Court File and Parties
COURT FILE NO.: CV-21-00670423-00CL DATE: 2022/04/22 SUPERIOR COURT OF JUSTICE – ONTARIO COMMERCIAL LIST
RE: Roderick John Sutton and Fok Hei Yu (in their capacity as Joint and Several Liquidators of Days Impex Limited and Days International Limited), Plaintiffs (Moving Parties) AND: Mahesh Nanik Dayaram also known as Mahesh Nanik Hathiramani, and Sabina Hathiramani, Defendants
BEFORE: C. Gilmore, J.
COUNSEL: Atrisha S. Lewis and RJ Reid, Counsel for the Plaintiffs (Moving Parties) Steve Tenai and Adam West, Counsel for Days Canada Limited, Days Holdings Limited and Scott McPhail (Responding Parties) David W. Levangie for the Defendants
HEARD: April 5, 2022
Endorsement on motion for Norwich Order
INTRODUCTION
[1] The Plaintiff court-appointed Liquidators (the “Liquidators”) seek a Norwich Order pursuant to the powers granted to them by the Recognition and Supplemental Orders granted by this Court on March 26, 2013. The Norwich Order is sought against two Ontario corporations: Days Canada Limited (“Days Limited”) and Days Holdings Limited (“Days Holdings” collectively “Days Canada” or the “Ontario Companies”) and their sole corporate director and officer, Scott McPhail (“Mr. McPhail”, collectively the “Third Parties”).
[2] The Third Parties submit that the Liquidators already have sufficient information to plead their claim. Their concerns about the dissipation of assets are protected through the current Mareva Order. The Liquidators are intending to use the Norwich Order to improperly trace assets for prospective and unsecured litigation creditors. As such, the Liquidators have not met the test for this Court to grant pre-action discovery by way of such an extraordinary remedy.
[3] Notwithstanding the Third Parties’ ably argued defence of the motion, I find, for the reasons set out below, that the test for granting a Norwich Order has been met in these circumstances with some narrow exceptions.
BACKGROUND
[4] The Liquidators are the court-appointed liquidators of Days Impex Limited (“Impex”) and Days International Limited (“International” collectively “Days Hong Kong”) in the liquidation proceeding in the Hong Kong Court. In 2011, that Court ordered the appointment of the Liquidators and the winding up of Days Hong Kong.
[5] On March 26, 2013, four separate orders were issued recognizing the Hong Kong Orders and the liquidation proceedings (the “Recognition and Supplemental Orders” or the “Recognition Order”). The Recognition Order gave the Liquidators powers to conduct their investigation of Days Hong Kong in Ontario. That Order was recognized in this Court as a “foreign main proceeding” under s. 269 of the Bankruptcy and Insolvency Act, R.S.C., 1985, c. B-3, as amended (the “BIA”).
[6] The role of a “liquidator” in Hong Kong is most closely equivalent to the role of a receiver under the BIA. The Liquidators in this case are representatives from FTI Consulting Hong Kong (“FTI”). FTI is a global advisory consulting firm which employs forensic accounting and fraud investigation professionals.
[7] The Recognition Order provided as follows with respect to Canadian proceedings and the powers of the Liquidators. The reference to “Days” refers to Days Hong Kong:
(a) that no person could commence or continue any action, execution of other proceedings in Canada concerning the property, debts, liabilities or obligations of Days other than those brought by the Liquidators in their capacity as foreign representatives; (b) a prohibition preventing Days from selling or otherwise disposing of their property in Canada, except in the ordinary course of their businesses; (c) the stay and suspension of all rights and remedies against Days except with the written consent of the Liquidators by leave of the Court; (d) that the Liquidators and their counsel had the right to examine under oath any person thought to have knowledge of the business, affairs, assets, or dealings of Days.
[8] Days Hong Kong was controlled by the Dayaram family. The Defendant Mahesh Dayaram (“Mr. Dayaram”) was a shareholder in Impex and head of finance for Days Hong Kong. Mr. Dayaram is currently serving a prison sentence in Hong Kong for conspiracy to defraud related to his ownership and operation of Days Hong Kong. Mr. Dayaram is a Canadian citizen. The Defendant Sabina Hathiramani (“Ms. Hathiramani”) is Mr. Dayaram’s wife. She resides in Hong Kong.
[9] Mr. Dayaram was sentenced to 10 years in prison in August 2015 as a result of the abovementioned criminal proceedings. All criminal appeals have been exhausted. Mr. Dayaram will complete his prison term in August 2022.
[10] In the criminal proceedings, it was found that Mr. Dayaram and his father (who was also convicted but passed away while in prison) applied for 161 import loans totalling $51.9M USD from various banks. False invoices and Bills of Lading were submitted to the banks to obtain the loans which flowed through and then out of Days Hong Kong. The lending banks lost tens of millions of US dollars as a result of the fraudulent scheme.
[11] Civil actions claiming over $39M USD were commenced in 2017 in Hong Kong against Mr. Dayaram for repayment of the loans. Service of the claim was attempted on Mr. Dayaram in May 2017. An order for substituted service was made in June 2017. Mr. Dayaram then brought applications in the Hong Kong Court to dismiss or strike out the claims. Those applications were dismissed. A trial date has not yet been set in the Hong Kong action. Mr. Dayaram has sought several extensions of the civil actions. The Liquidators are concerned that Mr. Dayaram intends to delay matters until after his release from prison so that he may move assets outside of Hong Kong and avoid enforcement.
[12] On November 21, 2017, Mr. Dayaram transferred his sole interest in a penthouse on Bamburgh Circle in Scarborough, Ontario (the “Ontario property”) to his wife for no consideration. The Ontario property was valued at $500,000 CDN.
[13] Days Canada is part of the companies controlled by the Dayaram family (the “Days Group”). On July 31, 2017, Mr. Dayaram resigned as a director of both Days Limited and Days Holdings. Mr. McPhail is the sole officer and director of Days Limited and Days Holdings following Mr. Dayaram’s resignations.
[14] On November 28, 2017, Mr. Dayaram redeemed his shares in Days Limited for $1,767,649 CDN. Days Limited passed a resolution on November 28, 2017 approving the redemption of Mr. Dayaram’s shares. According to the Third Parties, the redemption was undertaken to remove Mr. Dayaram as a shareholder to avoid concerns on the part of Days Limited’s lenders and other business parties about Mr. Dayaram’s continuing involvement in Days Limited given his criminal convictions.
[15] Mr. Dayaram did not receive cash for this redemption. Rather, Days Limited reduced a debt owed to it by Days Holdings which in turn reduced a debt owed to it by Mr. Dayaram in the amount of the redemption. The redemption was effected by Mr. McPhail by way of a Power of Attorney from Mr. Dayaram. The Power of Attorney was effective until December 31, 2017.
[16] In October 2021, the Liquidators commenced a claim against the Defendants for the fraudulent conveyance of the Ontario property which is the originating process for this motion. The Liquidators are considering amending their claim to add fraudulent conveyances of shares in Days Canada as a result of the share redemption described above.
[17] On November 22, 2021, the Liquidators obtained a temporary Mareva Order to preserve the Defendants’ Canadian assets. The Defendants are contesting the Mareva Order but have failed to substantively respond because of Mr. Dayaram’s incarceration in Hong Kong and lockdowns in prison due to COVID-19 outbreaks. There is currently no date set for the Mareva hearing due to Mr. Dayaram’s counsel being unable to obtain instructions from his client.
[18] The Liquidators seek the following information from the Third Parties by way of the Norwich Order:
(a) Scott McPhail, Days Canada Limited and Days Holdings Limited, shall produce and/or disclose to the Liquidators any information in its possession, power and control that relates to the valuation and redemption of Mahesh Dayaram's shares in Days Canada Limited. (b) Scott McPhail, Days Canada Limited and Days Holdings Limited shall inform/provide the Liquidators of the following: a. Documentation regarding the valuation of the shares of Days Canada Limited which were redeemed on November 28, 2017 by Days Canada Limited for $1,767,649, including any documentation and correspondence relating to how this amount was determined, calculated and agreed upon, including production of documents prepared by third parties for this purpose; b. Documentation, including any correspondence between Mahesh Dayaram and Days Canada Limited prior to the share redemption that took place on November 28, 2017, regarding the share redemption, including any documentation regarding who initiated the share redemption, when and for what reason and the business and affairs of Days Impex and Days International; c. Documentation that evidences Mahesh Dayaram's shareholdings in Days Holdings Limited between January 1, 2017 and the date of this Order and any transfers, redemptions, or other dispositions of these shares that occurred; d. The source of funds used by Mahesh Dayaram to purchase shares of Days Canada Limited and Days Holdings Limited, including banking information. If no cash was provided to purchase shares in Days Canada Limited and Days Holdings Limited, information about what consideration was provided; e. Their knowledge, information and belief regarding the nature, value, and location of the assets of Mahesh Dayaram and Sabina Hathiramani, in Canada and worldwide, whether in his, her or their own name or not and whether solely or jointly owned, which they had since January 1, 2017; f. Documentation substantiating the loan advanced to Mahesh Dayaram by Days Holdings Limited, including any documentation of when the loan was made, the payment terms, the reason for the loan, and any banking information regarding where the proceeds of the loan were deposited; g. A corporate chart detailing the relationship between Days Canada Limited and Days Holdings Limited and any other related entities; and h. Information about all shareholders and their respective holdings in Days Canada Limited and Days Holdings Limited. (c) Scott McPhail shall attend for an examination to be held within 30 days of this Court Order, in his personal capacity and as a representative of Days Holdings Limited and Days Canada Limited on the following issues: a. The Third Parties' knowledge of the business and affairs of Days Impex Limited and Days International Limited and any other company owned or controlled by Mr. Dayaram and Mrs. Dayaram; b. The interconnection of the companies owned or controlled by Mr. Dayaram and Mrs. Dayaram since 2017; c. The Third Parties' knowledge of the assets held or controlled by Mr. Dayaram and Mrs. Dayaram; d. Any item referred to in (b) above; and e. If Mr. McPhail is not knowledgeable about the business and affairs of either Days Holdings, Inc. and Days Canada Inc. the Liquidators may return the Court to seek assistance in examining a representative of Days Holdings Limited and Days Canada Limited.
THE POSITIONS OF THE PARTIES
The Third Parties
Information Concerning the Share Redemption
[19] The Third Parties’ position is that the Liquidators have already formed the opinion that Mr. Dayaram’s redemption of the Days Limited shares was a fraudulent conveyance. In fact, the Liquidators refer to it as a fraudulent conveyance in their Notice of Motion.
[20] The Liquidators cannot use pre-action discovery as a means to perfect their prospective pleading. Further, the Liquidators already have Days Limited’s information about the redemption including the date, who authorized it, why it occurred, how the redemption price was determined and who calculated the redemption price. Therefore, the Liquidators have what they need for their fraudulent conveyance pleading. Going further and allowing the Norwich Order would be a form of early discovery and deprive the Third Parties of the benefits and protections of pre-trial discovery including the deemed undertaking rule, examinations framed by a pleading, and costs should the Liquidators be unsuccessful.
[21] The Liquidators allege that the timing of the redemption is suspicious because it occurred within days of the alleged fraudulent conveyance of the Ontario property. However, redemption of shares is an accepted step that any corporation can take.
[22] The Liquidators also allege that the redemption price was not calculated in accordance with Days Limited’s Articles of Incorporation and is suspiciously low. They are therefore seeking access to the Days Limited’s accounting firm’s records to confirm how the price was calculated. The Third Parties respond that the redemption price was not nominal being more than $1.7M CDN. Under the Days Limited’s Articles of Incorporation (the “Articles”), each class of preferred shares is entitled to their respective redemption price together with any declared but unpaid dividends. A formula for the calculation of share redemptions is also provided in the Articles.
[23] The Third Parties’ accountants have explained to the Liquidators how they arrived at the redemption value. The Liquidators simply do not like the explanation.
Lack of Connection between the Third Parties and Days Hong Kong
[24] The Days Hong Kong entities do not have any interest in the Days Canada companies. Further, the Days Canada’s companies are in the hospitality business, a completely different business than Days Hong Kong. Mr. Dayaram’s convictions related only to the Days Hong Kong entities and did not include other companies owned by the Dayaram family.
[25] Mr. Fok Hei Yu (“Mr. Fok”) is the Managing Director and Head of Asia Corporate Finance & Restructuring at FTI, Hong Kong. He confirmed in his cross-examination that neither the forensic report completed by the Hong Kong police nor the Liquidator’s own analysis established any link between the Days Hong Kong entities and the Third Parties with respect to them being either participants or beneficiaries of the fraud.
[26] The Liquidators now seek information about Mr. Dayaram’s shares in Days Holdings and information related to all other shareholders in Days Holdings. This is simply a fishing expedition. There is nothing in the Recognition Order (which only permits investigation into Days Hong Kong) which would permit the Liquidators to investigate Days Canada. The alleged fraudulent conveyance of the Ontario property and the share redemption by Mr. Dayaram are insufficient to ground such a sweeping request. Mr. Fok acknowledged on cross-examination that Days Hong Kong has no interest in Days Canada.
[27] Information sought by the Liquidators in relation to assets owned by Days Canada and other worldwide assets owned by the Dayaram family plus the extensive examination rights sought are already contained in the outstanding Mareva Order.
[28] The Liquidators must show that the persons they seek to examine are more than mere witnesses. They must show that those individuals were involved in the matters in issue and are the only practicable source of the information sought. There is no allegation or proof that Mr. McPhail, Ms. Hathiramani or any other member of the Dayaram family (other than Mr. Dayaram Sr. who is now deceased) had any involvement in the fraud. None of them were charged.
[29] The Liquidators seek orders to trace assets. However, they are not judgment creditors. At best they are contingent creditors. The tracing remedy is not available without a proprietary right to the property in question.
[30] The requests for information by the Liquidators are exceedingly broad especially considering that the Liquidators have been in control of Days Hong Kong since 2011 and have not been appointed to investigate the Dayaram family. The search requests are burdensome and go back decades since they would mostly relate to documents dated prior to 2011. The Liquidators already have over 600 boxes of documents and 5200 exhibits from the criminal trial. They have interviewed over 25 people including Mr. Dayaram, his father, a director of Impex, and 20 employees.
[31] The Liquidators attempt to make a connection between Days Hong Kong and Days Canada by referring to letters provided to various banks by Mr. Dayaram Sr. using the income and assets of Days Canada as comfort to lenders. These representations were simply that the Days Group owned assets in Canada. At no time were representations made to those banks that the businesses were connected.
[32] Mr. Fok was asked in cross-examination if he had provided all of the evidence that the Liquidators found from the criminal proceedings that demonstrated a connection between Days Canada and Days Hong Kong. He gave an undertaking to ascertain if all evidence had been provided. In the course of a search done to answer that undertaking, the Liquidators discovered documents related to a Hong Kong company owned by the Dayaram family named “Karlove.” According to the Liquidators, the documents demonstrate that funds from the import loan scheme perpetrated by Days Hong Kong were sent to Days International BVI (“Days BVI”) and Days Impex Liberia (“Days Liberia”). Those funds were then used to pay costs related to the Prince George Ramada Hotel renovations.
[33] The Third Parties object to this information being used in support of the Liquidators’ motion. The Third Parties asked if there were any other documents from the criminal proceedings and not documents related to the investigator’s materials. This evidence was put in too late (after Mr. Fok had already sworn three affidavits) and without the opportunity for the Third Parties to respond. Further, there is no proof that the funds from Karlove were used for a hotel renovation. As well, some of the funds were received from Karlove prior to the date of the impugned loans.
[34] The Third Parties concede that the Liquidators’ investigation shows that $20,000 USD of the $52M USD in loans went to Karlove and that Karlove transferred $3M CDN to other unrelated entities. There is, however, no proof that those funds went to the Days Group. In any event, it is a large leap to connect the $20,000 USD to Days Canada being involved in the entire fraudulent scheme.
[35] Finally, there is the issue of timing. The Liquidators commenced their action in 2017. They completed a forensic investigation of Mr. Dayaram’s property in September 2020. That report identified Mr. Dayaram’s holdings in Canada and the alleged fraudulent conveyance of the Ontario property. They did not move for the Mareva Order for more than a year after their report became available. The urgency they allege is non-existent.
The Request for Legal Fees to be Included in the Indemnity
[36] The Liquidators’ undertaking to reimburse the Third Parties for their reasonable costs should include legal fees. The Liquidators should also post security for costs as they are not residents in Ontario.
[37] The Liquidators are seeking pre-action discovery while at the same time refusing to indemnify the Third Parties for their legal costs. The Liquidators do not have assets in Canada; and Hong Kong and Canada are not reciprocating jurisdictions.
Mr. Dayaram
[38] Other than a brief call on March 30, 2022, Mr. Dayaram’s counsel has not had contact with his client since February 2022 due to prison lockdowns related to serious COVID-19 outbreaks in Hong Kong. His client has had no email or internet access.
[39] There are two provisions in the Order sought by the Liquidators that relate to Mr. Dayaram, specifically paragraphs 2(e) and 3(c). His counsel submits that paragraph 4 of the Mareva extension Order, dated November 29, 2021, specifically contemplates that disclosure of his client’s assets not be made until after the Mareva hearing, if at all. Paragraph (c) of that Order is set out below:
(c) That paragraph 4 of the Mareva Order shall be varied as follows: THIS COURT ORDERS that the Defendants prepare and provide to their counsel within 30 days of the date of this Order, a sworn statement describing the nature, value, and location of their assets in Canada and worldwide, whether in his, her or their own name or not and whether solely or jointly owned, which they had as of November 22, 2021. If following a contested hearing with respect to the Mareva Order, it is ordered that either or both of the Defendants' statements be provided to the Plaintiffs, counsel to the Defendants shall provide the statement(s) to the Plaintiffs;
[40] Mr. Dayaram’s counsel submits that requiring his client to produce the documents requested by the Liquidators is akin to an examination in aid of execution. It is clear from Justice McEwen’s endorsement dated January 13, 2022 that he has the list of assets contemplated above but that list of assets is not to be disclosed without further order from him. Justice McEwen directs that a further conference be arranged to set a date for the scheduling of the final Mareva hearing.
[41] Mr. Dayaram’s counsel submits that those provisions of the Norwich relief sought against his client are simply a fishing expedition. The Liquidators must wait and comply with procedure already set out by this Court in the Mareva Orders.
The Liquidators
[42] The Liquidators submit that Mr. Dayaram has a history of using corporations to move money around to defraud creditors. They require the Norwich Order to obtain further information from possibly related companies to ensure the Mareva Order is effective and to expand the scope of the Orders if required. Alternatively, the Liquidators argue that the Days Canada entities are relevant to the business, affairs and assets of Days Hong Kong which are the entities being wound up by the Liquidators. They have therefore sought the right to examine the Third Parties on this basis.
The Share Redemption by Mr. Dayaram
[43] The Liquidators view the share redemption as a suspicious transaction for the following reasons:
a. The share redemption took place only seven days after the alleged fraudulent conveyance of the Ontario property. b. No cash traded hands. The result of the transaction was a reduction in the value of Mr. Dayaram’s Canadian assets. c. The Liquidators have been unable to verify that the redemption amount is the fair market value of the earlier consideration provided by Mr. Dayaram for the share issuance. Public filings show that Mr. Dayaram held a 17.83% share of Days Canada whose known real estate holdings are valued at approximately $33.91M. d. The use of a share redemption as a suspected form of fraudulent conveyance is unique and requires further information to validate. The information sought is not publicly available and may have been obscured through a web of corporate entities. e. A few months prior to redeeming his shares, Mr. Dayaram resigned as a director of both Canadian entities in 2017. Mr. Dayaram had been a director of Days Canada for 27 years before his resignation. f. The Third Parties have not offered a commercially reasonable explanation for the timing of the redemption or the abovementioned resignations. The Third Parties submit that the redemption and resignations occurred after all of Mr. Dayaram’s appeal routes had been exhausted. This does not make sense. Mr. Dayaram was convicted of conspiracy to defraud in 2015 and charged with fraud years prior to that. Days Hong Kong went bankrupt in 2011. g. The Liquidators do not know if Mr. Dayaram held shares in Days Holdings and if those shares have been redeemed as well. The Liquidators require information to determine if other potentially fraudulent share conveyances have occurred.
The Third Parties have Information which the Liquidators cannot Obtain Elsewhere
[44] The Third Parties are all involved in Mr. Dayaram’s Canadian corporate holdings and the redemption. They are not merely witnesses but are the only practicable source of information as such information is not publicly available.
[45] Mr. Dayaram is a convicted fraudster with a history of dishonest activity. The interests of justice favour assisting the Liquidators to ensure that Mr. Dayaram compensates his creditors. The issues of confidentiality are less persuasive where such confidentiality protects fraudulent acts.
[46] The Norwich Order is required to enable the Liquidators to preserve and trace assets. One can presume that Mr. Dayaram will continue his history of fraud and using the Days Group as a conduit for such activity. Third party verification is required to corroborate evidence provided by the defendants and to understand whether Mr. Dayaram has used other third-party entities as a conduit to avoid the enforcement of a personal judgment.
[47] The Liquidators deny they have sufficient information for their pleadings. Mr. Dayaram is in a foreign jail, subject to COVID-19 related lockdowns and not easily examined. He has demonstrated a pattern of delay in the Hong Kong civil proceedings. Further, the Liquidators are concerned that upon Mr. Dayaram’s release from jail in August 2022, he will immediately take steps to move or obfuscate the tracing of his assets. Given Mr. Dayaram’s incarceration and inability to provide instructions to his counsel, the Mareva hearing has been indefinitely delayed. This puts the Liquidators in an extremely prejudicial position. Mr. Dayaram refuses to release his court ordered statement of worldwide assets unless required to do so after the final hearing of the Mareva Order. There is no clarity as to exactly when that hearing will occur.
[48] Contrary to the assertions of the Third Parties, the information sought would not be available through the normal discovery process as the alleged fraudulent conveyance of the Ontario property is a legally distinct issue from the share redemption issue.
[49] The scope of the Recognition and Supplemental Orders is sufficient to permit the Liquidators the right to examine “any person reasonably thought to have knowledge of the business, affairs, assets or dealings” with Days Hong Kong and requires such persons to produce “any books, documents, correspondence or papers in that person’s possession or power relating in all or in part to Days’ business, affairs or dealings.”
[50] The Liquidators reasonably seek to examine Mr. McPhail in his personal capacity and as a representative of the Days Canada entities. The Liquidators have set out in the Order they seek an enumerated list of topics on which they seek to examine Mr. McPhail.
[51] The Liquidators are not interested in a fishing expedition. They seek specific and targeted information which is necessary for them to pursue the rights of creditors who have been wronged by Mr. Dayaram’s fraudulent activities.
There is a Connection between Days Canada and Days Hong Kong
[52] Days Canada is part of the Days Group which also includes Days Hong Kong. While Days Canada carries on a different type of business, the matter should not end there.
[53] Credit facilities extended by the Hang Seng Bank to Days Hong Kong were personally guaranteed by Mr. Dayaram Sr. and an internal report prepared by that bank in 2011 included an overview of the entire Days Group of companies. Days Canada’s Canadian assets of $60M were a consideration with respect to the bank modifying the credit facilities of Days Hong Kong.
[54] A similar internal report from HSBC in 2011 noted that “the Canadian hotels have all along been the major implied support of the personal guarantee given by [Mr. Dayaram’s father].” Given these representations made to and relied upon by banks, it is clear that the Canadian holdings are relevant to the Liquidators’ investigation.
[55] The Trustees and Receivers herein are entitled to a measure of deference by this Court consistent with their exercise of the effective management of a bankruptcy and in accordance with previous orders of this Court.
The Karlove Documents
[56] Karlove is a Hong Kong corporation controlled by the Dayaram family. In 2010 and/or 2011, Karlove received funds from Days BVI (the 99% shareholder of International) and used those funds to pay for refurbishment of the Ramada Prince George. At the relevant time, the Ramada Prince George was owned by a predecessor of Days Limited. Days BVI was a participant in the fraudulent scheme. Any funds received from it in 2011 are suspect.
[57] The Liquidators do not have the Karlove bank accounts for June 2011 to confirm that Karlove paid the Ramada Prince George expense, but Karlove made such payments on other occasions which the Liquidators submit means that the Ramada Prince George (an asset of Days Limited was the beneficiary of fraudulent funds. The produced documents therefore form the basis of a connection between Days Limited and Days Hong Kong.
[58] The Liquidators have not improperly supplemented their evidence as alleged by the Third Parties. The Liquidators searched their records in order to properly answer an undertaking given on Mr. Fok’s cross-examination. They located documents which show a clear connection between Days Hong Kong and Days Limited
[59] Specifically, the Liquidators rely on a letter written by Mr. Dayaram in November 2010 to HSBC in which he listed the net equity of the Days Canada hotels. The documents produced are business records and admissible for the truth of their contents under s.35 of the Evidence Act, R.S.O. 1990, c. E.23.
[60] Mr. Fok confirmed on cross-examination that the Third Parties were not known by the Liquidators to be part of the fraudulent scheme, but he did not say they were not beneficiaries of any of the fraudulent funds. The Karlove documents in fact provide strong evidence that Days Limited was a beneficiary of some of the fraudulent loan funds.
[61] The Third Parties requested an undertaking and received an answer. The fact that they do not like the answer does not mean that the Liquidators have improperly supplemented their evidence.
Indemnity for Costs and Security for Costs
[62] The Third Parties assert that the Liquidators’ indemnity must include legal costs and not simply their reasonable costs in complying with the Order.
[63] The indemnity to reimburse the Third Parties for their reasonable costs to comply with the Order would include the reasonable fees from document review service providers.
[64] An indemnity for damages arising from compliance with this Order is also not reasonable. If the Liquidators obtain documents which show wrongdoing by the Third Parties, the Liquidators should not be required to be financially responsible for harm inflicted on them by others.
[65] As for the Third Parties’ request for security for costs, they have not brought a proper motion in this regard. In any event, had such a motion been brought, the Liquidators would have been able to demonstrate that they have sufficient assets in Hong Kong to be realized upon if needed.
LEGAL ANALYSIS
[66] The test for a Norwich Order is well settled, not disputed in this case, and set out in Franco v. TD Canada Trust, 2021 ONSC 7237, at para. 11 as follows:
a) whether the applicant has provided evidence sufficient to raise a valid, bona fide or reasonable claim; b) whether the applicant has established a relationship with the third party from whom the information is sought such that it establishes that the third party is somehow involved in the acts complained of; c) whether the third party is the only practicable source of the information available; d) whether the third party can be indemnified for costs to which the third party may be exposed because of the disclosure; and e) whether the interests of justice favour the obtaining of the disclosure.
[67] A Norwich Order is an exceptional, equitable and flexible remedy as per GEA Group AG v. Flex-N-Gate Corporation, 2009 ONCA 619, 96 O.R. (3d) 481, at para. 91, which must be established based on the facts of each case.
[68] Whether the Liquidators have a bona fide or reasonable claim in this case relates in large part to the timing of the share redemption and Mr. Dayaram’s resignations in relation to the timing of the alleged transfer of the Ontario property and service of civil actions in Hong Kong.
[69] The Third Parties argue that Mr. Dayaram was entitled to redeem his shares at any time and that his resignations and the redemption were tied to Days Canada wanting to disassociate itself from Mr. Dayaram after his criminal appeals had been exhausted.
[70] I reject the Third Parties’ arguments with respect to the timing of the abovementioned circumstances as ones which cannot be relied upon by the Liquidators to ground their request. The reasons for favouring the Liquidators’ view are as follows:
a. Mr. Dayaram was charged with the fraud offences in 2011 and convicted in 2015. If the Third Party entities wished to disassociate themselves with Mr. Dayaram’s behaviour, they could have done so years earlier. b. The timing of the resignations, share redemption, and alleged fraudulent conveyance of the Ontario property in relation to service of the civil actions on Mr. Dayaram in 2017 cannot be ignored. It may be significant, it may not, but on its face, it is most certainly worth investigating. c. The argument of the Third Parties that the Liquidators have already decided that the share redemption was a fraudulent conveyance is insufficient to persuade the Court not to grant the Order sought. If the Liquidators are wrong in their assumptions, the Third Parties may rely on the indemnity to cover their costs of having to cooperate with the document production and examinations set out in the Order. d. There are questions in relation to the share redemption which are important and remain unanswered: why did no cash change hands? Why would the Liquidators not be entitled to information as to exactly how the redemption was calculated given the shares owned by Mr. Dayaram would suggest a much larger redemption; where did the money come from that was advanced by Mr. Dayaram for the loan in the first place and when?
[71] As well, the Liquidators have already demonstrated they have a prima facie case, or they would not have successfully obtained the Mareva Order.
[72] In defending the motion, the Third Parties relied in large part on the findings in GEA. In GEA, the Ontario Court of Appeal reviewed the Norwich Order as an equitable remedy. In that case, the Appellant, FNG, and the Respondent, GEA, entered into a Sale and Purchase Agreement (the “Agreement”). FNG failed to close. GEA sued for significant damages and sought a Norwich Order against certain Third Parties in Canada claiming that FNG was attempting to shield itself from GEA’s claim by engaging in fraud. An interim ex-parte Norwich Order was granted by this Court. In setting aside the interim Norwich Order, the Court made the following observations, at paras. 105-106 and 109-110:
[105] I recognize that GEA did not seek pre-action discovery merely to plead. GEA's counsel responsibly acknowledged during oral argument that GEA was "not very far away" from being able to plead one or more causes of action arising from FNG's alleged wrongdoing. In fact, this understates the situation. As in Meuwissen, GEA has ample information in hand to formulate and plead its case. Norwich relief is not available simply to assist GEA in perfecting its prospective pleading or to obtain further evidence to aid in proving the facts of the two potential frauds already identified.
[106] I also do not accept GEA's claim that it should be afforded pre-action discovery to ascertain whether FNG or its agents engaged in a third, as yet unknown fraud. The suggestion of a third cause of action in fraud is speculative. To grant a Norwich order for this purpose would countenance an overt "fishing expedition". [page508]
[109] Similarly, I am not persuaded that a Norwich order is necessary to preserve evidence. There is no indication on this record of the risk of potential destruction of relevant evidence by any of the appellants or by Khan in the absence of a Norwich order or that such destruction has already occurred.
[110] Nor, in my opinion, is this a tracing case. On the record before this court and the motions judge, GEA has no existing proprietary or personal claim or other beneficial entitlement to assets formerly or at present in the possession of any of the appellants or, indeed, Khan. [See Note 4 below] This case is therefore factually distinguishable from the tracing cases relied on by GEA. At most, GEA is an unpaid and unsecured creditor of FNG in respect of its outstanding costs award and a prospective unsecured creditor of FNG in relation to unquantified damages to be awarded in phase two of the Arbitration.
[73] I acknowledge that the Court of Appeal has made strong statements in GEA about the potential misuse of Norwich Orders. However, that case can be distinguished from the one at bar as follows:
a. In GEA there was no Mareva Order (and its consequent finding of a prima facie case). The court in GEA specifically mentions that the Norwich Order in that case was not sought as a means of pre-action discovery in aid of a Mareva Order as it is here. The Order sought is to ensure the effectiveness of the Mareva Order. I note that since the Mareva hearing has not been scheduled and may not be for a considerable period of time, the importance of the Norwich Order is emphasized. b. In GEA, the Court specifically found that the matter was not a tracing case. However, I find the opposite on the facts of this case. More information is needed with respect to both the share redemption and the condo transfer. More information is needed with respect to funds from Days BVI and Days Liberia flowing into Canadian held assets. Where the convicted fraudster in this case was able to perpetuate his fraud by moving money between corporations, tracing is indeed important. c. While I accept that a Norwich Order is not to be used to “perfect” prospective pleadings, the facts in GEA in that regard are very different from the instant case. In GEA, the moving parties sought a Norwich Order in order to determine if they had a cause of action against other parties. In this case, there is an Order appointing a Receiver/Liquidator who has broad powers to investigate (see para 6 above) in relation to the Defendants and Days Hong Kong. The Liquidators require more information to determine whether fraudulent proceeds can be traced into Canadian assets and whether there are other fraudulent transactions they do not know about. This is a fraud on a massive scale. The Liquidators’ court-appointed powers to investigate must be given deference. d. Finally, unlike GEA, this is a case which does concern the preservation of evidence. The timing of the condo transfer and the share redemption in relation to the commencement of the civil actions, the delay in both the civil actions in Hong Kong and the Mareva action in Ontario, and Mr. Dayaram’s release from prison in August 2022 cause understandable concern for the Liquidators.
[74] The Third Parties argue that the disclosure and examinations sought are overly broad and the information sought has either otherwise already been provided to the Liquidators or is publicly available. I disagree. The Days Canada entities and Mr. McPhail are the only practicable source of information about Days Canada and the redemption.
[75] Further, there is some evidence available with respect to the connection between Days Hong Kong and Days Canada. For example, on January 5, 2011, Days BVI deposited $186,000 HKD into Karlove’s bank account. The next day, Karlove paid $182,221.88 HKD to Vintage Collection Ltd. This is recorded as an expense to the Ramada Hotel in Prince George. On June 13, 2011, Karlove received $131,750 HKD from Days BVI. This amount was recorded as an expense of the same amount in the refurbishment report in relation to renovations at the Ramada Hotel in Prince George. As set out above, Days BVI was a participant in the fraudulent loan scheme.
[76] The Third Parties submit that the January 5, 2011 transfer was made prior to the commencement date of the investigation. Further, the one transaction which can be traced from Days BVI to Karlove and in turn to a Ramada Hotel expense is not a sufficient connection to found a request for documents going back decades.
[77] I would agree with the Third Parties’ position that the disclosure sought is broad and may require searches going back many years were it not for the fact that the very nature of Mr. Dayaram’s crimes relate to the movement of money between corporations in order to obfuscate his fraudulent activity. Mr. Dayaram cannot conceal his potentially tortious acts from creditors simply because it would be too “burdensome” to comply with their disclosure requests.
[78] The Third Parties submit that the documents provided in relation to the Karlove account are not admissible because they were provided in response to a different question than the one asked of Mr. Fok in cross-examination. Further, there has been no opportunity for the Third Parties to respond to submissions made by the Liquidators in relation to those documents.
[79] The Third Parties are confusing form with substance in this Court’s view. The disclosure process is a substantive and not a formal one. The fact that a document may have been retrieved from a different box is immaterial in this Court’s view. The Liquidators undertook to do a search and found a document which may not favour the Third Parties. The document cannot be “put back” and can be relied upon as a basis to conclude that there may be some connection between Days Hong Kong and Days Canada.
[80] The interests of justice require that the Order sought be granted. These are unique circumstances. The hearing in relation to the Mareva Order has been put off indefinitely. There is no information as to when Mr. Dayaram may be available to be examined or give instructions to his counsel. This set of circumstances, is of course, far more prejudicial to the Liquidators than to the Third Parties.
[81] As well, the Liquidators are court-appointed officers entitled to deference under the BIA in order to complete their investigation. They have very little insight into the Defendants’ Canadian assets other than the condo transfer and the share redemption. As they are not in a position to secure further information from Mr. Dayaram, they require the Norwich Order to trace assets and ensure the effectiveness of the Mareva Order.
Indemnity for Costs
[82] On the issue of the Liquidators’ indemnity, the Third Parties seek to have their legal costs payable for legal advice in relation to their obligations under any Norwich Order granted by this Court as well as legal advice in relation to potential privilege and privacy issues. They also seek an indemnity for damages. As the Liquidators are not resident in Ontario, the Third Parties require they post security for reasonable legal costs.
[83] I will not deal with the issue of security for costs as no motion was brought by the Third Parties on this issue, and the Liquidators have therefore had no opportunity to respond.
[84] The Third Parties rely on Rogers Communications Inc. v. Voltage Pictures, LLC, 2018 SCC 38, [2018] 2 S.C.R. 643. In that case, the Supreme Court of Canada ordered that that the appellant (Roger’s Communications Inc.) was entitled to its reasonable legal costs of compliance with a Norwich Order. $500 in costs was awarded. The Liquidators submit that this cannot be relied upon for the type of indemnification sought by the Third Parties.
[85] In Isofoton S.A. v. Toronto Dominion Bank (2007), 85 O.R. (3d) 780 (S.C.), at para. 55, the Court dealt with whether both an indemnity for costs and damages was required for a Norwich Order. I agree with the findings of the Court in Isofoton that “it is difficult to envision a situation in which the financial institution or other third party will be subject to liability and damages award for disclosing information pursuant to a court order.” As such, an indemnity for damages is not required in this case.
[86] As for the indemnity for costs, the difficulty, as pointed out by the Liquidators, is the prospect of having to pay costs to entities or individuals who are potentially wrapped up in the fraudulent activities. I agree. As such, legal costs will be included in the indemnity but for specific purposes and with certain conditions.
[87] Finally, I advert to Justice McEwen’s endorsement of November 29, 2021, which precludes the Liquidators from receiving information regarding the Defendants’ worldwide assets until after the Mareva hearing, if at all. As such, and in accordance with the protocol developed by Justice McEwen, paragraphs 2(e) and 3(c) of the draft Order proposed by the Liquidators are not included in my Orders set out below.
ORDERS AND COSTS
[88] Given all of the above, I make the following Orders:
a. The relief sought by the Liquidators is granted, in part. b. The draft Order provided by the Liquidators at Appendix B of their Reply Factum dated March 31, 2022 shall issue other than paragraphs 2(e) and 3(c). c. The Third Parties shall be indemnified for their reasonable costs including any legal advice on their obligations in relation to the abovementioned Order and any concurrent privacy or privilege issues. The Third Parties shall prepare a detailed Bill of Costs for review by the Liquidators before any costs are required to be paid. If the Liquidators do not agree with the costs sought by the Third Parties, the costs must be approved by Justice Gilmore or her designate on a motion with notice. d. A Case Conference shall be convened before Justice McEwen before the end of May 2022 to discuss the scheduling of the Mareva hearing.
[89] The Liquidators seek all inclusive partial indemnity costs of $55,383.48. The Third Parties’ all-inclusive partial indemnity costs for this hearing were $65,130.54. No Offers to Settle have been served. Mr. Levangie’s client is not seeking costs and costs are not being sought by the Liquidators or the Third Parties from Mr. Levangie’s client.
[90] The Liquidators have had substantial but not complete success. While the law with respect to Norwich Orders is well-known, this case was somewhat more complex given that it related to the Liquidators’ investigations pursuant to a Recognition Order where the main assets and litigation were located in a foreign country and where Mr. Dayaram was in jail and not able to be examined, or even contacted.
[91] In all the circumstances I am prepared to award the Liquidators their partial indemnity costs with a discount given their partial success. The Third Parties shall therefore pay to the Liquidators the all-inclusive sum of $40,000 forthwith.
C. Gilmore, J. Date: April 22, 2022