ONTARIO
SUPERIOR COURT OF JUSTICE
COURT FILE NO.: CV-14-2334-00
DATE: 2014-12-08
B E T W E E N:
EXPONENTS CANADA INC. and NAVDEEP SARAO
Navedeep Sarao, appearing self-represented
Exponents Canada Inc. not appearing
Plaintiffs
- and -
SUMIT SHARMA, CRITIVIA INC. and EXPONENTS INC.
Brandon Jaffe, for the defendants
Defendants
HEARD: November 20, 2014,
at Brampton, Ontario
Price J.
Reasons For Order
NATURE OF MOTION
[1] Navdeep Sarao (“Mr. Sarao”), one of three directors and shareholders of Exponents Canada Inc. (“ECI”), alleges that one of the other directors and shareholders, Sumit Sharma (“Mr. Sharma”), made unauthorized withdrawals of funds from ECI, which he used to buy a property for himself and his wife in Caledon Ontario. Mr. Sharma admits withdrawing the funds from ECI’s bank accounts, but says that the funds were either owed to him, or would be owed in the future, for services that his company, Critivia Inc., was rendering to ECI.
[2] Whether Mr. Sharma is rationalizing a theft of funds from ECI, or believes himself justified because Mr. Sarao, whom he suspected of dishonesty, authorized the withdrawals, his actions advanced his own personal interests at the expense of the company, and were contrary to his fiduciary duty as a director of ECI.
[3] On July 18, 2014, Tzimas J. made an Order prohibiting Mr. Sharma from selling or mortgaging the Caledon property. Mr. Sarao’s evidence that Mr. Sharma withdrew the funds without authorization, or borrowed them temporarily for his personal benefit and failed to repay them as agreed, satisfied the requirements for injunctive relief set out in R.J.R. MacDonald v. Canada (Attorney General), 1994 117 (SCC). The evidence established that ECI would suffer irreparable harm if the injunction was not granted, and that the balance of convenience favoured ECI.[^1] The injunction is needed to safeguard the trust interest that ECI claims in the Caledon property, and to prevent Mr. Sharma from depleting his equity in the property to secure indebtedness to new creditors.
[4] A month after Tzimas J. made her order Mr. Sharma filed a consumer proposal under the Bankruptcy and Insolvency Act (“BIA”), which stayed all legal proceedings against him, including proceedings to enforce Tzimas J.’s order, until his creditors considered the proposal. Two months later, Mr. Sharma mortgaged the Caledon property to finance a loan that he says he intended to use to pay his creditors in accordance with his consumer proposal. Before the mortgage could be registered, Mr. Sarao and ECI registered the order that Tzimas J. had made three months earlier, with the result that the Land Registrar refused to accept the mortgage for registration.
[5] Mr. Sharma now moves for an order directing the Land Registrar to discharge Tzimas J.’s order from the title to the Caledon property, and to permit the registration of his mortgage to the new lender. However, by the time he argued his motion, his creditors had rejected his proposal, thereby terminating the stay of legal proceedings against him.
[6] Mr. Sharma still argues that Tzimas J.’s order should be discharged, on the ground that Mr. Sarao registered it, in breach of the BIA, before Mr. Sharma’s creditors rejected his proposal. Mr. Sarao argues that the order should remain on title, on the ground that Mr. Sharma granted the mortgage, in breach of the order, before he filed his proposal. In any event, he says, Mr. Sharma’s proposal has now been rejected by his creditors, which entitles Mr. Sarao and ECI to enforce the order. Discharging the order, he says, would enable Mr. Sharma to benefit from his breach of the order, and profit from his alleged theft, and make it impossible for Mr. Sarao and ECI to recover the proceeds of the theft from the property.
[7] The court must determine whether Mr. Sharma’s desire to obtain financing by granting a mortgage on the Caledon property justifies this court ordering the Land Registrar to discharge Tzimas J.’s order, registered after a consumer proposal had been filed which stayed proceedings and, if so, whether such an order is still justified under the BIA when the consumer proposal has since been vacated.
BACKGROUND FACTS
Background of the dispute
[8] In 2010, Mr. Sharma, who holds a Bachelor’s degree in Industrial Design, proposed to Mr. Sarao that they start a company, Meravo Inc. (“Meravo”), to operate a business designing displays for retail companies and trade shows. They eventually agreed, and registered Meravo in 2010.
[9] In January 2012, Mr. Sharma and Mr. Sarao began talks with Exponents Inc. (“Exponents”), a U.S.-based design company, and Rajnikant Kedia (“Mr. Kedia”), the CEO of Exponents’ owner, Insta Group, with a view to entering into a partnership with Exponents. Mr. Sharma, Mr. Sarao, and Mr. Kedia agreed to form a new company, ECI, as an extension of Exponents in Canada. In anticipation of doing business as ECI, they agreed to register the domain “Exponents.ca” to acquire priority over its use.
[10] In late January 2012, Mr. Sharma, in his capacity as an employee/director of ECI, registered Exponents.ca as a domain. ECI’s employees were assigned an e-mail address at Exponents.ca, and ECI began operating with its three directors, Mr. Sharma, Mr. Sarao, and Mr. Kedia.
[11] Between May 21, 2013, and March 12, 2014, Mr. Sharma received $295,562.50 from ECI’s bank account at TD-Canada Trust, and used the funds to buy a property for himself and his wife in Caledon, Ontario:
a) He initially withdrew $65,562.50 as follows:
i) On May 21, 2013, he took 7,062.50;
ii) On July 2, 2013, he took $14,125;
iii) On November 4, 2013, he took $14,125;
iv) On December 19, 2013, he took $14,125;
v) On January 3, 2014, he took $14,125;
vi) On January 28, 2014, he took $2,000.
b) On March 7, 2014, he withdrew a further $85,000, which Meravo had loaned to ECI for its business operations. He took these funds as a loan from ECI, agreeing to repay them within 10 days after buying the Caledon property. He said that he required the funds as he faced difficulty securing a loan to buy the property. He repaid $20,000 of this loan. The balance of $65,000 remains outstanding.
c) On March 10, 2014, he withdrew a further $145,000 from ECI’s account, which he also used to buy the Caledon property. He entered into a loan agreement with ECI, witnessed by two employees of the company, agreeing to repay the loan within 10 days. He repaid $50,000 on March 12, 2014. The balance of $95,000 remains outstanding.
[12] Shortly after the 10 day term of the loans expired, Mr. Sharma informed Mr. Sarao, ECI, and Meravo Inc. that he would not be repaying the money had had received. As a result of his refusal to repay the funds, ECI was unable to pay its creditors, employees, and suppliers, or the Canada Revenue Agency. On March 12, 2014, two days after receiving the last of the funds from the company, Mr. Sharma notified Mr. Sarao, ECI, and Meravo that he intended to resign as a director of ECI. He submitted his resignation nine days later, on March 21, 2014.
[13] After Mr. Sharma resigned as a Director of ECI, he took control of the Exponents.ca domain, changed employee and director email passwords, and locked Mr. Sarao and ECI’s employees out of their email accounts and the company’s website. On April 30, 2014, he sent a mass email to ECI’s business associates, suppliers, clients, and a number of its potential clients, alleging that Mr. Sarao and ECI and its employees were engaged in fraudulent and criminal activity and urging them not to do any further business with them.
[14] Mr. Sharma, who still had signing authority over ECI’s bank accounts, contacted the banks and arranged for the accounts to be placed in a “freeze” status, thereby preventing Mr. Sarao from having access to them. In the meantime, he continued to maintain control of ECI’s domain, and to present himself as having a position of authority at ECI, in order to solicit business and transfer funds to his and the other defendants’ bank accounts.
[15] On May 6, 2014, Mr. Sarao and Mr. Kedia began proceedings that eventually led to the removal of Mr. Sharma as a Director of ECI. Mr. Sarao, Meravo, and ECI then made a motion, without notice to Mr. Sharma, and obtained an Order of Barnes J. dated May 26, 2014. The Order of Barnes J.:
a) directed TD-Canada Trust and the Royal Bank of Canada to give Mr. Sarao and his lawyer access to the ECI’s and Meravo’s bank accounts, to enable them to deposit, withdraw, and transfer funds;
b) directed Mr. Sharma and the other defendants not to contact ECI’s clients or suppliers; and
c) directed the defendants to give the plaintiffs the passwords to the Exponents.ca website, and directed the registrar of the domain to transfer its ownership and control to Mr. Sarao.
[16] Upon learning of Barnes J.’s order, Mr. Sharma moved to set it aside. After the parties initially appeared on June 5 and 12, 2014, when there was insufficient time to argue the motion, the court adjourned the motion to June 30, 2014. In the meantime, the parties exchanged offers to settle, which resulted in Mr. Sarao, ECI, and Meravo consenting to set aside Barnes J. order on terms prohibiting Mr. Sharma from making claims, or attempting to gain control of ECI’s domain or bank accounts. Based on the settlement, Donohue J. made an Order dated June 30, 2014, setting aside Barnes J.’s Order.
[17] On July 7, Mr. Sarao learned that from July 5 to 7, 2014, Mr. Sharma had submitted requests to reclaim the Exponents.ca domain. He says that Mr. Sharma refused to sign the settlement agreement, and continued contacting ECI’s banks, website domain registrar, competitors, suppliers and clients, with the apparent intention of causing injury to ECI and Mr. Sarao.
[18] Mr. Sharma brought a motion, returnable on Friday, July 18, 2014, for leave to represent Critivia Inc. and Exponents in the action. On July 13, Mr. Sarao and ECI issued an Amended Notice of Action removing Meravo as a plaintiff, and then resumed their action against Mr. Sharma, Critivia Inc., and Exponents, by causing a new Statement of Claim to be issued on July 13, 2014.
[19] At the return of Mr. Sharma’s motion on July 18, 2014, Mr. Sarao and ECI tendered the following evidence that it had served material on Mr. Sharma and the other defendants:
a) Vikram Khillon, an agent for the plaintiffs’ lawyer, Jujhar Mangat, swore an affidavit on July 17, 2014, in which he stated that on Monday, July 15, 2014, he served the defendants, Mr. Sharma, Critivia Inc., and Exponents, by email with: a Notice of Discontinuance of Meravo, the Amended Notice of Action and Statement of Claim, and the Responding Motion Material for a motion brought by the defendants.
b) On July 16, 2014, Mr. Sarao served the defendants’ responding motion record by registered mail. He sent the Amended Notice of Action and Statement of Claim on July 13 and 14, 2014, by email, and on July 17, 2014, by registered mail. The affidavit of service contains a confirmation from Mr. Sharma to Mr. Mangat, sent on July 1, 2014, at 9:59 a.m., thanking him for confirmation of receipt of Mr. Sharma’s motion for leave to represent his corporations, and stating that he looked forward to receiving Mr. Mangat’s “responding motion material” by e-mail and, mainly, by express/registered mail.
[20] There is, in the court file, a “Motion Record, Cross-Motion and Responding Motion Materials” prepared by Mr. Mangat on behalf of the plaintiffs, returnable on July 18, 2014. It is not stamped “filed” by the court office, which suggests that it was tendered on the date of the hearing, and given directly to the motion judge. The plaintiffs’ Notice of Motion states that it seeks, among other remedies, an Order for:
- The Defendants not to sell, further encumber, or allow any further liens against the property located at 16680 Mountainview Road, Caledon, Ontario, L7C 2V4, from the date of this order.
[21] Also included in Mr. Sarao’s Cross-Motion Record is the Motion Record of Mr. Sharma and the other Defendants dated July 11, 2014, for a motion to be heard July 18, 2014, for an Order requiring Mr. Sarao and ECI to disclose documents, and for an Order preventing Mr. Sarao from acting on behalf of ECI or Meravo, and from communicating any allegations about Mr. Sharma and the other defendants.
[22] Tzimas J. made an Order on July 18, 2014, on the motion by Mr. Sarao and the other plaintiffs. In it, she states, “[O]n reading the motion record, the responding motion material, and the affidavit of Navdeep Sarao, sworn July 14, 2014….” I infer from this wording that Tzimas J., in coming to her decision to make the Order, considered, among other documents, the motion that Mr. Sharma had brought, to which Mr. Sarao had responded.
[23] Tzimas J.’s endorsement from July 18, 2014, notes that Mr. Sharma did not appear on that date to argue his own motion, or to oppose Mr. Sarao’s motion. The endorsement states, in part:
The defendants were duly served with the plaintiffs’ motion for injunctive relief. In fact, the defendants had scheduled a parallel motion, though they did not confirm it. They have not attended on either their own motion, or on the plaintiffs’ motion. It is noted that the defendants were duly served with the plaintiffs’ motion and they have chosen not to be here this afternoon.
I have heard the plaintiffs’ submissions and an order is to issue in accordance with the draft Order which I have reviewed, amended, and approved. [Emphasis added]
[24] Tzimas J.’s Order dated July 18, 2014, provides, in paragraph 5 for:
The Defendants not to sell, further encumber, or allow any further liens against the property located at 166680 Mountainview Road, Caledon East, Ontario, L7C 2V4, from the date of the Order.
[25] For reasons that are unclear, Mr. Sharma, who acknowledges having received Tzimas J.’s Order by at least July 23, 2014, did not appeal from the Order. He prepared a motion to set aside the Order, but apparently did not proceed with it. The court file contains a motion record dated July 28, 2014, prepared by Mr. Sharma, returnable August 12, 2014. It is not stamped “filed” by the court office, which suggests that, like Mr. Sarao’s motion, it was tendered on the date of the hearing and given directly to the motion judge.
[26] In an “Application for Leave to Place a Motion on Today’s Motion List on Short Notice”, Mr. Sharma wrote: “I was unable to file my motion, after serving on the plaintiffs, because my “motion for leave to represent corporations” was pending”. Trimble J. apparently considered the motion, and directed that it be placed on the regular motions list, as it was not urgent. Mr. Sharma does not appear to have re-served his motion, or placed it on the regular motions list.
[27] Mr. Sharma’s motion to set aside Tzimas J.’s order, which is not before the court for determination, set out the following grounds, among others:
Affidavit of Service is fraudulent. As the dates do not correspond with Motion received by mail or by electronic email.
The “motion of Record” by the Plaintiffs was received by mail to the Defendants, which is the same date as the order signed by the Judge.
Documentation received by mail and email was missing Motion/record sheet and returnable date.
No Documentation was provided by the Plaintiffs or their Lawyers confirming returnable date of July 18, 2014, for Motion to the Defendants.
The Plaintiffs attempted to file emergency Motion without disclosing date for Motion to be heard or advance Notice to the Defendants.
[28] For reasons that are also unclear, Mr. Sarao and Meravo did not immediately register Tzimas J.’s Order dated July 18, 2014, against the title to the Caledon property. They did not register it for more than three months, until October 28, 2014, approximately an hour before Mr. Sharma or his lender tried to register a mortgage that Mr. Sharma had granted on the property. Mr. Sarao then filed Tzimas J.’s order, causing the Land Registrar to refuse to accept Mr. Sharma’s mortgage for registration.
[29] What happened in the three month interval from July 18, 2014, when Tzimas J. made her Order, to October 28, 2014, when the plaintiffs registered it on the title to the Caledon property? Mr. Sharma says that the Business Development Bank of Canada (“BDC”), which had loaned money to ECI, guaranteed by Mr. Sharma and Mr. Sarao, began proceedings against the two partners on their guarantee, which Mr. Sharma says caused him to seek bankruptcy protection.
Bankruptcy proceeding
[30] Mr. Sharma says that on August 28, 2014, in order to obtain relief from financial pressures that he faced, including his liability on the guarantee that he and Mr. Sarao had given to the Business Development Bank, he filed a consumer proposal with BDO Canada Limited (“BDO”) pursuant to Part II, Division II of the BIA. Mr. Sharma had known of Tzimas J.’s order for over a month, but says that he understood that the statutory stay of proceedings, triggered by s. 69.2 of the BIA when he filed his proposal, stayed paragraph 5 of Tzimas J.’s order, which prohibited him from mortgaging the Caledon property. Mr. Sharma therefore applied for a loan to finance the payments to his creditors that his consumer proposal contemplated, and offered the lender the security of a mortgage on the Caledon property in the amount of $170,000.
[31] Mr. Sarao and ECI apparently learned that Mr. Sharma was trying to mortgage the Caledon property and, to prevent him from doing so, filed Tzimas J.’s Order dated July 18, 2014, against the title to the property on October 28, 2014. Mr. Sharma’s lawyer wrote to ECI’s lawyer and complained that Tzimas J.’s order had been registered in breach of s. 60.2 of the BIA. ECI’s lawyer took the position that Mr. Sharma had granted the mortgage in breach of the order, and that paragraph 5(i) of ECI’s Claim, which alleged that Mr. Sharma had breached his duty, as a director, to act “honestly and in good faith with a view to the best interests of the corporation” entitled ECI to trace its money into the Caledon property, and that its claim would survive Mr. Sharma’s discharge from bankruptcy pursuant to s. 178(1)(d) of the BIA, which exempts claims based on dishonesty from discharge.
[32] In any event, Mr. Sarao and ECI argued, a consumer proposal could not be filed by a debtor whose indebtedness, like Mr. Sharma’s, exceeded $250,000. ECI’s claim alone amounted to $502,000, consisting of the $225,562.50 that had been taken from it, and $23,000 that was owing to it for its costs, for a subtotal of $248,562.50. With prejudgment interest, the total exceeded the $250,000 limit. In addition, Mr. Sharma still owed the Business Development Bank approximately $131,000 and he owed other creditors approximately $50,000, bringing the total to $683,000.
[33] In the stand-off between the two former partners, Mr. Sarao’s registration of Tzimas J.’s order preceded Mr. Sharma’s attempted registration of his mortgage, with the result that the Land Registrar refused to accept Mr. Sharma’s mortgage for registration.
[34] When Mr. Sharma’s creditors met to consider his consumer proposal on October 29, 2014, they adjourned their meeting to November 14, 2014. When they re-convened on that date, they rejected Mr. Sharma’s proposal.
[35] On November 20, 2014, Mr. Sharma moved for a declaration that Tzimas J.’s injunction be stayed, and for an order directing the Land Registrar to discharge Tzimas J.’s order from the title of the property, and to accept Mr. Sharma’s and his wife’s mortgage for registration.
[36] At the hearing of their motion on November 20, 2014, Mr. Sarao and ECI appeared without their lawyer, Mr. Mangat, who had prepared the motion on their behalf. Mr. Sarao reported that Mr. Mangat was at an examination for discovery in Toronto. It is troubling that Mr. Mangat regarded an examination for discovery as justification for his absence at court for the hearing of a motion that he had prepared. His conduct undoubtedly added to the time required for the hearing.
ISSUES
[37] The motion raises the following issues to be determined:
a) Should Tzimas J.’s order be set aside on the ground that Mr. Sharma did not receive proper notice of the motion?
b) Should the registration of Tzimas J.’s order be discharged from the title of the Caledon property on the ground that the stay of proceedings under s. 69.2 of the BIA: (1) nullified the order, or (2) prohibited its registration?
c) Should the court lift the stay of proceedings under s. 69.2 of the BIA, retroactive to October 28, 2014, in order to validate the registration of Tzimas J.’s order on that date, and to prevent the registration of the mortgage that Mr. Sharma granted on the Caledon property in contravention of the order?
d) Should the court, in the alternative, leave the order of Tzimas J. on title, on the ground that Mr. Sharma’s creditors rejected his consumer proposal on November 14, 2014, which terminated the stay of proceedings under s. 69.2 of the BIA?
PARTIES’ POSITIONS
[38] Mr. Sarao and ECI argue that:
a) The temporary stay of proceedings that arose pursuant to s. 69.2 of the BIA did not nullify Tzimas J.’s order, which prohibited Mr. Sharma from mortgaging the Caledon property.
b) The stay of proceedings under s. 69.2 did not prevent or prohibit the plaintiffs from registering Tzimas J.’s order on the title to the Caledon property, provided they took no steps to advance the action, or enforce a judgment against Mr. Sharma.
c) Mr. Sharma breached Tzimas J.’s order by granting a mortgage on the Caledon property. Discharging the order from the title to the property now would allow Mr. Sharma to derive a further benefit from his breach.
[39] Mr. Sharma argues that the stay of proceedings pursuant to s. 69.2 of the BIA prohibited Mr. Sarao and ECI from taking any steps in their action, including registering Tzimas J.’s order. They argue that for this reason, the order should be discharged from title, even though the stay was later terminated when Mr. Sharma’s creditors rejected his proposal.
ANALYSIS AND LAW
a) Should the Order of Tzimas J. be set aside?
[40] Mr. Sharma’s motion to set aside Tzimas J.’s order, made in default of a response by Mr. Sharma, is not before this court for determination. If such a motion were before the court, I would not be disposed to set the order aside. Misener D.C.J., in Dealers Supply (Agriculture) Ltd. v. Tweed Farm & Garden Supplies Ltd., set out three requirements that a moving party must meet in order to have an order against him or her set aside:
(1) The motion to set aside the order should be made as soon as possible after the applicant becomes aware of the order.
(2) The moving party's affidavit must set out circumstances under which the default arose, and must give a plausible explanation for the default.
(3) The moving party must set forth facts that support a conclusion that there is at least an arguable case to present on its merits.[^2]
[41] Misener D.C.J. commented that in addition to considering the above-mentioned requirements for setting aside a default order, the court has a broad obligation to consider all the circumstances, and to determine whether it is satisfied that no injustice will be done to the respondent to the motion, by the order that is finally made. The test articulated by Misener D.C.J., and his comment, were later approved of by Justice E.M. Macdonald in Lenskis v. Roncaioli.[^3]
[42] Applying the test to the present case, Mr. Sharma became aware of Tzimas J.’s Order by at least July 23, 2014. He initially moved to set aside the Order on July 28, 2014, but decided not to proceed with his motion at that time. Four months later, it can no longer be said that he has moved as soon as possible to set aside the order.
[43] The reasons that Mr. Sharma offers for his initial failure to respond to Mr. Sarao’s motion for injunction are not persuasive. The evidence is conflicting as to whether the motion was served on him. It appears that he served his own motion for leave to represent his corporations, Critivia Inc. and Exponents, but that he did not file that motion until August 7, when Donohue J. adjourned it to August 30th to be heard. After serving the motion on Mr. Sarao, returnable on July 18, 2014, Mr. Sharma was obliged to attend on that date, especially if the respondents served him, in the interval, with their motion for an injunction. Tzimas J. was satisfied that the defendants were properly served, and I am not convinced that they were not.
[44] Mr. Sharma explains that the reason he did not proceed with his motion to set aside Tzimas J.’s order was that he required leave to represent his companies. However, he was a named defendant in the action, and was entitled to appear, at least on his own behalf. Trimble J. directed that the motion be re-served, returnable on the regular motion list, and Mr. Sharma offers no compelling reason for why he failed to do so.
[45] After reviewing the facts that Mr. Sharma has set out, I would make the same order that Tzimas J. made. For the reasons that follow, I am not satisfied that Mr. Sharma has an arguable case on the merits.
[46] Mr. Sharma says, in effect, that he and his wife bought the Caledon property in anticipation of earnings that had not yet materialized. This created an economic dilemma for him, whereby his own economic interests were opposed to those of ECI. By his own account, there was growing antagonism between him and Mr. Sarao, whom he was coming to distrust. Instead of bringing this conflict to a head by applying to the court for an oppression remedy, he allowed it to escalate, fueled by the economic pressure of his own commitment to buy the Caledon property.
[47] Mr. Sharma continues to recount events in his affidavit sworn November 19, 2014. He says that when he began investigating ECI’s accounting, he discovered that during January and February 2014, about $563,310 of its profits were missing or had no track record reported into the system by Mr. Sarao. He further discovered that many of ECI’s suppliers from 2013 had not been paid. He concluded that Mr. Sarao had misled ECI’s directors about regularly depositing Payroll taxes to Canada Revenue Agency, and that up to the time Mr. Sharma resigned, these payments had not been made. Yet, instead of applying to the court for remedies for what appeared to him to be Mr. Sarao’s mismanagement of ECI and possible fraud, Mr. Sharma sought to extract what money he could from ECI, with the agreement of Mr. Sarao.
[48] Mr. Sharma says, in this regard:
Since I was in urgent need to close my property on February 14, 2014, I further delayed the closing of the house a month later to March 14 and incurred further penalties from the seller. On March 7, 2014, Mr. Sarao offered $85,000 from Meravo Inc. to help out the situation. This was to be repaid in full in the next few days once our receivables of $425,889 were received by ECI. This $85,000 included a loan amount of $70,000 to me and $15,000 towards outstanding unreimbursed expenses, which I had incurred for ECI. Meravo performed subcontract work for ECI. On March 11 and 12, 2014,…I paid back the loan amount of $70,000 to ECI in two separate transactions as per Mr. Sarao’s text message direction…$50,000 was paid to ECI on March 12, 2014, and a total of $20,00 was paid to Meravo on March 11th and 12th, as shown on…my personal bank statement for March 2014.
[49] Mr. Sharma states that on March 10, 2014, ECI finally received awaited receivables from one of its clients, and Mr. Sarao advised Mr. Sharma “to go to ECI’s bank branch to transfer $145,000 to Critivia toward outstanding bills and anticipated bills for April and May 2014.” Even assuming that this conversation took place, Mr. Sharma was acceding to an invitation from Mr. Sarao, whom he suspected of defrauding ECI, that he (Mr. Sharma) withdraw $145,000 from the company, payable to his own company, in part for “anticipated bills”.
[50] Mr. Sharma juxtaposes the amounts he withdrew from ECI with his estimate of amounts owing to him or his company then, or for services to be rendered in the future. Whether this is a gloss on a deliberate theft of company funds, or reflects a genuine belief that his actions were justified by an authorization given by Mr. Sarao, whose character he questioned but had not finally concluded was dishonest, Mr. Sharma’s actions were clearly contrary to ECI’s interests and to the fiduciary duty he owed to the company as its director.
[51] Based on Mr. Sarao’s evidence that Mr. Sharma either withdrew funds from ECI without authorization, or borrowed them temporarily and did not repay them as agreed, or both, Tzimas J. enjoined Mr. Sharma from mortgaging the Caledon property which he had acquired with the funds. Based on Mr. Sarao’s evidence, Tzimas J. was justified in concluding that the requirements for injunctive relief, as set out in R.J.R. MacDonald v. Canada (Attorney General), 1994 117 (SCC), were met.[^4]
b) Should the Order of Tzimas J. be discharged from title?
[52] Should the Order of Tzimas J. be discharged from the title to the property, in any event, on the grounds that the stay of proceedings that arose under s. 69.2 of the BIA, upon Mr. Sharma’s filing of his consumer proposal on August 28, 2014, (1) nullified the Order or (2) prohibited its registration against the title to the Caledon property?
[53] The stay of proceedings that arose by operation of s. 69.2 of the BIA when Mr. Sharma filed his consumer proposal did not nullify the injunction contained in Tzimas J.’s order. It simply stayed its enforcement.
[54] Registration of the Order was tantamount to enforcement of the injunction. The Saskatchewan Court of Queen’s Bench, in Condominium Plan No. 78R15349 v. Fayad, 2001 SKQB 104, held that registration of a caveat violated the stay of proceedings that s. 69 of the BIA mandated.
[55] Mr. Sarao and ECI violated s. 69.2 when they registered Tzimas J.’s order on October 28, 2014, knowing that Mr. Sharma had filed a consumer proposal two months earlier, on August 28th. This is not the end of the matter, however.
[56] There are two principal reasons why the court must refuse Mr. Sharma’s request that Tzimas J.’s order be discharged from the title to his property. The first is that it is a collateral attack of Tzimas J.’s order. The second is that its purpose is no longer, if it ever was, to facilitate the implementation of a consumer proposal, since the proposal was rejected.
[57] Mr. Sharma’s motion to discharge Tzimas J.’s order is a collateral attack on the order. The rule against collateral attack bars actions brought in the wrong forum to overturn rulings.
[58] Mr. Sharma and the other defendants did not appeal or proceed with their motion to set aside the order when they first became aware of it.
[59] Mr. Sharma’s purpose in making his motion to discharge the registration of the Order is not to facilitate the implementation of a consumer proposal. His proposal was rejected on November 14, 2014.
[60] The court has power to lift a stay of proceedings under the BIA in certain defined circumstances.
[61] The stay, which arises by operation of law, continues until the proposal has been refused or annulled.
[62] A court with jurisdiction in bankruptcy may lift a stay of proceedings pursuant to s. 69.4 of the BIA.
[63] To have a stay lifted, a creditor must show that this will not defeat the aim of s. 69.3 by giving one creditor an advantage over others.
[64] Farley J., in Cumberland Trading Inc., Re, 1994 7458 (ON SC), held that material prejudice is objective prejudice.
[65] Greer J., in Gazeta Inc. (Re), dismissed an application to discharge a writ of seizure and sale against the bankrupt’s property.
[66] In dismissing Gazeta’s application, Greer J. stated that the writ might be an impediment to refinancing but was not the type of document that normally justified removing it from title.
[67] Mr. Sharma’s desire to obtain financing by granting a mortgage on the Caledon property does not justify this Court to order the Land Registrar to discharge Tzimas J.’s order.
c) Should the stay of proceedings be lifted retroactively to validate the filing of Tzimas J.’s order?
[68] This court may properly lift a stay of proceedings under s. 69.4 of the BIA.
[69] Where an injunction would prevent a debtor from operating its business while it restructures under a consumer proposal filed in good faith, the court may decline to lift the stay.
[70] In the present case, because the consumer proposal was rejected, the balancing of rights between the interests of creditors is no longer necessary.
[71] At the present time, the balance of convenience favours ECI and Mr. Sarao, as creditors.
[72] Mr. Sharma’s lawyer urges the court to consider the potential impact on the lender who advanced funds believing it could register its mortgage.
[73] ECI, as a creditor affected by the operation of s. 69 to 69.31, is entitled to request the lifting of the stay of proceedings.
[74] My justification in lifting the stay to validate registration of Tzimas J.’s order would flow from s. 69.4(b).
[75] In [Chase Manhattan Bank N.A. v. Israel-British Bank (London) Ltd.], a trust was imposed over mistakenly paid proceeds in priority to creditors.
[76] Professor McCamus notes that courts should retain the power to shape constructive trust remedies to fit the circumstances.
[77] In 306440 Ontario Ltd. v 782127 Ontario Ltd., 2014 ONCA 548, the Court of Appeal described the close link required for constructive trust claims.
[78] In the present case, there is a close connection between the loss suffered by ECI and the benefit Mr. Sharma derived in the Caledon property.
[79] These facts support Tzimas J.’s decision to enjoin further encumbrance of the Caledon property.
[80] The Supreme Court of Canada, in Soulos v Korkontzilas, 1997 346 (SCC), emphasized that constructive trust remedies are guided by what is just in all the circumstances.
d) Should the court leave the registration of Tzimas J.’s Order on title?
[81] Tzimas J.’s order was justified when it was made. The present circumstances support its continuance to protect ECI’s and Mr. Sarao’s interest in the Caledon property pending a determination of the issue at trial.
[82] The purpose of the continued registration of the Order is reflected by s. 78(4) of the Land Titles Act.
[83] The registration of Tzimas J.’s order gives notice to those affected by it that they acquire their interest subject to the interests protected by the order.
CONCLUSION AND ORDER
[84] For the reasons set out above, the defendant’s motion is dismissed. If the parties are unable to agree on the costs of the motion, they may submit written argument, not to exceed four pages in length, accompanied by a Costs Outline, by December 31, 2014.
Price J.
Released: December 8, 2014
COURT FILE NO.: CV-14-2334-00
DATE: 2014-12-08
ONTARIO
SUPERIOR COURT OF JUSTICE
B E T W E E N:
EXPONENTS CANADA INC. and NAVDEEP SARAO
Plaintiffs
- and -
SUMIT SHARMA, CRITIVIA INC. and EXPONENTS INC.
Defendants
REASONS FOR ORDER
Price J.
Released: December 8, 2014
[^1]: R.J.R. MacDonald v. Canada (Attorney General), 1994 117 (SCC), [1994] 1 S.C.R. 311.
[^2]: Dealers Supply (Agriculture) Ltd. v. Tweed Farm & Garden Supplies Ltd., [1987] O.J. No. 2346, 22 C.P.C. (2d) 257 (Dist. Ct.).
[^3]: Lenskis v. Roncaioli, [1992] O.J. No. 1713, 11 C.P.C. (3d) 99 (Gen. Div.).
[^4]: R.J.R. MacDonald v. Canada (Attorney General), 1994 117 (SCC).