Court File and Parties
Oshawa Court File No.: CV-23-2023 Date: 20241216 Ontario Superior Court of Justice
Between: QIAN XI LUO, TAO ENLIGHTENMENT CORP., 2833527 ONTARIO INC., TIYOUYIHEI CORPORATION and ZHI GANG SHA Applicants – and – HAI JUN SONG, also known as NAVY SONG, DONG WANG, 1953199 ONTARIO INC., SONGSCO.COM LTD., NAVY EQUIPMENT RENTAL INC., SONG LANDSCAPING LTD., OCEAN EQUIPMENT LIMITED, OCEAN NURSERY INC. and SSL123 HOLDINGS INC. Respondents
Counsel: Jeff Rosekat and Daniel Waldman, for the Applicants James Zibarras and Tina Kaye, for the Respondents
Heard: November 22, 2024
Reasons for Decision
1This is an Application to appoint a receiver of the business, affairs, assets, undertakings and properties of the Respondents, 1953199 Ontario Inc. (“195 Ontario”), Ocean Nursery Inc., Ocean Equipment Limited and SSL123 Holdings Inc. (collectively, the “195 Companies”) and the Respondents, Songsco.com Ltd. (“Songsco”), Navy Equipment Rental Ltd. and Song Landscaping Ltd. (collectively, the “Song Companies”).
2The Application is brought under s. 101 of the Courts of Justice Act, R.S.O. 1990, c. C43, s. 243(1) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (the “BIA”) and s. 248 of the Business Corporations Act, R.S.O. 1990, c. B.16 (OBCA).
3The Applicants, Doctor Qian Xi Luo and Doctor Zhi Gang Sha (respectively “Luo” and “Sha”) are spouses. Through their respective holding corporations, the Applicants Tao Enlightenment Corp. and Tiyouyihei Corporation (the “Corporate Applicants”), they are 50 percent shareholders of the Respondent 195 Ontario. The Corporate Applicants hold first and second mortgages over property which is the principal place of business of the 195 Companies. 195 Ontario is the mortgagor. These mortgages secure a principal debt of $2.625 million which the Applicants allege has been in default for over a year.
4The Respondent, Hai Jun Song (“Song”) is Luo and Sha’s business partner. He is also a 50 percent shareholder of 195 Ontario. He is the sole shareholder of the Respondents Songsco.com Ltd., Navy Equipment Rental Inc. and Song Landscaping.
5The Respondent SSL123Holdings Inc. is a holding company owned 50 percent by Luo and 50 percent by Song. The Respondents Ocean Equipment Limited and Ocean Nursery Inc. (“Ocean Equipment” and “Ocean Nursery”, together the “Ocean Companies”) are owned by SSL123 Holdings Inc., and were the corporate vehicles through which Luo, Sha and Song operated the joint venture landscaping and equipment rental businesses.
Facts
6Commencing in 2016, the Applicants Luo and Sha and the Respondent Song formed and operated a horticulture nursery business (Ocean Nurseries) and a landscaping equipment sale and rental business (Ocean Equipment). Song operated the businesses, while Luo and Sha supplied capital for the venture. 195 Ontario was incorporated on April 11, 2016. Ocean Nursery and Ocean Equipment were incorporated on July 6, 2016. SSL123 was also incorporated on July 6, 2016 as a holding company to hold the shares of the Ocean Companies.
7Luo alleges that between June 8, 2016 and November 3, 2017, he made a “series of capital loans” to the Ocean Companies totalling $3.5 million. This amount is disputed by Song.
8To carry out their intended business operations, Luo and Song agreed to purchase a 47-acre property at 16110 Woodbine Avenue, in Stouffville, Ontario (the “Property”). The Property was purchased on April 18, 2016 for $2.85 million.
9Luo and Song agreed that Song’s share of the purchase price would be used to construct greenhouses and warehouses on the Property to house the businesses. Luo and Song obtained the agreement of the Vendor to finance Song’s share of the purchase price with a vendor take back mortgage of $1.425 million (the “VTB”). Luo and Song agreed that Song would be solely responsible for the interest and principal payments required under the VTB. The businesses were also under the primary operational control of Song, who ran them on a day-to-day basis.
10The parties dispute the contributions made by Luo and Song to the businesses in the following years.
11On September 14, 2016, the Luo Companies, 195 Ontario and Song executed an “Assumption and Indemnity Agreement”. Pursuant to this agreement:
a. The parties agreed that a second mortgage would be registered in favour of the Luo Companies to secure the $1.425 million of cash that Luo had paid on closing for the Farm Property (the “Farm Mortgage”). The Farm Mortgage was registered against the Property on June 23, 2017; b. Song agreed to be personally liable for repaying the VTB, including paying the monthly interest payments of $3,562.50; and c. Song agreed to indemnify the Luo Companies and save them harmless “against any all claims arising from the VTB”.
12The Applicants allege that Song breached this agreement by failing to pay the VTB when it became due.
13To protect her investment in the Farm Property, Luo agreed to lend 195 Ontario and Song $1.2 million (the “VTB Takeout Loan”), to retire the VTB. The VTB Takeout Loan was advanced by Luo’s holding company pursuant to a promissory note dated April 22, 2021 (the “Promissory Note”) and secured by a second-ranking mortgage registered against the Farm Property on April 22, 2021 (the “VTB Takeout Mortgage”). The Promissory Note and the VTB Takeout Mortgage each provide that $1.2 million was to be paid in full by October 22, 2021, with interest payable monthly at the rate of three percent per annum. Contrary to their terms, Song only repaid $700,000.00 and no interest payments have been received since December 22, 2022.
14On March 7, 2023, the Luo Companies made demand for payment on 195 Ontario of $1,515,103.49 owing under the Farm Mortgage and $510,426.77 owing under the VTB Takeout Mortgage. Notices of intention to enforce security were issued under both mortgages pursuant to s. 244(1) of the BIA. To date, no Statement of Claim regarding the enforcement of these mortgages has been issued.
15In the spring of 2021, Song entered into two agreements with a person named Zhengyi Yu (“Yu”): a lease and a sub-lease. Under the first agreement, Yu leased the Ocean Companies from 195 Ontario for $10,000 per month. Under the second “mirror” agreement, Song sub-leased Yu’s interest back from Yu. The Applicants allege that the purpose and result of these mirror agreements were to transfer the business operations of Ocean Companies to companies (the Respondents Navy Equipment Rental Ltd. and Song Landscaping Ltd.) controlled solely by Song. The Applicants allege that, contrary to the assertions of Song, no rent was ever paid by Yu under the first agreement.
16Luo alleges that although Song purported to close the Ocean Companies in 2021, Song actually appropriated the businesses into his own companies and that the businesses still operate on the Property.
17Luo retained an accountant to conduct a forensic accounting investigation into the records and operations of 195 Ontario and the related companies. The investigation revealed significant indications of suspicious transfers and payments to Song and his companies. The preliminary forensic accounting report, dated March 15, 2024, concludes that Song appears to have misappropriated approximately $5.4 million from 195 Ontario and the related companies. Song disputes these conclusions.
18Song argues that he and Luo agreed that they would equally share all of the capital and operating expenses of the jointly owned corporations. Song would be responsible for the day-to-day construction, renovation, operation and management of developing the Property. Song would contribute money, but would also be credited for contributing his personal time and effort towards the construction, renovation, operation and management of the businesses. Luo and Song would share on an equal basis any proceeds, revenues and/or profits from the businesses.
19However, as expenses relating to the development of the Property grew into the millions, Song alleges that Luo breached the terms of their agreement by failing to contribute her 50% share. Song takes the position that he contributed and paid a total of $3 million for significant improvements to the Property, including structures, offices, warehouses, greenhouses, driveways, landscaping and connecting utilities and services.
20Song also takes the position that, by mutual agreement of the parties, Ocean Equipment ceased operating in May 2020 and Ocean Nursery ceased operating in April 2021. Once the decision was made by Luo and Song to cease operations of Ocean Nursery, they decided to lease the buildings and facilities on the Property. The lease to Yu was pursuant to that joint decision and was made with the full knowledge and consent of Luo.
21Since Ocean Nursery and Ocean Equipment are no longer operating businesses, they have no assets. The only asset is the 47-acre Property owned by 195 Ontario that Ocean Nursery and Ocean Equipment previously operated on. That property was purchased in 2016 for $2.85 million, and was appraised at $7 million in 2018, in part because of the improvements made by Song. No updated appraisal was provided on this Application, but there is no evidence that the value of the Property has depreciated.
22Song alleges that, in November 2022, he discovered that Luo had made over $1 million in unauthorized transfers from the jointly owned corporations to corporations owned solely by Luo. Some of this money was used for renovations to Luo’s children’s homes. It was at this point that Song and Luo’s relationship broke down.
23Finally, Song argues that no funds were advanced by Luo to obtain the $1.425 million mortgage. He alleges that he did not understand the mortgage document and the loan agreement because they were presented to him in English and not translated to Mandarin. He takes the position that the mortgages are fraudulent.
24Assuming this matter proceeds through trial, the Court will necessarily make specific findings about fault and responsibility in evaluating the opposing claims. It is not my task to do so at this stage, and indeed I must be circumspect about purporting to reach definitive findings on a paper record: 340268 Ontario Limited v. Georghiades and Georghiades v. Georghiades, 2024 ONSC 6168, at paras. 48 and 49.
The Ella Mortgage Action
25On January 17, 2018, Luo, through her holding company Tao Enlightenment Corp. (“Tao”), loaned Song $1.5 million, secured by a second mortgage against Song’s personal residence on Ella Drive in Stouffville, Ontario. The mortgage was registered on January 26, 2018. Demand for payment was made on November 30, 2022. As payment was not forthcoming, a Notice of Sale was issued on February 22, 2023.
26On May 2, 2023, Tao commenced an action against Song and his spouse for payment and possession under the mortgage.
27Song defended and counterclaimed in the action, adding all of the 195 Companies named in this Application as Defendants by Counterclaim.
28In his counterclaim, Song alleges that the business affairs of the 195 Companies have been carried out “in a manner that is oppressive or unfairly prejudicial to …Song’s interest contrary to s. 248 of the OBCA” and he seeks, inter alia, an order for “the appointment of a Monitor to oversee the business affairs” of the 195 Companies, and an Order under s. 248 of the OBCA requiring “the winding up of the 195 Companies and the distribution of their property”.
29The Ella Mortgage Action is referenced in both parties’ materials, but is not before me on this Application.
Appointment of an Interim Monitor
30On May 3, 2024, the Applicants brought a motion within the Application to have MNP Ltd. appointed as Interim Monitor pending the return of the Application.
31On June 21, 2024, the Court granted an Order on consent appointing MNP as Interim Monitor without security, over all the Property of the Monitored Respondents pursuant to the terms of the Appointment Order. The Monitored Respondents are 195 Ontario, Ocean Nursery, Ocean Equipment, and SSL123 Holdings.
32The Interim Monitor filed a “First Report” on October 15, 2024. That Report indicated the Interim Monitor’s view that, despite repeated requests, Song and the Monitored Respondents “continue to obfuscate and frustrate the performance of the Interim Monitor’s mandate, in breach of sections 3, 4, 5, 6, and 9 of the Appointment Order”. The Report recommended amendments to its Appointment Order to expand its powers to obtain information from the Monitored Respondents to effectively monitor the Property. These expanded powers would include granting the Interim Monitor the power to search for, locate, and take possession of records of the Monitored Respondents or relating to the Property, wherever located and in whatever format, and giving the Interim Monitor the right to access any location owned by the Monitored Respondents or Song and his spouse, including Song’s personal residence, for the purpose of carrying out the Interim Monitor’s mandate.
33The Respondents take the position that they have complied with the terms of the June 21, 2024 Order, and that the Interim Monitor exceeded its authority by seeking information that was not within its mandate.
34This is not a dispute that I will resolve on this Application. The Applicants did not bring a motion to expand the powers of the Interim Monitor.
Positions of the Parties
35The issue to be determined on this Application is whether MNP should be appointed as receiver over the Property.
36To be clear, the Draft Order filed by the Applicants would grant extensive powers to the receiver, including:
a. to take possession of and exercise control over the Property and any and all proceeds, receipts and disbursements arising out of or from the Property; b. to receive, preserve, and protect the Property, or any part or parts thereof, including, but not limited to, the changing of locks and security codes, the relocating of Property to safeguard it, the engaging of independent security personnel, the taking of physical inventories and the placement of such insurance coverage as may be necessary or desirable; c. to manage, operate, and carry on the business of the Debtor, including the powers to enter into any agreements, incur any obligations in the ordinary course of business, cease to carry on all or any part of the business, or cease to perform any contracts of the Debtor; d. to engage consultants, appraisers, agents, experts, auditors, accountants, managers, counsel and such other persons from time to time and on whatever basis, including on a temporary basis, to assist with the exercise of the Receiver's powers and duties, including without limitation those conferred by this Order; j. to market any or all of the Property, including advertising and soliciting offers in respect of the Property or any part or parts thereof and negotiating such terms and conditions of sale as the Receiver in its discretion may deem appropriate; k. to sell, convey, transfer, lease or assign the Property or any part or parts thereof out of the ordinary course of business, i. without the approval of this Court in respect of any transaction not exceeding $50,000 provided that the aggregate consideration for all such transactions does not exceed $50,000; and ii. with the approval of this Court in respect of any transaction in which the purchase price or the aggregate purchase price exceeds the applicable amount set out in the preceding clause.
37The Applicants argue that a receiver should be appointed for the following reasons:
a. there is strong prima facie evidence that the Song Respondents have misappropriated at least $5.4 million from the 195 Companies; b. the Applicants are secured creditors of 195 Ontario pursuant to the Farm Mortgage and the VTB Takeout Mortgage, which secure a principal debt of $2.625 million and have been in default for over a year; c. Song (individually and through the Song Companies) has abused his position as a principal of the 195 Companies and has carried out their operations in a manner that is oppressive of or unfairly prejudicial to or that unfairly disregards the interests of the Individual Applicants; d. Song has concealed the financial dealings of the 195 Companies from the Applicants and continues to do so; e. there is reason to believe that the Respondents have misappropriated the 195 Companies (or some of them) and continue to operate them at the Farm Property without regard for the Applicants’ interests; f. the Respondents are in breach of the Appointment Order and MNP has been unable to preserve the Property as a result; and g. a serious breakdown of trust exists between the Applicants and the Respondents and the parties are clearly at an impasse regarding the operation of the 195 Companies.
38The Applicants also seek an Order appointing a receiver over the companies owned by Song. This relief was not in their Notice of Application but was raised for the first time in their Factum, served on the Respondents just three weeks before the Application was heard. The Respondents object to the Applicants seeking this relief since it was not raised in their Notice of Application and the Applicants did not file a motion to amend the Notice to include this relief. I will return to this issue later.
39The Applicants ask the Court to appoint MNP as receiver over the Property of both the 195 Companies and the Song Companies to perform a full forensic investigation into the affairs of the companies, resolve the impasse between the shareholders, market and sell the Property, including the Farm Property and distribute the proceeds to the stakeholders on an equitable basis.
40The Respondents take the position that the only asset owned by the 195 Companies is the 47-acre Property that is owned by 195 Ontario. The Applicants have registered two mortgages against this Property. The Respondents argue that the Applicants do not meet the test for the appointment of a receiver, which requires both a strong prima facie case and evidence of irreparable harm. Since the Property is jointly owned by the Applicants and Song, there is no concern that the Applicants’ right to recover is in any jeopardy. The current value of the Property far exceeds what the Applicants have invested in the joint venture.
41Moreover, many of the cases relied on by the Applicants involve mortgage agreements that expressly provide for the appointment of a receiver if the mortgagor defaults on the mortgage. There is no such provision in the mortgages at issue in this case.
42In summary, the Respondents argue that the balance of convenience does not favour the appointment of a receiver because:
a. there is no ongoing business; b. there is no risk to the 195 Property; c. there is no right to a receiver under the governing documents; d. there is no need to preserve or protect the 195 Property pending resolution of the underlying action currently before the Court; e. the receivership will result in substantial costs and expenses which will diminish the equity in the 195 Property, to the detriment of all parties; f. the appointment of a receiver is not appropriate simply because a dispute exists.
Analysis
43The Applicants rely on three statutory provisions to support their application: s. 101 of the Courts of Justice Act, s. 243(1) of the BIA and s. 248 of the OBCA. I will address each in turn.
(i) Section 101 of the Courts of Justice Act
44Section 101 of the Courts of Justice Act provides:
Injunctions and receivers
101 (1) In the Superior Court of Justice, an interlocutory injunction or mandatory order may be granted or a receiver or receiver and manager may be appointed by an interlocutory order, where it appears to a judge of the court to be just or convenient to do so.
Terms
(2) An order under subsection (1) may include such terms as are considered just.
45In my view, s. 101 does not apply to the present case. Section 101 provides for an interlocutory appointment of a receiver. An interlocutory appointment means that the receiver will be appointed on a temporary basis until the underlying action is determined. In this case, there is no underlying action.
46The Applicants have not issued a Statement of Claim against any of the Respondents in relation to the mortgage default or any alleged misappropriation of funds from 195 Ontario or the Ocean Companies. The Notice of Application does not seek the appointment of a receiver on an interim or interlocutory basis pending any action. It seeks the final appointment of a receiver.
47This interpretation of s. 101 is supported by the decision of MacPherson J.A. in Ontario v. Shehrazad Non Profit Housing Inc., 2007 ONCA 267, at para. 23:
Second, while this was not raised by either party, it appears to me that there may be a procedural issue to be determined on appeal, namely, whether it was appropriate for the Ministry to commence an application for the appointment of a receiver without that application being ancillary to another proceeding for relief. According to rule 14.05(3)(g) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, an application for the appointment of a receiver can be brought "when ancillary to relief claimed in a proceeding properly commenced by a notice of application". Similarly, rule 41.02 contemplates that a motion for the appointment of a receiver can be brought “in a pending or intended proceeding”.
48In the present case, the application for an appointment of a receiver is not ancillary to other relief claimed in the Notice of Application, it is the only relief claimed. Nor is there a “pending or intended proceeding”. The Fresh as Amended Notice of Application is dated March 20, 2024, and no proceeding has been commenced since then.
49This distinction is important. The test for the appointment of an interim receiver pursuant to s. 101 requires the application of the three-part test set out by the Supreme Court of Canada in RJR-MacDonald Inc. v. Canada (Attorney General), [1994] 1 S.C.R. 311, at paras. 47-48. The RJR-MacDonald test requires the applicant to demonstrate (i) that there is a serious issue to be tried; (ii) that the creditor will suffer irreparable harm if the relief is not granted; and (iii) that the balance of convenience favours the creditor: Akagi v. Synergy Group (2000) Inc., 2015 ONCA 368, at para. 92: “The test is often applied where the receivership order is purely interlocutory and ancillary to the pursuit of other relief claimed -- where it is, in effect, execution before judgment”.
50In the present case, the appointment of a receiver would not just be “execution before judgment”, it would be execution before claim.
51See also Mao v. Liu, 2024 ONSC 752, at para. 96 and cases cited therein:
Under section 101(1) of the Courts of Justice Act and Rule 41 of the Rules of Civil Procedure, a receiver or receiver and manager may be appointed by an interlocutory order, where it appears to a judge of the Superior Court to be just or convenient to do so. The test for appointing an interim receiver is similar to the test derived from RJR-MacDonald Inc. v. Canada (Attorney General) for the granting of an interlocutory injunction”. [Footnotes omitted].
52Finally, Strathy J. (as he then was) summarized the relevant principles in Anderson v. Hunking, 2010 ONSC 4008, at paras. 15 and 16 (citations omitted):
Section 101 of the Courts of Justice Act provides that the court may appoint a receiver by interlocutory order “where it appears to a judge of the court to be just or convenient to do so.” The following principles govern motions of this kind:
(a) the appointment of a receiver to preserve assets for the purposes of execution is extraordinary relief, which prejudges the conduct of a litigant, and should be granted sparingly… (b) the appointment of a receiver for this purpose is effectively execution before judgment and to justify the appointment there must be strong evidence that the plaintiff’s right to recovery is in serious jeopardy… (c) the appointment of a receiver is very intrusive and should only be used sparingly, with due consideration for the effect on the parties as well as consideration of the conduct of the parties… (d) in deciding whether to appoint a receiver, the court must have regard to all the circumstances, but in particular the nature of the property and the rights and interests of all parties in relation thereto… (e) the test for the appointment of an interlocutory receiver is comparable to the test for interlocutory injunctive relief, as set out in RJR-MacDonald Inc. v. Canada (Attorney General): (i) a preliminary assessment must be made of the merits of the case to ensure that there is a serious issue to be tried; (ii) it must be determined that the moving party would suffer “irreparable harm” if the motion is refused, and “irreparable” refers to the nature of the harm suffered rather than its magnitude – evidence of irreparable harm must be clear and not speculative… (iii) an assessment must be made to determine which of the parties would suffer greater harm from the granting or refusal of the remedy pending a decision on the merits – that is, the “balance of convenience”… (f) where the plaintiff’s claim is based in fraud, a strong case of fraud, coupled with evidence that the plaintiff’s right of recovery is in serious jeopardy, will support the appointment of a receiver of the defendants’ assets…
The appointment of a receiver for the purposes of preserving the defendant’s assets as security for a potential judgment in favour of the plaintiff is, like a Mareva injunction, an exception to the general principle that our courts do not grant execution before judgment…
53As will be discussed below, a less stringent test may apply if the appointment of a receiver is sought as a final order under the BIA or the OBCA: Hands-On Capital Investments Inc. v. DMCC Holdings Inc., 2023 ONSC 2417, at para. 50.
54My point at this juncture is that s. 101 of the Courts of Justice Act is limited to interlocutory appointments “when ancillary to relief claimed in a proceeding”. It does not, therefore, apply to this case.
55Putting aside the procedural issue raised above, the Applicants in this case have presented a strong prima facie case. The preliminary forensic accounting report dated March 15, 2024 presents a strong prima facie case that Song has misappropriated funds from 195 Ontario. In addition, Song’s lease of the Property to Yu, and the mirror sub-lease back to Song, are particularly suspicious. In my view, the Respondents have failed to provide a satisfactory explanation for the sub-lease other than that it was designed to appropriate the joint business for Song’s sole benefit.
56That said, the Applicants have failed to satisfy the irreparable harm component of the three-part test. Given the nature of the Property – a 47-acre farm with buildings – and the fact that the Property is owned jointly by the parties, and the fact that the Applicants hold a first and second mortgage over the Property, the Applicants’ right to recover any potential judgment (should an action be commenced some time in the future) is not in any real jeopardy: 2607087 Ontario Limited v. 2654993 Ontario Ltd. et al., 2024 ONSC 4595, at para. 57. Apart from the Farm Property, there does not appear to be any property that requires preservation in this case. Even assuming that the Respondents have misappropriated the funds and business as alleged by the Applicants, the 47-acre Property appears to have sufficient value to provide the Applicants with security.
57There is no evidence as to why the Applicants have not commenced a mortgage enforcement proceeding, which “if successful, the Applicant would presumably be entitled to force a sale of the Real Property and seek to be paid out on its mortgages”: 2607087 Ontario Limited, at para. 58.
58Moreover, the Applicants have failed to persuade me that the immediate sale of the Property – even before an action has been commenced – is necessary. Even if the Property is sold tomorrow, the distribution of the proceeds of sale will have to wait until the parties either settle their case or there is a judicial resolution of their opposing claims. The appointment of a receiver cannot bring an end to these proceedings because, although the receiver can investigate and make recommendations, the receiver cannot decide the dispute between the parties. No explanation has been provided as to why the immediate sale of the Property is “just or convenient”.
(ii) Section 243 of the Bankruptcy and Insolvency Act
59Section 243 of the BIA provides that on an application by a secured creditor, a court may appoint a receiver to, inter alia, take possession of the property of an insolvent person and exercise such control thereon that the court considers advisable if the court considers it “just or convenient”. Unlike s. 101 of the Courts of Justice Act, s. 243 of the BIA is not limited to interlocutory orders.
60An “insolvent person” is defined in s. 2 of the BIA as:
a person who is not bankrupt and who resides, carries on business or has property in Canada, whose liabilities to creditors provable as claims under this Act amount to one thousand dollars, and
(a) who is for any reason unable to meet his obligations as they generally become due, (b) who has ceased paying his current obligations in the ordinary course of business as they generally become due, or (c) the aggregate of whose property is not, at a fair valuation, sufficient, or, if disposed of at a fairly conducted sale under legal process, would not be sufficient to enable payment of all his obligations, due and accruing due;
61Since s. 243 applies to any “secured creditor”, one of the factors considered by the courts when deciding whether to appoint a receiver under s. 243 is whether the creditor has a right to appoint a receiver under the loan document: 2806401 Ontario Inc. o/a Allied Track Services Inc., 2022 ONSC 5509, at para. 15:
Where the rights of the secured creditor include, pursuant to the terms of its security, the right to seek the appointment of a receiver, the burden on the applicant is lessened: while the appointment of a receiver is generally an extraordinary equitable remedy, the courts do not so regard the nature of the remedy where the relevant security permits the appointment and as a result, the applicant is merely seeking to enforce a term of an agreement already made by both parties. [Emphasis added.]
62In 340268 Ontario Limited v. Georghiades and Georghiades v. Georghiades, 2024 ONSC 6168, Black J. stated, at para. 104:
There are of course many receivership cases under section 243 - 245 of the BIA, but, while the test of “just and convenient” under the BIA is shared with s. 101 of the CJA, most often the BIA cases feature a contractual right within security instruments to appoint a receiver, which the caselaw confirms renders the appointment of a receiver less “extraordinary” than where no such contractual right exists.
63See also: Bank of Montreal v Carnival National Leasing Limited, 2011 ONSC 1007, at para. 25; 2607087 Ontario Limited v. 2654993 Ontario Ltd. et al., 2024 ONSC 4595, at para. 10.
64In the present case, the Luo Companies are secured creditors, they hold a first and second mortgage over the Farm Property owned by 195 Ontario. They allege that 195 Ontario is an “insolvent person” because it is unable to meet its obligations: it has defaulted on the two mortgages.
65This is not, however, a case in which the creditor has the right to appoint a receiver under the loan document.
66Moreover, the Respondents dispute the validity of the mortgages, and each party has accused the other of misappropriation. Given these disputes, I am left with the same questions I had when considering the parties’ positions under s. 101 of the Courts of Justice Act: Assuming that 195 Ontario qualifies as an “insolvent person” under s. 243 of the BIA, what is the advantage of appointing a receiver to immediately liquidate the insolvent corporation’s property? There is no evidence that the Applicants’ right to recovery is in jeopardy, and there cannot be any distribution of the property until the parties’ opposing positions have been resolved. Apart from liquidating the sole asset of 195 Ontario, what is the receiver going to do? Neither of the Ocean Companies has operated since 2021, so there is no business for a receiver to manage.
67In my view, s. 243 of the BIA leads to the same result as s. 101 of the Courts of Justice Act: it is not “just and convenient” to appoint a receiver at this stage of the proceedings.
68There is evidence that the Song Companies continue to operate a nursery on the Property, and that this nursery was misappropriated from the 195 Companies. The Applicants have, belatedly, sought to add an order that the receiver should manage the Song Companies as well. I agree with the Respondents that this amendment – added for the first time in the Applicants’ factum - was brought too late to give the Respondents a fair opportunity to respond. The Applicants contend that it should have been obvious to the Respondents since Song’s cross-examination on August 27, 2024, that the Applicants would seek to appoint a receiver over the Song Companies. Assuming this to be correct, if it should have been obvious to the Respondents on that date, it should have been even more obvious to the Applicants, who were unable to explain why they waited until October 31, 2024, to put the Respondents on notice that they would seek to expand the relief claimed in their Notice of Application.
69Finally, to the extent that this Application is brought under s. 243 of the BIA, I was provided with no authority to support the proposition that the Song Companies are “insolvent persons”, such that s. 243 of the BIA would apply to them.
(iii) Oppression Remedy under s. 248 of the Business Corporations Act
70Section 248 of the OBCA provides a remedy to shareholders unfairly oppressed or prejudiced by the conduct of any security holder, creditor, director or officer of the corporation. Section 248(2) provides:
(2) Where, upon an application under subsection (1), the court is satisfied that in respect of a corporation or any of its affiliates,
(a) any act or omission of the corporation or 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.
71One of the orders available to the court under s. 248 (b) is “an order appointing a receiver or receiver manager”.
72While the Applicants rely on s. 248 of the OBCA in their Notice of Application, their factum makes no additional reference to it.
73It is, however, clear from the material filed by both parties that there has been a serious breakdown of trust between the Applicants and the Respondents, and the parties are at an impasse regarding the operation of the 195 Companies. It is not, however, clear that the Property must be immediately liquidated or that the appointment of a receiver will resolve any of the disputes between the parties.
74As discussed by Black J. in the Georghiades case, at paras. 109 - 110, one available option for the Court under s. 248 of the OBCA is the appointment of what has come to be referred to as an “investigative receiver”:
An “investigative receiver” appears to capture a broad array of potential mandates, sometimes limited to basic and relatively unobtrusive information-gathering akin to a monitor, and sometimes where more extensive forensic investigations are called for: see e.g. Akagi v. Synergy Group (2000) Inc., 2015 ONCA 368, 125 O.R. (3d) 401; Boutin v. Boutin, 2022 ONSC 4776. At the most expansive end of the spectrum, under s. 101(1) of the CJA one finds a “receiver and manager” (often referred to as a “receiver/manager”): Shehrazad Non Profit Housing Inc., 2007 ONCA 267, 85 O.R. (3d) 81.
Again, while these various titles (and perhaps other variations on these themes) are used throughout the relevant case law, based on the same statutory sources and often with little discussion about a particular choice of title, it is readily apparent that the different titles are used to describe court-appointed officers with differing powers, whose respective appointments are intended to be and are tailored to the precise circumstances into which they are respectively deployed.
75It appears that the threshold for the appointment of an investigative receiver is lower than for receiver manager: see Black J.’s detailed review of the case law at paras. 113 – 159 of Georghiades. Black J. concludes, at para. 113, that the Court needs “to carefully consider the proposed role of a given court officer in identifying the correct test for their appointment”.
76In Akagi v. Synergy Group (2000) Inc., 2015 ONCA 368, the Court of Appeal identifies “consistent themes” that emerge from the authorities, and states, at para. 90:
Generally, the investigative receiver does not control the debtor’s assets or operate its business, leaving the debtor to continue to carry on its business in a manner consistent with the preservation of its business and property…
Finally, in all cases the investigative receivership must be carefully tailored to what is required to assist in the recovery of the claimant’s judgment while at the same time protecting the defendant's interests, and to go no further than necessary to achieve these ends.
77In addition, the Court must consider “the appropriateness of the proposed investigation, bearing in mind its usefulness and reasonableness under the circumstances, with due consideration to its expected costs and benefits”: Kerbel v. Morris Kerbel Holdings Limited, 2023 ONSC 529, at para. 48.
78An investigation under the OBCA is not intended to determine the rights of parties or to assist the parties to prepare for litigation: Kerbel, at paras. 55 and 59:
[A]n investigation is only an investigation, and is not a proceeding for the determination of rights. The investigation provided for by [the relevant section of the OBCA] is not one which should concern itself primarily with disputed or uncertain questions of law.
As has been observed by this Court, an investigation as contemplated in the OBCA is an extraordinary remedy and is not intended to assist the Court in making findings of oppressive conduct, and nor should it be used to assist parties to prepare for litigation.
79In the present case, the Applicants have not sought the appointment of an investigative receiver. The Applicants already have the preliminary forensic accounting report of March 15, 2024, and the parties have already consented to an interim monitor who has filed a first report. It is not clear to me that an investigative receiver could do much more at this stage. Nor did the Applicants bring a motion to expand the investigative powers of the interim monitor. The Applicants brought this Application for the appointment of a receiver with the power to “market and sell the Property, including the Farm Property and distribute the proceeds to the stakeholders on an equitable basis”. For the reasons given at paras. 58 and 65 above, I am not satisfied that the Court should appoint a “receiver or receiver-manager” over 195 Ontario or the 195 Companies at this stage of the proceedings.
80Nor am I prepared to consider the Applicants’ request to appoint a receiver over the Song Companies under s. 248 of the OBCA. As indicated above, this request was raised for the first time in the Applicants’ factum, filed three weeks before the Application was heard. Moreover, before I could consider the appointment of a receiver over the Song Companies, the Applicants would have to persuade the Court that they qualify as “complainants” under s. 248(1) of the OBCA, as defined by s. 245. The Applicants made no submissions on this point.
Conclusion
81For the foregoing reasons, the Application is dismissed.
82If the parties are not able to agree on costs, the Respondents may serve and file costs submissions not to exceed 3 pages plus costs outline and any offers to settle, within 20 days of the release of this decision. The Applicants may serve and file responding submissions within a further 15 days.
Justice R.E. Charney Released: December 16, 2024