COURT FILE NO.: 11-CV-436360CP
DATE: August 28, 2012
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Jerzy Robert Zaniewicz and Edward Clarke
Plaintiffs
- and -
Zungui Haixi Corporation, Ernst & Young LLP, Fengy Cai, Jixu Cai, Yanda Cai, Michelle Gobin, Michael W. Manley, Patrick A. Ryan, Elliott Wahle, Margaret Cornish, CIBC World Markets Inc., Canaccord Genuity Corp. (f.k.a. Canaccord Financial Ltd.), GMP Securities LP and Mackie Research Capital Corporation (f.k.a. Research Capital Corporation)
Defendants
COUNSEL:
• Douglas Worndl the Plaintiffs
HEARING DATE: August 23, 2012
PERELL, J.
REASONS FOR DECISION
[ 1 ] The Plaintiffs, Jerzy Robert Zaniewicz and Edward Clarke, have commenced a proposed class action about alleged misconduct in the trading of the shares of Zungui Haixi Corporation (“Zungui”) in the primary and secondary market for securities in Ontario. Zungui is a corporation under Ontario’s Business Corporations Act, R.S.O, 1990, c. B. 16. The action arises out of the collapse in the value of the publicly traded securities of Zungui that occurred in August 2011, following the revelation of accounting audit issues.
[ 2 ] Amongst the defendants are Jixu Cai, Fengyi Cai, and Yanda Cai, who are brothers and residents of the People’s Republic of China.
[ 3 ] In somewhat urgent circumstances - because of the possible expiry of the limitation period for claims with respect to misrepresentations made in the secondary market pursuant to “Part XXIII.1 of the Ontario Securities Act , RSO 1990, c S.5 - the Plaintiffs seek an order for substituted service on the Cais of the material for the motion for leave to assert the secondary market claims.
[ 4 ] An order for substituted service is problematic because China is a signatory to the Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters, 15 November, 1965, Can TS 1989 No 2 (entered into force 10 February 1969, accession by Canada 26 September 1988) (“the Convention”).
[ 5 ] Because China has denounced other forms of service, under the Convention, service in China can only be made through the central authority of the Chinese government. The Plaintiffs are attempting to serve the Originating Process through the central authority, but this may take many months with an indeterminate outcome. If service is made only through the central authority, it may come too late and the limitation period will already barred the Plaintiffs’ claims.
[ 6 ] On March 26, 2012, I granted an order permitting substituted service of the originating process, by international pre-paid post, on Zungui and on the Cai brothers at their last known addresses. My order was amended on April 2, 2012 to correct a clerical error. Substituted service on the Cais was subsequently made pursuant to the March 26, 2012 order. The originating process did not include any material for the motion for leave to assert the secondary market claims.
[ 7 ] At the time of making the March 26, 2012 order for service of the originating process, I relied on the decision of Master Graham in Khan Resources Inc v . Atomredmetzoloto JSC , 2011 ONSC 5465 , [2011] O . J . No. 4793 (S .C.J. ) (Master) , but in doing so, I was unaware that the Master’s decision had been reversed by Justice O’Marra. See Khan Resources v Atomredmetzoloto JSC , 2012 ONSC 1522 , [2012] O . J . No. 1059 (S.C.J.) .
[ 8 ] In Khan Resources , the plaintiffs sought to serve the defendant Russian companies in the Russian Federation under the Convention, but the Russian central authority refused to effect service. Master Graham granted an order under r ule 16.08 of the Rules of Civil Procedure validating service on the defendants. Master Graham held that the Convention does not oust the jurisdiction of the court to order substituted service. Justice O’Marra, however, allowed an appeal from the Master ’s decision and held that an order to substitute, dispense with or validate service is not available where service is required to be made in a contracting state under the Convention. The decision of Justice O’Marra in Khan Resources is under appeal with the hearing s cheduled for September 11, 2012.
[ 9 ] At first blush it would appear that I erred in making the March 26, 2012 order for substituted service because I was ignorant of the fact that the Master’s decision had been reversed. However, arguably it turns out that I, nevertheless, reached the correct result, because Justice O’Marra’s decision, which I do not disagree with, can be distinguished.
[ 10 ] As it happens, several months later, in Gray v SNC-Lavalin Group Inc . , I considered the decision of Justice O’Marra in Khan Resources . I distinguished his judgment and made an order for substituted service. See Gray v. SNC-Lavalin Group Inc . , 2012 ONSC 3735 .
[ 11 ] I t was my opinion in the SNC-Lavalin Group case, and it is my opinion in the case at bar, that Khan Resources does not apply to the circumstances of a case where service need not be performed in a contracting state but can be made because of the defendant’s connection to Ontario .
[ 12 ] In the SNC-Lavalin Group case, the person to be served, Mr. Aïssa was not a foreigner and he normally was a Canadian resident. Thus, the order for substituted service on Mr. Aïssa was actually under the general manner of service (rule 17.05 (2)) and not the rule for the manner of service in a Convention state (rule 17.05(3).). Service of the court documents outside Ontario was based on Mr. Aïssa’s normal residency in Québec. That the plaintiff in the SNC-Lavalin Group case was attempting service in accordance with the Convention was a redundancy that should proceed out of an abundance of caution but did not affect whether an order for substituted service was available. Service on Mr. Aïssa was based on his normal connection to Canada.
[ 13 ] In the case at bar, as I will shortly explain, there is a strong argument that Jixu Cai and Fengyi have attorned to Ontario’s jurisdiction and there is a good, albeit somewhat weaker argument, that Yanca Cai also has attorned to Ontario’s jurisdiction. The result is that the Plaintiffs’ efforts to serve the Cais pursuant to the Convention are a useful redundancy, but these efforts do not preclude an order for substituted service if such an order is otherwise justified, which is my ultimate conclusion.
[ 14 ] Jixu Cai has a particularly strong connection to Ontario and may even be taken to have already agreed that he can be served in Ontario by service on an agent for service.
[ 15 ] Jixu Cai was a director and the CEO of Zungui until he resigned on June 19, 2010. Prior to his resignation, he was involved in the Initial Public Offering that is an aspect of the underlying litigation against Zungui and the other defendants. As a part of the process for the filing of a prospectus, on December 11, 2009, Jixu Cai signed a standard form of the General Prospectus Requirements appointing GODA Incorporators, Inc. as his agent to accept service in Canada.
[ 16 ] The form appointing GODA Incorporators Inc. as agent to accept service was signed by Jixu Cai as a part of the Initial Public Offering process. This requirement is set out in at National Instrument 41-101, section 9(2)(a)(vii), which states:
Required documents for filing a final long form prospectus
9.2 An issuer that files a final long form prospectus must
(a) file the following with the final long form prospectus: …
(vii) Non-Issuer’s Submission to Jurisdiction – a submission to jurisdiction and appointment of agent for service of process of
(A) each selling security holder, and
(B) each person or company required to sign a certificate under Part 5 or other securities legislation, other than an issuer,
in the form set out in Appendix C, if the person or company is incorporated or organized in a foreign jurisdiction and does not have an office in Canada or is an individual who resides outside of Canada.
[ 17 ] The statement: “(B) each person or company required to sign a certificate under Part 5, or other securities legislation,” refers to section 58 of the Ontario Securities Act , RSO 1990, c S.5, which provides:
Certificate by issuer
- (1) Subject to subsection (3) of this section and subsection 63 (2), and subject to any waiver or variation consented to in writing by the Director, a prospectus filed under subsection 53 (1) or subsection 62 (1) shall contain a certificate in the prescribed form, signed by the chief executive officer, the chief financial officer, and, on behalf of the board of directors, any two directors of the issuer, other than the foregoing, duly authorized to sign, and any person or company who is a promoter of the issuer. R.S.O. 1990, c. S.5, s. 58 (1) ; 1999, c. 9, s. 206 (1); 2007, c. 7 , Sched. 38, s. 4 (1).
[ 18 ] For present purposes, the following sections of the form signed by Jixu Cai are pertinent:
NON-ISSUER FORM OF SUBMISSION TO JURISDICTION AND APPOINTMENT OF AGENT FOR SERVICE OF PROCESS
Name of Person filing this form (the “Filing Person”) – Mr. Jixu Cai
Name of agent for service of process (the “Agent”) – GODA Incorporators, Inc.
The Filing Person designates and appoints the Agent at the address of the Agent stated above as its agent upon whom may be served any notice, pleading, subpoena, summons or other process in any action, investigation or administrative, criminal, quasi-criminal, penal or other proceeding (the “Proceeding”) arising out of, relating to or concerning the distribution of Securities made or purported to be made under the Prospectus, and irrevocably waives any right to raise as a defence in such Proceeding any alleged lack of jurisdiction to bring the Proceeding.
The Filing Person irrevocably and unconditionally submits to the non-exclusive jurisdiction of
(a) the judicial, quasi-judicial and administrative tribunals of each of the provinces of Canada in which the securities are distributed under the Prospectus; and
(b) any administrative proceeding in any such province,
in any Proceeding arising out of or related to or concerning the distribution of Securities made or purported to be made under the Prospectus.
Until six years after completion of the distribution of the Securities made under the Prospectus, the Filing Person shall file a new submission to jurisdiction and appointment of agent for service of process in this form at least 30 days before termination of this submission to jurisdiction and appointment of agent for service of process.
This submission to jurisdiction and appointment of agent for service of process shall be governed by and construed in accordance with the laws of Ontario.
[ 19 ] Fengyi Cai also has a particularly strong connection to Ontario, and he too may be taken to have already agreed that he can be served in Ontario by making service on an agent for service.
[ 20 ] Fengyi Cai has and been and continues to be an Officer and Director of Zungui since October 29, 2009. Although he did not participate in them, he has been a party to proceedings commenced by the Ontario Securities Commission with respect to the affairs of Zungui.
[ 21 ] Fengyi Cai was also involved in the Initial Public Offering that is an aspect of the underlying litigation against Zungui and the other defendants. In the prospectus, he is noted as being the “principal securityholder.” The prospectus states:
The Principal Securityholder, the promoter of the Offering, is a resident of a jurisdiction outside of Canada. Although the Principal Securityholder has appointed GODA Incorporators, Inc. as its agent for service of process in the Province of Ontario, Canada, it may not be possible for investors to collect from the Principal Securityholder judgments obtained in Canada predicated on the civil liability provisions of securities legislation of certain of the provinces of Canada. ….
[ 22 ] Under National Instrument 41-101, section 9(2)(a)(vii)(B), described above, Fengyi Cai as the promoter of the offering was a “person or company required to sign a certificate under Part 5 or other securities legislation”, and therefore, he was required to file a Submission to Jurisdiction Form in the same form as that of Jixu Cai.
[ 23 ] Thus, Fengyi Cai has appointed GODA Incorporators Inc. or undertook to appoint GODA Incorporators Inc. to be his agent for service. He has promised to make himself accessible to justice in Canada.
[ 24 ] Yanda Cai connection to Ontario is perhaps a little weaker than the connection of his brothers. Yanda Cai has been and continues to be a director of Zungui since October 29, 2009, and he became CEO on June 19, 2010. As the CEO of Zungui, Yanda Cai made numerous filings required by the Ontario Securities Commission including Form 52-109FV1 Certificate of Annual Filings Venture Issuer Basic Certificate (“Certificate of Annual Filings”) and Form 52-109V2 Certificate of Interim Filings Venture Issuer Basic Certificate (“Certificate of Interim Filings”). Although he did not participate in them, he has been a party to proceedings commenced by the Ontario Securities Commission with respect to the affairs of Zungui. On March 7, 2012, the Commission found that he had engaged in conduct contrary to the public interest.
[ 25 ] It is arguable that as successor to his brother Jixu, Yanda Cai ought to have also appointed GODA Incorporators Inc. to be his agent for service, although this is not required by statute or regulation. In any event, Yanda Cai has by his role as CEO of an Ontario Corporation submitted to making himself accessible to justice in Canada.
[ 26 ] I conclude that I have the jurisdiction to make an order for substituted service notwithstanding that there are ongoing attempts to make service under the Convention. The issue then becomes whether the circumstances justify an order for substituted service on Jixu, Fengui, and Yanda Cai.
[ 27 ] In this last regard, the evidence is that efforts were made to serve the Cai brothers by delivering the documents to the offices of GODA Incorporators, Inc., which shares space and appears to be associated with the Toronto Law Firm, Goodmans LLP. GODA retained copies of the documents but did not accept service. Efforts were also made to serve court documents at the business offices of Zungui, but it appears that Zungui has abandoned its offices.
[ 28 ] The Plaintiffs took steps to locate and to determine the residential addresses of the brothers in China and this information was provided to the court when I made my original order for substituted service. They have been served in accordance with the March 23, 2012 order but have not responded by delivering a notice of intent to defend the Ontario action. As noted above, the Plaintiffs have also gotten the process underway for service in China in accordance with the Convention.
[ 29 ] The test for substituted service was summarized as follows by Master Dash in Chambers v Muslim (2007), 87 OR (3d) 784 (Master) at para 13 :
What is the test for substituted service under rule 16.04? The plaintiff must satisfy the court, on proper evidence, that the proposed method of substituted service will have “some likelihood” or a “reasonable possibility” of bringing the action to the attention of the defendant, otherwise “the exercise of obtaining an order for substituted service is a charade.” One must select the mode of service “that is most likely to bring the document in question to the attention of the defendant”. This could include publication in a newspaper in the defendant’s locality. However, “substituted service is not available if the whereabouts of the defendant are unknown”. If “the defendant will not learn of the action through substituted service” it may be “more appropriate to ask for an order dispensing with service altogether”. Furthermore, before substituted service is ordered the plaintiff must show that “all reasonable steps have been taken to locate the party and to personally serve him or her. What is reasonable will depend on the nature of the case, the relief claimed, the amount involved and all of the surrounding circumstances.” Substituted service is not intended to spare the inconvenience or expense or difficulty of personal service if personal service can be effected.
[ 30 ] I am satisfied that the criteria for substituted service have been satisfied in the case at bar and that the requested order should issue.
Perell, J.
Released: August 28, 2012
COURT FILE NO.: 11-CV-436360CP
DATE: August 28, 2012
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Jerzy Robert Zaniewicz and Edward Clarke
Plaintiffs
‑ and ‑
Zungui Haixi Corporation, Ernst & Young LLP, Fengy Cai, Jixu Cai, Yanda Cai, Michelle Gobin, Michael W. Manley, Patrick A. Ryan, Elliott Wahle, Margaret Cornish, CIBC World Markets Inc., Canaccord Genuity Corp. (f.k.a. Canaccord Financial Ltd.), GMP Securities LP and Mackie Research Capital Corporation (f.k.a. Research Capital Corporation)
Defendants
REASONS FOR DECISION
Perell, J.
Released: August 28, 2012.