Court File and Parties

CITATION: Ndex Systems Inc. v. Aquino, 2011 ONSC 6654

COURT FILE NO.: 140/11

DATE: 2011/11/16

SUPERIOR COURT OF JUSTICE – ONTARIO

(DIVISIONAL COURT)

RE: NDEX SYSTEMS INC., Appellant (Plaintiff)

AND:

KENNETH AQUINO also known as KEN AQUINO and MARJORIE J. HULL, Respondents (Defendants)

BEFORE: Justices L. C. Leitch, K. E. Swinton and A. L. Harvison Young

COUNSEL: Kevin Sherkin, for the Appellant

Michael Donsky, for the Respondents

HEARD: at Toronto on November 7, 2011

E N D O R S E M E N T

[1] On March 7, 2011, Madam Justice Hoy granted summary judgment in favour of the respondents (defendants) on the basis that there was no genuine issue requiring a trial of the appellant’s (plaintiff’s) claims.

[2] The only issue on this appeal is whether the motions judge was correct in her conclusion that there is no genuine issue requiring a trial with respect to the appellant’s claim in oppression.

Background Facts

[3] The appellant and Financial Centre Securities Corporation (“FCSC”) entered into a software license agreement on April 4, 2001.

[4] On July 7, 2003, the appellant commenced legal proceedings in Quebec Superior Court (Civil Division) against FCSC and its guarantor, 1036362 Ontario Limited (“103”).

[5] According to the appellant, its “road to obtaining judgment was a long one, paved with numerous actions on the part of [the respondents] to thwart and delay” its efforts.

[6] Ultimately, judgment was granted in favour of the appellant against both FCSC and 103 on June 3, 2008 in the absence of FCSC and 103. In accepting the appellant’s claim for extra-judicial costs, the Quebec Court held at para. 34 that FCSC and 103 were “unreasonable and in bad faith in their conduct of litigation” and as a result, “legal fees that were incurred as a result of the…unreasonable or abusive behaviour” were reimbursed amounting to $1,135.00.

[7] FCSC filed a notice of appeal, which was dismissed. The appellant then commenced an application in Ontario for a judgment recognizing and enforcing its Quebec judgment, which proceeded on an unopposed basis and on May 7, 2009, the appellant was granted judgment against FCSC and 103 in the amount of $146, 521.14 exclusive of interest.

[8] In the present action, the appellant relied on s. 248 of the Business Corporations Act, R.S.O. 1990, c. B.16 (“OBCA”) and asserted that the respondents, who were officers, directors and shareholders of FCSC, conducted themselves in a manner oppressive and unfairly prejudicial to the appellant’s interest as a judgment creditor of FCSC. It sought judgment against the respondents for the unsatisfied judgment it obtained against FCSC.

[9] The motions judge found that the Investment Dealers’ Association of Canada (the “IDA”) informed the respondents that, in 2003, it would not permit FCSC to continue to operate as a securities broker and thereafter, the respondents entered into an agreement with Integral, another securities broker registered with the IDA.

[10] Pursuant to the arrangements between the respondents and Integral, from December 31, 2003 to June 30, 2008 all compensation from their financial advisory services was paid to FCSC. During this period, the respondents continued to make shareholder loans to FCSC. FCSC paid amounts owing to its landlord, legal fees and various operating expenses; paid a consulting fee to one of the respondents; reduced the shareholder loans; made loans to 103; and made payments to another related company.

[11] The motions judge found that between December 31, 2003 and June 30, 2008, amounts paid into FCSC, pursuant to the arrangement between the respondents and Integral and by way of shareholder loans from the respondents, exceeded repayments of the respondents’ shareholder loans.

[12] As of July, 2008, the respondents began working for another securities broker, Raymond James, who would not pay their compensation to FCSC. As a result, FCSC is without revenue and assets, and the appellant has been unable to collect its outstanding judgment. The motions judge found that the timing of the move to Raymond James was “coincidental” and the respondents left Integral for cogent business reasons.

[13] The appellant is the only creditor who did not benefit as a result of revenues which flowed through FCSC during the relevant period.

[14] The motions judge found that the “litigation delay”, as she described it, did not establish oppression pursuant to s. 248 of the OBCA.

[15] She also found (at para. 26),

The failure of the defendants to ensure that FCSC, when making payments to creditors out of the income attributable to the defendants’ personal efforts on behalf of another, un-related company that flowed through FCSC, set aside amounts, on a prorata basis, to satisfy the plaintiffs’ claim, if it succeeded, was not oppressive, or unfairly prejudicial to and did not unfairly disregard the interest of the plaintiff. It had no reasonable expectation that FCSC would be managed and operated in a way that would ensure that it was paid for its debt, if established at trial.

[16] As a result, she found that there was no genuine issue requiring a trial with respect to the appellant’s (plaintiff’s) claim in oppression. Earlier, she had stated that there were no material facts in dispute.

The Oppression Remedy Provision Under the Ontario Business Corporations Act

[17] Section 248(1) and (2) of the OBCA states as follows:

248(1) A complainant and, in the case of an offering corporation the Commission may apply to the court for an order under this section.

(2) Where, upon an application under (1), the court is satisfied that in respect of a corporation or any of its affiliates,

(a) any act or omission of the corporation of any of its affiliates effects or threatens to effect a result;

(b) the business or affairs of the corporation or any of its affiliates are, have been or are threatened to be carried on or conducted in a manner; or,

(c) the powers of the directors of the corporation or any of its affiliates are, have been or are threatened to be exercised in a manner,

that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer of the corporation, the court may make an order to rectify the matters complained of.

Disposition

[18] It is the position of the appellant that the respondents acted oppressively in not setting aside amounts on a pro-rata basis as a contingency fund pending judgment in the satisfaction of the appellant’s claim. The appellant asserts that the motions judge erred in law in concluding otherwise, considering all of the payments made by FCSC after being served with the appellant’s Statement of Claim.

[19] The appellant submits that the motions judge erred in not finding that it was a reasonable expectation of the appellant that FCSC would be managed to ensure that the appellant, as one of its creditors, would be paid and that it is not unreasonable that the appellant expected that the respondents would not make substantial payments to themselves, related companies and pay all other creditors, except for its claim.

[20] With respect to the submission of the respondents that they put money into FCSC, rather than stripping assets from it, the appellant takes issue with the fact that significant amounts of money were removed by the respondents to their benefit after they paid money into FCSC. But for the actions of the respondents, such monies would have been otherwise available to satisfy the appellant’s judgment on a pro-rata basis.

Applicable Case Law

[21] In Downtown Eatery (1993) Ltd. v. Ontario, [2001] O.J. No. 1879 (C. A.) the Court noted at para. 56 that the “oppressive” conduct that causes harm to a complainant need not be undertaken with the intention of harming the complainant. Provided that it is established that a complainant has a reasonable expectation that a company’s affairs will be conducted with a view to protecting his interest, the conduct complained of need not be undertaken with the intention of harming the plaintiff. If the effect of the conduct results in harm to the complainant, recovery under s. 248(2) may follow.

[22] We are satisfied that the motion judges’ conclusions were correct, and that there is no genuine issue requiring a trial. These circumstances are quite distinct from those before the court in Downtown Eatery, where at para. 62, the Court of Appeal found that it was a “reasonable expectation” of the judgment creditor that the directors and officers in “terminating the operations” of the debtor corporation and “leaving it without assets to respond to a possible judgment, should have retained a reserve to meet the very contingency that resulted … By diverting the accumulated profits of [the debtor corporation] to other companies that they owned, they were able to insulate these funds from being available to satisfy” the judgment creditor. In that case, the alleged oppressors were taking funds out of an otherwise profitable company.

[23] The motions judge was not in error in analogizing the circumstances of this case to those before the court in Stabile v. Milani, [2004] O.J. No. 2804 (C.A.), in which the Court found that a creditor had the expectations of “any remote potential judgment creditor” that the “affairs of the potential debtor corporation would be conducted honestly and in good faith, based on the reasonable business judgment of its directing minds, and in a manner that did not unfairly prejudice or affect his interests” (at para. 46).

[24] It was open to the motions judge to conclude that the arrangements made with Integral were of no detriment to the appellant and find, as it was open for her to do so, that the amount paid to the shareholders in repayment of loans was less than the compensation paid by Integral, noting that but for such an arrangement, FCSC would have had no revenues. This was not a case where the respondents were stripping assets from a profitable company.

[25] It was also open for the motions judge to find that what she described as “litigation delay” did not establish oppression pursuant to s.248.

[26] Accordingly, the appeal is dismissed.

[27] The respondent should receive costs of the appeal. Counsel indicated that they would like to make further submissions on quantum after the disposition was made. If the parties cannot agree on costs, they may make brief written submissions within 30 days of the release of this decision.

Justice L. C. Leitch

Justice K. E. Swinton

Justice A. L. Harvison Young

Released: November 10, 2011