NEWMARKET

COURT FILE NO.: CV-109216-00

DATE: 20130306

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: FISAZ INVESTMENTS INC., Applicant

AND:

SASHAL INC., Respondent

BEFORE: THE HON. MR. JUSTICE G.M. MULLIGAN

COUNSEL:
J. Buote, Counsel, for the Applicant

J. Armstrong Gates, Counsel, for the Respondent

HEARD: March 1, 2013

ENDORSEMENT

[1] The applicant Fisaz Investments Inc. (“Fisaz”) brings an Application for a declaration that a transfer of shares and a Buy Sell Notice is null and void. The respondent Sashal Inc. (“Sashal”) opposes the relief sought, and by its own Counter-Application seeks a declaration that there was a proper notice given to Fisaz leading to the transfer of shares between the parties and that the Buy Sell Notice is valid and enforceable.

[2] By way of background there are a number of facts that are not in dispute. The shares in question are the shares of Milano Computer Systems Inc. (“Milano”) a private Ontario corporation. Paul Pagliaro is the president of Sashal and Imram Zalfackruddin is the President of Fisaz. Both parties had knowledge of and involvement with Milano. Pagliaro acquired shares in Milano and incorporated Sashal to hold those shares.

[3] In October of 2009 Fisaz purchased 340 shares of Milano from Sashal. Sashal retained 510 shares in the company. Both parties were represented by counsel during this transaction. The purchase price was $940,000. Part of the consideration was a Promissory Note from Fisaz to Sashal for $140,000 with payments due of four instalments plus accrued interest. Of note, the first payment was due March 1, 2010. That payment nor any of the subsequent payments were made other than a $3,000 payment which was paid several months after the March 1, 2010 payment was due. To secure the Promissory Note the parties entered into a Share Pledge Agreement for 60 of the shares. The Note made provisions for default after written notice. By way of the Share Pledge Fisaz appointed Sashal as Power of Attorney with respect to the shares in the event of a demand.

[4] At the same time the parties entered into a Unanimous Shareholders Agreement on October 9, 2009.

[5] It is not disputed that Fisaz did not make the first payment on the Promissory Note which was due and payable March 1, 2010. It is not disputed that Imram Zalfackruddin made a demand for payment by email dated March 3, 2010 which stated in part:

Please advise of me of your plan by March 5th next to make this payment as I have obligations as well that are quite pressing.

[6] Relations between the parties deteriorated. There is evidence that they had a lunch time meeting in October of 2010. What occurred at this meeting is in dispute. Pagliaro’s position is that he gave Mr. Zalfackruddin the requisite 30 day written notice to remedy the default under the Note failing which Sashal would exercise its rights under the Share Pledge Agreement. Both principals filed affidavits in support of the position of their companies. Mr. Pagliaro provided detailed evidence about the meeting, the discussions that took place and the fact that he handed over this Notice to Mr. Zalfackruddin. He was cross-examined as to the circumstances of this meeting. Mr. Zalfackruddin denied that he received such a Notice of Default.

[7] On the 29th day of November 2010 Pagliaro caused to be transferred 60 common shares in Milano which it held pursuant to the Pledge Agreement to Sashal. The transfer took place under the authority that Mr. Pagliaro had as Power of Attorney from Fisaz under the Share Pledge Agreement of October 9, 2009. The transfer of shares was made as an exhibit as was a Resolution of the directors of Milano Computer Systems Inc. The Resolution was executed by Sashal Inc. by its president Paul Pagliaro and by Fisaz Investments Inc. by Paul Pagliaro acting as Attorney pursuant to s.8 of the Share Pledge. However, it bears repeating that Fisaz originally purchased 340 shares in Milano and the Share Pledge only involved 60 shares. The Resolution of Shareholders dated February 29, 2010 was not signed by Fisaz Investments Inc. in its own right with respect to those shares not involved in the Share Pledge. Further, there is no evidence that Fisaz signed any subsequent annual minutes after this Resolution.

[8] It should be noted that a previous Resolution of the Directors of Milano Computer Systems Inc. was signed by Paul Pagliaro for Sashal and Imram Zalfackruddin for Fisaz.

[9] There is no doubt that the Milano shares had considerable value. Both parties had the benefit of dividends declared and paid. However, unhappy differences continued and on February 14, 2012 Sashal Inc. issued a Buy Sell Notice to Fisaz. Sashal offered to purchase all of the shares owned by Fisaz for $3,294.12 per share for a total purchase price of $922,353.60 or in the alternative, offered to sell its shares to Fisaz at the same price per share for a total price of $1,877,648.40. It should be noted that the Buy Sell Offer recited that Sashal owns 570 shares and Fisaz owns 280 shares. Those figures reflected that Sashal had acquired for itself, pursuant to the Share Pledge, 60 of the original shares issued to Fisaz. Fisaz declined the Offer to Sell and instead elected to purchase Sashal’s shares. As Mr. Zalfackruddin states in his affidavit at para. 19:

Fisaz elected to purchase Sashal shares of Milano. I did not notice at the time the discrepancy in the number of shares.

[10] Both parties retained lawyers to attend to the Buy Sell.

[11] A closing date was set for the end of April but a few days before closing counsel for Fisaz raised a question as to how Sashal acquired 60 more shares. Counsel requested copies of all Notices or documents relating to that issue. Counsel also requested clarification regarding a credit the purchaser may receive against the purchase price for any indebtedness of the vendor. Finally, counsel requested an extension to May 21, 2012.

[12] Counsel for Sashal agreed that there were debts owing to Milano by both Fisaz and Sashal and agreed that the matter could proceed if each shareholder provided an undertaking to readjust once the numbers were confirmed.

[13] However, the counsel for Sashal denied an extension request and took exception to the late inquiry about the number of shares owned by Sashal in view of the share numbers set out in the Buy Sell Notice. As counsel set out in its email:

We expect your client to close the purchase transaction on Monday, April 30, 2012 as contractually required and previously agreed upon, failing which our client shall consider your client to be in default and hereby reserves all of its rights under the Agreement and at law.

[14] Fisaz commenced an application on April 27, 2012. On May 4, 2012 Sashal delivered a notice pursuant to s. 13.7 of the Unanimous Shareholders Agreement which stated in part:

Sashal hereby gives notice to Fisaz and intends to purchase from Fisaz all of the shares of the corporation beneficially owned by Fisaz for $617,976.91 (being two-thirds of the price payable pursuant to the Buy Sell Notice) less the amount of debt owed by Fisaz to the corporation as at the day of closing of this purchase transaction.

[15] Section 13.7 of the Unanimous Shareholders Agreement executed by the parties October 9, 2009 provided as follows:

If, at the Time of Closing, the Purchaser neglects or refuses to complete the transaction of purchase and sale herein contemplated, the Vendor shall have the right, without prejudice to any other rights which the Vendor may have, to give to the Purchaser, within fifteen (15) days of the Date of Closing, a notice that the Vendor (hereinafter in this Section called the “New Purchaser”) intends to purchase from the Purchaser (hereinafter in this Section called the “New Vendor”) all of the shares of the Corporation beneficially owned or controlled by the New Vendor and any Shareholder Loan owing by the Corporation to the New Vendor at a purchase price for each share and the Shareholder Loan equal to two thirds (2/3) of the price payable in the subject transaction in which the default occurred (hereinafter in this Section called the “New Purchase Price”). The resulting transaction of purchase and sale shall take place at the Place of Closing, at the Time of Closing, on the date (hereinafter in this Section called the “New Date of Closing”) which is thirty (30) days following the receipt or deemed receipt of the aforesaid notice. At the Time of Closing, the New Vendor and its Shareholder Loan to the New Purchaser who shall purchase the same for the New Purchase Price, payable in accordance with the terms herein contained for the payment of the purchase price in the subject transaction in which the default occurred. [emphasis added]

[16] It is clear from the original Buy Sell Agreement that Sashal was prepared to purchase Fisaz’s shares for $922,353.60. Relying on the penalty provision in the Unanimous Shareholders Agreement it now seeks to acquire those shares for $617,976.91. The result, if Sashal is successful, is that Fisaz will incur a loss of over $300,000 because it requested a short extension and questioned the number of shares.

POSITION OF FISAZ

[17] Fisaz raises a number of issues in seeking the relief which it requests. Those arguments can be distilled to the following points:

(a) that the Share Pledge Agreement did not contemplate that Sashal could take or foreclose those shares for its own account;

(b) that there was no default on the Note given that the parties discussed some forbearance in the light of another agreement to sell to a third party;

(c) that no notice was properly given to Fisaz;

(d) that any notice required compliance with the Personal Property Security Act;

(e) that any notice required compliance with the Bankruptcy and Insolvency Act.

POSITION OF SASHAL INC.

[18] Sashal responds as follows:

(a) the transfer of the 60 shares to Sashal in the event of default by Fisaz was fully contemplated by the parties;

(b) there was a default under the Agreement which is not disputed and there was no agreement whereby Fisaz was not required to make the payments;

(c) notice was given in writing and personally delivered to Mr. Zalfackruddin at a meeting and the notice, which was made an exhibit, fully complied with the notice requirements contemplated in the contract between the parties;

(d) given that this was a contractual matter the provisions of the Personal Property Security Act do not have application here and if the provisions of the Act do apply the document delivered does provide adequate notice;

(e) the provisions of the Bankruptcy and Insolvency Act do not apply here because there is no clear and cogent evidence that Fisaz was an insolvent person given that it had valuable shares in Milano for which Sashal was prepared to pay over $900,000.

ANALYSIS

[19] For the purpose of this application and cross-application I am satisfied that there was no notice of default given to Fisaz in accordance with the contractual obligations between the parties. Fisaz asked for a short extension to reasonably and diligently examine the issue of the 60 shares. An extension for less than a month to pursue that inquiry was reasonable in my view.

[20] Under the circumstances Sashal cannot avail itself of para. 13.7 in the Unanimous Shareholders Agreement to take advantage of the penalty provision set out therein.

[21] In concluding that no proper notice was given I have considered the following:

(i) There is a dispute about whether or not notice was handed over at the meeting between the parties.

(ii) Although the notice was significant and triggered certain rights and responsibilities it was not sent by regular or registered mail to Fisaz or its principal.

(iii) Fisaz did not sign the Resolution of Shareholders dated November 29, 2010 which recorded the transfer of 60 common shares even though it owned a substantial block of shares in addition to the 60 common shares. Nor were there any subsequent annual meeting minutes recording this transfer.

(iv) There was no accounting to Fisaz to put it on notice that the shares had actually been transferred to Sashal under Power of Attorney. The Share Pledge Agreement provided as follows:

7. Application of Proceeds

After payment of expenses incurred by the secured party in connection with the realization the balance of any proceeds received by the secured party in or connection with realizing, collecting, selling, transferring or delivering of the pledged shares or any part thereof shall be applied on account of the amount due under the Promissory Note and any surplus paid to the pledgor. [emphasis added]

[22] When a party relies on a written Demand to enforce its rights it has a clear and unequivocal obligation to satisfy the court that this demand was received by the debtor party. In my view this obligation is magnified when the severe penalty as set out in s.13.7 of the Unanimous Shareholders Agreement is considered.

[23] In the result, the relief sought by the applicant, Fisaz Investments Inc., as set out in the Application paras. (a), (b) and (c) is granted.

[24] The relief sought by Sashal Inc. by way of counter-application is therefore dismissed.

[25] Nothing in this decision prevents the parties from entering into a new Buy Sell Agreement subject to the adjustment they previously agreed upon by way of Undertakings and subject to a further adjustment for the value of the 60 shares and any consequent offset for the value of the Promissory Note plus interest as stipulated therein.

COSTS

[26] At the conclusion of this hearing both counsel agreed that an award of costs of $60,000 including HST would be fair and reasonable for the successful party. The applicant having achieved a success on the motion the Respondent is required to pay costs to the applicant forthwith in the amount of $60,000 all inclusive.

MULLIGAN J.

Date: March 6, 2013