Lederer et al. v. 372116 Ontario Limited c.o.b. Hemispheres International Manufacturing Company et al. [Indexed as: Lederer v. 372116 Ontario Ltd.]

53 O.R. (3d) 203

[2001] O.J. No. 565

Docket Nos. C35340, C34820 and C34836

Court of Appeal for Ontario

Osborne A.C.J.O., Goudge and Sharpe JJ.A.

February 21, 2001

Corporations--Derivative actions--Intended defendants in derivative action moved unsuccessfully for leave to intervene in application under s. 246 of Business Corporations Act for leave to commence derivative action--Motions judge did not err in dismissing motion to intervene--Proceeding for leave to commence derivative action may be brought by way of application rather than motion--Intended defendants not required to be served with notice under rule 37.01(1)--Business Corporations Act, R.S.O. 1990, c. B.16, s. 246--Rules of Civil Procedure, R.R.O. 1990, Reg. 194, rule 37.01(1).

The respondents brought an application seeking leave pursuant to s. 246 of the Business Corporations Act, to commence a derivative action in the name of a company. The application was brought pursuant to rule 14.05(2) of the Rules of Civil Procedure. The proposed lawsuit contended that each of the appellants aided the sole officer and director of the company to divert assets, income and economic opportunities of the company to his own benefit. The appellants moved to be added as intervening respondents to the application. The motion to intervene was dismissed. The appellants appealed. They argued that leave to commence a derivative action must be obtained by notice of motion and that, by virtue of rule 37.07(1), service on them was mandatory because they would be affected by the order sought. As a result, they argued, they were entitled to participate in the application for leave to commence the derivative action. They also argued that the motions judge erred in concluding that there was no reason for them to become involved in an issue that was essentially one between the complainants and the directors of the company.

Held, the appeal should be dismissed.

The plain language of s. 246 of the Act clearly permits the proceeding for leave to be brought by way of application. Since the respondents were not obliged to proceed by motion, the service provisions of rule 37.07(1) could not avail the appellants, and they could only gain the right to participate in the application for leave by moving successfully to intervene pursuant to rule 13.01.

The motions judge did not err in dismissing the application for leave to intervene. While there may be exceptional cases in which intended defendants in a derivative action ought to be given leave to intervene in an application under s. 246, this case was not one of them. The appellants would be able to bring an attack on the action once it was commenced and served on them.

APPEAL from a judgment of Nordheimer J. (2000), 2000 22408 (ON SC), 50 O.R. (3d) 282, 48 C.P.C. (4th) 110 dismissing motion for leave to intervene in application for leave to commence derivative action.

Cases referred to Chilian v. Augdome Corp. (1991), 1991 7335 (ON CA), 2 O.R. (3d) 696, 78 D.L.R. (4th) 129, 44 O.A.C. 263, 49 C.P.C. (2d) 1 (C.A.); Lederer v. 372116 Ontario Ltd., [2000] O.J. No. 4171 (S.C.J.); Samuel Manu-Tech Inc. v. Redipac Recycling Corp., [1998] O.J. No. 4766 (Gen. Div.) Statutes referred to Business Corporations Act, R.S.O. 1990, c. B.16, s. 246 Rules and regulations referred to Rules of Civil Procedure, R.R.O. 1990, Reg. 194, rules 13.01, 14.01(3), 14.05(2), 37.07(1), 38.06

Bryan Finlay, Q.C., for appellant Fraser Milner Casgrain LLP. Gordon D. Capern and Megan E. Shortreed, for applicants Sonya Lederer and Maxine Cooper. Frederick L. Myers and Lindsay P. Hill, for Ray, WECO and KPMG. Martin Teplitsky, for Allan Fenwick. Ronald G. Slaght, for respondent Susan Fenwick. Terrence J. O'Sullivan and Rocco Di Pucchio, for 372116 Ontario Ltd. c.o.b. Hemispheres International Manufacturing Co.

The judgment of the court was delivered by

[1] GOUDGE J.A.: -- The appellants Fraser Milner Casgrain and Keith Ray, KPMG LLP and Wm. Eisenberg & Co. each moved to be added as intervening respondents to the application brought by Sonya Lederer and Maxine Cooper, the respondents in this appeal. Nordheimer J. dismissed both motions to intervene. The appellants appealed to this court and on December 15, 2000, this panel dismissed both appeals with reasons to follow. These are those reasons.

[2] The relevant facts can be simply stated. The underlying application was brought by the respondents seeking leave pursuant to s. 246 of the Ontario Business Corporations Act, R.S.O. 1990, c. B.16 ("the Act") to commence a derivative action in the name of a company called Hemispheres. The applicants (who are the respondents in this appeal) each own 30 per cent of the company. The remaining 40 per cent is owned by their brother Allan Fenwick who is also the sole officer and director of Hemispheres. The proposed lawsuit asserts in essence that Allan Fenwick used his position as the controlling mind of Hemispheres to divert assets, income and economic opportunities of the company to his own benefit. The proposed lawsuit further contends that each of the appellants aided Mr. Fenwick in this diversion in breach of their obligations to the company and to the respondents personally. The appellants moved to intervene in the respondents' application for leave to commence this lawsuit.

Analysis

[3] Section 246 of the Act reads as follows:

246.(1) Derivative Actions -- Subject to subsection (2), a complainant may apply to the court for leave to bring an action in the name and on behalf of the corporation or any of its subsidiaries, or intervene in an action to which any such body corporate is a party, for the purpose of prosecuting, defending or discontinuing the action on behalf of the body corporate.

(2) Idem -- No action may be brought and no intervention in an action may be made under subsection (1) unless the complainant has given fourteen days' notice to the directors of the corporation or its subsidiary of the complainant's intention to apply to the court under subsection (1) and the court is satisfied that,

(a) the directors of the corporation or its subsidiary will not bring, diligently prosecute or defend or discontinue the action;

(b) the complainant is acting in good faith; and

(c) it appears to be in the interests of the corporation or its subsidiary that the action be brought, prosecuted, defended or discontinued.

(3) Application -- Where a complainant on an application made without notice can establish to the satisfaction of the court that it is not expedient to give notice as required under subsection (2), the court may make such interim order as it thinks fit pending the complainant giving notice as required.

(4) Interim order -- Where a complainant on an application can establish to the satisfaction of the court that an interim order for relief should be made, the court may make such order as it thinks fit.

[4] The underlying application by the respondents was brought pursuant to rule 14.05(2).

14.05(2) A proceeding may be commenced by an application to the Superior Court of Justice or to a judge of that court, if a statute so authorizes.

[5] The appellants' motions to intervene in the application were made under rule 13.01 which is as follows:

13.01 (1) A person who is not a party to a proceeding may move for leave to intervene as an added party if the person claims,

(a) an interest in the subject matter of the proceeding;

(b) that the person may be adversely affected by a judgment in the proceeding; or

(c) that there exists between the person and one or more of the parties to the proceeding a question of law or fact in common with one or more of the questions in issue in the proceeding.

(2) On the motion, the court shall consider whether the intervention will unduly delay or prejudice the determination of the rights of the parties to the proceeding and the court may add the person as a party to the proceeding and may make such order as is just.

[6] The appellants argue that the method of proceeding used by the respondents is misconceived. They say that leave to commence a derivative action must be obtained by notice of motion because rule 14.01(3) says that when leave to commence a proceeding is required it shall be obtained by motion. They then go on to argue that, by virtue of rule 37.07(1), service on them was mandatory because they will be affected by the order sought. They say that, as a result, they are entitled to participate in the application seeking leave to commence the derivative action.

[7] I disagree. This argument was not dealt with by Nordheimer J. because it was first raised in this court. Its fatal flaw is that it ignores the straightforward language of s. 246 of the Act. Section 246(1) provides that a complainant "may apply" for leave to commence a derivative action. Sections 246(3) and (4) both provide for forms of interim relief when such an "application" is made. As Morden A.C.J.O. (as he then was) said in Chilian v. Augdome Corp. (1991), 1991 7335 (ON CA), 2 O.R. (3d) 696 at p. 711, 78 D.L.R. (4th) 129 (C.A.):

While the foregoing indicates the permissible forms of proceeding encompassed by "may apply" in a statutory provision, it should not obscure the commonly held understanding that when the legislature uses this term, particularly in modern statutes, it contemplates, generally, the use of the more summary form of proceeding, the application.

[8] As Morden A.C.J.O. also states at p. 709, the rules are subordinate legislation and it is fundamental that the legislature has the last word on the method of procedure to be used. What matters is the legislation. In my view, the plain language of s. 246 of the Act clearly permits the proceeding for leave to be brought by way of application. Since that is what was done here we need not decide whether the proceeding must only be brought by application. Suffice it to say that the respondents were not obliged to proceed by motion and hence the service provisions of rule 37.07(1) cannot avail the appellants.

[9] Rule 38.06 provides that since the appellants were not named as parties to the application, the respondents were not obliged to serve them. The appellants could therefore gain the right to participate in the application for leave only if they were able to move successfully to intervene pursuant to rule 13.01.

[10] This they failed to do before Nordheimer J. His fundamental conclusion was that there was no reason in principle why the appellants should become involved in an issue (namely, leave to commence a derivative action) that is essentially one between the complainants and the directors of the company. He went on to add that the interest of the appellants would likely be represented adequately on the application by Hemispheres and Allan Fenwick. While he found that the appellants may be adversely affected by the results of the application (in that they may then be drawn into a derivative action), this did not outweigh the added complexity that their addition would bring to the application for leave. He therefore denied to grant the appellants leave to intervene.

[11] Before us the appellants argued that Nordheimer J. erred in reaching this conclusion, the more so because at the opening of the appeal, counsel for Hemispheres and Allan Fenwick indicated (for the first time) that they would not be appearing on the application for leave and would not therefore be advancing the interest of the appellants.

[12] I disagree with this argument. In my view, Nordheimer J. reached the correct conclusion.

[13] There is no doubt that rule 13.01 calls for the exercise of a judicial discretion. I see no basis to interfere with the exercise of that discretion made by Nordheimer J. on the material that he had before him. Indeed, even taking into account the new information that neither the company nor Mr. Fenwick intend to appear on the application for leave, I think Nordheimer J. reached the correct conclusion. I say that for these reasons.

[14] First, I agree with Nordheimer J. (and prior to him Lane J. in Samuel Manu-Tech Inc. v. Redipac Recycling Corp., [1998] O.J. No. 4766 (Gen. Div.)) that the seeking of leave to commence a derivative action under s. 246 of the Act is fundamentally a proceeding between the complainants on the one hand and the corporation and the directors on the other. The complainants seek to have the company do something which they say is in its interest but which the directors refuse to authorize. That these are the core players in the application for leave is confirmed by s. 246(2) which requires that advance notice of the complainants' intention to apply for leave be given solely to the directors of the company. There is no suggestion in s. 246 that intended defendants are to be participants in an application for leave to commence a derivative action.

[15] Second, I agree with Ground J. in Lederer v. 372116 Ontario Ltd., [2000] O.J. No. 4171 (S.C.J.) that the application procedure envisaged by s. 246 is intended to be expeditious so that if litigation is necessary in the interest of the corporation its commencement will not be unduly delayed. This suggests that additional participants in a leave application beyond those envisaged by s. 246 ought to be the exception, not the norm. There is nothing in the record here to suggest any such exceptional dimensions to this case.

[16] Third, if the appellants are excluded from the application for leave, their downstream rights as intended defendants are nevertheless fully protected. Once the action is commenced, they will be able to attack the proceeding against them as frivolous or vexatious, move for summary judgment, or take any other steps available to a defendant in any lawsuit. In so doing they will be able to make the same sorts of submissions that they indicate they wish to make on the leave application. Hence it is of no moment that the application for leave may go unopposed.

[17] Finally, it is hard to see why intended defendants in a derivative action should have any earlier opportunity to stop the proceedings than defendants in other proceedings just because the derivative action requires a leave application before it is begun.

[18] In summary, while there may be exceptional cases in which intended defendants in a derivative action ought to be given leave to intervene in the application under s. 246, this case is not one of them. The appellants will be fully able to bring an attack on the action once it is commenced and served on them. They have simply not demonstrated any exceptional circumstances that warrant a departure from the norm envisaged by s. 246. Hence, I think Nordheimer J. reached the right result.

[19] I would therefore dismiss the appeals with costs.

Appeal dismissed.