Superior Court of Justice - Ontario

RE: Alpha Technologies Limited v. Alexander Arkhipov

2016 ONSC 2722

Court File No.: CV-14-515170

Before: Master R.A. Muir

Counsel: L. Klug for the defendants M. Shortreed and D. Cooney for the plaintiffs

Heard: April 19, 2016

Endorsement

[1] There are two motions before the court. The defendants seek an order requiring the plaintiffs to serve a further and better affidavit of documents. The plaintiffs seek an order requiring the defendants to attend at an examination for discovery.

[2] At the outset of the argument of these motions, the plaintiffs objected to the filing of a further affidavit by the defendants. Although the affidavit was served only one day before these motions were argued, it was in response to an affidavit served by the plaintiffs just four business days before these motions were heard. I determined that it was appropriate to grant leave to the defendants to file the affidavit under those circumstances. I offered the plaintiffs an opportunity to adjourn these motions in order to deliver a reply. The plaintiffs declined this offer and proceeded with the argument of the motions.

[3] The plaintiffs are an international group of companies, involved with the design, manufacture and distribution of power related products for telecom, cable television, alternative energy and other similar industries (the “Alpha Group”). Between 2003 and early 2014, the defendant Alexander Arkhipov (“Arkhipov”) was the general director of the defendant now known as Omegatec Limited Liability Company (“Alpha Russia”). Alpha Russia had been incorporated pursuant to the laws of the Russian Federation in 2001 and was in the business of selling the Alpha Group’s Canadian designed products in Russia. Alpha Russia is now bankrupt and is the subject of ongoing insolvency proceedings in the Arbitrazh Court of Moscow.

[4] As general director of Alpha Russia, Arkhipov was tasked with the responsibility of developing the Alpha Group’s business in Russia. The plaintiffs allege that rather than growing the Alpha Russia business, Arkhipov used his position as general director of Alpha Russia to misappropriate substantially all of Alpha Russia’s assets. The plaintiffs (other than Alpha Russia) are seeking damages from Arkhipov, and the other defendants, of more than $3,000,000.00 US on the basis of deceit, inducing breach of contract, breach of trust, breach of fiduciary duty and other causes of action. Arkhipov and the other defendants have denied the plaintiffs’ allegations. They take the position that the plaintiffs were at all times fully aware of Arkhipov’s actions in managing Alpha Russia.

[5] In determining the issues relating to the scope of production I have applied the relevance test set out in Rule 30.02 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 (the “Rules”). I am also mindful of the proportionality requirements of Rule 29.2.03 and the factors identified under that rule. It is also important to note that a party seeking additional production must demonstrate that there is some basis to believe that the documents they seek actually exist. Speculation is not enough. If there remains any doubt, the parties should proceed to oral discovery where questions can be asked about the existence of allegedly missing documents. See In-Store Products Ltd. v. Zuker, 2015 ONSC 6215 (Master) at paragraph 29; Bow Helicopters v. Textron Canada Co., 1981 CarswellOnt 2908 (SC – Master) at paragraph 9; and George v. Beaubien, 2000 CarswellOnt 2002 (SCJ) at paragraph 35.

[6] The defendants’ initial requests for additional production were numerous and extensive. Some of the additional production requested was provided by the plaintiffs after reflecting on the defendants’ requests. Other categories of requested production were withdrawn by the defendants after they were satisfied that no such documents were in the plaintiffs’ possession, control or power or after deciding the request could wait until oral discovery.

[7] By the time the argument of this motion was completed, the defendants had reduced their production request to seven categories of documents. Those groups of documents can be identified as follows:

(a) unredacted financial statements and related documents of the Alpha Group parent company, the plaintiff Alphatec Limited and the plaintiff Alpha Innovations Limited from 2003 to 2014;

(b) documents and working papers from the audit files kept by Alphatec Limited’s and Alpha Innovations Limited’s auditors, PricewaterhouseCoopers (“PWC”);

(c) various email communications between Alpha Group employees Fred Kaiser, Maria Constantinou and Mathias Drummer;

(d) documents relating to inventory counts;

(e) documents from the files kept by the accounting firm HLB;

(f) documents relating to asset appraisals; and,

(g) SAL (bankruptcy trustee) documents.

[8] Having considered these document requests in view of the pleadings and the evidence filed on this motion, it is my view that a limited amount of further production is required at this time and prior to examinations for discovery taking place.

[9] In my view, the requested financial statements and underlying financial documents are relevant and ought to be produced. At the heart of the plaintiffs’ claim against Arkhipov for misappropriation is the allegation that he manipulated the company’s books and records which involved, among other things, concealing more than $3,000,000.00 US in unpaid inventory owed to Alphatec Limited. I am satisfied that the financial relationship between Alpha Russia and the other plaintiffs is relevant to the matters in issue in this action.

[10] In any event, the plaintiffs do not really dispute the relevance of the financial documents requested. However, they argue that the requested financial documents are relevant only to the extent that they reveal transactions relating to Alpha Russia. For this reason, the financial statements that have been produced by the plaintiffs have been significantly redacted to omit items not related to Alpha Russia transactions. The financial statements for certain years have not been produced at all as the plaintiffs have advised that those statements contain no information in relation to Alpha Russia.

[11] I agree with the plaintiffs that only the Alpha Russia aspects of the financial documents are relevant to the matters in issue in this action. However, I see no basis for redacting a document that contains entries that are relevant and other entries that are not relevant. In my view, if a document contains relevant information, the entire document must be disclosed so that it may be read and considered in its entirety. Moreover, it is my view that the absence of any reference to Alpha Russia in the related companies’ financial statements is just as relevant in the context of this action as is an express reference to Alpha Russia. For this reason, it is my view that all of the audited financial statements for Alphatec Limited and Alpha Innovations Limited from 2003 to 2014 must be produced in their entirety and without redactions. I accept the plaintiffs’ evidence that they do not have financial statements prior to 2008. They were apparently under no legal obligation to keep those records. However, it is not clear to me whether the plaintiffs have requested copies of the earlier financial statements from their auditors who may have retained copies for their records. The plaintiffs shall make a request of PWC for copies of the Alphatec Limited and Alpha Innovations Limited 2003 to 2007 financial statements, if available. The plaintiffs shall also produce copies of all other accounting records of Alphatec Limited and Alpha Innovations Limited in relation to dealings with Alpha Russia, not already produced. I note the willingness of the plaintiffs to produce these documents in accordance with their ongoing disclosure obligations and as set out at page 25 of their compendium.

[12] I understand that the plaintiffs have some concerns about the production of sensitive financial information as part of this proceeding. However, I see no reason why the parties cannot attempt to enter into some form of confidentiality agreement to govern the use of the documents by the defendants. Of course, all of the parties are bound by the deemed undertaking rule. In addition, if the plaintiffs are concerned about the public availability of sensitive financial documents a sealing order can be sought at the appropriate time on proper evidence. The defendants are facing very serious allegations of misconduct. They ought to be provided a full opportunity to defend themselves at trial.

[13] I accept the plaintiffs’ evidence that they do not presently have possession, control or power over the PWC audit files of Alphatec Limited and Alpha Innovations Limited. It also appears that PWC is not prepared to release copies of those documents without the plaintiffs entering into an engagement involving a significant fee. It is unclear, however, just how much this fee would be and the extent of the volume of documents involved. I am not prepared to rule on this production request without further information from the plaintiffs and PWC as to the cost and extent of this additional production. I am concerned that such production may not be proportional in the context of this action and in view of the significant production made to date. The plaintiffs shall make inquiries of PWC in order to determine the amount of the engagement fee requested and the volume and nature of the documents within the PWC audit files. This portion of the defendants’ motion is adjourned to be continued before me at a case conference in my capacity as case management master for this action.

[14] I accept the plaintiffs’ sworn evidence that all documents in their possession, control or power in relation to email communications between Alpha Group employees Fred Kaiser, Maria Constantinou and Mathias Drummer, inventory accounts and asset appraisals have been produced. The plaintiffs have made production of a significant number of documents that fall into these categories. Mr. Drummer’s file has been produced in full. They state that there simply are no further inventory counts or appraisals available. Many Alpha Russia documents are under the control of the trustee in Moscow. In my view, the defendants’ request for additional production of these documents is simply speculation. There is no evidence to suggest that such documents actually exist beyond what has been produced. No further production is required in respect of these requests.

[15] In my view, the HLB documents requested are relevant to the matters in issue in this action. HLB is a Russian accounting firm. It was hired by the plaintiffs to conduct an investigation of Arkhipov’s management and operation of Alpha Russia. The report has been produced by the plaintiffs. It appears that they are relying on the report, at least to some extent, in support of their claims in this proceeding. The statement of claim makes specific reference to the plaintiffs carrying out investigations and audits of Alpha Russia. In my view, the documents created, reviewed and relied upon by HLB as part of its investigation are also relevant to the matters in issue in this action. The HLB report lists a number of documents reviewed by HLB. Unfortunately, it now appears that the originals of those documents are under the control of the Moscow trustee and not in the possession, control or power of the plaintiffs. What is not known, however, is whether HLB has copies of those documents in its file. The HLB report refers to Alphatec Limited as its “customer”. Alphatec Limited may be able to obtain a copy of the HLB file. I am therefore ordering that the plaintiffs make a request of HLB for its complete file and produce its contents to the defendants if made available by HLB.

[16] Finally, the SAL request involves documents generated by the Moscow bankruptcy trustee. I am satisfied on the basis of the plaintiffs’ evidence that they have produced all of the SAL documents in their possession, control or power. Any other SAL documents appear to be under the control of the trustee. These requests also appear to be simple speculation on the part of the defendants. No further SAL production is required.

[17] With respect to the plaintiffs’ motion, it is my view that the defendants acted reasonably in not attending the previously scheduled examinations. Any agreement between the parties to attend examinations for discovery must have been premised on the parties making full and proper production. It is clear from the evidence that the plaintiffs had not made full production by the time the discoveries were first scheduled to proceed in the summer of 2015. Significant additional production has been made since then and I have ordered further production as part of my determination of the defendants’ motion. Under the circumstances, it is my view that the defendants have not lost their right to examine the plaintiffs first. The plaintiffs’ motion is dismissed. I will deal with the scheduling of examinations for discovery as part of the exercise of my Rule 77 case management jurisdiction at a future case conference.

[18] I therefore order as follows:

(a) the plaintiffs shall produce the unredacted audited financial statements for Alphatec Limited and Alpha Innovations Limited from 2003 to 2014, to the extent available and subject to a confidentiality agreement;

(b) the plaintiffs shall make a request of PWC for copies of the 2003 to 2007 Alphatec Limited and Alpha Innovations Limited financial statements;

(c) the plaintiffs shall produce copies of all other accounting records of Alphatec Limited and Alpha Innovations Limited in relation to dealings with Alpha Russia from 2003 to 2014, to the extent not already produced;

(d) the plaintiffs shall make inquiries of PWC in order to determine the amount of the engagement fee requested and the volume and nature of the documents within the PWC audit files and this portion of the relief requested by the defendants is adjourned to be determined by me at a future case conference;

(e) the plaintiffs shall make a request of HLB for its complete file and produce its contents to the defendants if made available by HLB;

(f) the balance of the relief sought by the defendants on their motion is dismissed without prejudice to the right of the defendants to seek such production on a post-discovery motion; and,

(g) the plaintiffs’ motion is dismissed.

[19] Any outstanding issues, including the costs of these motions, the timing of further production and a timetable for the future steps in this action will be considered by me at a case conference. Counsel shall contact me directly by email when ready to request a date for a case conference.

Master R.A. Muir

Date: April 22, 2016