Malata Group (HK) Ltd. v. Jung

89 O.R. (3d) 36

Court of Appeal for Ontario,

MacPherson, Armstrong and Epstein JJ.A.

February 15, 2008

Corporations -- Oppression -- One of three shareholders of closely held corporation bringing oppression action alleging that another shareholder (who was also director) had misappropriated corporate funds -- Plaintiff not being required to proceed by way of derivative action -- Claims being properly advanced in oppression action -- Business Corporations Act, R.S.O. 1990, c. B.16, ss. 246, 248.

The plaintiff was one of three shareholders of M Ltd., a closely held corporation. The plaintiff was also a creditor of M Ltd. The defendant was another shareholder, and was also a director and officer of M Ltd. The plaintiff brought an action alleging that the defendant had misappropriated corporate funds, breached his fiduciary duty to M Ltd., and failed to act honestly and in the best interests of M Ltd. The plaintiff sought a declaration to that effect and orders requiring the defendant to return unlawfully diverted funds to M Ltd. The defendant moved for an order dismissing those claims on the ground that they were derivative in nature and required leave of the court as provided in s. 246 of the Ontario Business Corporations Act. The motion judge dismissed the motion and held that the claims were appropriately advanced in an oppression action. The defendant appealed.

Held, the motion should be dismissed. [page37 ]

There is not a bright-line distinction between the claims that may be advanced under the derivative action section of the Act and those that may be advanced under the oppression remedy provisions. Owing to this overlap, a court cannot determine which is the appropriate avenue for a claim to proceed through the simple application of a rule such as the rule in Foss v. Harbottle. Instead, a court must examine the relevant statutory text and the facts of the claim at issue. The oppression provision of the Act, s. 248, is drawn in broad language. Included in the list of remedies in s. 248(3) is a provision for "an order varying or setting aside a transaction or contract to which a corporation is a party and compensating the corporation or any other party to the transaction or contract". This provision contemplates a remedy under s. 248 that benefits the company itself even though the claim made by the complainant could also have been pursued by way of a derivative action. Allowing s. 248 oppression claims to proceed where there is harm to the corporation would not nullify s. 246 of the Act, because the two sections involve different threshold tests. Section 246 simply requires a violation of the corporation's legal rights. Section 248 requires, in the case of harm to the corporation, a violation of corporate legal rights that is oppressive or unfairly prejudicial, or that unfairly disregards the complainant's interests. In disputes involving closely held companies with relatively few shareholders, there is less reason to require the plaintiff to seek leave of the court. The small number of shareholders minimizes the risk of frivolous lawsuits against the corporation, thus weakening the main rationale for requiring a claim to proceed as a derivative action. The plaintiff could have proceeded by way of a derivative action. However, given the overlap between ss. 246 and 248 and the particular circumstances of this case, it was not required to do so. The impugned claims were properly advanced under the oppression remedy section of the Act.

APPEAL from the order of Ground J., [2007] O.J. No. 1704, 157 A.C.W.S. (3d) 317 (S.C.J.), dismissing a motion to dismiss certain claims in a statement of claim.

The judgment of the court was delivered by

Cases referred to C.I. Covington Fund Inc. v. White, 2000 22676 (ON SC), [2000] O.J. No. 4589, [2000] O.T.C. 865 (S.C.J.); Ford Motor Co. of Canada Ltd. v. Ontario Municipal Employees Retirement Board, [2004] O.J. No. 191, [2004] O.T.C. 53 (S.C.J.), consd Other cases referred to Deluce Holdings Inc. v. Air Canada (1992), 1992 7654 (ON SC), 12 O.R. (3d) 131, [1992] O.J. No. 2382, 98 D.L.R. (4th) 509, 8 B.L.R. (2d) 294, 13 C.P.C. (3d) 72 (Gen. Div.); Ford Motor Co. of Canada Ltd. v. Ontario Municipal Employees Retirement Board (2006), 2006 15 (ON CA), 79 O.R. (3d) 81, [2006] O.J. No. 27, 206 O.A.C. 61, 12 B.L.R.(4th) 189 (C.A.), supp. reasons [2006] O.J. No. 2179, 208 O.A.C. 125, 17 B.L.R. (4th) 169 (C.A.); Foss v. Harbottle (1843), 67 E.R. 189, 2 Hare 461 (Eng. V.-C.); Hercules Management Ltd. v. Ernst & Young, 1997 345 (SCC), [1997] 2 S.C.R. 165, [1997] S.C.J. No. 51, 115 Man. R. (2d) 241, 146 D.L.R. (4th) 577, 211 N.R. 352, 139 W.A.C. 241, [1997] 8 W.W.R. 80, 31 B.L.R. (2d) 147, 35 C.C.L.T. (2d) 115; Jabalee v. Abalmark Inc., [1996] O.J. No. 2609, 64 A.C.W.S. (3d) 754 (C.A.); Meditrust Healthcare Inc. v. Shoppers Drug Mart (2002), 2002 41710 (ON CA), 61 O.R. (3d) 786, [2002] O.J. No. 3891 (C.A.); Ontario (Securities Commission) v. McLaughlin, [1987] O.J. No. 1247 (H.C.J.) Statutes referred to Business Corporations Act, R.S.O. 1990, c. B.16, ss. 134(1), 246, 248 [as am.] Canada Business Corporations Act, R.S.C. 1985, c. C-44 Rules and regulations referred to Rules of Civil Procedure, R.R.O. 1990, Reg. 194, rule 21.01(3) [page38 ] Authorities referred to Keohnen, Markus, Oppression and Related Remedies (Toronto: Thomson Carswell, 2004) MacIntosh, Jeffrey G., "The Oppression Remedy: Personal or Derivative?" (1991) 70 Can. Bar Rev. 29

Terry Corsianos, for appellant. Brett D. Moldaver and Brendan Hughes, for respondent.

ARMSTRONG J.A.: --

Introduction

[1] This appeal concerns the relationship between derivative actions and oppression complaints under the Business Corporations Act, R.S.O. 1990, c. B.16 (the "Act"), and the impact on that relationship of the rule in Foss v. Harbottle [See Note 1 below that a shareholder has no personal cause of action for harm done to the corporation.

[2] The appellant moved before Justice Ground of the Superior Court of Justice to dismiss certain paragraphs of the statement of claim pursuant to rule 21.01(3)(b) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 on the ground that the claims advanced were derivative in nature and required leave of the court as provided in s. 246 of the Act. The motion judge declined the relief sought and held that the claims were appropriately advanced in an oppression action. In doing so, the motion judge observed [at para. 7] that "the rule in Foss v. Harbottle has been substantially diluted by the enactment of the derivative and oppression action provisions of the [Act]".

[3] The appellant also appeals the judge's order declining to dismiss two other paragraphs of the statement of claim pursuant to rule 21.01(3)(b) on the ground that they breach the notice provisions of a unanimous shareholder agreement.

[4] I would dismiss the appeal. [page39 ]

Facts

[5] The respondent, Malata Group (HK) Limited ("Malata HK"), commenced an action against the appellant, Henry Chi Hang Jung. According to the allegations in the statement of claim, Malata HK, Mr. Jung and Jimmy Jian Yuan Chen are the three shareholders of Malata Canada Ltd. Jung and Chen each own approximately 41 per cent of the common shares of Malata Canada. Malata HK owns approximately 18 per cent of the common shares of Malata Canada. Malata HK is also a creditor of Malata Canada. Jung, Chen and Malata HK are parties to a unanimous shareholder agreement. Messrs. Chen and Jung are also directors and officers of Malata Canada.

[6] Malata Canada is an Ontario corporation that imported and sold consumer electronic products manufactured in China. Malata Canada operated in the wholesale market in Canada and sold its products to customers such as Home Depot, Canadian Tire, Best Buy and Philips Electronics.

[7] Malata HK alleges in its statement of claim that Mr. Jung misappropriated corporate funds, breached his fiduciary duty to Malata Canada, and failed to act honestly and in the best interests of Malata Canada and Malata HK. It is alleged that such conduct has threatened the business life of the company and rendered Malata Canada incapable of paying its debt to Malata HK. Malata HK also alleges that Jung breached the shareholder agreement.

[8] In subparagraphs 1(a), (c), (d), (e) and (j) of the statement of claim, Malata HK seeks the following relief:

(a) An Order for a declaration that the Defendant, Henry Chi Hang Jung, is in breach of the Unanimous Shareholder Agreement among Jimmy Jian Yuan Chen, Malata Group (HK) Limited and Malata Canada Ltd., entered into on April 1st, 2004.

(c) An Order for a declaration that Henry Chi Hang Jung has acted [sic] and has failed to act honestly and in good faith as an officer and director of the Corporation in contravention of the Ontario Business Corporation Act, R.S.O., 1990 c. B-16.

(d) An Order for an ex-parte mandatory, interim mandatory, and mandatory injunction directing Henry Chi Hang Jung and the Canadian Imperial Bank of Commerce to forthwith immediately transfer and cause to be transferred the sum of $918,879.44 (USD) unlawfully diverted by him and deposited to an account solely operated by Henry Chi Hang Jung at the Canadian Imperial Bank of Commerce under the account name of Malata Canada Ltd. back to Malata Canada Ltd.'s corporate account at the Scotia Bank bearing account number: 459220012815.

(e) An Order for an ex-parte mandatory, interim mandatory, and mandatory injunction requiring Henry Chi Hang Jung forthwith to return [page40 ]$601,400.00 (CND) improperly removed by him on his instructions on or about January 13, 2005 from Malata Canada Ltd.'s corporate bank account at the Bank of Nova Scotia, bearing Account Number: 459220012815 and to forthwith provide the Plaintiffs with full details, banking records, instructions, and information as to where the said funds were transferred, to whose account, and to whose benefit including, but not limited to, all wiring instructions, account numbers, transit numbers, bank branch information, addresses, telephone numbers and fax numbers.

(j) An Order for a mandatory injunction requiring that Henry Chi Hang Jung sell all of his shares to the Plaintiffs in Malata Canada Ltd. pursuant to sections 9.42, 9.5 and 9.6 of the Unanimous Shareholder Agreement.

[9] In the motion, Mr. Jung sought to dismiss subparagraphs 1(c), (d) and (e) on the ground that the substance of the claims is derivative in nature and therefore required leave of the court before proceeding.

[10] Mr. Jung also sought to dismiss subparagraphs 1(a) and (f) on the ground that Malata HK had failed to give Mr. Jung 30 days to rectify his breaches of the shareholder agreement and therefore Malata HK lacked standing to advance these claims.

The Motion Judge's Reasons

[11] The motion judge's position is summarized in paras. 5, 6 and 7 of his reasons:

I am of the view that the relief in clauses (b) and (c) above is clearly appropriate in an oppression action in that it is premised on the conduct of the Defendant causing the business affairs of Malata Canada to be carried on or conducted in a manner that is oppressive or unfairly prejudicial to Malata HK. I am further of the view that it would be appropriate in an oppression action to seek the relief sought in clauses (a) and (j) above, being relief sought pursuant to the provisions of the unanimous shareholders agreement governing Malata Canada, in that it is the position of the Plaintiff that the same conduct constituted a breach of the unanimous shareholders agreement and entitles the Plaintiff to an order requiring that the Defendant sell his shares of Malata Canada to the Plaintiff. ...

The position of the Defendant appears to be principally based on the relief sought in clauses (d) and (e) above in that such relief is solely for the benefit of Malata Canada and the claims made by the Plaintiff in the action are therefore derivative in nature and cannot be brought within an oppression action. The defendant relies on the rule in Foss v. Harbottle as enunciated by La Forest J. in Hercules Management Ltd. v. Ernst & Young, 1997 345 (SCC), [1997] 2 S.C.R. 165 at paragraph 59 as follows:

The rule in Foss v. Harbottle provides that individual shareholders have no cause of action for any wrongs done to the corporation and that if an action is to be brought in respect of such losses, it must be brought either by the corporation itself (through management) or by way of a derivative action. [page41 ]

In my view, the Defendant's position ignores the development of the law in this province which recognizes that the rule in Foss v. Harbottle has been substantially diluted by the enactment of the derivative action and oppression action provisions of the OBCA and the case law recognizing that derivative actions and oppression actions are not mutually exclusive.

[12] In support of his conclusion, the motion judge relied on three cases: Ontario (Securities Commission) v. McLaughlin, [1987] O.J. No. 1247 (H.C.J.); Deluce Holdings Inc. v. Air Canada (1992), 1992 7654 (ON SC), 12 O.R. (3d) 131, [1992] O.J. No. 2382 (Gen. Div.); and Ford Motor Co. of Canada Ltd. v. Ontario Municipal Employees Retirement Board, [2004] O.J. No. 191, [2004] O.T.C. 53 (S.C.J.).

[13] In McLaughlin, Henry J., on a motion to strike out a statement of claim, considered the scope of the then-relatively new oppression remedy section (then s. 247) of the Act and its relationship with the derivative actions section (then s. 245) of the Act. In so doing, he made the following comment at para. 12:

Under the new Part XVII there is no inconsistency in a derivative action under sec. 245 requiring leave and sec. 247 not being so limited; leave is required under sec. 245 to protect the corporation from frivolous and unwarranted interference by disaffected claimants who seek to inject the corporation into litigation as a party plaintiff for which the corporation may initially have to provide the financing. The proceeding now created by sec. 247 on the other hand is quite different; it creates a new personal cause of action to which the corporation need not be a party. A careful reading of the statement of claim reflects a claim for payment direct to plaintiffs and not to Mascan.

[14] In Deluce, the defendant moved to strike certain paragraphs of the statement of claim as being outside the scope of the oppression remedy. In dismissing the motion, R.A. Blair J. said at p. 155 O.R.:

The other thrust of Air Canada's attack on the pleading was that the allegations raise claims which are the claims of Air Ontario and not those of Deluceco as shareholder. The action is therefore derivative in nature and Deluceco requires leave of the court to commence it in relation to these claims, counsel submit. There is authority, however, that merely because the plaintiffs in a minority shareholder oppression action rely on conduct which might in the first instance have caused harm to the company (and, therefore, give rise to a derivative claim), the plaintiffs are not deprived of their personal remedy under s. 241: see Ontario (Securities Commission) v. McLaughlin (1987), 11 O.S.C.B. 442 (H.C.J.) (Henry J.). Accordingly, again, it cannot be said to be plain, obvious and beyond doubt that the plaintiff cannot succeed.

[15] In Ford, Cumming J. said at para. 241:

Conduct which may result in harm to a company and may therefore be the subject of a derivative claim may also result in oppression to minority shareholders. The presence of a derivative action remedy does not preclude minority shareholders from pursuing their personal remedy under s. 241. The two [page42 ]are not mutually exclusive. (Jabalee v. Abalmark Inc., [1996] O.J. No. 2609 at para. 5 (C.A.); Ontario Securities Commission v. McLaughlin (1988), 11 O.S.C.B. 442, [1987] O.J. No. 1247 (H.C.J.)).

The Appeal

(i) The position of the appellant

[16] Counsel for the appellant submits that the motion judge erred in ruling that Malata HK has the legal capacity to seek a declaration (as in subparagraph 1(c) of the statement of claim) that Mr. Jung has breached his statutory duties to the company to act honestly and in good faith with a view to the best interests of the corporation as required by s. 134(1)(a) of the Act. As such, absent an order granting the leave of the court, the appellant lacks standing to proceed.

[17] In respect of subparagraphs 1(d) and (e) of the statement of claim, in which the appellant seeks the return of monies owed to Malata Canada, counsel for the appellant submits that the motion judge erred in holding that these claims could be advanced pursuant to the oppression remedy, because the harm alleged was harm to the company, and therefore the claim can only be advanced by way of derivative action with leave of the court.

[18] Counsel for the appellant also argues that the oppression remedy cannot be invoked against an individual acting in his personal capacity. He submits that Mr. Jung is being sued in his personal capacity and not in respect of his powers as a director. Counsel for the appellant concludes, therefore, that the oppression remedy simply does not apply in these circumstances.

[19] Counsel for the appellant further submits in respect of subparagraphs 1(a) and (j) that these claims assert breaches of the shareholder agreement which are subject to a 30-day notice period during which the appellant may correct its defaults. Since this action was commenced before the 30-day notice period had expired, the respondent lacked the capacity to commence the action and the motion judge erred in failing to so find.

(ii) The position of the respondent

[20] The respondent's position simpliciter is that the motion judge got it right. Respondent's counsel submits that derivative actions and claims made under the oppression remedy are not mutually exclusive. There is a degree of overlap between the two. Respondent's counsel relies upon the endorsement in Jabalee v. Abalmark Inc., [1996] O.J. No. 2609, 64 A.C.W.S. (3d) 754 (C.A.), where this court said at paras. 4-5: [page43 ]

The oppression remedy in section 248 of the Ontario Business Corporations Act is very broad and may well entitle a minority shareholder in a closely-held company to relief arising out of a director's breach of fiduciary duty.

Equally, although some of the claims in the proposed amended statement of claim could be the subject of a derivative action, they may also make out a case of oppression. The two are not mutually exclusive. See Deluce Holdings Inc. v. Air Canada (1992), 1992 7654 (ON SC), 12 O.R. (3d) 131 (Gen. Div.) and PMSM Investments Limited v. Bureau (1995), 25 O.R. (3d) 586 (Gen. Div.).

[21] Counsel for the respondent also argues that the respondent's claims are based upon breaches of the shareholder agreement to which the respondent is a party and therefore his client is entitled to sue Mr. Jung directly for those breaches whether or not the breaches also caused harm to the company.

[22] Counsel for the respondent further submits that Malata HK's failure to abide by the 30-day notice period for the curing of defaults under the shareholder agreement does not oust the jurisdiction of the court to entertain this action.

Analysis

(i) The rule in Foss v. Harbottle

[23] Laskin J.A. in Meditrust Healthcare Inc. v. Shoppers Drug Mart (2002), 2002 41710 (ON CA), 61 O.R. (3d) 786, [2002] O.J. No. 3891 (C.A.) succinctly stated the rule in Foss v. Harbottle as follows at para. 12:

The rule in Foss v. Harbottle provides simply that a shareholder of a corporation -- even a controlling shareholder or the sole shareholder -- does not have a personal cause of action for a wrong done to the corporation. The rule respects a basic principle of corporate law: a corporation has a legal existence separate from that of its shareholders. See Salomon v. Salomon & Co. Ltd., [1897] A.C. 22, 66 L.J. Ch. 35 (H.L.). A shareholder cannot be sued for the liabilities of the corporation and, equally, a shareholder cannot sue for the losses suffered by the corporation.

[24] In Meditrust at para. 16, Laskin J.A. also considered the limits to the rule in Foss v. Harbottle as described by the Supreme Court of Canada in Hercules Management Ltd. v. Ernst & Young, 1997 345 (SCC), [1997] 2 S.C.R. 165, [1997] S.C.J. No. 51, at para. 62:

The rule in Foss v. Harbottle does not, of course, preclude an individual shareholder from maintaining a claim for harm done directly to it. Again, in Hercules, La Forest J. explained the limit of the rule at p. 214 S.C.R.:

One final point should be made here. Referring to the case of Goldex Mines Ltd. v. Revill (1974), 1974 433 (ON CA), 7 O.R. (2d) 216 (C.A.), the appellants submit that where a shareholder has been directly and individually harmed, that shareholder may have a personal cause of action even though the corporation may also have a separate and distinct cause of action. Nothing in the foregoing paragraphs should be understood to detract from this principle. In finding that claims in respect of losses stemming from an alleged inability to oversee or supervise management are really [page44 ]derivative and not personal in nature, I have found only that shareholders cannot raise individual claims in respect of a wrong done to the corporation. Indeed, this is the limit of the rule in Foss v. Harbottle.

(Emphasis in original)

(ii) Can the claims advanced in subparagraphs 1(c), (d) and (e) be advanced under the oppression remedy of the Act?

[25] The answer to this question raises the distinction between derivative actions and oppression claims. One author has described this distinction as "murky": see Markus Keohnen, Oppression and Related Remedies (Toronto: Thomson Carswell, 2004) at 443. Another author observed in 1991 that "for every holding that the oppression remedy may not be enlisted in a derivative cause, there is an opposite holding": see Jeffrey G. MacIntosh, "The Oppression Remedy: Personal or Derivative?" (1991) 70 Can. Bar Rev. 29 at 49.

[26] It appears from my reading of the case law that there is not a bright-line distinction between the claims that may be advanced under the derivative action section of the Act and those that may be advanced under the oppression remedy provisions.

[27] Owing to this overlap between the oppression remedy and the derivative action, a court cannot determine which is the appropriate avenue for a claim to proceed through the simple application of a rule such as the rule in Foss v. Harbottle. Instead, a court must examine the relevant statutory text and the facts of the claim at issue. I now turn to the language of s. 248.

[28] Subsection 248(2) of [the] Act defines the nature of the conduct which is covered by the oppression remedy:

248(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.

Subsection 248(3) sets out a non-exhaustive list of remedial orders available to the court. In its preamble, s. 248(3) states that "the court may make any interim or final order it thinks fit". [page45 ]

[29] It is stating the obvious to say that s. 248 of the Act is drawn in broad language, both in terms of the harms it addresses and the non-exhaustive list of remedies it contemplates. Included in the list of remedies in s. 248(3) is a provision for "an order varying or setting aside a transaction or contract to which a corporation is a party and compensating the corporation or any other party to the transaction or contract": see s. 248(3)(h) (emphasis added). This provision contemplates a remedy under s. 248 that benefits the company itself even though the claim made by the complainant could also have been pursued by way of a derivative action.

[30] As already noted, this court recognized in Jabalee, supra, that there is a degree of overlap between the claims that could be made out as derivative actions and those that could fall under the oppression remedy. As this court said at para. 5 of the endorsement, "[t]he two are not mutually exclusive."

[31] One situation in which the overlap between the oppression remedy and the derivative action can be found is where directors in closely held corporations engage in self- dealing to the detriment of the corporation and other shareholders or creditors. A relevant case in this respect is C.I. Covington Fund Inc. v. White, 2000 22676 (ON SC), [2000] O.J. No. 4589, [2000] O.T.C. 865 (S.C.J.), in which Swinton J. observed at para. 41:

A number of oppression cases turn on the fact that there has been conduct by directors or majority shareholders that amounts to self-dealing at the expense of the corporation or other corporate stakeholders (SCI Systems Inc. v. Gornitzki Thompson & Little Co. (1997), 36 B.L.R. (2d) 207 (Ont. Ct. (Gen. Div.)), aff'd (1998), 1998 17741 (ON SCDC), 110 O.A.C. 160 (Div. Ct.)); Neri v. Finch Hardware (1976) Ltd. (1995), 1995 7412 (ON SC), 20 B.L.R. (2d) 216 (Ont. Ct. (Gen. Div.)); Loveridge Holdings Ltd. v. King- Pin Ltd. (1991), 5 B.L.R. (2d) 195 (Ont. Ct. (Gen. Div.)). For example, in SCI, there was oppression because the directors unfairly removed assets from the corporation so as to prevent the payment of a corporate debt and to benefit themselves.

[32] In Covington, the complainant purchased shares in and loaned money to a closely held company. The respondent, the CEO and majority shareholder of the company (presumably also a director) misappropriated intellectual property (patents) belonging to the company, resulting in the company's inability to pay its creditors. Invoking s. 248(3) of the Act, the court ordered the respondent to cease using the technology related to the patents and assigned the patents and patent applications to the company. In reaching this conclusion, Swinton J. said at paras. 46 and 47:

Section 248(3) of the OBCA confers a broad discretion on the Court in determining an appropriate remedy, including "any interim or final order it thinks fit". The purpose of the remedy is to rectify the oppression. The provision has been used to make compensation orders against individual directors where their conduct has been found oppressive in small, closely held [page46 ]corporations such as Delta, and they have personally benefited -- for example, by the removal of assets from the corporation (see, for example, SCI; Sidaplex, supra).

In this case, Delta has represented that the patents and patent applications for the Snowfluent technology are the property of the corporation, and White, as a principal of the corporation, was behind those representations. The corporation has a right to claim beneficial ownership at common law. This is not a case where a monetary award against White will adequately protect the interests of the stakeholders, especially given his evidence that he faces financial difficulties personally. If Delta's proprietary interest is not protected, the corporation will be denied the value of the patents, both in terms of possible licensing fees for their use and their value if they can be sold. Clearly, the creditors will be in a better position to recoup some of their funds if the patents are assets of the corporation which can be sold.

[33] I find Swinton J.'s analysis persuasive and useful. Although not identical, the circumstances in Covington are not dissimilar from the circumstances alleged in the statement of claim in this case. The complainant in each case is a shareholder and creditor of a closely held corporation. In both cases, the complainant alleges misappropriation of corporate property by another shareholder and director. In both cases, a loss to the company results in a derivative loss to the complainant.

[34] This analysis begs the question of whether there is any meaningful distinction between the oppression remedy under s. 248 of the Act and the derivative action under s. 246 of the Act. In my view, allowing s. 248 oppression claims to proceed where there is harm to the corporation would not nullify s. 246, because the two sections involve different threshold tests. Section 246 simply requires a violation of the corporation's legal rights. On the other hand, s. 248 requires, in the case of harm to the corporation, a violation of corporate legal rights that is oppressive or unfairly prejudicial, or that unfairly disregards the complainant's interests.

[35] It is perhaps worth noting that another relevant difference between the derivative action and the oppression remedy relates to costs. Subsection 247(d) explicitly allows a court to order the corporation to pay the legal fees or other costs reasonably incurred in connection with a derivative action. The oppression remedy section of the Act, though it invests courts with broad remedial authority, contains no such provision.

[36] On the appeal of the Ford case, supra, Rosenberg J.A., in a much different fact situation, considered the distinction between personal causes of action and derivative actions in the context of the oppression remedy under the Canada Business Corporations Act, R.S.C. 1985, c. C-44. He observed at paras. 111 and 112:

It seems to me that it would be a serious mistake to attempt to confine the broad discretion granted courts by the oppression remedy within a formal [page47 ]construct of causes of action. To do so could bring with it all the complexities of the common law as to when a shareholder might, not-withstanding the rule in Foss v. Harbottle . . . maintain a personal action and thrust those complexities into the oppression remedy. Parliament could not have intended such a result. The breadth of the remedy to which these shareholders are entitled must turn on the wording of the statutory provisions.

While s. 241 contemplates remedies that benefit the corporation or shareholders as a whole, it is nevertheless founded on the principle of a wrong done to a shareholder or identifiable group of shareholders. Section 241(2)(a) (the provision relied upon in this case) is drawn in broad terms but it depends upon a finding that the complained of act or omission by the corporation or any of its affiliates "is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer".

See Ford Motor Co. of Canada Ltd. v. Ontario Municipal Employees Retirement Board (2006), 2006 15 (ON CA), 79 O.R. (3d) 81, [2006] O.J. No. 27 (C.A.).

[37] While Rosenberg J.A. makes it clear in Ford that the minority shareholder in that case was seeking a personal remedy, i.e., damages, I find that his reasoning in the above paragraphs informs the approach to be taken to the issue raised in this case.

[38] It is important in my view that in this case, we have a closely held corporation. It seems to me that if the alleged oppressive conduct is made out when Malata HK is one of three shareholders and, more particularly, is a major creditor of Malata Canada, it is appropriate for Malata HK to seek a return of the monies to Malata Canada under s. 248 of the Act. Malata HK could have proceeded by way of a derivative action. However, given the overlap between ss. 246 and 248 of the Act and the particular circumstances of this case, I do not believe that it was required to do so.

[39] In disputes involving closely held companies with relatively few shareholders, such as the case at bar and Covington, there is less reason to require the plaintiff to seek leave of the court. The small number of shareholders minimizes the risk of frivolous lawsuits against the corporation, thus weakening the main rationale for requiring a claim to proceed as a derivative action.

[40] In the result, I am satisfied that the claims in subparagraphs 1(c), (d) and (e) of the statement of claim are properly advanced under the oppression remedy section of the Act.

[41] Counsel for the appellant also submits that the oppression remedy cannot be invoked against an individual in his personal capacity. He argues that Mr. Jung was acting personally and not as a director of Malata Canada when he is alleged to have misappropriated the company's funds. This is a matter better left to the trial judge who will have the benefit of argument made on a full trial record. I would not give effect to this ground of appeal. [page48 ]

(iii) Are the claims advanced under subparagraphs 1(a) and (j) barred by reason of the failure to give 30 days' notice under the shareholder agreement?

[42] In respect of the claims asserted in subparagraphs (a) and (j) of the statement of claim, I am unable to find anything in the notice provisions of the shareholder agreement that would preclude the respondent from commencing the action prior to the expiry of the notice period. The notice period simply provides an opportunity for the appellant to cure the alleged breaches; it does not limit the availability of resort to the court. In my view, it would take express language in the agreement to accomplish that result, and the agreement here contains no such language.

Disposition

[43] For the above reasons, I would dismiss the appeal.

Costs

[44] The parties are agreed that the appropriate award for the costs of the appeal is $5,000 inclusive of disbursements and GST. I would make that order in favour of the respondent.

Appeal dismissed.

Notes

Note 1: Foss v. Harbottle (1843), 67 E.R. 189, 2 Hare 461 (Eng. V.-C.), Wigram V.C.