Court File and Parties

COURT FILE NO.: CV-18-594543 DATE: 20190611 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: ZEIFMANS LLP AND: MITEC TECHNOLOGIES INC., ABE SCHWARTZ, JEFFREY A. MANDEL and SETH RUDIN

BEFORE: Mr. Justice Chalmers

COUNSEL: M. Adilman, for the Applicant D. Carson for the Respondents

HEARD: April 1, 2019

Endorsement

Overview

[1] Zeifmans LLP (“Zeifmans”), a judgment creditor of Mitec Technologies Inc. (“Mitec”) brings this Application pursuant to the Business Corporations Act, R.S.O. 1990, c. B.16 (“OBCA”) for the following orders:

Oppression

(a) An order pursuant to s. 248 of the OBCA declaring that the Respondents carried on the business of Mitec or conducted themselves in a manner that is oppressive and unfairly prejudicial to, or unfairly disregards the interests of Zeifmans, and an order that the Respondents compensate Zeifmans for the amounts due under the Judgment dated June 20, 2017 in the amount of $53,336 inclusive of interest, plus $8,000 in costs and annual interest in the amount of 18 percent.

Derivative Action

(b) An order pursuant to s. 246 of the OBCA granting leave to Zeifmans to commence and prosecute a derivative action in the name of and on behalf of Mitec against the individual Respondents, Abe Schwartz, (“Schwartz”), Jeffrey A. Mandel (“Mandel”) and Seth Rudin (“Rudin”).

[2] Zeifmans provided accounting services to Mitec, and rendered its account on May 6, 2016, in the amount of $40,000. The account was not paid. Zeifmans commenced an action for payment of the invoice on November 1, 2016. The action ultimately resulted in a Consent Judgment on June 20, 2017. The judgment orders Mitec to pay the following accounts:

(a) Claim, inclusive of pre-judgment interest in the amount of $53,336; (b) Costs in the amount of $8,000; and (c) Annual interest in the amount of 18 percent.

The Consent Judgment remains unpaid.

[3] Zeifmans takes the position that as a creditor of Mitec, its reasonable expectation was that its account would be paid before there was any payment to shareholders. The account was not paid when Mitec proceeded with a Share Consolidation plan, which resulted in a payment to shareholders on October 4, 2016. Zeifmans argues that this action was oppressive and unfairly disregarded its interests.

[4] The Respondents take the position that the Share Consolidation and subsequent share payment did not violate Zeifmans’ reasonable expectations as a creditor of Mitec, and in any event was a reasonable business strategy. The Respondents also take the position that there was no self-dealing by the directors of Mitec and therefore there is no basis for the imposition of personal liability on the individual directors, Schwartz, Mandel and Rudin (collectively the “Directors”).

Background Facts

[5] Mitec is a corporation whose shares traded on the Venture Exchange of the Toronto Stock Exchange (“TSE”). Schwartz was the Chairman of Mitec and the largest individual shareholder with 40 percent of the shares. The other Directors, Mandel and Rudin were also shareholders in the company. At the relevant time, Mandel was the President and Chief Executive Officer of Mitec.

[6] Zeifmans is an accounting firm. It had provided accounting services to Mitec for several years. The accounting services included the preparation of audited financial statements.

[7] In 2013, Mitec attempted a “restart” of the business, which was in part funded by Schwartz. The restart was unsuccessful. In 2015, Schwartz negotiated a settlement of the debt owed to him by Mitec, which was in the amount of $2,000,000 in secured promissory notes and $357,000 in unsecured debt. Schwartz received a transfer of shares that were held by Mitec in Covalon Technologies Inc. (“Covalon”). The share transfer was approved by the TSX Venture Exchange. As part of the agreement, Schwartz forgave the remaining $357,000 owed to him by Mitec.

[8] In a press release dated January 6, 2016, Mitec indicated that it had avoided receivership by negotiating the debt re-payment arrangement with Schwartz. According to Mandel, if Schwartz had not agreed to forgive the remaining $357,000 owed to him, Mitec would have been unable to meet its ongoing obligations as they came due.

[9] On March 9, 2016, the Directors approved a plan to privatize Mitec so it would not be required to pay the legal and regulatory costs of remaining a public company, which were approximately $150,000 a year. Mitec’s legal advisors recommended a share consolidation (the “Share Consolidation”) as the best method to privatize Mitec.

[10] At that time Mitec had 12,595,015 issued and outstanding common shares, of which 5,200,000 were held by Schwartz. The Share Consolidation would result in Mitec exchanging one common share for the 5,200,000 held by Schwartz. Following the share transfer, the previous holders of Mitec’s common shares (the “Fractional Shareholders”) would be eliminated. Any value in Mitec after settlement of its financial obligations would be distributed to the Fractional Shareholders. It was anticipated that the payment to the Fractional Shareholders would be $0.02 per pre-consolidated share.

[11] Zeifmans met with Mitec’s senior management on April 5, 2016 to discuss the Share Consolidation plan. At that time, Zeifmans was aware of the Management Discussion and Analysis (MD&A) dated March 31, 2016 in which Mitec indicated it was not carrying on active operations and had accepted the liquidated basis of accounting.

[12] Zeifmans sent an engagement letter later on April 5, 2016. In the letter, Zeifmans confirms that it was retained to carry out the following:

a) Audit Mitec’s financial statements as at December 31, 2014 and 2015; b) Mitec’s statement of operations, retained earnings and cash flows for the year then ended; and, c) Mitec’s summary of its significant accounting policies and other explanatory information.

[13] The engagement letter did not include an estimate for fees. The first estimate of fees is found in the e-mail sent on April 18, 2016, which attached the Audit Planning Report. Zeifmans provided an estimate of $40,000.00. This was higher than in the past. Zeifmans stated that the higher cost was a function of the amount of work that has to go into the file to support the liquidation assumptions.

[14] Later on April 18, 2016, Mandel sent an e-mail to Kevin Quadri (“Quadri”) of Zeifmans suggesting that they speak as soon as possible. They spoke the next day at which time Mandel expressed his concerns with respect to the fees estimate. On April 19, 2016, Quadri sent an e-mail to Mandel stating that Zeifmans would be unable to complete the work within the expectation of $15,000-$20,000. Quadri forwarded an internal Zeifmans e-mail (also dated April 19, 2016) which provided that Mitec had a number of technically challenging areas. It was noted that there had been write downs to Mitec in the past, but because Mitec was planning on liquidating there was no opportunity for future work. In the internal e-mail it was suggested that Zeifmans propose to Mitec that it find another firm to prepare the audited financial statements.

[15] On April 19 and 20, 2016, Mandel spoke with Quadri to discuss the fee estimate. He objected to the fee and stated that it was unrealistic to expect Mitec to find another firm to complete the audit engagement, which was 10 days from the filing deadline of April 29, 2016.

[16] The Board Meeting to discuss the Share Consolidation took place on Friday, April 29, 2016 at 6 p.m. Zeifmans was expected to provide the final audited statements in time for the meeting. At 6:02 p.m., Quadri sent the draft financial statements and an audit committee report to the Board of Directors. Brian McGee (“McGee”) and Quadri of Zeifmans attended the meeting. They advised the Board that Zeifmans would not be able to provide final sign off on the audited statements that day.

[17] There was some acrimony between Zeifmans and Mitec at the Board meeting. Mitec was very concerned that the statements were not available. It had been made clear to Zeifmans that the statements had to be filed with the TSX by 11:59 p.m. that evening. Mitec was concerned that there may be financial penalties or a cease trade order because the statements were not filed on time.

[18] By e-mail sent on April 29, 2016 at 7:55 p.m., Mandel suggested to Quadri that Zeifmans continue to work on the audit so the statements could be filed as soon as the filing system opened on the morning of May 2, 2016. Quadri responded by e-mail sent April 29, 2016 at 8:08 p.m. and confirmed that Zeifmans would continue to work on the file.

[19] On Saturday, April 30, 2016 at 5:22 pm, McGee sent an e-mail to Mandel. McGee expressed concern that at the Board Meeting on April 29, 2016, there was an indication that the Directors of Mitec might be resigning from the company. McGee was concerned that if that happened Zeifmans would not be paid for its services. McGee asked Mandel to provide his personal guarantee that he would continue to act as a Director of Mitec and would direct the company to pay Zeifmans’ account in full and without any offset for liability that might arise from the late filing of the statements. McGee stated that Zeifmans was not prepared to complete the financial statements without this guarantee.

[20] McGee followed up on the e-mail in a telephone call later that day with Mandel. He advised that Zeifmans’ recorded time on the audit file exceeded $65,000, however Zeifmans was prepared to finish the assignment for the amount of the estimate, $40,000.

[21] Mandel in his affidavit sworn on August 9, 2018 states that the Mitec Board concluded that it had no choice but to agree with the terms set out by McGee, given the importance of filing the financial statements on time. He responded to McGee by e-mail sent Saturday, April 30, 2016 at 7:59 pm. Mandel stated that, while both sides disagreed on the details, Mitec was “prepared to commit to pay $40,000 for the audit and commits not to sue Zeifmans if Zeifmans completes the audit in time for Mitec to file its audited statements and MD&A before the open of markets on Monday May 2, 2016.”

[22] On Sunday, May 1, 2016 at 12:31 pm, McGee responded to Mandel. He advised that Zeifmans accepted the proposal except for the commitment with respect to the MD&A. He advised that Zeifmans does not prepare the MD&A and therefore could not commit to having the MD&A filed by May 2, 2016. He asked for Mandel’s confirmation of the change in the proposal. There was no response from Mandel to this e-mail.

[23] The audited statements were completed and delivered to Mitec and filed on May 2, 2016. On May 6, 2016, Zeifmans rendered its account in the amount of $40,000.00 plus HST for a total of, $45,200.00. The account provided that for balances over 30 days past due, interest would be charged at the rate of 18 percent per annum.

[24] The meeting of the Mitec Shareholders took place on June 6, 2016. The Proxy Management Circular for the shareholders meeting on June 6, 2016 provided that the payment to the shareholders would be made after payment of its legal and accounting costs. At the meeting, the shareholders approved the Share Consolidation plan.

[25] On June 20, 2016, Quadri sent an e-mail to Mandel and asked when payment of the account could be expected. Mandel responded on June 21, 2016. He stated that he had “an idea about potentially dealing with your invoice”, and stated he would get back to Zeifmans by the end of the week. In the e-mail, Mandel did not take the position that he agreed that Mitec would pay the account under duress.

[26] Mandel did not get back to Quadri until July 19, 2016. At that time Mandel sent an e-mail in which he stated that it was difficult to generate cash. Again, there is no reference to duress in the e-mail. Mandel offered to ask Schwartz if he would consider making a direct payment to Mitec to settle the account. He stated that he could not ask Schwartz to pay the whole amount but that if Zeifmans reduced the amount, he would propose that Schwartz personally write a cheque. There was no response by Quadri to this e-mail.

[27] The Directors of Mitec met on September 9, 2016 to take the steps necessary to effect the Share Consolidation. On October 4, 2016, Mitec made the payment to the fractional shareholders. The total amount of the payment was $147,899.58. Although entitled to a payment as a fractional shareholder, Schwartz abstained from receiving any payment.

[28] On September 28, 2016, legal counsel retained by Zeifmans sent a demand letter seeking payment of the invoice by October 3, 2016, failing which Zeifmans would proceed with a legal action. Mandel responded with a letter to counsel dated October 3, 2016, which was marked “without prejudice”. Mandel outlined Mitec’s concerns regarding the circumstances surrounding the delivery of draft financial statements on April 29, 2016. He stated that Mitec was prepared to settle the matter amicably. There was no response to Mandel’s letter.

[29] On November 1, 2016, Zeifmans commenced an action against Mitec for payment of its invoice. Mitec delivered its Statement of Defence on December 6, 2016. In the Defence, Mitec takes the position that Zeifmans was in breach of its fiduciary duty to Mitec in that it failed to complete the audit work in a timely manner. Mitec also alleges that Zeifmans took advantage of Mitec’s vulnerable position with respect to the regulatory deadline to file financial statements to demand a payment in excess of its normal fees. In the Defence, Mitec does not specifically plead that Mandel agreed to pay the Zeifmans’ account under duress.

[30] On June 20, 2017, Mitec consented to judgment in the Zeifmans’ action on the basis that it did not have sufficient funds to continue to defend the action.

Analysis

[31] Zeifmans is seeking an order pursuant to the oppression remedy set out in s. 248(2) of the OBCA and for an order for leave to commence a derivative action in the name of and on behalf of Mitec, pursuant to s. 246 of the OBCA.

1. Oppression Remedy

[32] Section 248 of the OBCA provides that a “complainant” may apply to court for an order if any act of the corporation or the directors, is “oppressive”, “unfairly prejudicial to”, or “unfairly disregards the interests” of a stakeholder.

[33] The oppression remedy is an equitable remedy to ensure fairness and it gives the court broad jurisdiction to enforce fair conduct on the part of a corporation: BCE Inc. v. 1976 Debentureholders, 2008 SCC 69, [2008] 3 S.C.R. 560, at para. 58.

[34] In assessing a claim for oppression, there are two requirements:

• To identify the expectations that the complainant’s claims have been violated by the conduct in issue and establish that those expectations were reasonably held; and,
• The reasonable expectations were violated by corporate conduct that was “oppressive”, “unfairly prejudicial to”, or “unfairly disregards the interests” of the complainant: Wilson v. Alharayeri, 2017 SCC 39, [2017] 1 S.C.R. 1037, at para. 24.

Is Zeifmans a Complainant for the Purposes of s. 248 of the OBCA?

[35] Section 245 of the OBCA defines a “complainant” as:

(a) A registered holder or beneficial owner, and a former registered holder or beneficial owner, of a security of a corporation or any of its affiliates, (b) A director or an officer or a former director or officer of a corporation or of any of its affiliates, (c) Any other person who, in the discretion of the court, is a proper person to make an application under this Part.

[36] Zeifmans takes the position that as a creditor of Mitec, the court should exercise its discretion pursuant to s. 245(c) of the OBCA and grant Zeifmans standing as a complainant for the purposes of the oppression remedy.

[37] It is “well established” in the case law that a creditor has status to bring an application as a complainant: SCI Systems Inc. v. Gornitzki Thompson & Little Co. (1997), 147 D.L.R. (4th) 300 (Ont. C.J. (Gen. Div.)), at para. 28, affirmed and award varied (1998), 110 O.A.C. 160 (Div. Ct.).

[38] In determining whether to exercise its discretion to give a creditor status as a complainant, the court may consider a number of factors, including whether the Plaintiff was a creditor at the time the allegedly oppressive acts took place, whether the creditor’s interest in the affairs of the corporation is too remote, whether the creditor is proceeding in good faith, whether the creditor is in a position analogous to that of a minority shareholder or whether the creditor has a particular interest in the manner in which the affairs of the company are managed: Royal Trust Corp. of Canada v. Hordo (1993), 10 B.L.R. (2d) 86 (Ont. C.J. (Gen. Div.)), at para. 14.

[39] In this case, Zeifmans was a creditor of Mitec once it performed the audit work and rendered its invoice on May 6, 2016. Therefore, Zeifmans was a creditor when the Share Consolidation plan was approved by the shareholders on June 6, 2016 and when the payment to the shareholders was made on October 4, 2016.

[40] Zeifmans’ interest in Mitec was not too remote. Zeifmans was the accountant for the company and had been retained to audit the financial records. The work was completed and the invoice sent to Mitec. Mandel confirmed in the e-mail sent April 30, 2016 that the amount of the invoice would be paid. The debt at that point was not uncertain or speculative.

[41] Zeifmans performed the audit work for Mitec on the understanding that it would be compensated for its work. Zeifmans relied on both the public statements made by Mitec that the payment to shareholders would not be made until after payment of legal and accounting fees, as well as the statement from Mandel on April 30, 2016 that the invoice would be paid in full. I am satisfied that Zeifmans was proceeding in good faith.

[42] Zeifmans had an interest in the manner in which the affairs of the corporation were managed. Zeifmans had provided accounting services for many years and was involved in the share consolidation plan. Its work in auditing the financial statements was required before the plan could proceed. After it had performed its work and rendered its invoice, it had an interest that the company not be managed in such a way that the debt could not be paid.

[43] In all of the circumstances of this case, I exercise the broad discretion available to me and grant standing to Zeifmans as a complainant.

Does the Evidence Support the Reasonable Expectation the Claimant Asserts?

[44] To succeed in a claim pursuant to the oppression remedy, Zeifmans must identify its expectations and establish that those expectations were reasonably held. The reasonable expectations will be determined objectively having regard to the specific facts of the case: The Investment Administration Solutions Inc. v. Pro-Financial Asset Management Inc., 2018 ONSC 1220, 80 B.L.R. (5th) 144, at paras. 86-87.

[45] There are a number of relevant factors that may be considered in determining whether a reasonable expectation exists, including general commercial practice, the nature of the corporation, the relationship between the parties, past practice, steps the claimant could have taken to protect itself, representations and agreements and the fair resolution of conflicting interests between corporate stakeholders: BCE, at para. 72.

[46] Zeifmans takes the position that it had a reasonable expectation was that it would be treated fairly and would be paid for its work before any payment was made to shareholders. Zeifmans refers to certain documentation produced by Mitec, which provide that creditors would be paid before any payments to shareholders would be made. The MD&A report for the quarter ending March 31, 2016 provides that after the Share Consolidation there will be a payment to the fractional shareholders, “net of the corporation’s financial obligations”. The Proxy Management Circular for the shareholders meeting on June 6, 2016 provides that the payment to the shareholders would be made after payment of its legal and accounting costs.

[47] Zeifmans also argues that after the e-mail exchange on April 30, 2016, it expected that the account would be paid in full. By e-mail sent April 30, 2016 Mandel stated that Mitec is “prepared to commit to pay $40,000 for the audit”. Zeifmans completed its work in reliance of this statement and delivered the audited statement in time for filing when the markets opened on May 2, 2016. Although Mitec later took the position that it agreed to payment of the account, under duress, there was no reference to duress in the e-mails exchanged by Mandel and Quadri over the summer of 2016.

[48] The Respondents argue that Zeifmans’ expectation that it would be paid in full for its work was not reasonably held. Before starting the assignment, Zeifmans was aware Mitec was having financial difficulties. Zeifmans did not insist on any protective terms in the engagement letter, including the payment of an up-front monetary retainer or personal guarantees. The Respondents argue that the oppression remedy is to not to rewrite the contract between the parties, or to relieve a party from the consequences of an improvident contract: J.S.M. Corp. (Ontario) Ltd. v. Brick Furniture Warehouse Ltd., 2008 ONCA 183, 234 O.A.C. 59, at paras. 60, 62.

[49] Although it could be argued that Zeifmans ought to have considered including some protective terms at the time of the engagement letter, it asked for and received confirmation of payment of $40,000 before completing the assignment. Once the e-mail from Mandel was received on April 30, 2016, it was reasonable for Zeifmans to expect that Mitec would follow through on this agreement to pay the invoice in full.

[50] Once there was an agreement to pay the amount of the invoice, it was reasonable for Zeifmans to expect that no payment would be made to the shareholders without first paying its invoice. Not only is this consistent with the statement made by Mandel in the e-mail sent on April 30, 2016, it is also consistent with the Proxy Management Circular for the shareholders meeting on June 6, 2016, which provides that the payment to the shareholders would be made after payment of the accounting costs.

[51] In all of the circumstances, I find that it was the reasonable expectation of Zeifmans that it would receive payment of its invoice of $40,000 and that the invoice would be paid before there was a payment to the shareholders.

Does the Evidence Establish that the Reasonable Expectations were Violated by Conduct which was Oppressive, Unfairly Prejudicial or Unfairly Disregarded the Interests of Zeifmans?

[52] To succeed in an oppression remedy claim, there must be more than mere prejudice or an adverse effect on the complainant. Oppressive conduct is conduct that is “burdensome, harsh and wrongful”. Conduct will be considered to be unfair “if the conduct prejudices rights or disregards interests unfairly”: The Investment Administration Solutions, at para. 90.

[53] It is the position of Zeifmans that Mitec, in making the payment to the shareholders on October 4, 2016, when its invoice remained outstanding, was conduct that was oppressive and unfair. The payment to the shareholders occurred after Mandel sent the e-mail on April 30, 2016 in which he agreed that Mitec would pay the invoice in the amount of $40,000. Zeifmans argues that the payment to the shareholders without first paying Zeifmans violated its reasonable expectations and was unfairly prejudicial and unfairly disregarded its interests.

[54] At the time of the payment to the Shareholders, Mitec had sufficient funds to pay Zeifmans’ account. On October 4, 2016, when the Shareholder payment was made, there was $194,594.94 in the bank account. On October 31, 2016, one day before Zeifmans commenced its claim against Mitec there was $136,609.09 in the account. The funds in the bank account were gradually reduced and within three months of the shareholder payment there were insufficient funds in the Mitec account to pay the amount owing to Zeifmans.

[55] The Respondents argue that Zeifmans could have received, at least part payment, if it had agreed to negotiate a lower amount instead of bringing an action for payment of the account. I reject this argument. There was no obligation on Zeifmans to negotiate a lower payment. Mandel had committed Mitec to payment of the entire amount of the invoice. Also based on the amounts in the Mitec bank account, Mitec had sufficient funds to pay the entire outstanding amount.

[56] There does not appear to be any valid business reason for making the payment to the shareholders before satisfying Zeifmans’ account. The failure to pay the account was not because of a dispute as to the amount to be paid, or Mitec having insufficient funds. It appears that at the time of the shareholder payment, Mitec had no intention of paying the Zeifmans account notwithstanding Mandel’s previous agreement to do so.

[57] In all of the circumstances of this case, I find that that the actions of Mitec, in making the payment to the shareholders before the Zeifmans’ account was paid was unfairly prejudicial and unfairly disregarded the interests of Zeifmans. The payment to the shareholders violated Zeifmans’ reasonably held expectation that it would receive payment of its invoice before any payment to the shareholders was made.

Personal Liability of the Directors of Mitec

[58] Pursuant to s. 248(3) of the OBCA, the court has broad discretion to make any order it thinks fit.

[59] Before personal liability will be imposed on directors or officers, two requirements must be satisfied:

• The directors or officers are implicated in the oppressive conduct;
• The imposition of personal liability must be a “fit” remedy in all the circumstances: Wilson v. Alharayeri, at para. 31.

Are the Directors Implicated in the Oppressive Conduct?

[60] The Directors, Schwartz, Mandel and Rudin are implicated in the oppressive conduct. Mandel, in his e-mail sent April 30, 2016, confirmed that Mitec would pay to Zeifmans $40,000 for the audit. The Directors met on September 9, 2016, to take the steps necessary to effect the Share Consolidation which included the payment to the shareholders. The Directors decided to proceed with the shareholder payment without first paying the Zeifmans’ invoice. The decision made by the Directors was contrary to Mandel’s commitment that Mitec would pay Zeifmans $40,000 for the audit. In addition, the Directors’ decision was contrary to the Proxy Management Circular for the Shareholders meeting held on June 6, 2016, which provided that the payment to the shareholders would be made after payment of all legal and accounting costs.

Is the Imposition of Personal Liability a “Fit” Remedy?

[61] In determining whether personal liability on the directors is a fit remedy, it is appropriate to consider whether the directors acted in bad faith and if the directors received a personal benefit. Although those factors are relevant, neither is a necessary condition in determining whether personal liability is an appropriate remedy: Wilson v. Alharayeri, at para. 50.

Did the Directors Obtain a Personal Benefit?

[60] Zeifmans takes the position that the individual Directors benefited, directly or indirectly, from the Share Consolidation plan and the shareholder payments.

[61] At the time of the shareholder payment on October 4, 2016, the Directors Schwartz, Mandel and Rudin were shareholders. Mandel held 52,500 shares and Rudin held 525 shares. Pursuant to the shareholder payment, each shareholder received $0.02 per share. Although Mandel and Rudin received a payment for their shares, the payment was minimal. Schwartz did not participate in the shareholder payment.

[62] With respect to the personal benefit received by Schwartz, Zeifmans relies on the following:

• At the time of the Share Consolidation/Shareholder Payout, Mitec was involved in litigation in Quebec (the “Quebec Action”). As a result of the Share Consolidation, the benefit of the Quebec Action was transferred to Schwartz.
• Mitec paid the bills of the lawyers acting on the Quebec Action.
• Prior to the Share Consolidation, Schwartz received 2,500,000 shares and warrants in Covalon.
• Schwartz could utilize Mitec’s income tax loss carry forwards.

[63] There is no evidence of any benefit related to the transfer of the Quebec Action to Schwartz. In the Quebec Action, Mitec was being sued for approximately $1,000,000 and was advancing a counterclaim in the amount of $317,300. The matter proceeded to trial and “went badly” for Mitec. No amount has been recovered by either party. The payment to the lawyers acting on the Quebec Action was not a benefit to the Directors.

[64] Prior to the Share Consolidation, Schwartz received a transfer of Covalon shares that were held by Mitec. At the time of the transfer the value of the Covalon shares were equivalent to the value of the Mitec shares. The share transfer was approved by the TSX Venture Exchange. Even if the transfer of the Covalon shares was a personal benefit to Schwartz, Zeifmans was not a creditor at the time of the transfer.

[65] There is insufficient evidence to allow me to conclude that the tax loss carry forwards are a benefit that could be used by Schwartz. Mandel’s evidence was that he was advised by Zeifmans that it was, “very unlikely that the losses could be carried forward”: Mandel Affidavit, sworn September 24, 2018, at para. 10. McGee’s evidence was that that there will “always be restrictions” with respect to when the tax loss carry forwards can be used. He did not have any evidence that Schwartz had actually used any of the loss carry forwards: McGee Transcript, Q. 89-90. I note that no expert evidence was tendered in support of the position that the income tax loss carry forwards were a benefit to Schwartz.

Did the Directors Act in Bad Faith?

[66] Mandel in his e-mail sent on April 30, 2016 confirmed that Mitec would pay Zeifmans’ account in the amount of $40,000 if the audited financial statements were completed before the open of markets on May 2, 2016. Although Zeifmans delivered the audited financial statements on time, Mitec did not pay the account. The Directors met on September 9, 2016 to take the steps necessary to effect the Share Consolidation and payment to the shareholders. The Directors did not pay the Zeifmans’ account before proceeding with the payment to the shareholders.

[67] There does not appear to be any valid reason for not paying the account before making the shareholder payment on October 4, 2016. Once Mandel confirmed payment of the account in the amount of $40,000 there was no dispute as to the amount owed for the audit. Also, there were sufficient funds in the Mitec bank account before and after the payment to the shareholders was made. The Directors failed to comply with Mandel’s agreement that Mitec would pay the invoice in the amount of $40,000. The Directors also failed to follow the Proxy Management Circular for the shareholders meeting on June 6, 2016, which provides that the payment to the shareholders would be made after paying its legal and accounting costs.

[68] Mitec argues that there was a valid dispute as to the invoice and that it was justified in not paying the account and proceeding with litigation. That position is not supported by the evidence. Mandel agreed to pay the invoice in the amount of $40,000. The only condition to payment was that Zeifmans would complete the work so the statements could be filed when the markets opened on May 2, 2016. Zeifmans complied with that condition. In e-mails exchanged over the summer of 2016, Mandel did not take the position that he agreed to this arrangement only under duress.

[69] Mitec required the audited financial statements to allow it to pursue its share consolidation and shareholder payment plan. Mitec did not pay any amount to Zeifmans for this work. Even after Mandel agreed that Mitec would pay the invoice in the amount of $40,000, Mitec has not paid for the accounting services which were necessary to allow for the payment to the shareholders.

[70] I find that in all of the circumstances, the failure to pay Zeifmans for services rendered, especially in light of the agreement by Mandel to do so, amounts to bad faith.

Summary – Personal Liability of Directors

[71] Although personal benefit and bad faith are factors in determining whether personal liability is an appropriate remedy, the absence of one of these elements does not foreclose the imposition of personal liability if that is the “fit” remedy in all of the circumstances: Wilson v. Alharayeri, at para. 50.

[72] The oppression remedy exists to rectify the harm to a complainant. Oppressive conduct that does not yield a personal benefit may trigger personal liability on a director if the directors act in bad faith: Wilson v. Alharayeri, at para. 45.

[73] I find that the Directors acted in bad faith. In all of the circumstances, I find that the “fit” remedy in this case is to impose personal liability on the Directors.

[74] The imposition of personal liability is for the payment of the amount of the Consent Judgment. This order goes no further than necessary to rectify the oppression and vindicate the reasonable expectations of Zeifmans: Wilson v. Alharayeri, at paras. 52-54.

2. Derivative Action

[75] A derivative action is brought in the name of and on behalf of the corporation. In the derivative action, the cause of action is for a wrong done to the corporation or for losses exclusively suffered by the corporation: The Investment Administration Solutions, at paras. 82-83.

[76] The granting of leave to commence a derivative action is an extraordinary remedy: Chandler v. Sun Life Financial Inc. (2006), 14 B.L.R. (4th) 171 (Ont. S.C.), at para. 20. To obtain leave, the complainant must meet the high onus of proving the following:

• The directors will not bring an action
• The complainant is acting in good faith
• It is in the interests of the corporation that the action be brought: OBCA, s. 246(2)

Acting in Good Faith

[77] Zeifmans must establish that the application for leave is brought in good faith. This is an objectively reasonable component that overlaps with the requirement that the action be in the best interests of the corporation: Jennings v. Bernstein (2000), 11 B.L.R. (3d) 259 (Ont. S.C.), at para. 41.

[78] In this case, Zeifmans wishes to proceed with the derivative action in an attempt to have Mitec pay its invoice. There is no suggestion in the material that the derivative action would benefit Mitec. A derivative action that is motivated less by potential return to the corporation and more by the prospect of a tactical advantage against the corporation would not meet the objectively reasonable component that leave is being sought in good faith: Jennings v. Bernstein, at para. 44.

Best Interests of the Corporation

[79] In determining whether a derivative action is in the best interests of the corporation, the following factors are relevant:

• Whether the corporation has limited financial resources;
• Whether the allegations are supported by specific documentary or factual evidence and whether an investigation into the allegations would be time consuming and expensive for the corporation;
• Whether the applicant’s negligible interest in the corporation is such that he has no incentive to minimize litigation costs;
• Whether the litigation would divert considerable time of management and considerable resources away from the appropriate focus;
• Whether there is any support from the other stakeholders of the derivative action: Melnyk v. Acerus Pharmaceuticals Corporation, 2018 ONSC 1353, 80 B.L.R. (5th) 139 (Div. Ct), at para. 10.

[80] There is no evidence that the derivative action would be in the best interests of the corporation. In fact the evidence is to the contrary. Mitec has limited financial resources and cannot fund the litigation. There are no other stakeholders who support a derivative action.

[81] I therefore do not grant leave to Zeifmans to commence a derivative action.

Conclusions

[82] I conclude as follows:

Oppression Remedy

• Zeifmans is a creditor, and asks this court to exercise its discretion to give it “complainant” status. Zeifmans rendered its account on May 6, 2016 and was a creditor at the time the allegedly oppressive acts took place. Mandel stated in his e-mail sent April 30, 2016 that the account would be paid by Mitec in full. At that point the debt was not uncertain or speculative, and Zeifmans’ interest in Mitec’s financial affairs was not too remote. I exercise my discretion to grant standing to Zeifmans as a complainant.
• Zeifmans’ expectation was that it would be paid for its work before there was a payment to the shareholders. This expectation was reasonably held and was based on the public statements made by Mitec that the payment to the shareholders would be made after the payment of legal and accounting fees. Also it was reasonable for Zeifmans to expect it would receive payment after receiving the e-mail from Mandel on April 30, 2016, in which he stated that Mitec would pay the account in full.
• The payment to the shareholders before the Zeifmans account was paid was unfairly prejudicial to, or unfairly disregarded the interests of Zeifmans and violated its reasonable expectations. By e-mail sent April 30, 2016, Mandel agreed that Mitec would pay the Zeifmans’ account in the amount of $40,000. At the time of the shareholder payment there were sufficient funds in the Mitec account to pay the Zeifmans’ invoice. There was no valid business reason for not paying the Zeifmans’ account before making the shareholder payment, when there was a prior agreement to do so and Mitec had sufficient funds.
• The court has broad discretion to make any order it deems fit. A “fit” remedy may include imposing personal liability on the Directors. In determining whether personal liability is a fit remedy the court will consider whether the Directors acted in bad faith and whether they received a personal benefit. I find that the Directors acted in bad faith in not paying the Zeifmans’ account before making the payment to the shareholders, after there had been a specific agreement to do so. Although the personal benefit to the Directors was nominal, I exercise my discretion and order that the Directors Schwartz, Mandel and Rudin are personally liable to pay to Zeifmans the amount of the Consent Judgment.

Derivative Action

• Granting leave to commence a derivative action is an extraordinary remedy and the complainant must meet a high onus of proving that the Directors will not bring the action, that the complainant is acting in good faith and that it is in the interests of the corporation that the action be brought.
• There is no evidence that the derivative action is in the best interests of the corporation and I do not grant leave to commence a derivative action in the name of Mitec.

Disposition

[83] I grant the Application and order the Respondents to pay the amounts due pursuant to the Consent Judgment, dated June 20, 2017.

[84] The Applicant is entitled to its costs of the Application. The parties each submitted Cost Outlines at the conclusion of the argument. The Respondents claim partial indemnity costs in the amount of $58,865.88, inclusive of counsel fees, HST and disbursements. The Applicant claims partial indemnity costs in the amount of $41,267.29, inclusive of counsel fees, HST and disbursements.

[85] The costs to which the Applicants are entitled, must be fair and reasonable and within the expectation of the parties: Boucher v. Public Accountants Council (Ontario) (2004), 71 O.R. (3d) 291 (C.A.).

[86] The Respondents’ Cost Outline is in the amount of $58,865.88 for partial indemnity costs. This is the amount the Respondents would have been seeking if successful on the Application. Therefore this amount must have been within their expectation if unsuccessful on the Application.

[87] I have also considered the principle of proportionality. The amount of the judgment was $53,336, plus costs of $8,000, plus interest. The amount spent in proceeding with this Application is out of proportion to the amounts in issue. Having said that, the issues were complex, and involved a consideration of the oppression remedy and the derivative action. The Joint Application Record consisted of three volumes, and each party filed a Compendium, Factum and Books of Authorities. The motion was argued over a full day.

[88] In all of the circumstances, I award costs to the Applicant fixed in the amount of $35,000, inclusive of counsel fees, HST and disbursements.

Date: June 11, 2019 Chalmers J.