substantially the terms and conditions set forth in Schedule “A” hereto, which notes the Company plans to distribute to the holders of Old Notes pursuant to section 3.1(b) of this Plan of Arrangement;

(t)                                    “Old Notes” means the aggregate, as of August 5, 2014, of $38,640,000 outstanding 8% convertible unsecured notes of the Company due April 2, 2018;

(u)                                 “Plan of Arrangement” means this Plan of Arrangement, as may be amended or restated from time to time;

(v)                                 “Tax Act” means the Income Tax Act (Canada), as may be amended, restated or replaced from time to time;

(w)                               “Terrace” or the “Company” means Terrace Energy Corp., a company existing under the BCBCA;

(x)                                 “Terrace Noteholders” means the holders of the Old Notes; and

(y)                                 “Trustee” means Computershare Trust Company of Canada, or such other licensed trust company selected by the Company.

1.2                               Interpretation Not Affected by Headings: The division of this Plan of Arrangement into articles, sections, subsections, paragraphs and subparagraphs and the insertion of headings are for convenience of reference only and shall not affect the construction or interpretation of this Plan of Arrangement.  Unless otherwise specifically indicated, the terms “this Plan of Arrangement”, “hereof”, “hereunder” and similar expressions refer to this Plan of Arrangement as a whole and not to any particular article, section, subsection, paragraph or subparagraph and include any agreement or instrument supplementary or ancillary hereto.

1.3                               Number, Gender and Persons: Unless the context otherwise requires, words importing the singular shall include the plural and vice versa, words importing the use of either gender shall include both genders and neuter, and words importing a person shall include a natural person, firm, trust, partnership, association, corporation, joint venture or government (including any governmental agency, political subdivision or instrumentality thereof) and any other entity or group of persons of any kind or nature whatsoever.

1.4                               Meaning: Undefined words and phrases used herein that are defined in the BCBCA shall have the same meaning herein as in the BCBCA unless the context otherwise requires.

1.5                               Date for any Action:  If the date on which any action is required to be taken hereunder is not a Business Day, such action shall be required to be taken on the next succeeding day which is a Business Day.

1.6                               Currency:  Unless otherwise stated, all references herein to amounts of money are expressed in lawful currency of Canada.

1.7                               Governing Law: This Plan of Arrangement shall be governed by and construed in accordance with the laws of the Province of British Columbia and the federal laws of Canada applicable therein.

ARTICLE 2
PURPOSE AND EFFECT

2.1                               Binding Effect: The Arrangement will become effective and, and be binding at and after, the Effective Time in accordance with its terms on the Company and all Terrace Noteholders, without any further act or formality required on the part of any person, except as expressly provided herein.

2.2                               Treatment of Terrace Noteholders:

(a)                                 Interest

Accrued and unpaid interest on the Old Notes shall be cancelled as of the Effective Time without further payment therefor.  Interest on the New Notes will accrue from the last interest payment date in respect of the Old Notes immediately preceeding the Effective Date, and the first interest payment on the New Notes will include interest accrued from such date.

(b)                                 Issuance of the New Notes

In accordance with the steps and sequence set forth in Article 3, on the Effective Date, Terrace shall issue and shall be deemed to issue to the Terrace Noteholders one (1) New Note for each $1,000 of principal amount of Old Notes exchanged hereunder.  The Terrace Noteholders shall and shall be deemed to irrevocably and finally exchanged the Old Notes for the New Notes and shall be deemed to have received the New Notes in full and final settlement, discharge and release of the Old Notes and of all entitlements relating thereto.

ARTICLE 3
THE ARRANGEMENT

3.1                               The Arrangement: At the Effective Time, the following shall occur and be deemed to occur in the following chronological order without further act or formality, notwithstanding anything contained in the provisions attaching to any of the Old Notes:

(a)                                 Terrace, the Trustee and the co-Trustee shall enter into the Indenture;

(b)                                 each $1,000 of principal amount of outstanding Old Notes will be irrevocably and finally exchanged for one (1) New Note and the holders of the Old Notes will be removed from the register(s) of Old Notes of the Company and will be added to the register of New Notes as the holders of the number of New Notes that they have received on the exchange; and

(c)                                  all of the issued Old Notes outstanding immediately prior to the Effective Time will be cancelled with the appropriate entries being made in the register(s) of Old Notes of the Company.

3.2                               No Fractional Notes: Notwithstanding section 3.1, no fractional New Notes shall be distributed to the Terrace Noteholders and, as a result, all fractional amounts arising under such sections shall be rounded down to the next whole number.

3.3                               Deemed Fully Paid and Non-Assessable: All New Notes issued pursuant to this Plan of Arrangement shall be deemed to be validly issued and outstanding as fully paid and non-assessable securities for all purposes of the BCBCA.

3.4                               Arrangement Effectiveness: The Arrangement shall become final and conclusively binding on the Terrace Noteholders and the Company at the Effective Time.

3.5                               Post-Effective Time Procedures:  Subject to the provisions of Article 4, and upon the return of a properly completed Letter of Transmittal by a registered former Terrace Noteholder together with the certificate(s) representing Old Notes and such other documents as the Trustee may require, former Terrace Noteholders shall be entitled to receive delivery of the certificate(s) representing the New Notes to which they are entitled pursuant to section 3.1(b).

3.6                               Supplementary Actions: Notwithstanding that the transactions and events set out in section 3.1 shall occur and shall be deemed to occur in the chronological order therein set out without any act or formality, the Company shall be required to make, do and execute or cause and procure to be made, done and executed all such further acts, deeds, agreements, transfers, assurances, instruments or documents as may be required to give effect to, or further document or evidence, any of the transactions or events set out in section 3.1, including, without limitation, any resolutions of directors authorizing the issue, transfer or redemption of shares, any share transfer powers evidencing the transfer of shares and any receipt therefore, and any necessary additions to or deletions from share registers.

ARTICLE 4
DELIVERY OF NEW NOTES

4.1                               Surrender of Old Notes: Following the later of the Effective Date and the surrender to the Trustee for cancellation of a certificate which immediately prior to the Effective Time represented outstanding Old Notes that were exchanged under the Arrangement, together with a duly completed and executed Letter of Transmittal and such additional documents and instruments as the Trustee may reasonably require, the Terrace Noteholder of such surrendered certificate will be entitled to receive in exchange therefor, the New Notes which such Terrace Noteholder has the right to receive under the Arrangement for such Old Notes, and any certificate so surrendered will forthwith be cancelled.

4.2                               Issue of New Notes:  Upon surrender to the Trustee for cancellation of a certificate that immediate before the Effective Time represented one or more outstanding Old Notes that were exchanged for New Notes in accordance with section 4.1 hereof together with a duly completed and executed Letter of Transmittal and such additional documents and instruments as the Trustee may reasonably require, the Trustee shall deliver to such holder following the Effective Time, a certificate or certificates representing the New Notes that such holder is entitled to receive in accordance with section 3.1(b).

4.3                               Right to Exchange:  After the Effective Time and until surrendered for cancellation as contemplated by section 4.2, each certificate that immediately prior to the Effective Time representing Old Notes shall be deemed at all times to represent only the right to receive in exchange therefor the New Notes that the holder of such certificate is entitled to receive in accordance with section 3.1(b).  Notwithstanding the foregoing, if, prior to the time of surrender of the certificate representing Old Notes, the New Notes have been redeemed or matured in accordance with their terms, the Old Notes shall then be deemed to represent only the right to receive in exchange therefor an amount, without interest, in cash equal to the aggregate amount of the interest payments, principal payment and other amounts with a payment date after the Effective Time theretofore paid with respect to such New Notes.

4.4                               Lost Certificates:  If any certificate, that immediately prior to the Effective Time represented Old Notes that were exchanged for New Notes in accordance with section 3.1(b), shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the holder claiming such certificate to be lost, stolen or destroyed, the Trustee shall deliver in exchange for such lost, stolen or destroyed certificate, the New Notes that such holder is entitled to receive in accordance with section 3.1(b).  When authorizing such delivery of New Notes that such holder is entitled to receive in exchange for such lost, stolen or destroyed certificate, the holder to whom such New Notes are to be delivered shall, as a condition precedent to the delivery of such New Notes, give a bond satisfactory to the Company and the Trustee in such amount as the Company and the Trustee may direct, or otherwise indemnify the Company and the Trustee in a manner satisfactory to the Company and the Trustee, against any claim that may be made against the Company or the Trustee with respect to the certificate alleged to have been lost, stolen or destroyed and shall otherwise take such actions as may be required by the articles and notice of articles of Terrace.

4.5                               Interest and Principal Payments: No principal payment made after the Effective Time with respect to the New Notes after the Effective Time shall be delivered to the holder of any unsurrendered certificate that, immediately prior to the Effective Time, represented outstanding Old Notes unless and until the holder of such certificate shall have complied with the provisions of sections 4.1 and 4.2.  Subject to applicable law and section 4.6, at the time of such compliance, there shall, in addition to the delivery of the New Notes to which

such holder is thereby entitled, be delivered to such holder, without interest, the amount of the principal payment with a payment date after the Effective Time theretofore paid with respect to such New Notes.  Any and all interest payments made after the Effective Time and delivered to the holder of any unsurrendered certificate that, immediately prior to the Effective Time, represented outstanding Old Notes shall be, and shall be deemed to be, an interest payment with respect to the New Notes and no further or additional amounts in respect of interest payments made on or after the Effective Time and on or before the date of compliance with the provisions of section 4.1 and 4.2 shall be made or delivered to such holder upon delivery of the New Notes to which such holder is entitled.

4.6                               Withholding Rights:  Terrace and the Trustee shall be entitled to deduct and withhold from any New Notes deliverable to any person hereunder and from all interest or other amounts payable to any Terrace Noteholder such amounts as Terrace or the Trustee is required or permitted to deduct and withhold therefrom under any provision of applicable laws in respect of taxes.  To the extent that such amounts are so deducted, withheld and remitted, such amounts shall be treated for all purposes under this Plan of Arrangement as having been paid to the person to whom such amounts would otherwise have been paid.

4.7                               Limitation and Proscription: To the extent that a holder of Old Notes as of immediately preceding the Effective Time shall not have complied with the provisions of sections 4.1 or 4.4 on or before the date that is six (6) years after the Effective Date (the “Final Proscription Date”), then the New Notes that such former holder of Old Notes was entitled to receive shall automatically be cancelled without any payment of principal or interest in respect thereof and the New Notes to which such former holder of Old Notes was entitled, and the Trustee shall cancel any certificates in respect of such New Notes.  The interest of the former holder of Old Notes in such New Notes and the payment of principal and interest thereon to which it was entitled shall be terminated as of the Final Proscription Date.

4.8                               No Liens:  Any exchange or transfer of securities pursuant to this Plan of Arrangement shall be free and clear of any Liens, restrictions, adverse claims or other claims of third parties of any kind.

4.9                               Paramountcy:  From and after the Effective Time: (i) this Plan of Arrangement shall take precedence and priority over any and all Old Notes issued prior to the Effective Time; (ii) the rights and obligations of the registered holders of Old Notes and Terrace in relation thereto, shall be solely as provided for in this Plan of Arrangement; and (iii) all actions, causes of actions, claims or proceedings (actual or contingent and whether or not previously asserted) based on or in any way relating to any Old Notes shall be deemed to have been settled, compromised, released and determined without liability except as set forth herein.

ARTICLE 5
CONDITIONS PRECEDENT

5.1                               Conditions Precedent: The implementation of this Plan of Arrangement shall be conditional upon the fulfillment, satisfaction or waiver by the Company of the following conditions precedent:

(a)                                 this Plan of Arrangement shall have been approved at the Meeting, with or without amendment, in accordance with the Interim Order;

(b)                                 all other consents, orders, regulations and approvals required, necessary or desirable for the completion of the Arrangement, including any required approval of the TSX-V, must have been obtained or received, each in a form acceptable to the Company;

(c)                                  the Final Order and any other necessary order(s) of the Court with respect to the Arrangement shall have been obtained in form and substance satisfactory to Terrace, acting reasonably; and

(d)                                 no action shall have been instituted and be continuing, on the Effective Date, for an injunction to restrain, a declaratory judgment in respect of, or damages on account of, or relating to, this Plan of Arrangement or the Old Notes and no cease trading or similar order with respect to any securities of Terrace shall have become effective or threatened.

ARTICLE 6
AMENDMENTS

6.1                               Amendments Prior to Effective Time: Terrace may amend, modify and/or supplement this Plan of Arrangement at any time and from time to time prior to the Effective Time, provided that each such amendment, modification and/or supplement must be: (i) filed with the Court and, if made following the Meeting, approved by the Court; and (ii) communicated to the Terrace Noteholders, if and as required by the Court.

6.2                               No Notice: Any amendment, modification or supplement to this Plan of Arrangement may be proposed by Terrace at any time prior to or at the Meeting with or without any other prior notice or communication, and, if so proposed and accepted by the Terrace Noteholders voting at the Meeting (other than as may be required under the Interim Order), such amendment, modification or supplement shall become part of this Plan of Arrangement for all purposes.

6.3                               Approval by the Court: Any amendment, modification or supplement to this Plan of Arrangement that is approved by the Court following the Meeting shall be effective only if it is consented to by Terrace.

6.4                               Administrative Amendments: Any amendment, modification or supplement to this Plan of Arrangement may be made following the Effective Time by Terrace, provided that it concerns a matter which, in the reasonable opinion of Terrace, is of an administrative nature required to better give effect to the implementation of this Plan of Arrangement and is not adverse to the financial or economic interests of any Terrace Noteholder.

6.5                               Withdrawal: This Plan of Arrangement may be withdrawn prior to the Effective Time in the sole discretion of the Company.

ARTICLE 7
REFERENCE DATE

7.1                               Reference Date: This plan of arrangement is dated for reference the 11th day of September, 2014.

SCHEDULE “A”

SUMMARY TERMS OF THE NEW NOTES

IN THE SUPREME COURT OF BRITISH COLUMBIA

IN THE MATTER OF SECTIONS 288 AND 291

OF THE BUSINESS CORPORATIONS ACT, S.B.C. 2002, c. 57

AND AMENDMENTS THERETO

AND

IN THE MATTER OF A PROPOSED ARRANGEMENT

BETWEEN TERRACE ENERGY CORP. AND

THE NOTEHOLDERS OF TERRACE ENERGY CORP.

TERRACE ENERGY CORP.

PETITIONER

ORDER MADE AFTER APPLICATION
(FINAL ORDER)

Evan Griffith

Sangra Moller LLP

Barristers and Solicitors

1000 Cathedral Place

925 West Georgia Street

Vancouver, BC V6C 3L2

Facsimile: (604) 669-8803