CITATION: 2018511 Ontario Ltd v. 1043019 Ontario Incorporated, 2016 ONSC 193
COURT FILE NO.: CV-1048862
DATE: 2016/02/29
SUPERIOR COURT OF JUSTICE - ONTARIO
BETWEEN: 2018511 Ontario Ltd. and 2133599 Ontario Ltd., Plaintiffs
AND
1043019 Ontario Incorporated, Defendant
AND BETWEEN: 1043019 Ontario Incorporated, Plaintiff by Counterclaim
AND
2018511 Ontario Ltd. and 2133599 Ontario Ltd.
and Stephen Gala and Helga Gala, Defendants by Counterclaim
BEFORE: Madam Justice Julianne Parfett
COUNSEL: Kibondo M. Kilongozi, counsel for the Plaintiff 2133599 Ontario Ltd. and Helga Gala
Brett A. Capstick, counsel for the Defendant 1043019 Ontario Inc.
Sylvie Labbé, counsel for Stephen Gala and Plaintiff 2018511 Ontario Ltd.
HEARD: January 7, 2016
ENDORSEMENT
[1] The Applicant, 2018511 Ontario Ltd. wishes to discontinue its claim against the Defendant, 1043019 Ontario Ltd. The Defendant by counterclaim, Helga Gala (Ms. Gala) opposes this discontinuance. All other parties have consented to the Applicant’s withdrawal. There is a cross-motion brought by Ms. Gala requesting that she be given leave to continue the action in the name of the Applicant company pursuant to sections 245 & 246 of the Business Corporations Act.[^1]
Background
[2] In 2002, one of the Defendants by counterclaim, Stephen Gala (Mr. Gala) incorporated the Applicant company. There is a dispute over the purpose of this incorporation. Ms. Gala contends that it was done for the purpose of running a family enterprise; Mr. Gala contends that it was incorporated for the purpose of managing any one of a number of businesses that he intended to operate. Notwithstanding this dispute, it is uncontested that Mr. Gala incorporated the Applicant company and was at all times its sole director.
[3] In 2007, the Applicant, Mr. Gala and Ms. Gala signed a lease with the Defendant, 1043019 Ontario Ltd (the lessor). The lease was filed with the court and it indicates that Mr. Gala signed on behalf of the Applicant as its president and Ms. Gala signed as the secretary of the company. They also signed the lease in their personal capacities.
[4] The parties ran a restaurant out of the premises. Shortly after they started the restaurant, it became apparent that they could not obtain a liquor licence due to Mr. Gala’s criminal record. Consequently, Mr. and Ms. Gala decided that Ms. Gala would incorporate a separate company – 2133599 Ontario Ltd for the purpose of obtaining a liquor licence. Ms. Gala is the sole director of that company. That company filed corporate income tax returns for the revenue earned by the restaurant. Although it was clear that 213599 Ontario Ltd. was the corporation that carried on the business of the restaurant, no one sought to amend the lease.
[5] It is conceded by Ms. Gala that the Applicant never had any articles of incorporation, by-laws or minutes, no shares were ever issued and no changes were ever made to the initial registration of the corporation.
[6] In 2009, Mr. and Ms. Gala separated. Mr. Gala left the restaurant business and Ms. Gala carried on by herself. In June 2010, the lessor locked Ms. Gala out of the premises. Ms. Gala then started an action against the lessor. The plaintiffs were 2018511 Ontario Ltd. and 2133599 Ontario Ltd. However, Mr. Gala’s permission to include the Applicant as a plaintiff was not obtained prior to the action being initiated.
Issues
[7] There are two issues in this motion: first, whether Ms. Gala had standing to initiate this action on behalf of the Applicant and second, whether Ms. Gala should be given leave to continue the action on behalf of the Applicant.
Analysis
[8] The starting point for the analysis is the general principle outlined in Anand v. State Farm[^2] that
[t]his is the type of relief the court should ordinarily be prepared to grant, subject to a cost order where appropriate, unless there is a real concern of abuse or of substantial prejudice. Each of those potential scenarios would require compelling evidence from the party opposing the relief.[^3]
[9] Ms. Gala argues that this case is one that fits within the exception to the general rule as outlined above.
[10] Ms. Gala concedes that she is not a named director of the Applicant company. However, she argues that the restaurant was a family business and she and Mr. Gala shared all the profits of the business, therefore, she is a ‘deemed director’ of the Applicant. She points to the fact that she signed the lease as secretary of the Applicant as further evidence of her association with the Applicant. The first issue is easily disposed of. Section 115(4) of the BCA sets out the circumstances in which someone may become a ‘deemed director’. It states,
Where all of the directors have resigned or have been removed by the shareholders without replacement, any person who manages or supervises the management of the business and affairs of the corporation shall be deemed to be director for the purposes of this Act.
[11] In the case of Re Diversified Business Communications,[^4] the court further clarified this section by noting that the section is to be construed as being a provision ‘which imposes responsibilities upon the deemed directors – as opposed to confirming rights or empowering them to do things’.[^5]
[12] Mr. Gala never resigned as director of the Applicant, nor was he removed so the first pre-condition for confirming Ms. Gala as a deemed director is not met. Even if Mr. Gala had resigned or abandoned his position as director – which Ms. Gala also alleges – Ms. Gala is attempting to use her position as a deemed director to assert rights on behalf of the Applicant – something that is not permitted according to the jurisprudence.
[13] In short, Ms. Gala is not a deemed director of the Applicant and she is not a director of the Applicant. There is no evidence supporting any change in the organization of the Applicant such that the court could find that Ms. Gala became the secretary of the corporation. Signing the lease as secretary is not proof that Ms. Gala was in fact in such a position. If, as Ms. Gala alleges, it was intended that she participate equally in the Applicant company then it would have been a simple matter to add her as a director. However, this amendment was never made. Consequently, I find that Ms. Gala was never in any way associated with the Applicant. Mr. Gala is, and has remained throughout, the sole director of the Applicant and the only person authorized to act on the Applicant’s behalf. Consequently, Ms. Gala did not have the necessary authority to start an action in the name of the Applicant.
[14] The second question arising out of the cross-motion is also easily dealt with. Section 245 of the BCA provides that a complainant is someone who is either
- A registered holder or beneficial owner, and a former registered holder or beneficial owner, of a security of a corporation or any of its affiliates;
- A director or an officer or a former director or officer of a corporation or of any of its affiliates; or
- Any other person who, in the discretion of the court, is a proper person to make an application.
[15] The relevant portion of s. 246 states,
(1) Subject to subsection (2), a complainant may apply to the court for leave to bring an action in the name and on behalf of a corporation or any of its subsidiaries, or intervene in an action to which any such body corporate is a party, for the purpose of prosecuting, defending or discontinuing the action on behalf of the body corporate.
[16] Ms. Gala uses the same arguments with respect to her assertion that she is a ‘proper person to make an application’ as she made to assert that she is a ‘deemed director’. These arguments do not persuade me that she can oust the actual director – Mr. Gala – from his role as the directing mind of the Applicant. Consequently, Ms. Gala is not a ‘complainant’ pursuant to s. 245 of the BCA.
[17] In Marc-Jay Investments Inc. v. Levy[^6], the court held that a complainant may bring a derivative action where they are acting in good faith, the action is not frivolous or vexatious, they have standing to commence (or continue) the action and where the action is in the interest of the shareholders.[^7]
[18] As noted earlier, Ms. Gala does not have standing. As a result, the cross-motion seeking leave to continue the action in the name of the Applicant is denied.
[19] As a final note, it is unclear why the action was not started by Ms. Gala in her own name. While she had no authority to start the action in the Applicant’s name, as a signatory to the lease, she had authority to start an action for damages against the Defendant lessor in her own name. There is no doubt the withdrawal of the Applicant company from this action will cause Ms. Gala some prejudice. However, it is not irremediable.
Conclusion
[20] The Applicant company is granted leave to discontinue the action without costs. The cross-motion of Ms. Gala is denied.
Costs of this motion
[21] The parties should attempt to resolve the issue of costs themselves, however, if the parties cannot resolve the issue of costs, brief written submissions of no more than one page, with attachments including Offers to Settle and a detailed Bill of Costs, are to be provided with 15 days with a right of reply within a further five days.
Madam Justice Julianne Parfett
Date: February 29, 2016
CITATION: 2018511 Ontario Ltd. v. 1043019 Ontario Incorporated, 2016 ONSC 193
COURT FILE NO.: CV-1048862
DATE: 2016/02/269
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEN: 2018511 Ontario LTD. and 2133599 Ontario Ltd., Plaintiff
AND
1043019 Ontario Incorporated, Defendant
AND BETWEN: 1043019 Ontario Incorporated, Plaintiff by Counterclaim
AND
2018511 Ontario LTD. and 2133599 Ontario Ltd.
and Stephen Gala and Helga Gala, Defendants by Counterclaim
BEFORE: Madam Justice Julianne Parfett
COUNSEL: Kibondo M. Kilongozi, counsel for the Plaintiffs
Brett A. Capstick, counsel for the Defendants
Sylvie Labbé, counsel for Stephen Gala
ENDORSEMENT
Parfett J.
Released: February 29, 2016
[^1]: R.S.O., Chapter B.16. [^2]: [2007] O.J. No. 1256 (SCJ) [^3]: At para. 19. [^4]: [2002] O.J. No. 5930 (SCJ) [^5]: At para. 5. [^6]: 1974 786 (ON SC), 5 O.R. (2d) 235 (HCJ) [^7]: At para. 9.