CITATION: TCR Holding Corporation v. Ontario, 2010 ONCA 233
DATE: 20100330
DOCKET: C51033
COURT OF APPEAL FOR ONTARIO
Goudge, MacPherson and MacFarland JJ.A.
IN THE MATTER OF THE BUSINESS CORPORATIONS ACT, R.S.O. 1990, c. B.16, AS AMENDED AND IN THE MATTER OF TCR HOLDING CORPORATION
BETWEEN
TCR Holding Corporation
Applicant (Respondent)
and
Her Majesty the Queen in right of Ontario
Respondent
and
Henry Heidt and Angela Young
Interveners (Appellants)
S.R. Cameron and F. Stephen Finch, Q.C., for the appellants
J. Alan Aucoin and Katherine McEachern, for the respondent TCR Holding Corporation
No one appearing, for the respondent Her Majesty the Queen in right of Ontario
Heard: March 8, 2010
On appeal from the judgment of Justice Frank J.C. Newbould of the Superior Court of Justice dated August 19, 2009, with reasons reported at (2009), 64 B.L.R. (4th) 139.
MacPherson J.A.:
A. INTRODUCTION
[1] Following an application for rectification brought by TCR Holding Corporation (“TCR”), in which Henry Heidt and Angela Young intervened as added parties, Newbould J. set aside the amalgamation of TCR and several subsidiary companies nunc pro tunc. The interveners appeal the decision, dated August 19, 2009, and request that the order be set aside and judgment dismissing the application for amalgamation be entered.
B. FACTS
(1) The parties and events
a. June 2000 share purchase transaction
[2] In June 2000, the president of TCR, Trent Robinson, agreed to purchase Henry Heidt’s shares in Heidt Products Inc. (“HPI”), a manufacturer of school and institutional furniture in Waterloo. Heidt owned all the shares in HPI, and he agreed to a sale price of $11.5 million, payable $9 million at closing with a promissory note for the balance, payable in five years. The promissory note was secured by a guarantee from HPI and from “Holdco”, the corporate sole owner of the purchaser of HPI.
[3] 1420859 Ontario Limited (“859”) was subsequently incorporated to be the purchaser of HPI. Also incorporated was 1420846 Ontario Limited (“846”) as “Holdco”, the corporate sole owner of the purchaser, 859. In a share purchase agreement dated June 30, 2000, 859 as the purchaser of HPI gave a promissory note to Heidt for the $2.5 million balance. 846, as the owner of 859, provided the guarantee on the promissory note to Heidt.
[4] Therefore, as of June 30, 2000, TCR owned all the shares of 846; 846 owned all the shares of 859; and 859 acquired all the shares of HPI. On closing, 859 amalgamated with HPI to form HPI, making 846 the holder of the shares of HPI, and HPI gave Heidt a new promissory note for $2.5 million to replace that from 859, which 846 guaranteed by pledging the shares of HPI to Heidt. The only assets of 846 were the shares of HPI.
b. October 31, 2003 amended promissory note
[5] A new promissory note was issued by HPI to Heidt on October 31, 2003, for $2 million. This was the outstanding balance on the debt. Under the new promissory note, the date for payment was extended to July 6, 2010; however, HPI defaulted in payment of the new note on October 31, 2006. The outstanding balance at that time was $1.6 million. On November 1, 2006, a receiver was appointed for HPI. Unable to sell the assets, the receiver placed HPI into bankruptcy on December 21, 2006. HPI had assets of $2.4 million and liabilities of $12.6 million.
c. 2008 amalgamation
[6] On May 22, 2008, TCR amalgamated with several wholly owned subsidiary companies: 991 Victoria North Limited, Ferris Drive Limited, and 846. As a result of the amalgamation, TCR assumed the liabilities of 846, the guarantor of the HPI promissory note to Heidt. The amalgamation was recommended by Douglas Bruns, TCR’s accountant, and Paul Flemming, its solicitor.
[7] Bruns recommended the amalgamation for tax planning purposes, but stated that the inclusion of 846 played no role in the tax planning: he meant the amalgamation to dissolve 846 as he considered it a purposeless “shell company”. Bruns also stated that had he known about the potential liability on the guarantee, he would never have recommended 846’s amalgamation with TCR. Flemming, though he was involved in the June 2000 transaction, stated that he had forgotten about 846’s outstanding obligation to Heidt as a result of its guarantee on the promissory note. Robinson stated that he was unaware that 846 had guaranteed the promissory note to Heidt, and certified 846 as solvent prior to the amalgamation, unaware of its assets and liabilities.
(2) The litigation
[8] Heidt commenced litigation against TCR and the law firm that had acted contemporaneously for Heidt, Robinson and their respective corporations. By Statement of Claim issued on October 10, 2008, Heidt claimed against TCR based on the guarantee of 846 that had become a potential liability of TCR through the amalgamation.
[9] TCR delivered a Statement of Defence and Crossclaim, pleading: (a) that the sole purpose of including 846 in the amalgamation was to clean up and streamline the corporate holdings of TCR; (b) that Flemming and Bruns had mistakenly and negligently failed to take into consideration any ongoing obligations of 846 pursuant to the guarantee in the amalgamation; and (c) the defences of mistake and non est factum.
[10] TCR then made an application for an order setting aside the amalgamation of TCR and its subsidiary companies, including 846, principally on the basis that 846 had been included in the amalgamation in error. The respondent Ontario, on behalf of the Director appointed under the Business Corporations Act, R.S.O. 1990, c. B.16, did not oppose the order sought and takes no position in this court.
[11] The application judge concluded that the intention of TCR, as formed by Robinson on the advice of Bruns and Flemming, was that 846 was to be included in the amalgamation as a corporation without any liabilities. He defined the mistake to be rectified as Robinson’s lack of knowledge as to the liabilities of 846, Flemming’s lack of recollection, and Bruns’ assumption that 846 had no liabilities, preparing yearly financial statements for 846 on that basis. He found further that no one would be prejudiced by an order setting aside the amalgamation, neither TCR nor the interveners. With regard to the interveners, he stated that they would not be prejudiced as it could not be said that they were losing something to which they were entitled; in fact, he considered it a windfall to the interveners if the amalgamation was not set aside.
[12] The application judge set aside the amalgamation, noting that TCR and the other companies involved would be free to undertake a new amalgamation. He also noted in passing that he saw no reason that the court could not also grant to TCR relief against mistake, an alternative equitable ground paired with rectification.
[13] The interveners appeal the application judge’s decision.
C. ISSUE
[14] The main issue on the appeal is whether the application judge erred in setting aside the amalgamation of TCR and its subsidiary companies. The appellants also challenge the application judge’s costs award.
D. ANALYSIS
[15] The appellants contend that the application judge made several factual and legal errors in his analysis culminating in the setting aside of the amalgamation of TCR and its subsidiary companies.
[16] First, the appellants assert that the application judge erred by concluding that the intention of the parties seeking the amalgamation was to include 846 in the amalgamation as a company with no liabilities. Rather the intent, claim the appellants, was a simpler one – to amalgamate the four companies, irrespective of their current financial situations.
[17] I do not accept this submission. The application judge’s conclusion on this point is a factual one and is, therefore, subject to substantial deference. The application judge reviewed the relevant evidence, including the evidence of Robinson, Flemming and Bruns, and concluded that “the intention of TCR … was that 846 was to be included in the amalgamation as a corporation without any liabilities.” I see no basis for interfering with this conclusion.
[18] Second, the appellants contend that the creation by the amalgamation of a debt owing to them is not, as the application judge found, a windfall. 846 owed money to the appellants and TCR stepped into its shoes, thereby becoming liable to pay off the debt. It follows, say the appellants, that the application judge also erred by concluding that the appellants would suffer no prejudice if the amalgamation was set aside; on the contrary, the appellants’ prejudice would be an inability, bordering on impossibility, of recovering the debt owed to them by 846.
[19] In a sense, this is the flip side of the appellants’ first submission. Importantly, like the first submission, it implicates the application judge’s assessment of the factual record. The application judge carefully reviewed the history of the transactions, including the genesis of, and rationale for, 846’s guarantee. He concluded:
The covenant of TCR was never bargained for and would be a windfall if the amalgamation were not set aside. I share the view of Farley J. in Re: GT Group Telecom Inc. (2004), 2004 52533 (ON SC), 5 CBR (5th) 230 that it would be inappropriate for a party, in that case the CCRA, to claim a windfall benefit which arose through an inadvertent mistake.
In my view, this conclusion cannot be considered a palpable and overriding error.
[20] Third, the appellants submit that the application judge erred in his understanding and application of the principle of rectification.
[21] In Snell’s Equity, 31st ed. (John McGhee ed., London: Sweet & Maxwell, 2005), the equitable principle of rectification is defined at para. 14-02:
There will be cases where the terms of the instrument do not accord with the true agreement between the parties: a term may have been omitted, or an unwanted term included, or a term may be expressed in the wrong way. In such cases, equity has power to reform, or rectify, that instrument so as to make it accord with the true agreement. What is rectified is not a mistake in the transaction itself, but a mistake in the way in which that transaction has been expressed in writing.
[22] The appellants assert that although the application judge purported to conduct a rectification analysis, his actual conclusion – setting aside the amalgamation – does not comport with the above definition of the remedy. In light of the application judge’s factual conclusion that “the true intention of TCR … was that 846 was to be included in the amalgamation as a corporation without any liabilities”, they argue that, if the law permitted, the proper rectification order would have been to amend the amalgamation to reflect this intention. This is not what the application judge did; instead, he simply set aside the amalgamation, effectively sending all of the parties back to ‘square one’.
[23] There is some force to this submission. A pure rectification order amending the amalgamation to reflect the parties’ intention that 846 was joining the amalgamated company with no liabilities would have violated s. 178(2)(a)(i) of the Business Corporations Act, which provides:
178(2) The articles of amalgamation shall have attached thereto a statement of a director or an officer of each amalgamating corporation stating that,
(a) there are reasonable grounds for believing that,
(i) each amalgamating corporation is and the amalgamated corporation will be able to pay its liabilities as they become due,
[24] In any event, the application judge did not make a rectification order along these lines. Rather, although he used the analysis and language of rectification, in the end he simply set aside nunc pro tunc the amalgamation.
[25] The question then becomes: was this order lawful and appropriate? In my view, it was.
[26] Broadly speaking, a superior court has “all the powers that are necessary to do justice between the parties”: see 80 Wellesley St. East Ltd. v. Fundy Bay Builders Ltd., 1972 535 (ON CA), [1972] 2 O.R. 280 (C.A.), at p. 282. More specifically, “superior courts have equitable jurisdiction to relieve persons from the effect of their mistakes”: see 771225 Ontario Inc. v. Bramco Holdings Co. (1995), 1995 745 (ON CA), 21 O.R. (3d) 739 (C.A.), at p. 741.
[27] This was the alternative basis for the application judge’s order. After reviewing the relevant evidence, he characterized the inclusion of a still debt-liable 846 in the amalgamation as “an inadvertent mistake” and, citing Bramco and this court’s decision in Attorney General of Canada v. Juliar (2000), 50 O.R. (30) 728, concluded that there was “no reason not to grant the relief to TCR under this equitable jurisdiction to relieve against mistake.” I see no basis for disagreeing with this analysis or with the application judge’s exercise of discretion in setting aside the amalgamation. The amalgamating companies agreed to the amalgamation based on the mistake that 846 was debt free.
[28] Finally, the appellants submit that the application judge should not have awarded costs to TCR because it was TCR’s fault that the application became necessary.
[29] I disagree. The respondent in the application, her Majesty the Queen in right of Ontario, did not contest the application. The appellants, as interveners on the application, did. Their intervention generated costs to TCR in preparation and in response to their position. The application judge, in the exercise of his discretion, made a costs order in favour of TCR. I would not interfere with this order.
[30] I would dismiss the appeal. The respondent is entitled to its costs of the appeal which I would fix at $32,000 inclusive of disbursements and GST.
RELEASED: March 30, 2010 (“S.T.G.”)
“J.C. MacPherson J.A.”
“I agree S.T. Goudge J.A.”
“I agree J MacFarland J.A.”