SUPERIOR COURT OF JUSTICE – ONTARIO
COMMERCIAL LIST
RE: Lorenzo Longo, Yuling Zhang and Benson Hum, Applicants
AND:
Yu Pu Zhang, Chisyn International Inc. and China Synergies (N.A.) Inc., Respondents
BEFORE: D. M. Brown J.
COUNSEL: S. Schwartz, for the Applicants H. Wright, for the Respondent, Yu Pu Zhang
HEARD: December 10, 2012
REASONS FOR DECISION
I. Interlocutory motions in an OBCA oppression application
[1] In this OBCA oppression application two motions are before me: one by the applicants requiring the respondent, Chisyn International Inc., to pay their interim legal fees and disbursements, and one by the respondent, Yu Pu Zhang (“Zhang”), for extensive documentary production. A five-day trial is scheduled to start on March 11, 2013.
II. The financial health of the subject company
[2] What is the state of health of Chisyn, the company in which the applicants and the individual respondent are shareholders? According to the applicant, Lorenzo Longo:
As a result of the litigation, the companies do not currently carry on business in a significant manner. The Company and China Synergies no longer maintain an office. Chisyn’s only employees are the Applicants and Zhang.
The companies have not procured new business opportunities since at least May 2011 when the litigation commenced.
The value of our shares in the Company have plummeted. In my view, they now have minimal value. The Company’s only material assets are its cash and inventory.
According to Longo, Chisyn has $1.8 million in its bank account, the prospect of annual gross profit of $75,000 from one remaining production program, inventory of $400,000 and accounts receivable of $150,000. The company has a tax liability of between $200,000 and $250,000.
[3] How much have the applicants spent on legal fees to date in this proceeding? $125,000 according to Longo. How much do they need to proceed to trial? About the same, $118,500.
[4] How did that come about? In the circumstances of this motion, I think a bit of procedural history is in order.
III. The all-too-common procedural anatomy of a small-company oppression application
2011
[5] This OBCA oppression application was issued on May 6, 2011. As put by Morawetz J. in his March 30, 2012 endorsement:
[I]t is clear that the litigants cannot agree on any issue affecting Chisyn. The Applicants blame Mr. Zhang. Mr. Zhang blames the Applicants. The Applicants believe that they have control over Chisyn through a 60% share ownership. Mr. Zhang disputes the Applicants’ position on the basis of the order made by Newbould J. which provides that no payments may be made out of Chisyn unless the signature of Mr. Zhang and one of the Applicants are both present. Mr. Zhang also references the unanimous shareholders’ agreement (“USA”) entered into in 2007 which provides that Mr. Zhang alone was to have the sole signing authority.[^1]
[6] On May 13, 2011 Newbould J. made an interim consent order (i) requiring Zhang to produce corporate records and documents, (ii) changing the signing authority for Chisyn’s bank accounts to anyone of the applicants jointly together with Zhang, (iii) ordering Zhang to return U.S. $360,000 to Chisyn, (iv) ordering Zhang to disclose any Chisyn or China Synergies inventory he had diverted from the company’s warehouse, (v) prohibiting Zhang from entering into any transactions on behalf of the respondent corporations which would materially affect or reduce their value, and (vi) adjourning the interim relief motion to a 9:30 on May 20, 2011. Newbould J. reserved the costs of the interim motion “to the judge hearing this matter”.
[7] At the May 20, 2011 appointment a timetable was set which contemplated the completion of all application pre-hearing steps by the end of July, 2011, and an appointment scheduled for that August to set a date for the hearing.
[8] The parties did not comply with that timetable. On consent, it was revised by order made June 29, 2011. The revised timetable contemplated the completion of cross-examinations in July and a mediation in August.
[9] On August 15, 2011 the applicants scheduled an urgent interim motion for August 23 in which they sought permission to sign Chisyn wire payments for manufacturers’ invoices without the concurrence of Zhang. Significant materials were filed for the motion. In his endorsement C. Campbell J. observed:
The matter is stalemated because Mr. Zhang has not as envisaged co-signed cheques.
C. Campbell J. granted the interim relief sought by the applicants, but also ordered:
Until further order of the Court the Company will not enter into any new business.
As to costs, C. Campbell J. wrote: “Costs not dealt with at this time. The issue may be raised in mediation or further court hearing.”
[10] On August 22, 2011, the respondents filed their responding application record.
[11] A meditation took place in September, 2011, but did not result in any agreement.
[12] The court file contained emails between counsel in October, 2011. Mr. Wright, in an email dated October 17, 2011, identified in some detail the documentary production sought by Zhang; no effort was made to secure an order for documentary production at that time.
[13] A second mediation was held on November 28, 2011 before C. Campbell J. No settlement was reached.
2012
[14] At a 9:30 appointment on February 3, 2012, Morawetz J. directed the parties to attend a case conference before C. Campbell J. on February 24 to schedule a proposed applicants’ motion to enforce a directors’ resolution. As a result of that case conference, the motion was argued on March 27 before Morawetz J.
[15] Two motions were before Morawetz J. on March 27, 2012: (i) the applicants’ motion authorizing Chisyn to proceed with an action against CKMAX Technology Inc. or (ii) to permit the applicants solely to sign cheques to enable Chisyn to fund the CKMAX litigation, including the reimbursement of Longo of $15,000 for costs he had incurred in respect of the CKMAX litigation, as well as to pay the applicant shareholders outstanding 2010 allowances; and, (ii) a motion by Zhang permitting Chisyn to pay him $880,000 in respect of loans he had made to Chisyn.
[16] In terms of the procedural lay of the land at the time of the March 27, 2012 motions, no hearing date yet had been scheduled for the application because, according to Longo, “there has been no agreement between the parties on the manner in which the hearing is to be conducted and the estimated length of the hearing.”
[17] In his affidavit in support of the applicants’ March 20, 2012 motion, Longo deposed that since the commencement of the application he personally had funded the applicants’ legal expenses and, as well, he had funded $15,000 in legal costs for the CKMAX litigation. He stated: “I cannot continue to pay Chisyn’s costs in prosecuting the CKMAX litigation”.
[18] The applicants’ motion also included a request for an order authorizing Chisyn to reimburse Yuling Zhang the sum of $87,000 as partial re-payment of monies she had paid to a Chinese supplier to secure parts for the company. According to Longo’s affidavit, Yuling Zhang used her own money to pay two factories in China for the parts.
[19] Morawetz J. permitted Chisyn to pay $65,000 to independent counsel to move forward with the CKMAX litigation, but otherwise dismissed the motions:
[11] There is no basis, at this point, to allow one side or the other to gain a significant advantage in the oppression application. This is left for another day.
[12] Accordingly, at this time, the payment necessary to move forward with the CKMAX litigation, i.e. the payment of $65,000 to fund independent legal counsel on a going-forward basis is to be made. This payment is to be made by Chisyn. However, such payment may be subject to further adjustment in this proceeding. In my view, it is appropriate to leave this issue to the judge hearing the application. A determination can be made as to whether the expense was a proper expense to be paid by Chisyn or whether it should be allocated to one or more of the shareholders of Chisyn.
[13] It is my understanding that Chisyn has approximately $1.6 million at this point in time. Therefore, the payment of the $65,000 should not create any liquidity issues.
[14] With respect to the remaining claims of the various shareholders for payment of purported shareholder advances or other monies expended on behalf of the corporation, including Mr. Longo’s request for reimbursement of litigation expenses, it is premature to make any determination on these issues on an interim basis. They can be determined in the application.
[15] In my view, it is essential to ensure that the assets of Chisyn are not dissipated prior to the determination of the application. In this respect, the order of Newbould J. remains in force. No payments may be made out of Chisyn unless the signature of Mr. Zhang and one of the Applicants are both present.
[16] There has been divided success on this motion. No costs are awarded.[^2]
It appears from an April 26, 2012 order that an appointment was required to settle the terms of the order of Morawetz J.
[20] On June 8, 2012, C. Campbell J. set a trial date for March 11, 2013 and stated that he would continue to manage the proceeding as necessary.
[21] On October 17, 2012, the parties appeared before C. Campbell J. who set a date for these motions for the advance of legal fees to the applicants and the production of documents to the respondent.
[22] I could not locate in the court file any trial preparation plan, notwithstanding that the trial is scheduled to start in less than three months and the parties obviously are not co-operating with each other in moving this proceeding to trial.
IV. The applicants’ motion: OBCA s. 249(4)
[23] The applicants move under section 249(4) of the OBCA for an order requiring Chisyn to pay their interim legal fees and disbursements in connection with the application. Specifically, they seek payment of $125,000 for outstanding legal fees, together with $118,500 for future fees and disbursements to take them through to trial. The respondent opposes the relief sought.
A. The governing legal principles
[24] The power of a court to make an interim order for costs in an oppression application lies in section 249(4) of the OBCA which provides as follows:
249(4) In an application made or an action brought or intervened in under this Part, the court may at any time order the corporation or its affiliate to pay to the complainant interim costs, including reasonable legal fees and disbursements, for which interim costs the complainant may be held accountable to the corporation or its affiliate upon final disposition of the application or action.
[25] In Alles v. Maurice, Blair J. (as he then was) interpreted the requirements of section 249(4) as follows:
In the end, I would prefer to say simply that an applicant for relief under s. [249(4)] need establish that there is a case of sufficient merit to warrant pursuit and that the applicant is genuinely in financial circumstances which but for an order under s. [249(4)] would preclude the claim from being pursued.[^3]
Blair J. reached this conclusion because he viewed the purpose of section 294(4) as follows:
[I]t is this inability to fund an otherwise meritorious lawsuit and the advantage which such a situation gives to an "oppressive" majority that the power given under s. 248(4) to order costs is directed.[^4]
[26] More recently, the Divisional Court, in Stefaniak v. Murphy, described the analysis to be performed under section 249(4) in the following terms:
The parties agree that the motions judge applied the correct test for determining whether special circumstances justified an award of interim costs under the Act:
the applicant is in financial difficulty;
the applicant's financial difficulty is connected to the alleged oppressive conduct and his difficulties arise from the pursuit of the law suit;
but for an interim costs award, the applicant could not pursue the oppression action; and
the applicant has established a case of sufficient merit to warrant the costs order.[^5]
[27] Some dispute still exists in the case law about the extent of the link which a complainant must establish between the alleged oppressive conduct and its financial difficulty. In Wilson v. Conley,[^6] Rosenberg J. thought that the complainant needed to demonstrate that the financial difficulty arose out of the alleged oppressive actions of the respondents. In Alles v. Maurice, Blair J. disagreed, observing that nothing in the language of the statute or in its purpose required the complainant to demonstrate a cause and effect relationship between the conduct of the respondents and the need for funding.[^7] Back in 1999 Lamek J. attempted to reconcile the two approaches in Perretta v. Telecaribe Inc. by stating that “it is enough…if the alleged oppression has affected the plaintiff’s ability to finance an otherwise meritorious lawsuit. But there must be some connection between the conduct complained of and the plaintiff’s financial inability.”[^8] More recently, in Stefaniak v. Murphy, the Divisional Court stated that the applicant’s financial difficulty must be connected to the alleged oppressive conduct and the complainant’s difficulties must have arisen from the pursuit of the lawsuit.[^9]
B. Analysis
[28] I need not reconcile those different lines of authorities because this motion can be decided by reference only to the first and third criteria – have the applicants demonstrated that they are in financial difficulty which, but for an order under s. 249(4), would preclude the claim from being pursued?
[29] The evidence filed by the applicants on this point was contained in the November 19, 2012 affidavit of Lorenzo Longo. Zhang’s counsel sought an adjournment of the motion to cross-examine on the affidavit. I refused the adjournment.
[30] Longo deposed that since Chisyn was a start-up company, it did not have the ability to pay the applicants significant salaries. Some salary was paid to Long, Hum and Yuling Zhang prior to December, 2010, but they have not received any salary since that date. Yuling Zhang did not file an affidavit; information about her financial affairs was given by Longo on a hearsay basis. Benson Hum filed a supplementary affidavit in which he “supported” the evidence contained in Longo’s affidavit, but Hum did not offer any information about his personal financial affairs.
[31] In his affidavit Longo deposed that he has been funding the litigation from his personal savings because Yuling Zhang and Benson Hum “did not have the financial ability to contribute toward the payment of our professional fees.” Longo deposed that currently neither he nor Yuling Zhang have “any other sources of income”. Benson Hum evidently receives $2,500 a month from China Synergies. Longo stated that he lives off his savings for everyday living expenses, does not own a home or any other property, and presently lives with his parents.
[32] As to Yuling Zhang, Longo deposed that currently she was supported by her husband and did not have the financial ability to contribute toward the cost of the litigation. Longo stated that Benson Hum also was supported by his spouse and did not have the financial ability to contribute toward the cost of litigation.
[33] In support of these statements about the financial circumstances of the three applicants, Longo filed only one set of documents which revealed that one of Hum’s credit cards was cancelled in September, 2012. Hum filed no personal financial information with his affidavit. No independent evidence was filed about the taxable income earned by any of the applicants since this proceeding or about their assets and liabilities.
[34] In my view, that is not sufficient evidence to support a motion for interim relief under OBCA s. 249(4). If a complainant asserts that it is in financial difficulty, it must adduce independent evidence of its financial circumstances so that the court can examine the income, expenses, assets and liabilities of the complainant. Mere assertions in an affidavit unsupported by independent documentary evidence are insufficient. Further, if a group of complainants, such as the applicants, contend that each of them is in financial difficulty, each should file an affidavit. The state of the financial affairs of a complainant is a material issue on this type of interim motion, and the evidence adduced should be direct, not hearsay, evidence.
[35] I would also note that the complainants did not seek relief under OBCA s. 249(4) when they were before Morawetz J. last March, yet they filed no evidence to explain what has happened between then and now to create the financial difficulties which necessitated seeking interim relief.
[36] Accordingly, although in paragraph 33 of his affidavit Longo stated that “if the applicants do not receive the requested interim payment, we are concerned that we will not be able to continue with the litigation”, I conclude that the applicants have failed to adduce sufficient evidence to support such an assertion.
[37] Moreover, notwithstanding that Longo deposed the complainants had already incurred $125,000 in outstanding legal fees and anticipated incurring a further $118,500, he did not file as exhibits any of the invoices already rendered or a bill of costs outlining the nature and amount of legal work required to prepare for trial. As was said in Alles v. Maurice:
Motions of this nature should be supported by a realistic amount of information and verification sufficient to assist the Court in making an assessment of what is a fair quantum to be awarded.[^10]
I have no such evidence before me.
[38] I therefore conclude that on the evidence filed the complainants have failed to adduce adequate evidence of financial difficulty and have filed no evidence which would enable an assessment of what might be a fair quantum of interim costs to award. For those reasons, I dismiss the applicants’ motion. I would add that in his March endorsement Morawetz J. sent clear a message to the parties that the assets of Chisyn should not be dissipated prior to the hearing of the application:
[11] There is no basis, at this point, to allow one side or the other to gain a significant advantage in the oppression application. This is left for another day.
[15] In my view, it is essential to ensure that the assets of Chisyn are not dissipated prior to the determination of the application. In this respect, the order of Newbould J. remains in force.
I see nothing in the materials before me to alter that view.
V. The respondent’s production motion
[39] Zhang moved for an order requiring the applicants to produce extensive documentation and records concerning Chisyn and China Synergies (N.A.) Inc.
[40] Paragraph 2 of the March order of Morawetz J. reads, in part:
THIS COURT ORDERS that Chisyn shall pay to the [independent counsel] an amount up to $65,000 to fund that counsel on a go-forward basis with respect to the CKMAX litigation…
[41] Longo deposed that Zhang had refused to co-operate in selecting independent counsel. That is apparent from the July 13, 2012 email from Zhang’s counsel to Mr. Lisus, the independent counsel, advising that on-going disputes amongst the directors/shareholders had to be resolved before Chisyn could issue a retainer cheque. That position taken by Zhang ignored the clear language of the order of Morawetz J. Since Zhang has refused to take steps which would enable Chisyn to comply with paragraph 2 of the order of Morawetz J., I conclude that this Court should not hear any motion brought by Zhang until he complies with the existing court order.
[42] Consequently, I will not consider Zhang’s production motion.
VI. Trial preparation plan
[43] This matter is scheduled to go to trial on March 11, 2013. From the materials filed, and from my review of the court record, I am concerned that the parties have not turned their minds to preparing for the trial. I am also disappointed by the apparent lack of co-operation amongst counsel. May I remind them of Justice Farley’s “3-Cs” which remain the bedrock of litigation on the Commercial List: “Co-operation, communication and common sense shall continue to be the principles of operation of the Commercial List.” Those principles apply with even greater force in oppression applications where the emotions of the parties run high and the litigation often assumes the dynamics of matrimonial litigation.
[44] Counsel advised that they planned to re-attend before C. Campbell J. in late January or early February. That would be leaving matters too late. A trial preparation plan must be put in place much sooner. Accordingly, I order the parties to prepare trial preparation plans containing the information described in Part B of Schedule “A” to my Reasons in George Weston Limited v. Domtar Inc.,[^11] which for convenience I reproduce below:
B. What will the proposed trial look like?
[19] To enable the court to understand the alternative to a lengthy Post-Discovery summary judgment motion – i.e. a trial – the parties should submit information which details the following:
(i) Length of trial: How long will the trial take, broken down amongst time for opening statements, evidence, closing submissions and intra-trial motions?
(ii) Evidence: Each party should identify the witnesses they intend to call at trial and specify the anticipated lengths of the examinations-in-chief and cross-examinations for each witness, including the expert witnesses;
(iii) Documents: How many documents do the parties anticipate adducing at trial? How many documents may be contested?
(iv) In-trial motions: What motions, if any, do the parties anticipate bringing at the start of or during the trial? How much time should be allocated for each motion?
[45] The parties shall book a one-hour case conference before me on any of the following dates at which time I will review the trial preparation plans and issue directions for the trial: December 18, 19, 20, 21, 27, 28, 31, 2012; January 2, 3 or 4, 2013.
VII. Summary
[46] For the reasons set out above, I dismiss the applicants’ motion and refuse to consider Zhang’s motion. There shall be no order as to costs.
(original signed by)__________
D. M. Brown J.
Date: December 14, 2012
[^1]: 2012 ONSC 2027, para. 5. [^2]: 2012 ONSC 2027. [^3]: (1992), 5 B.L.R. (2d) 146 (Gen. Div.), para. 19. [^4]: Ibid., para. 17. [^5]: 2010 ONSC 971, para. 12. [^6]: (1990), 1 B.L.R. (2d) 220 (Ont. Gen. Div.) [^7]: Alles, para. 17. [^8]: [1999] O.J. No. 4487 (S.C.J.), para. 10. [^9]: Stefaniak, para. 12. [^10]: Alles, para. 22. [^11]: 2012 ONSC 5001.