COURT OF APPEAL FOR ONTARIO

CITATION: Osztrovics Estate v. Osztrovics Farms Ltd., 2015 ONCA 463

DATE: 20150622

DOCKET: M45166 (C60373)

Brown J.A. (In Chambers)

In the Matter of the Bankruptcy of Victor Osztrovics of the Town of Burford, in the Province of Ontario

BETWEEN

PricewaterhouseCoopers Inc. in its capacity as Trustee of the Estate of Victor Osztrovics, a Bankrupt

Responding Party

and

Osztrovics Farms Ltd., Elysia Osztrovics and Violet Osztrovics

Moving Parties

Alastair J. McNish, for the moving parties

Christopher Horkins, for the responding party

Heard: June 12, 2015

ENDORSEMENT

OVERVIEW

[1] The applicants, Osztrovics Farms Ltd. (“OFL”), Elysia Osztrovics and Violet Osztrovics (collectively the “Osztrovics Applicants”), seek leave pursuant to s. 193(e) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, to appeal from the order of Wilton-Siegel J. dated April 9, 2015 (the “Order”) (reasons reported at 2015 ONSC 2079). The Order dismissed the Osztrovics Applicants’ appeal from the order of Registrar Short dated August 6, 2014 (reasons reported at 2014 ONSC 4405), and granted the cross-appeal of PricewaterhouseCoopers Inc., the Trustee in bankruptcy of the estate of Victor Osztrovics, who held shares in OFL.

[2] Back in November, 2012, the Trustee requested from OFL certain information that it required to value the bankrupt’s shares in the corporation. To date, OFL has refused to provide this information. The effect of the Order is to require OFL to disclose to the Trustee a list of documents pursuant to BIA s. 164 and to require Elysia, the bankrupt’s wife, and Violet, the bankrupt’s mother, to submit to oral examinations pursuant to BIA s. 163.

[3] As a preliminary matter, the Trustee submits that the Osztrovics Applicants missed, by one day, the deadline for bringing their leave motion specified by the BIA and its rules. Given that it was obvious the Osztrovics Applicants intended to appeal the Order, in my view the justice of the case supports granting the applicants an extension of time so that this matter can be dealt with on its merits: Bankruptcy and Insolvency General Rules, C.R.C. 1978, c. 368, s. 31(1). For the reasons that follow, the application for leave to appeal is dismissed.

BACKGROUND FACTS

[4] OFL is incorporated under the Ontario Business Corporations Act, R.S.O. 1990, c. B.16, and operates a tobacco farm. Elysia and Violet are directors of OFL, as was the bankrupt prior to his bankruptcy on June 21, 2011.

[5] Violet owns 51.7% of OFL’s Class A voting shares. Prior to his bankruptcy, the bankrupt owned 51 OFL common shares and 48% of the company’s Class A voting shares. Those shares are now registered in the name of the Trustee.

[6] On November 20, 2012, the Trustee wrote to OFL’s counsel requesting all information and documents relating to OFL’s operations. In its First Report dated July 11, 2013, the Trustee reported that it needed documents about OFL’s business affairs in order to value the bankrupt’s shares in OFL. Those shares constitute the bankrupt’s most significant asset. The Trustee reported that OFL had refused to provide the requested information and documents. In its Report, the Trustee stated that it was seeking an order under BIA s. 164(1) compelling OFL to provide the requested documents, and orders under BIA s. 163(1) compelling Elysia and Violet to attend examinations under oath.

[7] The Trustee’s motion initially was heard by the Registrar. Wilton-Siegel J. summarized the Registrar’s decision at para. 7 of his reasons:

In his reasons dated August 6, 2014, (the "Reasons") the Registrar concluded that the language of ss. 163 and 164 was sufficiently broad to encompass documents of a corporation respecting its business and affairs, i.e. that such documents may also relate "in whole or in part to the bankrupt, his dealings or property.” The Registrar further concluded in paragraph 73 of the Reasons that, in this case, the Trustee had demonstrated the necessary link between the Information and the Bankrupt, his dealings or property. On this basis, he ordered the disclosure of the Information. He also ordered the examinations of Elysia and Violet for the same reason, although he considered that the "proportionality principle" required a "hybrid solution" to the order sought under s. 163 in respect of Violet, being the delivery of responses to written interrogatories.

The Registrar ordered that each party should bear its own costs of the motion.

[8] The Osztrovics Applicants appealed the Registrar’s order, and the Trustee cross-appealed that part of the order which required Violet to answer written interrogatories instead of submitting to an oral examination. The motion judge dismissed the Osztrovics Applicants’ appeal, granted the Trustee’s cross-appeal, and set aside the Registrar’s cost order, instead awarding the Trustee its partial indemnity costs.

[9] The Osztrovics Applicants seek leave to appeal the Order, submitting that the motion judge erred by:

(i) interpreting the Trustee’s right to access under BIA ss. 163 and 164 as one which entitled the Trustee “to disclosure from a private corporation of such information as is relevant to permit a valuation of shares of a bankrupt in such corporation”;

(ii) setting aside a confidentiality term the Registrar had attached to OFL’s disclosure of information pursuant to BIA s. 164;

(iii) authorizing the BIA s. 163 examination of Violet and requiring that the examination be an oral one, instead of one conducted by way of written interrogatories; and,

(iv) interfering with the Registrar’s cost decision.

APPLICABLE TEST

[10] Section 193 of the BIA provides that in any case other than those enumerated in BIA ss. 193(a) to (d), an appeal lies to the Court of Appeal only with leave of a judge of the Court of Appeal. In Business Development Bank of Canada v. Pine Tree Resorts Inc., 2013 ONCA 282, 115 OR (3d) 617, at para. 29, Blair J.A. summarized the principles applicable on a leave to appeal motion under BIA s. 193(e):

Beginning with the overriding proposition that the exercise of granting leave to appeal under s. 193(e) is discretionary and must be exercised in a flexible and contextual way, the following are the prevailing considerations in my view. The court will look to whether the proposed appeal,

a) raises an issue that is of general importance to the practice in bankruptcy/insolvency matters or to the administration of justice as a whole, and is one that this Court should therefore consider and address;

b) is prima facie meritorious, and

c) would unduly hinder the progress of the bankruptcy/insolvency proceedings.

[11] In respect of the merits of an appeal, an applicant must be able to convince the court that there exist “legitimately arguable points… so as to create a realistic possibility of success on the appeal”: Re Ravelston Corp., 2005 63802 (ON CA), 24 C.B.R. (5th) 256, [2005] O.J. No. 5351 (C.A.), at paras. 28-29; Re Ravelston Corp. Ltd., 2007 ONCA 268, 31 C.B.R. (5th) 233, at para. 12.

ANALYSIS

The Trustee’s power to demand documents

[12] The Osztrovics Applicants submit that the motion judge erred in concluding that BIA s. 164 authorized the Trustee to demand internal corporate records from a privately-held corporation in which the bankrupt owned shares. They contend that BIA s. 164 only permits a trustee to gain access to records in the hands of third parties that pertain directly to a bankrupt’s business and dealings, such as the records of the auditors and accountants of the bankrupt.

[13] The general importance and merit of the issue, the applicants argue, is supported by the Trustee’s inability “to cite a single case where a corporation in which a bankrupt individual owned shares was ordered to produce its internal corporate records.” They contend that the determination of the proper scope of BIA s. 164 would be of significant interest to the practice in bankruptcy/insolvency matters, as would the issue of whether the motion judge erred in finding that no operational conflict existed between BIA ss. 163 and 164 and the duties of care imposed on directors by OBCA s. 134.

[14] In the specific circumstances of this case, I do not regard the issue raised by the applicants concerning the scope of BIA s. 164 as prima facie meritorious. BIA s. 164(1) authorizes a trustee to require a person to produce any documents or records in his possession “of any kind relating in whole or in part to the bankrupt, his dealings or property.” After noting that the Registrar had concluded that the information sought by the Trustee was relevant to the valuation of the bankrupt’s shares in OFL, the motion judge stated, at paras. 13 through 16 of his reasons:

The disclosure contemplated by ss. 163 and 164 of the BIA is directed toward ensuring that the trustee can fulfill its responsibilities to investigate and value, or otherwise establish, the assets and the liabilities of the bankrupt. In this regard, the valuation of any shares owned by a bankrupt is an important element, particularly where, as in the present circumstances, such shares represent the most significant asset of the estate.

Accordingly, while there may be issues regarding the relevance of particular documents of a corporation for any valuation of the shares of such corporation, I think that the principle is clear. A trustee in bankruptcy is entitled to disclosure from a private corporation of such information as is relevant to permit a valuation of shares of a bankrupt in such corporation. Further, I do not accept the implicit premise of the Appellants' argument – that corporate documentation pertains solely to the business and affairs of the corporation. In the present circumstances, where the former shares of the Bankrupt in OFL constitute the most significant asset of his estate and represent a significant shareholding in OFL, there is no reason why the Information cannot pertain to both the Bankrupt and OFL for the purposes of s. 164 of the BIA.

[15] Without accepting the breadth of the principle articulated by the motion judge, I see no viable argument that he erred in affirming the Trustee’s authority to demand the information sought from OFL in the specific circumstances of this case – i.e. where the bankrupt held a significant number of the issued shares of OFL, those shares constitute the most significant asset of the bankrupt’s estate, and the information sought from OFL is necessary to value the bankrupt’s shares. The position advanced by the applicants – that the Trustee’s power to demand documents under BIA s. 164 does not extend to disclosure from a private corporation of information relevant to permit a valuation of the bankrupt’s shares in OFL – asks the court to read into the section limiting language not suggested by s. 164 nor which finds any support in the case law. Moreover, such a limitation on the powers of the Trustee under s. 164 would frustrate its ability to discharge its duty to the bankrupt’s creditors to value and realize upon the most significant asset in his estate – his shares in OFL.

[16] As to the applicants’ argument that the motion judge erred in finding no operational conflict existed between OBCA s. 134 and BIA ss. 163-164, apparently it was the Registrar who first raised the issue of the possible application of the doctrine of federal paramountcy, but he concluded that no operational conflict existed. Putting to one side the question of why the applicants would wish to raise this as an issue on appeal when a finding of operational conflict would result in the federal legislation – i.e. BIA s. 164 – prevailing, I see no viable argument that the motion judge erred in principle when he concluded, in paras. 29 through 31 of his reasons, that:

I am not persuaded that the Registrar erred in law in concluding that there was no operational conflict between s. 134 of the OBCA and ss. 163 and 164 of the BIA.

The Appellant's argument incorrectly posits a conflict between the directors' duty or discretion, on the one hand, and a trustee's power to investigate. The real operational question is between the trustee's right to disclosure as a shareholder and its right to disclosure as a trustee in bankruptcy. The former is complementary to the latter, not in conflict with it.

There is also no conflict between the provisions of s. 134 of the OBCA and the BIA. As the Appellants note, s. 134 merely codifies the obligations of directors to act in the best interests of a corporation. Any determination that directors may make regarding the best interests of a corporation is necessarily restricted by the obligation of the corporation to comply with statutorily mandated powers, whether derived from federal or provincial statutes.

[17] I conclude that there is no realistic possibility that the Osztrovics Applicants could succeed on appeal were leave to appeal granted on this issue.

The remaining grounds of appeal involving BIA ss. 163 and 164

[18] The Osztrovics Applicants seek leave to appeal on two other BIA ss. 163 and 164 issues:

(i) the decision of the motion judge to set aside para. 2 of the Registrar’s order, which had stipulated that “commercially sensitive information of OFL that is disclosed to the Trustee, and corporate records of OFL which disclose such commercially sensitive information…shall not be disclosed to the creditors or the inspectors that have been appointed by the creditors”; and,

(ii) the order that Violet submit to a BIA s. 163 examination by way of oral examination.

[19] As to the first ground, the applicants submit that the motion judge exceeded his jurisdiction as an appeal judge under BIA s. 192(4) by dealing with para. 2 of the Registrar’s order because that term of the order was not under appeal. I see no merit in this argument: the Osztrovics Applicants’ Notice of Motion by way of Appeal asked to set aside the Registrar’s decision in its entirety.

[20] As to the BIA s. 163 examination of Violet, the bankrupt’s mother and a director of OFL, the motion judge quite reasonably observed, at para. 50 of his reasons, that the Registrar had determined “Violet was a ‘person who had knowledge of the affairs of [the] bankrupt’,” and the applicants advance no argument as to how the Registrar erred in making that finding of fact. Given the Registrar’s finding of fact, it is difficult to see how Violet can fashion a viable argument resisting submitting to a BIA s. 163 examination.

[21] The Osztrovics Applicants submit that the Registrar possessed the power to impose confidentiality conditions on the disclosure of information to the Trustee and to direct that the examination of Violet proceed by way of written interrogatories, and the motion judge therefore erred in setting aside those portions of the Registrar’s order.

[22] Irrespective of the strength or weakness of the merits of those arguments, to grant leave to appeal on these issues in the specific circumstances of this case would unduly hinder the progress of this bankruptcy proceeding. The Trustee made its initial demand for information about OFL on November 20, 2012. Over the past 2.5 years the Osztrovics Applicants have refused to provide the requested information. Their refusal has prevented the Trustee from valuing the most important asset in the bankrupt’s estate – his shares in OFL. To permit an appeal would further delay the administration of an estate whose affairs already have been impeded unduly by the applicants’ refusals.

Leave to appeal the costs award

[23] The Registrar ordered that each party bear their own costs notwithstanding that the Trustee had “succeeded in obtaining generally what it was seeking.” The motion judge set aside that order and awarded the Trustee partial indemnity costs. The Osztrovics Applicants submit that there was no basis for the motion judge to interfere with the Registrar’s discretionary costs order. Regardless of any merits in that argument, the correctness of the costs award does not raise an issue that is of general importance to the practice in bankruptcy/insolvency matters or to the administration of justice as a whole, and I am not satisfied that leave to appeal that issue should be granted.

DISPOSITION

[24] I dismiss the Osztrovics Applicants’ motion for leave to appeal. I agree with the applicants that the partial indemnity costs of $12,180.68 sought by the Trustee on this leave motion are too high. In my view, a fair and reasonable award of costs to the Trustee would be $6,000, which I order the Osztrovics Applicants to pay to the Trustee within 10 days of the date of this order.

“David Brown J.A.”