COURT FILE NO.: 11-51001
DATE: 2012/08/10
ONTARIO
SUPERIOR COURT OF JUSTICE
IN THE MATTER of the Ontario Business Corporations Act, R.S.O. 1990, c. B. 16, ss. 207 and 248 and rule 14.05(2) of the Rules of Civil Procedure
BETWEEN:
BEEZER HOLDINGS INC. AND VASILIOS (BILL) SYRROS
Applicants
– and –
RICHARD OH AND LIXAR SRS INC.
Respondents
Christopher R.N. McLeod, for the Applicants
Aaron Crangle, for the Respondent, Richard Oh
HEARD: May 7, 2012
REASONS ON MOTION AND CROSS MOTION
Madam Justice Bonnie R. Warkentin
[1] This matter first came before me on March 28, 2012. The Applicants brought a motion within the Application that Richard Oh ("Oh") pay $3.0 million to the Respondent Lixar SRS Inc. ("LSRS") together with a variety of sanctions should the payment not be made within a specified time frame.
[2] The Applicants also request an order requiring the completion of the income tax returns of LSRS with the accountant of their choice. The outstanding taxes, interest and penalties that have accrued to the Canada Revenue Agency ("CRA") by LSRS, would be paid from the $3.0 million. Additionally, the Applicants seek an order permitting the Applicant Vasilios (Bill) Syrros ("Syrros"), on behalf of LSRS, to deal with certain shares owned by LSRS.
[3] Oh brought a cross motion seeking that the Application be converted to an Action. Oh also seeks to have the proceeding transferred to the City of Toronto.
[4] On March 28, 2012, I ordered the parties to attend cross-examinations on the affidavits in these motions, to complete disclosure and undertakings arising from those cross-examinations and to return to the Court to argue the motions on May 7, 2012.
Background
[5] LSRS is a privately held cooperation incorporated under the Ontario Business Corporations Act. The Applicant Beezer Holdings Inc. (“Beezer”) is also a privately held corporation incorporated under the Act, whose shares are wholly owned by Syrros.
[6] In June 2009, LSRS sold its assets to a third party corporation, Gridpoint North Inc. The purchase price of the assets was $6.0 million in cash, together with 1,958,333 shares in Gridpoint North Inc. which were then valued at $23.5 million dollars. The shares in Gridpoint North Inc. were issued to LSRS and were subject to vest over a period of time. They have now fully vested.
[7] At issue in the Application is the distribution of the net proceeds of sale and the right to manage or wind up LSRS including the Gridpoint North Inc. shares which are the only remaining significant asset of LSRS.
[8] The Applicants claim that LSRS is owned 35% by Beezer and 65% by Oh.
[9] Oh agrees that Beezer and Oh own LSRS, but Oh claims there was never a percentage arrangement between Beezer and Oh regarding ownership. Oh asserts that no shares were ever issued by LSRS and that the issue of ownership must be determined by this Court. Oh also claims that the parties had an agreement to share the profits of the LSRS sale with various third parties.
[10] The Applicants acknowledge that no LSRS shares were ever issued, but claim this was mere oversight and that the parties always conducted their business on the basis of a 35/65% share interest. Based upon this percentage ownership, the Applicants allege that Beezer is entitled to 35% and Oh 65% of the net proceeds of sale of the assets of LSRS with the same 35/65% proportion respecting the shares in Gridpoint North Inc.
[11] Beezer received approximately $1.0 million from the sale proceeds. Between the closing of the asset sale in June 2009 and late 2010, all of the remaining proceeds of sale, except for the Gridpoint North Inc. shares were dispersed by Oh. Oh claimed he distributed the funds in accordance with an agreement with Syrros to various individuals who were instrumental in assisting LSRS become successful. The Applicants claim that Oh has not properly accounted for the manner in which the proceeds were distributed.
[12] The Applicants claim that from the time LSRS was incorporated until the assets were sold in June 2009, Oh was the person responsible for ensuring all financial statements and filings with CRA were completed. Months after the closing of the asset sale, the Applicants discovered that the financial statements and tax returns for LSRS had neither been prepared nor filed with respect to its 2009 fiscal year end or any subsequent year end, leaving LSRS, the Applicants and Oh obligated for unpaid taxes, penalties and interest. It was at this time that the Applicants discovered that except for the $1.0 million paid to Beezer, the balance of the $6.0 million had been disbursed without their knowledge or consent, leaving LSRS without sufficient cash with which to cover its obligations.
[13] On a motion before Mr. Justice Scott on May 26, 2011, he ordered that Oh be removed as a Director and Officer of LSRS with a variety of other orders limiting Oh's involvement in LSRS. The order also required that Oh produce all records in his possession relating to LSRS and required an accounting firm acceptable to both parties be retained to produce LSRS's financial statements and income tax filings for the years 2009 and 2010. This order was made on consent of the parties.
[14] Oh was required to cooperate with the chosen accounting firm, including that he provide all necessary consents so that the financial statements and income tax returns for LSRS could be completed. Syrros was to instruct the accounting firm.
[15] The order of Justice Scott also placed the share certificates in Gridpoint North Inc. in the possession of Beezer until further order, and prevented the parties from dealing with the shares in any way without further Court order.
[16] The parties agreed to retain the services of BDO Canada to prepare the financial statements and file tax returns on behalf of LSRS. Syrros proceeded to retain and instruct BDO Canada in this work. Syrros claims that in violation of the May 26, 2011 order, Oh failed to cooperate with BDO and failed to provide the documentation necessary to complete the financial statements.
[17] By November 2011, BDO, not having fully completed its work, refused to provide any further services for LSRS because they had not been paid. The evidence on this motion was that none of BDO Canada's bills had been paid nor had they been provided with a retainer when they began the work. BDO is presently owed approximately $23,000.00, with unbilled work in progress of approximately $3,000.00. The evidence also indicated that the cost to complete the work so the 2009 and 2010 financial statements and tax returns for LSRS are ready for filing would be approximately $5,000.00.
[18] The Applicants now seek to retain a second accounting firm, Welch LLP, to complete the income tax returns and make all the necessary filings on behalf of LSRS. Welch LLP proposes to make a voluntary disclosure application to CRA in an attempt to minimize penalties and interest, which Welch LLP contends will be significant.
[19] The Applicants produced an opinion from Welch LLP that the failure to file tax returns for LSRS would result in a 5% late filing penalty fee, plus an additional 1% for each month the returns are late. Welch LLP was also concerned that there were deficiencies regarding a certain tax election (T2057) completed in connection with the asset sale.
[20] Welch LLP provided its opinion without having reviewed the work completed by BDO and without the complete LSRS documentation from the asset sale. Counsel for the Applicants argued that in spite of this, Welch LLP did have sufficient information to complete the tax returns on behalf of LSRS and to make the voluntary disclosure. To do so would require that LSRS be in a position to pay the outstanding taxes (possibly between $1.0 million and $2.0 million), thus the Applicant’s motion to have Oh pay the sum of $3.0 million to LSRS.
[21] Oh objected to engaging the services of Welch LLP when BDO had already completed the majority of work necessary to finalize the tax returns. His counsel argued that engaging the services of Welch LLP would duplicate work already completed and increase costs to the company. He also objected to the court giving any weight to an opinion that was given without having reviewed the underlying financial documents on which the opinion was purportedly based.
[22] Counsel for Oh noted that the Applicants' motion claiming a $3.0 million payment exceeded the amount claimed in the Application itself. Oh submitted that the court should require the parties to pay the outstanding BDO invoices and deposit sufficient additional retainer funds with BDO in order for them to complete the work. Oh estimated that the cost of this would be approximately $34,000.00. Oh did not accept the Welsh LLP report and speculated that the tax owing would be substantially lower than the Welch LLP estimate.
Discussion
[23] The central issue in these motions relates to the completion of the tax returns and whether or not BDO Canada should complete the work, which would require its invoices to be paid or whether the services of Welch LLP should be engaged.
[24] The evidence proffered by the Applicants was that there were serious issues with respect to numerous of the business deductions Oh put to BDO. When explanations were sought by BDO, the Applicants claim that Oh failed or refused to address their inquiries adequately.
[25] The Applicants contend that the majority of the unsubstantiated deductions by Oh were for his personal expenses and cannot be characterized as business deductions. If those deductions are eliminated, the tax liability for LSRS will be substantially greater than had originally been anticipated by BDO and the parties, possibly as high as the estimate by Welch LLP.
[26] The evidence demonstrated that there were significant withdrawals from the LSRS accounts by Oh from 2008 until the sale proceeds were disbursed that have not been adequately explained. Oh claims that LSRS was engaged in a trading pilot project in which large amounts of money were lost, thus providing LSRS with substantial tax write offs. It appears that Syrros, BDO Canada and Welch LLP had significant concerns about the efficacy of this alleged trading project.
[27] Syrros claims that LSRS never engaged in a trading pilot project and that Oh has simply manufactured this in an effort to cover his improper withdrawals from LSRS. The bank accounts and other transaction records show that Oh was transferring funds to his personal accounts including his personal trading accounts from which he either lost or dispersed these funds.
[28] The Applicants have proposed that the payment of $3.0 million by Oh is necessary for the purpose of paying for the accounting services, any tax liability, including penalties and interest, together with amounts that are still owed to the Applicants from the net proceeds of the asset sale of LSRS. Oh takes the position that parties should share the cost of BDO Canada’s account, complete the tax filing and then deal with the outstanding issues between the parties by way of a Court Action.
[29] The Applicants suggest that there is some urgency to their motion that Oh pay the $3.0 million to LSRS due to concerns that Oh will deplete his assets and may have already done so, resulting in the Applicants bearing the burden of the tax liability of LSRS and rendering Oh judgment proof from any claims by the Applicants in the future. Their concerns about Oh were substantiated when cross-examination of Oh revealed that he has few remaining assets. Unfortunately, this also precludes his ability to repay $3.0 million to LSRS.
[30] Counsel for Oh alleged that the motion of the Applicants is an attempt to address all of the issues in the application without following the usual process. Oh also contends that because there are serious issues in dispute such as each parties’ ownership interest of LSRS, that this matter would more appropriately be determined by proceeding as an action rather than an application.
Analysis
[31] The relationship between Oh and Syrros has degenerated to the point of being entirely unworkable so that management of LSRS by them as business partners is no longer possible. After hearing the submissions of the parties and reviewing their voluminous materials, it is apparent that Oh has not fully cooperated with BDO Canada regarding the completion of the financial statements and tax returns of LSRS and has not adequately explained the distribution of the $6.0 million dollars, without first completing the financial statements and tax returns for LSRS.
[32] Similarly, there are many unanswered questions about Oh's use of funds from LSRS that he transferred into his own accounts. These amounts appear to run into millions of dollars.
[33] Conversely, when provided the opportunity and authority for completing the financial statements and tax returns, as set out in the order of Mr. Justice Scott in May 2011, the Applicants retained BDO Canada and then failed to provide them with any funds whatsoever with respect to the completion of their task. Syrros claims he intended to pay for BDO’s accounts from LSRS, only to discover that the LSRS bank accounts had been depleted by Oh.
[34] BDO Canada appears to have acted appropriately in preparing the financial statements and asking the appropriate questions regarding questionable expenses. There was no satisfactory explanation provided to me as to why the Applicants now wish to retain a second accounting firm to prepare the same documentation.
[35] Notwithstanding that Oh disbursed the cash portion of the proceeds of sale of LSRS assets and appears to have few remaining assets of his own, I do not find there is the urgency to this matter as alleged by the Applicants, with the exception that the failure to file the tax returns of LSRS has resulted in potentially increased liability for the parties as a result of accrual of interest and penalties. The tax issue appears more to have arisen over who should pay BDO’s account rather than an urgent matter requiring immediate court intervention.
[36] There are assets of LSRS in the form of the Gridpoint North Inc. shares valued in excess of $23.0 million. Neither the Applicants nor Oh initially desired to dispose of any of the shares of Gridpoint North Inc. in order to pay for the accounting expenses and the potential tax liability, although this position seems to have changed somewhat.
[37] I agree with Oh that much of what the Applicants seek in their motion is actually part of the Application.
[38] The only issues I am prepared to make findings on in these motions relate to the manner in which the tax returns and financial statements for LSRS will be completed and to address the interim ongoing management of LSRS including the Gridpoint North Inc. shares.
[39] I will also address the issue of whether or not the matter should be converted to an Action and whether it should be transferred to Toronto.
[40] Because there are still significant assets in LSRS in the form of the Gridpoint North Inc. shares any entitlement by the Applicants to a share of LSRS can be compensated by the manner in which those shares or the proceeds thereof are distributed. Therefore, the sanctions sought by the Applicants are unnecessary.
[41] I therefore make the following orders:
(a) Oh shall pay the sum of $17,000.00 payable to BDO Canada, or to whomever BDO Canada directs in order to pay half of the outstanding accounting invoices and to complete the financial statements and tax returns for LSRS for 2009 and 2010, together with any other documentation required in order to satisfy the Canada Revenue Agency.
(b) The payment of $17,000.00 to BDO Canada by Oh is payable on or before August 31, 2012.
(c) Should Oh fail to make the payment of $17,000.00 set out above on or before August 31, 2012, Syrros shall sell sufficient Gridpoint North Inc. shares to cover that amount and pay it to BDO Canada as Oh’s share of the cost. Oh's failure to make his share of the payment will then be dealt with in the payment of costs as set out below.
(d) Syrros shall remain the sole director and officer of LSRS and shall have the authority to instruct BDO Canada regarding the outstanding financial statements and tax returns. Syrros is also authorized to sign and file all tax returns as necessary without input or consent from Oh.
(e) Syrros shall also pay $17,000.00 to BDO Canada, or to whomever BDO Canada directs for half of the accounting fees as set out in (a) above, however, Syrros may choose to pay the funds himself (or through Beezer) or he may sell or transfer sufficient shares of Gridpoint North Inc. to cover that amount on or before August 31, 2012.
(f) Syrros in his role as the sole director and officer of LSRS may sell, transfer or otherwise deal with the Gridpoint North Inc. shares on behalf of LSRS in his sole discretion in order to maximize their value or potential.
(g) Syrros may also sell or transfer the Gridpoint North Inc. shares for the purpose of paying all tax liability, penalties and interest owing to CRA by LSRS. In all other respects, except as may be agreed by the parties or ordered by this Court, the shares or proceeds of sale of shares of Gridpoint North Inc. shall not be disbursed and shall remain assets of LSRS and in the possession of Syrros.
(h) With the exception of the sale or transfer of shares to pay accounting fees and tax liability, Syrros must provide Oh's lawyer with 15 days' notice of his intention to deal with the shares before selling or trading the shares.
(i) Syrros may also instruct BDO Canada to complete the tax returns and financial statements without allowing questionable deductions for undocumented, unexplained or unsupported expenses. In other words, if there are personal expenses and not properly documented business deductions, and if BDO is not satisfied that the pilot trading project is a legitimate enterprise, then the financial statements shall reflect that. Syrros shall be guided by the advice he receives from BDO Canada with respect to all questionable deductions. Similarly he shall accept their advice with respect to legitimate deductions, which may in fact include the trading pilot project, in an effort to minimize tax liability if they are satisfied with its legitimacy based upon the information they now have.
(j) Syrros shall also explore the possibility of a voluntary disclosure application to CRA.
(k) If Oh wishes to provide additional supporting documentation to BDO Canada regarding the deductions he has put forward, he must do so on or before September 15, 2012. His failure to do so will result in Syrros proceeding on the basis of the advice he receives from BDO Canada with the information then in their possession.
(l) The outstanding issues of ownership interest in LSRS, distribution of the net proceeds of sale of the assets of LSRS, including the apportioning of the Gridpoint North Inc. shares, and the apportionment of tax liability, including interest and penalties, shall be determined in the main proceeding.
(m) The issue of whether or not to continue this matter as an application or convert it to an action shall be determined after the completion of the tax returns of LSRS and the full extent of the tax liability and questionable expenses have been processed by BDO Canada. Either party may bring that issue back before the court on a motion.
(n) Regarding the location of this proceeding, I find that Ottawa is the appropriate forum. Syrros may not reside in within the City of Ottawa, however he conducts the majority of his business in Ottawa and the head office of Beezer is in Ottawa. Syrros is now the sole director and officer of LSRS. The office of BDO Canada where the LSRS financial statements and tax returns are being prepared is in Ottawa as is the office of Welch LLP.
(o) Oh may reside in Toronto and have certain witnesses he wishes to call in Toronto however, I find that the balance of convenience favours Ottawa as the appropriate forum. This proceeding shall therefore remain in Ottawa.
Costs
[42] Should the Respondent Richard Oh fail to make the $17,000.00 payment to BDO Canada on or before August 31, 2012 as ordered, then costs are awarded against Richard Oh on a substantial indemnity basis in these motions payable forthwith. Written costs submissions shall be submitted to me through the trial coordinator on or before September 15, 2012 and are limited to 5 pages together with Bills of Costs.
[43] Alternatively, if Richard Oh makes the payment to BDO Canada as required by this order, costs of these motions shall be determined in the cause.
Madam Justice Bonnie R. Warkentin
Released: August 10, 2012
COURT FILE NO.: 11-51001
DATE: 2012/08/10
ONTARIO
SUPERIOR COURT OF JUSTICE
IN THE MATTER of the Ontario Business Corporations Act, R.S.O. 1990, c. B. 16, ss. 207 and 248 and rule 14.05(2) of the Rules of Civil Procedure
B E T W E E N:
BEEZER HOLDINGS INC. AND VASILLIOS (BILL) SYRROS
Applicants
– and –
RICHARD OH AND LIXAR SRS INC.
Respondents
REASONS ON MOTION AND CROSS MOTION
Madam Justice Bonnie R. Warkentin
Released: August 10, 2012