Tomken Kamato (V) Ltd. v. 752458 Ontario Ltd. et al.

[Indexed as: Tomken Kamato (V) Ltd. v. 752458 Ontario Ltd.]

Ontario Reports

Ontario Superior Court of Justice,

Chapnik J.

July 28, 2014

121 O.R. (3d) 378 | 2014 ONSC 4484

Case Summary

Civil procedure — Parties — Corporations — Dissolved corporation being active when action against it was commenced — Corporation dissolved after it filed defence and counterclaim — Section 242(1) of Business Corporations Act permitting dissolved corporation to defend action and assert counterclaim — Director of corporation at time of dissolution having authority to give instructions on behalf of corporation — Business Corporations Act, R.S.O. 1990, c. B.16, s. 242(1).

The plaintiff brought an action against the defendants for non-payment of accelerated rent. The defendants filed a statement of defence and counterclaim. The corporate defendant (the "Corporation") was subsequently voluntarily dissolved. The plaintiff brought a motion for summary judgment, seeking the dismissal of the counterclaim on the basis that the Corporation had no capacity to defend the motion, bring a motion or proceed with the counterclaim. The defendants had begun proceedings for the Corporation's revival, and sought to stay the action and the counterclaim until the Corporation was revived.

Held, the motion should be dismissed.

On a proper reading of s. 242(1) of the Business Corporations Act, R.S.O. 1990, c. B.16, a dissolved corporation has the right to defend an action and to assert a counterclaim, particularly when the documents were filed prior to its dissolution. A stay of proceedings was therefore unnecessary. If the conclusion that the Corporation had the capacity to litigate was wrong, granting a stay of proceedings until such time as the Corporation was revived would be just and reasonable.

A director of the Corporation at the time of dissolution had the authority to give instructions on behalf of the Corporation.

Reliable Life Insurance Co. v. Black, 2009 80101 (ON SC), [2009] O.J. No. 5903, 83 C.C.L.I. (4th) 290 (S.C.J.), not folld

Malamas v. Crerar Properties Corp., [2009] O.J. No. 4726, 65 B.L.R. (4th) 277 (S.C.J.) [Leave to appeal to Div. Ct. denied [2010] O.J. No. 2135, 2010 ONSC 2883, 70 B.L.R. (4th) 69, 2010 2883 (Div. Ct.)], apld [page379]

Other cases referred to

Category 5 Imaging Ltd. v. Antoniadis, [2013] O.J. No. 5989, 2013 ONSC 7989 (S.C.J.); Masonry Council of Unions Toronto and Vicinity and its members Bricklayers, Masons Independent Union of Canada, Local 1, [2013] O.L.R.D. No. 4560, 236 C.L.R.B.R. (2d) 263, 2013 84208 (L.R.B.); Seam Electronics Inc. v. A. Deskin Sales Corp., [1992] O.J. No. 580, 1992 CarswellOnt 2915 (Gen. Div.)

Statutes referred to

Business Corporations Act, R.S.O. 1990, c. B.16, ss. 241 [as am.], 242 [as am.], (1) [as am.], (a), (b) [as am.], 243 [as am.]

Courts of Justice Act, R.S.O. 1990, c. C.43, s. 106

Rules and regulations referred to

Rules of Civil Procedure, R.R.O. 1990, Reg. 194, rules 21.01(1) (b), 57.01

MOTION by the plaintiff for summary judgment.

Ellad Gersh, for plaintiff.

Pathik Baxi, for defendants.

[1] CHAPNIK J.: — The plaintiff, Tomken Kamato (V) Ltd. ("Tomken"), as landlord, and the defendant 752458 Ontario Ltd. (the "Corporation"), as tenant, entered into a lease agreement (the "agreement") on June 28, 2010. The defendant Peter Jarvis Brown indemnified the Corporation's obligations under the lease, which was for a term of five years and three months.

[2] The Corporation abandoned the premises and terminated the lease on or about January 25, 2012, claiming inter alia that the landlord breached its covenant of quiet and peaceful enjoyment of the premises.

[3] In September 2012, Tomken commenced this action for non-payment of accelerated rent in the sum of $87,816.88. The defendants filed a defence and counterclaim on January 4, 2013, seeking $500,000 in damages to its equipment and for lost income. On January 10, 2013, the Corporation filed articles of dissolution with the Ministry of Government Services (the "ministry") and the Corporation was then voluntarily dissolved.

[4] After learning of the dissolution in July 2013, the plaintiff brought this motion for summary judgment, seeking the dismissal of the counterclaim on the basis that the Corporation has no capacity to defend the motion, bring a motion or proceed with the counterclaim.

[5] In response, the defendants have begun proceedings for the Corporation's revival and they seek a stay of this action and the counterclaim until the Corporation is revived. Specifically, the Corporation has published notices in the Ontario Gazette and the Mississauga News and has proposed a draft bill for this [page380] purpose, which is presently before the legislature. It is anticipated to take about one and a half years for the bill to become an Act of Parliament and thereby revive the Corporation (the maximum time frame being two and a half years). The defendant Peter Brown is not a party to the counterclaim.

[6] The above circumstances give rise to the following questions:

(1) Do the defendants have status to defend the motion or bring a cross-motion?

(2) Is the Corporation's dissolution fatal to its counterclaim?

(3) Are the defendants entitled to a stay of proceedings?

(4) Who should be authorized to give instructions on behalf of the Corporation while it is dissolved?

Issue No. 1 -- The Corporation's Status

[7] The relevant sections of the Business Corporations Act, R.S.O. 1990, c. B.16 ("BCA") that deal with the dissolution of a corporation are found in s. 242(1)(a) and (b), which provide as follows:

242(1) Despite the dissolution of a corporation under this Act,

(a) a civil, criminal or administrative action or proceeding commenced by or against the corporation before its dissolution may be continued as if the corporation had not been dissolved;

(b) a civil, criminal or administrative action or proceeding may be brought against the corporation as if the corporation had not been dissolved[.]

[8] These provisions have been interpreted by the courts with conflicting results. The plaintiff relies upon the case of Reliable Life Insurance Co. v. Black, 2009 80101 (ON SC), [2009] O.J. No. 5903, 83 C.C.L.I. (4th) 290 (S.C.J.), in which Perkins J. dismissed an appeal of a master's decision, that held s. 242 does not permit a dissolved corporation to defend a motion or prosecute a counterclaim.

[9] The only issue in Reliable was whether two dissolved corporations could be represented by the same non-lawyer. The defendants suggested that this was possible because of the powers afforded dissolved corporations under ss. 241 to 243 of the BCA. The master found that those provisions could not save the defendants. As dissolved and not revived entities, the corporate defendants could neither defend the action nor be represented by any person.

[10] Perkins J. upheld the decision of the master, stating, at para. 7: [page381]

My review of the cases [cited by the parties] leads me to conclude that the weight of the authority appears to be that a corporation must be revived in order to continue to prosecute or defend an action and that section 242(1)(a) should be read as curing any defect that occurred in the interregnum between the dissolution of a corporation and its revival, but not as conferring a right to continue to prosecute or defend without being revived.

[11] It is not clear from the facts reported in Reliable when the corporations dissolved or whether they were in the process of being revived, but given that Perkins J. focused on s. 242(1)(a) in the comments quoted above, it would appear that the dissolutions occurred after the action was commenced.

[12] The defendants distinguish Reliable on its facts or, in the alternative, allege it was wrongly decided. They base their argument on the decision of this court in Malamas v. Crerar Properties Corp., [2009] O.J. No. 4726, 65 B.L.R. (4th) 277 (S.C.J.), leave to appeal to Div. Ct. denied 2010 ONSC 2883, [2010] O.J. No. 2135, 2010 2883 (Div. Ct.).

[13] In Malamas, the plaintiff brought a motion pursuant to rule 21.01(1)(b) [of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194] for an order striking out the statement of defence on the ground that, long before the action was commenced, the defendant's letters patent had been cancelled and the corporation dissolved by administrative action. The plaintiff argued before Matlow J. in the Superior Court that since the corporation had been dissolved for failure to comply with filing requirements, and remained dissolved at the time of the motion, the corporation was a non-entity and could not file a defence. Matlow J. dismissed the plaintiff's motion under s. 242(1)(b). That section permits a party to commence an action against a dissolved entity, and "[i]t would be unthinkable that the law would recognize the right of someone to bring an action against a defendant and, at the same time, deny that defendant the right to defend it": Malamas, at para. 9.

[14] In support, Matlow J. looked to s. 242(1)(a). Matlow J. noted, at para. 10, that s. 242(1)(a) "authorizes a corporation which is sued before it is dissolved to defend the action as if it had not been dissolved" (emphasis added). In particular, the board of directors "as at the moment before it was dissolved might be entitled to instruct counsel, pay the costs of the defence and use the assets of the corporation before they were forfeited to the Crown to pay those costs and make all other reasonably required expenditures" in relation to the litigation: Malamas, at para. 10.

[15] In denying leave to appeal from that decision, the Divisional Court agreed with Matlow J.'s comments on the absurdity of reading s. 242(1)(b) literally and held that the right to defend [page382] an action in such circumstances is implicit in the wording of s. 242(1) (b): Malamas v. Crerar Properties Corp., supra. In doing so, the Divisional Court endorsed the reasoning of Matlow J., stating, at paras. 3 and 4:

Matlow J. noted the gap in the legislation which permits suit against a dissolved corporation but which does not specifically provide for the defence of the suit by the dissolved corporation. His observations concerning the sorry state of the legislation are apt.

Matlow J. held that it was implicit in s. 242(1)(b) of the Business Corporations Act, R.S.O. 1990, c. B-16 which permits suit against a dissolved corporation, that the corporation could defend. He held that to hold otherwise would produce an absurd result, namely, the plaintiff could sue, but the defendant could not defend itself.

[16] As noted in the defendants' factum, other legal commentators have remarked upon the failure of the legislature to clearly provide for the right of a dissolved corporation to defend an action.

[17] In my view, Malamas was correctly decided and remains good law. The courts' interpretation of s. 242(1) (b) is consistent with the language in s. 242(1) (a), which authorizes a corporation that is sued before it is dissolved to defend the action as if it had not been dissolved. See, also, Masonry Council of Unions Toronto and Vicinity and its members Bricklayers, Masons Independent Union of Canada, Local 1, [2013] O.L.R.D. No. 4560, 2013 84208 (L.R.B.), at para. 15. As well, in Seam Electronics Inc. v. A. Deskin Sales Corp., [1992] O.J. No. 580, 1992 CarswellOnt 2915 (Gen. Div.), at para. 13, the plaintiff's action was allowed to proceed pursuant to the predecessor to s. 242(1)(a) notwithstanding that the plaintiff was dissolved and not yet revived.

[18] In the case at bar, the Corporation was active at the time the plaintiff commenced the lawsuit, and it continued to exist until after it filed its defence and counterclaim. Only then did it file the articles of dissolution. As a result, s. 242(1)(a) applies both to the plaintiff's action and the counterclaim. That is, the plaintiff's action "commenced . . . against the corporation before its dissolution" and the counterclaim "commenced by the corporation before its dissolution". Accordingly, these actions "may be continued as if the corporation had not been dissolved". Under the reasoning in Malamas, it would be absurd to interpret the word "continue[]" in s. 242(1)(a) to mean that the plaintiff's action can proceed but the dissolved corporation cannot defend or prosecute the counterclaim. Section 242(1) (a) authorizes the dissolved corporation to participate in the process "as if [it] had not been dissolved". [page383]

[19] To the extent that the holding in Reliable differs from that in Malamas, it is noteworthy that Reliable was first decided in December 2009, and there is no evidence the court there considered the Malamas decision of the Superior Court, which was issued in November 2009, or the subsequent Divisional Court's ruling in 2010.

[20] In the articles of dissolution prepared by the principals of the Corporation, they state the Corporation had no property to distribute among shareholders and there were no pending court proceedings. They admit that these were misstatements. Nevertheless, I agree with the plaintiff that the sole issue in the main motion is a question of law, that is, whether the Corporation's lack of capacity precludes it from defending this motion and bringing its own motion or proceeding with the counterclaim. The admitted misstatements do not alter the question of status.

[21] Based on the jurisprudence and the relevant statutory provisions, I am satisfied that on a proper interpretation of s. 242(1), a dissolved corporation has the right to defend an action, and to assert a counterclaim, particularly when the documents are filed prior to its dissolution. A careful reading and textual analysis of s. 242 as a whole demonstrates that this interpretation is in accord with the intention of the legislature and implied in the wording of the section.

[22] Still, as suggested by Matlow J. in Malamas, it would be advisable for the legislature to make this abundantly clear.

[23] Therefore, with respect to whether the Corporation has the capacity to defend this motion, bring its own motion and/or proceed with the counterclaim, I would answer the question in the affirmative. In my view, it does.

Issue No. 2 -- The Counterclaim

[24] The defendants filed a very detailed defence and counterclaim prior to the dissolution. They did not realize the dissolution might affect their ability and right to proceed with it. They have taken active steps to effect its revival. In my view, the Corporation is entitled to continue the counterclaim in association with its right to defend the action brought against it. Indeed, as a plaintiff by counterclaim, the Corporation has the right under s. 242(1)(a) to continue the counterclaim notwithstanding its dissolution. For all of the reasons stated above, the Corporation's dissolution is, in my view, not fatal to its counterclaim. [page384]

Issue No. 3 -- The Stay

[25] In any event, the defendants have brought a cross-motion for a stay of proceedings, pending the revival of the Corporation.

[26] Section 106 of the Courts of Justice Act, R.S.O. 1990, c. C.43 provides:

106. A court, on its own initiative or on motion by any person, whether or not a party, may stay any proceeding in the court on such terms as are considered just.

[27] I agree with the plaintiff that, notwithstanding the broad language in s. 106, a stay of proceedings should only be granted sparingly and only in the clearest of cases.

[28] It is well-settled law that a party seeking a stay of proceedings must demonstrate that the following conditions are met:

(1) the continuation of the proceeding would cause an injustice to the party seeking the stay because it would be oppressive or vexatious or would be an abuse of process of the court in some other way; and

(2) a stay would not cause injustice to the opposing party.

See, e.g., Category 5 Imaging Ltd. v. Antoniadis, [2013] O.J. No. 5989, 2013 ONSC 7989 (S.C.J.), at para. 9.

[29] The defendants, in their counterclaim, assert that, as a result of the plaintiff's breaches of the agreement, it has suffered damages involving

(a) computer and equipment repair and/or replacement repair costs; and

(b) loss of past, present and future business earnings.

[30] This is a case in which several triable issues have been raised by both parties. In light of my finding that the Corporation may continue to defend the action and pursue its counterclaim even though it is dissolved, a stay is not necessary at the present time to prevent injustice to the defendants.

[31] If, on the other hand, I am wrong about the Corporation's current capacity to litigate, and the Corporation lacks the power to defend the action or pursue its counterclaim unless and until it is revived, then there would be significant injustice to the defendants if a stay were not granted. Without a stay, the counterclaim would be dismissed. The Corporation would be deprived of the opportunity to have its allegations determined on the merits and, if appropriate, to recover damages for the alleged harms, [page385] even though it is simply waiting on administrative approval to return it to active status. The injustice that the defendants would incur in that event is self-evident.

[32] With respect to the second condition for granting a stay, the plaintiff claims it would suffer injustice if the stay were granted, in the following ways:

(1) Tomken has sold several properties held by investors in the aggregate amount of $18,900,000, but it has withheld the approximate sum of $500,000, pending the completion of this case. It argues, therefore, that requiring it "to wait indefinitely to pay out its investors the withholding amount is an injustice which is oppressive".

(2) It "may" also be prejudiced by the delay caused by the stay on its ability to locate and retain key witnesses in defence of the counterclaim.

[33] In response, the defendant states that the plaintiff has failed to indicate how the inability to remit the withheld amount would prejudice it or to provide any particulars regarding this alleged prejudice such as the interest, if any, that the said funds are accruing, where they are invested and for whom.

[34] According to the defendants, the plaintiff has also failed to provide information as to the purported witnesses or their anticipated evidence and as to why its defence of the counterclaim would be compromised due to the passage of time.

[35] Regarding the plaintiff's allegations of delay from the stay, I note that most of the steps necessary to revive the Corporation have already been taken. The Corporation filed articles of dissolution with the ministry on January 10, 2013, under the erroneous view that the Corporation's counterclaim would not be at risk of being dismissed upon dissolution. They have retained counsel to defend the claim and advance the counterclaim in addition to taking active steps to revive the Corporation. They have provided credible evidence that the process of reviving a voluntarily dissolved corporation is primarily administrative and that, so long as the proper procedure is followed"there is sufficient likelihood that the Corporation will in fact be revived".

[36] Inconvenience does not amount to the level of prejudice or injustice. I do not find the plaintiff would suffer an injustice from the delay that a stay would occasion in this case.

[37] However, in light of my ruling on Issues 1 and 2, and for the reasons given above, a stay of the proceedings would be unnecessary at the present time. Nevertheless, if I am incorrect [page386] in my ruling that the Corporation has the capacity to defend the action and pursue its counterclaim while it is dissolved, then I would agree with the defendants that this is one of those "clearest of cases" in which the defendant has satisfied its onus to demonstrate that a stay would not cause an injustice to the plaintiff. In such circumstances, granting a stay of proceedings until such time as the Corporation is revived would be just and reasonable in the circumstances.

Issue No. 4 -- Authority to Give Instructions

[38] In its amended notice of cross-motion, the defendants seek "an order granting leave for Cindy Brown, a director of the Corporation at the time of dissolution, to provide instructions on its behalf until such time as it has been revived".

[39] As noted above, Matlow J. found in Malamas, at para. 10, that s. 242(1)(a) "might" authorize the board of directors of a dissolved corporation (as the board was constituted at the moment of dissolution) "to instruct counsel, pay the costs of the defence and use the assets of the [dissolved] corporation" in connection with the ongoing litigation: Malamas, at para. 10. Certainly, someone must speak for the entity, and if it were a going concern, that person would be the board of directors.

[40] Ms. Brown was a director of the Corporation at the time of dissolution, as was Mr. Brown, a defendant in this action. Through the cross-motion, Mr. Brown has consented to Ms. Brown's ability to provide instructions to counsel on behalf of the Corporation. I also note that Ms. Brown already has been examined on discovery on issues concerning the Corporation's conduct.

[41] Accordingly, if leave is required for Ms. Brown to give instructions on behalf of the Corporation, leave is granted.

Conclusion

[42] The plaintiff has raised a technical legal argument in support of its motion for summary judgment. The argument rests on the assertion that a dissolved corporation cannot defend the action or, indeed, oppose the plaintiff's motion.

[43] This court, however, interprets the relevant statutory provisions in a manner to the contrary and, in doing so, relies on compelling jurisprudence to that effect.

[44] As well, I am of the view that as a matter of equity, the matters raised by the parties prior to the dissolution are genuinely triable issues that should be heard on their merits. The defendants have taken timely and expeditious steps to revive the Corporation. The balance of convenience and the relative injustices to the parties favours the defendants. [page387]

[45] Accordingly, the plaintiff's motion for summary judgment dismissing the Corporation's counterclaim is dismissed and the cross-motion is allowed in part with costs of both motions to the Corporation.

[46] At the conclusion of the hearing, I asked counsel for their costs outline or bill of costs. The plaintiff presented two sets of costs -- one in regard to its summary judgment motion and another for the counterclaim, claiming costs on a partial indemnity scale of $27,770.79 and $43,068.94, respectively.

[47] The defendants' bill of costs includes categories for partial, substantial and full indemnity in the amounts of $10,019.48, $15,029.23 and $16,699.14, respectively, plus disbursements of $591.99. The disparity in costs may be due to the fact that there was a change of lawyers for the defendants in November 2013, or other matters of which I am unaware.

[48] Considering the respective parties' bills of costs and the criteria in rule 57.01, it is my view that a fair and reasonable award of costs to the defendant Corporation that is within the expectation of the parties would be the sum of $16,000 for both motions. Accordingly, subject to any further submissions within 15 days of the release of these reasons, costs are awarded to the Corporation in the all-inclusive sum of $16,000.

Motion dismissed.

End of Document