Court File and Parties
Court File No.: CV-11-3620-00 Date: 2012-02-16 Superior Court of Justice - Ontario
Re: Warren Garratt v. Robert Charlton, B&W Machining Company Inc., Nozzle Technologies Inc. and 1139061 Ontario Limited
Before: Ricchetti J.
Counsel: P. Baxi, Counsel, for the Applicant F. Pignoli, Counsel for the Respondents
Heard: February 14, 2012
Endorsement
Ricchetti J.
[1] After the hearing on February 14, 2012, I advised the parties that an order would issue, effective February 14, 2012, appointing Grant Thornton as Interim Receiver-Manager of the corporate defendants in accordance with the terms of the draft order signed by me. These are the reasons for my decision to appoint Grant Thornton as Interim Receiver-Manager of the corporate defendants.
Application and Motion
[2] Warren Garratt (“Garratt”) commenced this Application on September 14, 2011 seeking, amongst other relief, an order for the winding up of B&W Machining Company (B&W); Nozzle Technologies Inc. (“Nozzle”) and 1129061 Ontario Limited (“113 Ontario”) collectively the “Companies”.
[3] One of the remedies sought by Garratt was, because of the deadlock with Robert Charlton (“Charlton”), the appointment of a Receiver-Manager to provide for an orderly disposition or winding up of the Companies.
[4] For unknown reasons, Garratt's holding company, 1491178 Ontario Inc., and Charlton's holding company, 1491176 Ontario Inc., were not made parties to this application. These companies should have been parties as they are the direct shareholders of the Companies. In any event, counsel for both parties, on instructions of Charlton and Garratt who were in court, agreed that 1491178 Ontario Inc. and 1491176 Ontario Inc. would be bound by the terms of this order as though parties to these proceedings.
[5] As the application did not move forward, Charlton brought this motion on November 2, 2011 for an order appointing Grant Thornton as Receiver-Manager of the Companies.
[6] The parties entered into a consent order on November 7, 2011 requiring, among other things, mutual disclosure of financial information, execution of a short lease extension and repayment of certain monies expended by one of the parties personally for rent (“Consent Order”).
[7] The motion came before me on February 7, 2012. A consent order was issued for a portion of the relief sought in the motion. The balance of the motion for the appointment of a receiver-manager was adjourned to February 14, 2012.
The Position of Charlton
[8] Charlton seeks the appointment of a receiver-manager to preserve his interests in the Companies. Charlton submits the immediate appointment of a receiver-manager is necessary as the parties have not been able to and would not be able to resolve their disagreement or provide for an orderly winding up or sale of the Companies.
The Position of Garratt
[9] Garratt does not oppose the appointment of a receiver-manager but seeks to have the receivership order deferred for 30 or 45 days to permit him to make an offer to buy Charlton's shares. Garratt blames the delay in making an offer on Charlton's failure to produce the financial information pursuant to the Consent Order.
The Facts
[10] Garratt and Charlton each own 50% of the shares of the Companies through wholly owned holding companies. Garratt and Charlton are the sole officers, directors and indirect shareholders of the Companies.
[11] Garratt and Charlton have operated the Companies for some 24 years. The Companies have been successful in the design and manufacture of industrial parts and fittings.
[12] The Companies operated from rental premises at 2900 Argentia Road, Mississauga. The Company has significant machinery and equipment located in the rental premises. The lease expired in June 2011. The lease has not been renewed. The tenancy continues on a month to month basis provided the rent is paid.
[13] In June 2011, Garratt and Charlton had a "falling out" – perhaps over whether the lease should be renewed, perhaps over allegations of misappropriation or perhaps over the lack of dual signatures on some cheques. It is not necessary for this Court to determine on this motion what the disagreement was about or whether one party or both parties were at fault. These are issues that can be determined in the Application.
[14] What is clear is that, as a result of the disagreement, Garratt and Charlton have been unable to agree on or make business decisions since June 2011. The result of this impasse or deadlock has been disastrous for the Companies.
[15] The Companies ceased to carry on business. There is some cash in the Companies’ bank account. The Companies own equipment and machinery with significant value. The Companies' present liabilities are unknown.
[16] The Companies’ banker, Royal Bank of Canada, became aware of the disagreement between the parties. In August 2011, the bank froze all business accounts of the Companies and made them “deposit only”. The Royal Bank of Canada has confirmed it would continue to keep the Companies’ accounts on “hold” until there was an agreement between Garratt and Charlton. No such agreement has been reached to date. As a result, as of this date, the bank accounts remain frozen as deposit accounts only.
[17] The Companies' liabilities have not been paid. Suppliers have ceased providing manufacturing materials. Utilities have not been paid. Phones have been disconnected. The Companies are being sued by various creditors. The Companies’ insurance coverage has expired. The Companies’ surveillance equipment is no longer operating.
[18] Further, the Companies have failed to deal with necessary bookkeeping and financial reporting. Financial statements have not been prepared. Corporate tax returns have not been completed and filed. They are overdue.
[19] With respect to the leased premises, the Landlord has permitted the Companies to remain on the premises provided the rent has been paid. Because the Companies’ equipment and machinery is on the leased premises, the parties have paid the rent – presumably to avoid distress. However, the result is uncertainty because it is not known how long the Landlord will permit this. Further, the Companies continue to pay rent while generating no income from the leased premises.
[20] Both parties allege the other has acted unreasonably and improperly - hence the cross-allegations of oppression and deadlock.
[21] Some examples of this include Charlton alleging that Garratt had improperly issued cheques without his signature or approval. Garratt denies this. Garratt alleges that Charlton started a new competing business. Charlton denies this. There are also issues as to who owns what equipment or machinery personally and issues regarding the repayment of shareholder loans.
[22] There parties cannot agree on the necessary business decisions to carry on business, to wind it up or the sell it.
[23] This impasse or deadlock has now continued for approximately 8 - 9 months (June 2011 to February 2012).
[24] Even when the parties agreed to the Consent Order on November 7, 2011, the parties were not able to implement what they had agreed to (notwithstanding it was a court order):
i. The parties agreed a bookkeeper needed to be hired to complete the corporate financial statements. Without these statements corporate tax returns (which are past due) cannot be filed. Names of accountants were exchanged between counsel. The parties could not agree on an accountant for weeks. Then one party felt that a "bookkeeper" excluded an “accountant” and refused to agree on a new accountant to do the statements. The other party felt that the existing accountant had a conflict as having done the other party’s tax returns for a number of years. The end result is that the statements have not been done. The corporate tax returns have not been completed or filed;
ii. Garratt was the person in charge of the Companies' financial information. Charlton sought access to the computerized financial information. Garratt did provide Charlton with computer access. However, Garratt did not give Charlton the password. Instead, Garratt alleged that Charlton knew the password. Charlton denied it. After considerable back and forth for weeks, Garratt finally gave Charlton the password;
iii. A short term lease was to be negotiated with the Landlord. It has still not been signed. The Companies remain in the leased premises on a month to month basis; and
iv. Repayment of rent monies paid by one of the parties personally. This was not done.
[25] It is surprising to see Garratt’s November Affidavit state that the Companies were inoperable due to the disagreement but then, after Charlton brought this motion for the appointment of a receiver-manager, to file an affidavit stating that “we are not at an impasse”. Mr. Garratt now appears to recognize the high costs of a Receiver-Manager and considers it “more viable for both parties to negotiate directly in good faith to resolve the issues one by one”. While it would be more financially viable to the parties to resolve the issues, there appears to be no hope the parties would be able to do so. They have not resolved the issues since June 2011 and it is now February 2012 without resolution even on minor issues.
[26] I am satisfied that the Companies are at serious risk and immediate steps must be taken to preserve and protect the Companies. In a few months there will be nothing to liquidate or wind up.
The Law
[27] Charlton submits this Court has jurisdiction to make the order under s. 101 of the Courts of Justice Act or s. 248 of the Ontario Business Corporations Act.
[28] Justice Strathy summarized the law on the appointment of a receiver under s. 101 of the Courts of Justice Act in Anderson v. Hunking, 2010 ONSC 4008, at para 15:
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: Fisher Investments Ltd. v. Nusbaum (1988), 31 C.P.C. (2d) 158, 71 C.B.R. (N.S.) 185(Ont. H.C.);
(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: Ryder Truck Rental Canada Ltd. v. 568907 Ontario Ltd. (Trustee of) (1987), 16 C.P.C. (2d) 130, [1987] O.J. No. 2315 (H.C.);
(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: 1468121 Ontario Limited v. 663789 Ontario Ltd., 2008 66137 (ON SC), [2008] O.J. No. 5090, 2008 66137 (S.C.J.), referring to Royal Bank v. Chongsim Investments Ltd. 1997 12112 (ON SC), (1997), 32 O.R. (3d) 565, [1997] O.J. No. 1391 (Gen. Div.);
(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: Bank of Nova Scotia v. Freure Village of Clair Creek 1996 8258 (ON SC), (1996), 40 C.B.R. (3d) 274, 1996 8258 (Ont. S.C.J.);
(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), 1994 117 (SCC), [1994] 1 S.C.R. 311 at paras. 47-48, 62-64, 111 D.L.R. (4th) 385;
(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: Syntex Inc. v. Novopharm Ltd., (1991), 1991 14290 (FCA), 36 C.P.R. (3d) 129, [1991] F.C.J. No. 424 (C.A.);
(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”: See 1754765 Ontario Inc. v. 2069380 Ontario Inc. 2008 67403 (ON SC), (2008), 49 C.B.R. (5th) 214 at paras. 7 and 11, [2008] O.J. No. 5172 (S.C.);
[29] Section 248(1) - (3) of the Ontario Business Corporations Act (OBCA)provides:
- (1) A complainant and, in the case of an offering corporation, the Commission may apply to the court for an order under this section.
(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.
(3) In connection with an application under this section, the court may make any interim or final order it thinks fit including, without limiting the generality of the foregoing,
(a) an order restraining the conduct complained of;
(b) an order appointing a receiver or receiver-manager;
(c) an order to regulate a corporation’s affairs by amending the articles or by-laws or creating or amending a unanimous shareholder agreement;
(d) an order directing an issue or exchange of securities;
(e) an order appointing directors in place of or in addition to all or any of the directors then in office;
(f) an order directing a corporation, subject to subsection (6), or any other person, to purchase securities of a security holder;
(g) an order directing a corporation, subject to subsection (6), or any other person, to pay to a security holder any part of the money paid by the security holder for securities;
(h) 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;
(i) an order requiring a corporation, within a time specified by the court, to produce to the court or an interested person financial statements in the form required by section 154 or an accounting in such other form as the court may determine;
(j) an order compensating an aggrieved person;
(k) an order directing rectification of the registers or other records of a corporation under section 250;
(l) an order winding up the corporation under section 207;
(m) an order directing an investigation under Part XIII be made; and
(n) an order requiring the trial of any issue.
[30] S. 207 of the OBCA provides:
(1) A corporation may be wound up by order of the court,
(a) where the court is satisfied that in respect of the corporation or any of its affiliates,
(i) any act or omission of the corporation or any of its affiliates effects a result,
(ii) the business or affairs of the corporation or any of its affiliates are or have been carried on or conducted in a manner, or
(iii) the powers of the directors of the corporation or any of its affiliates are or have been 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; or
(b) where the court is satisfied that,
(i) a unanimous shareholder agreement entitled a complaining shareholder to demand dissolution of the corporation after the occurrence of a specified event and that event has occurred,
(ii) proceedings have been begun to wind up voluntarily and it is in the interest of contributories and creditors that the proceedings should be continued under the supervision of the court,
(iii) the corporation, though it may not be insolvent, cannot by reason of its liabilities continue its business and it is advisable to wind it up, or
(iv) it is just and equitable for some reason, other than the bankruptcy or insolvency of the corporation, that it should be wound up; or
(c) where the shareholders by special resolution authorize an application to be made to the court to wind up the corporation.
(2) Upon an application under this section, the court may make such order under this section or section 248 as it thinks fit.
Analysis
[31] The facts in this case are highly unusual:
i. The Companies are deadlocked;
ii. The parties cannot agree on how to continue to carry on business, wind the Companies up or sell the Companies;
iii. The Companies have ceased to carry on business due to the deadlock;
iv. The Companies’ business has been shut down for some 7-8 months;
v. The Landlord and creditors are already taking action against the Companies to protect their interests;
vi. Both parties claim they are being oppressed by the conduct of the other;
vii. The parties have not been able to agree on anything completing necessary financial statements and tax returns; and
viii. The continuation of the present situation will result in the Companies having little or no value very shortly.
[32] There is no dispute a Receiver-Manager should be appointed. Whether the R.J. MacDonald test is used or the "just and equitable" test is used, the result is the same - a Receiver-Manager is necessary under both s. 101 of the Courts of Justice Act and s. 248 of the OBCA.
[33] I agree with the comments of Justice Swinton in Goft v. 1206468 Ontario Ltd. (2001) 2001 28358 (ON SC), 11 B.L.R. (3d) 131, at para. 36, where, despite the Court's reluctance to grant such an order, given the likely expense, the appointment of a receiver was the "only practical way to resolve the parties' dispute...". At this stage, the appointment of a Receiver-Manager is not a drastic step; it is necessary and the only step that might preserve some value in the Companies. Further, the expense of a receiver-manager must be considered in light of the likely consequences should a receiver-manager not be appointed.
[34] The only issue is whether the appointment of a receiver-manager should be delayed to permit the parties to negotiate a resolution that would avoid the costs of a receivership.
[35] Mr. Garratt wants time to negotiate a resolution. Mr. Charlton does not believe anything would be accomplished.
[36] Unfortunately, I conclude that further time would likely be futile while the consequences of delaying the order would likely be disastrous. The parties have had approximately 8 months to resolve issues during which time there appears to have been no rational discussions or resolution of any significant issues between the parties. There does not even appear to be any progress towards resolution of the issues. The parties have been unable to agree on even the simplest matters and could not even comply with the terms of Consent Order without further disagreement.
[37] Let me deal with the primary reason why Garratt states that a receivership order should be delayed for a period of time. Garratt states he has not been able to make an offer because Charlton did not make the financial disclosure contemplated by the consent order. I do not accept this as:
i. it fails to recognize that nothing happened between June 2011 and November 2011 with respect to financial disclosure by both parties;
ii. it fails to recognize that Mr. Garratt contributed to the delay by not providing the password to the computer system. It would have been easier to simply give Charlton the password than spending weeks arguing over whether Charlton already had the password;
iii. it fails to recognize that Garratt was responsible for the financial aspects of the Companies and would have already been familiar with the financial worth of the Companies; and
iv. it fails to recognize that Garratt first moved to wind up the Companies.
[38] I am not persuaded any further time would be productive. However, I am persuaded there is continued financial harm to the Companies and likely negative consequences arising from actions which may be taken by the Companies’ creditors or the Landlord. There may also be benefits arising from a receivership order which might include some protection from director’s liability or prevent termination of the lease or distress action by the Landlord.
[39] The order is granted. Fortunately, the parties were able to agree on the wording of the receivership order.
Costs
[40] Either party seeking costs may make written submissions within the next 3 weeks, which submissions are limited to 4 pages plus any attached Bill of Costs and authorities.
[41] The responding party(s) may make written submission, subject to the same limitations on length, within one week thereafter.
Ricchetti, J.
Released: February 16, 2011.