ONTARIO

SUPERIOR COURT OF JUSTICE

COURT FILE NO.: 1492/10 (Milton)
DATE: 20121227

B E T W E E N:

Royal Bank of Canada

Plaintiff

• and -

Hi-Tech Tool and Die Inc., and Dusko Zlojutro

Defendants, Plaintiffs by Crossclaim

Slobodan Nikolic

Defendant, Defendant to the Crossclaim

E. Freedman, for the Plaintiffs by Crossclaim, Hi-Tech Tool and Die Inc. and Dusko Zlojutro

J. Stanleigh, for the Defendant to the Crossclaim, Slobodan Nikolic

HEARD: April 24-27, 30 and August 7 and 10, 2012

REASONS FOR JUDGMENT ON CROSSCLAIM

K. van Rensburg J.

Introduction

1Royal Bank of Canada (“RBC”) commenced the main action in these proceedings to collect on a debt owed by its customer Hi-Tech Tool and Die Inc. (“Hi-Tech”) and two guarantors, Dusko Zlojutro and Slobodan (“Bob”) Nikolic. Default judgment was obtained against both guarantors, and set aside on consent against Mr. Zlojutro and Hi-Tech. Hi-Tech was put into receivership by order of Mesbur J. on April 27, 2011, and with RBC’s agreement, Mr. Zlojutro has continued to operate the business.

2This judgment is in respect of a trial of a crossclaim by Hi-Tech and Mr. Zlojutro against Mr. Nikolic, and, pursuant to an amendment permitted at trial, Mr. Nikolic’s counterclaim against Mr. Zlojutro and Hi-Tech.

Relief Sought

3Hi -Tech and Mr. Zlojutro seek damages from Mr. Nikolic and an order requiring the transfer of his shares in Hi-Tech to Mr. Zlojutro for fair market value. They seek to have certain temporary orders granted in the course of this litigation made final, such as the removal of Mr. Nikolic as an officer and director of Hi-Tech and his exclusion from the Hi-Tech business premises. Mr. Zlojutro and Hi-Tech pursued their claims under the provisions of the Ontario Business Corporations Act, R.S.O. 1990, c. B.16 (the “OBCA”) . They also alleged that Mr. Nikolic engaged in fraud and is liable for compensatory and punitive damages.

4Mr. Nikolic asks that the court vacate the orders removing him from the Hi-Tech premises, and excluding him from the corporation. Although his pleadings were amended to claim such relief, he no longer seeks to purchase Mr. Zlojutro’s shares and to oust him from the business; rather he wants to have restored the status quo before this action was commenced, with both parties continuing as directors and shareholders of Hi-Tech. He asks for an order requiring Mr. Zlojutro to account for legal fees paid through Hi-Tech and for all funds paid to Mr. Zlojutro since July 15, 2010.

The Dispute

5Hi-Tech was incorporated in August 2003, initially with three shareholders, Mr. Nikolic, Mr. Zlojutro, and Zeljko Zegarac. Mr. Nikolic held 34 shares, while the other two partners in the business each had 33 shares. In 2008 Mr. Nikolic and Mr. Zlojutro bought out Mr. Zegarac’s shares. Although that left Mr. Nikolic with 50.5% of the shares, there is no question that the intention was for Mr. Nikolic and Mr. Zlojutro to be equal shareholders in the business.

6There was no shareholder agreement or other document setting out the terms on which the business was formed and to be operated. Mr. Nikolic, who is the principal of another company, Brevina Tool & Die Co. Ltd. (“Brevina”), contends that Hi-Tech was incorporated for the sole purpose of manufacturing dies for the auto industry, and that he never agreed to Hi-Tech taking over the business from Brevina’s major customer, to manufacture machine parts for Poss Design Limited (“Poss Design” or “Poss”).

7Mr. Zlojutro asserts that Hi-Tech’s business was what was described on the company’s business cards that were obtained by Mr. Nikolic: “Design and Build Progressive and Hand Transfer Tooling, CNC Machining and Wire Cutting”, and that Hi-Tech took on whatever business it could get. The three partners contributed their existing customer relationships, including Mr. Nikolic’s long-standing relationship with Poss Design. Hi-Tech acquired Brevina’s CNC machine in 2003, and purchased a new CNC machine in 2005, both of which were fitted with Poss fixtures, in order to manufacture parts for Poss.

8Mr. Zlojutro and Mr. Zegarac, as well as other workers, who contracted their services to Hi-Tech, were responsible for operating the equipment, while Mr. Nikolic mostly worked in the office, and took care of the paperwork. Between September 2003, when Hi-Tech was formed, and 2010, when the receiver was appointed, Hi-Tech billed Poss Design the sum of $1,418,000. During the same period Brevina billed Poss, and was paid by Poss, more than $1.3 million.

9At the heart of the crossclaim is a dispute over the Poss Design revenues. Mr. Zlojutro contends that Mr. Nikolic diverted Poss Design revenues to Brevina, for work performed on Hi-Tech’s premises, using Hi-Tech personnel and equipment, and that this occurred without his knowledge or consent. Hi-Tech suffered financially because such revenues had been diverted. Eventually, Mr. Nikolic caused RBC to call its loan, and this, as well as the company’s precarious financial condition, resulted in the pending receivership.

10Mr. Nikolic claims that Hi-Tech was a losing proposition from the outset, bolstered only by the financial support he provided over the years, including the opportunity to do some work for Poss Design, which was intended to be temporary only until Hi-Tech became profitable. He denies that he was responsible for the Bank calling its loan, and he contends that, both before and after he was excluded from Hi-Tech, Mr. Zlojutro has been diverting monies from Hi-Tech.

Decision

11For the reasons that follow, I find that Mr. Nikolic appropriated funds that were owed to Hi-Tech when he continued to invoice Poss Design through his own company Brevina. Mr. Nikolic withdrew other funds to which he was not entitled, in particular, the sum of $53,500 paid in February 2004 by cheque to Brevina. In diverting these funds, Mr. Nikolic was in breach of his obligations as a director of Hi-Tech, and his conduct was fraudulent, dishonest and oppressive. Mr. Nikolic engaged in other oppressive conduct, by withdrawing $60,000 for his personal use from the Hi-Tech bank account at the time of refinancing, which led RBC to call its loans, and by his subsequent conduct in attempting to drive Hi-Tech into bankruptcy, with a view to acquiring for his own benefit, its equipment and business.

12Both Hi-Tech and Mr. Zlojutro are entitled to damages and other remedies, which I address at the conclusion of these reasons. Mr. Nikolic’s counterclaim to the crossclaim is dismissed.

(Full judgment text continues exactly as in the source; no wording altered.)

K. van Rensburg J.

Released: December 27, 2012

COURT FILE NO.: 1492/10 (Milton)
DATE: 20121227

ONTARIO SUPERIOR COURT OF JUSTICE B E T W E E N: Royal Bank of Canada Plaintiff - and – Hi-Tech Tool and Die Inc., and Dusko Zlojutro Defendants, Plaintiffs by Crossclaim Slobodan Nikolic Defendant, Defendant to the Crossclaim REASONS FOR JUDGMENT ON CROSSCLAIM K. van Rensburg J.