Gustafson et al. v. Johnson et al.

[Indexed as: Gustafson v. Johnson]

Ontario Reports

Ontario Superior Court of Justice,

Pierce J.

April 26, 2016

131 O.R. (3d) 203 | 2016 ONSC 2804

Case Summary

Corporations — Shareholders — Original shareholders and directors of corporation transferring their shares to their wives to put shares beyond reach of their creditors — Transfer documents and shareholders' register not indicating that wives held shares in trust — Husbands' claim that wives held shares in trust rejected — Doctrine of estoppel by convention not applying — Wives rebutting presumption of resulting trust by tendering deed of gift — Gift constituting juristic reason to deny constructive trust based on unjust enrichment.

Corporations — Winding up — Directors of corporation convicted of tax evasion — Directors not seeking new business — Corporation becoming so dysfunctional that it ceased to operate — Shareholders' application for order winding up corporation allowed.

C, G and J were the original shareholders and directors of the corporation. They transferred their shares to their wives to put the shares beyond the reach of their creditors. In their capacity as directors, C, G and J passed a resolution by which the corporation resolved to hire individuals described as "natural persons" to act as agents for the corporation. All three directors were later convicted of tax evasion, and the corporation pleaded guilty to conspiracy to commit tax evasion. The directors stopped bidding on new contracts. Mrs. G and Mrs. C brought an application for an order winding up the corporation. The respondents denied that the applicants were shareholders and claimed that the applicants held the shares in trust for their husbands.

Held, the application should be allowed.

The deeds of gift transferring the shares were not qualified in any way. Neither the transfer documents nor the shareholders' register indicated that the shares were impressed with a trust. The doctrine of estoppel by convention did not apply as there was no credible evidence that the parties shared an assumption that the shares would be held in trust. The applicants had rebutted the presumption of resulting trust with clear proof that the shares were a gift. The gift represented a juristic reason to deny a constructive trust based on unjust enrichment. The applicants and Mrs. J were the shareholders of the corporation. [page204]

The management of the corporation had become mired in disputes that included tax evasion schemes and fractured working relationships. Two directors went to jail for significant periods, and the corporation was fined. The directors failed to account for revenue, pay liabilities or pursue new work. The cumulative effect of the chaos was to prejudice the shareholders and jeopardize the value of their shares. The applicants had established that it would be just and equitable to wind up the corporation.

Cases referred to

• Animal House Investments Inc. v. Lisgar Development Ltd. (2007), 87 O.R. (3d) 529 (S.C.J.)
• Farkas v. Bedic, [2016] O.J. No. 474, 2016 ONCA 82
• Gold v. Rose, [2001] O.J. No. 12, [2001] O.T.C. 4 (S.C.J.)
• Kerr v. Baranow, [2011] 1 S.C.R. 269, 2011 SCC 10
• Pecore v. Pecore, [2007] 1 S.C.R. 795, 2007 SCC 17
• Peter v. Beblow, [1993] 1 S.C.R. 980
• Pettkus v. Becker, [1980] 2 S.C.R. 834
• Ryan v. Moore, [2005] 2 S.C.R. 53, 2005 SCC 38
• Re Bondi Better Bananas Ltd. and Vollario, [1951] O.R. 845 (C.A.)

Statutes referred to

• Business Corporations Act, R.S.O. 1990, c. B.16 [as am.], ss. 100 [as am.], 141(1), 207, (1), (b)(iv), (c), 208, 218(1), 248 [as am.], (3)
• Solicitors Act, R.S.O. 1990, c. S.15 [as am.]

Authorities referred to

Waters, Donovan, Mark Gillen and Lionel Smith, Waters' Law of Trusts in Canada, 4th ed. (Carswell: Toronto, 2012)

APPLICATION for an order winding up a corporation.

Morris Holervich, for applicants. Christopher Hacio, for respondents.

PIERCE J. : —

Introduction

[1] This is a contested winding up application, pursuant to the provisions of the Ontario Business Corporations Act, R.S.O. 1990, c. B.16. [page205]

[2] The applicants, Gina Gustafson and Juanita Curle, seek an order winding up the corporations, Norall Group Inc. and Norall Group Contracting Inc.

[3] The respondents Bruce Johnson and Allan Curle consent to an order liquidating the assets of the corporations, but object to the corporations being wound up. They dispute that the applicants are the majority shareholders and directors of the corporations. At the heart of the dispute is this question: who are the shareholders of the corporations? The answer will determine who is entitled to the assets if the corporations are wound up.

[4] The corporations have not carried on business since 2012. However, Allan Curle, Bruce Johnson, Jeanette Johnson and the two corporations have launched an action claiming damages against the applicants as well as against Holly LeBrun, Carl Gustafson and D.J. Gustafson Engineering Ltd. The plaintiffs in the action allege that the defendants misappropriated corporate assets and destroyed the corporations. Accordingly, they submit that corporate assets, as liquidated, should be held in court pending the outcome of their action.

[5] In 2014, the court stayed the corporations' claims in the action because Bruce Johnson and Allan Curle did not have proper authority to initiate claims on their behalf. The plaintiffs moved for the appointment of independent counsel for the corporations but their motion was dismissed. Leave to commence a derivative action on behalf of the corporations has not been obtained.

[6] There has been no progress in the action since 2014.

[7] The value of assets held by the corporations approximates $1 million plus miscellaneous vehicles and equipment. Two creditors remain: the corporate solicitor and Aegus Contracting which completed a contract left unfinished by the corporations. These debts are contentious.

[8] In 2013, the parties agreed to an interim order that provided for payment of the corporations' expenses but limited payments to $500 per transaction, absent consent. Since this application began, it has become mired in procedural skirmishes, undoubtedly at great cost to the parties. The relationship between the parties is fractious.

Who are the Shareholders?

[9] The applicants seek a declaration identifying the shareholders in the corporations. The respondents argue that there is insufficient evidence to determine this issue and submit that a trial should be ordered. For reasons that follow, I do not agree that a trial is required. There is a full evidentiary record on the [page206] application. The record includes corporate documents, affidavits of all concerned parties, including Jeanette Johnson (who is not a party to the application), and transcripts of cross-examinations. Where credibility issues arise, there is sufficient evidence to make credibility findings.

[10] The respondents ask the court to draw an adverse inference about the applicants' failure to file an affidavit from the corporate solicitor, arguing that his would be the best evidence. In my view, the evidence of the corporate solicitor is not necessary to an adjudication of the applicants' case. The parties and witnesses who have first-hand knowledge of events have filed affidavits. As well, the corporate records provide corroboration.

[11] Norall Group Inc. ("NGI") is an engineering company incorporated in 1996. By 2001, the shareholding structure for NGI was:

• Allan Curle 49 per cent
• Carl Gustafson 35 per cent
• Bruce Johnson 16 per cent

[12] All three shareholders held positions as directors of the corporation and all were active in its daily management. In time, they became concerned that their shares might be vulnerable to creditors.

[13] Carl Gustafson described the meeting of the directors of NGI with their new corporate solicitor, Mr. Brian MacIvor. He deposed:

After Norall Group Inc. was incorporated, but before Norall Group Contracting Inc. was incorporated, the directors changed lawyers and retained Mr. Brian MacIvor as the corporate lawyer. The directors discussed with Mr. MacIvor the implications of corporate and directors' liability and decided that the shares of Norall Group Contracting Inc. would be issued to our wives, being Mrs. Juanita Curle, wife of Mr. Allan Curle with 49% of the shares, Mrs. Gina Gustafson, wife of myself with 35% of the shares, and Mrs. Jeanette Johnson, wife of Mr. Bruce Johnson, with 16% of the shares. This decision was largely based on our belief that the operations directors hold significant exposure to liability as compared to the shareholders.

[14] Although the wives took no role in the operation of the company, the three directors decided to transfer their shares in NGI to their wives, Juanita Curle, Gina Gustafson and Jeanette Johnson.

[15] On December 1, 2003, Allan Curle executed a document called "deed and declaration of gift", transferring 25,000 NGI shares to his wife, Juanita Curle. The deed of gift recites that [page207] the NGI shares were delivered in consideration of "natural love and affection" for his wife. The deed concludes:

I acknowledge that it is my intent to vest absolute ownership and title in the twenty-five thousand (25,000) Class "A" Common Shares in the share capital of the Corporation in my wife, Juanita, from the date of this deed and declaration.

[16] Thus, the shares were placed beyond the reach of Mr. Curle's creditors. The deed of gift was duly signed by Allan Curle and witnessed. The gift was not qualified in any way. There was no indication that the shares were to be held in trust.

[17] On the same day, Juanita Curle acknowledged receipt of the shares by virtue of her signature on a document titled "acceptance and receipt of gift". Her signature was witnessed. This document, drawn up by the corporate solicitor, did not indicate that she held the shares in trust.

[18] Further, on December 1, 2003, Messrs. Curle, Gustafson and Johnson, in their capacities as directors of NGI, passed a resolution approving the transfer of shares from Allan Curle to Juanita Curle. The shareholders' register for NGI duly recorded the transfer of shares. These documents do not show that the shares were impressed with a trust.

[19] On January 1, 2006, a deed of gift, identical to the Curle deed, transferred Mr. Gustafson's NGI shares to his wife, Gina Gustafson. The corporate record documents this transfer and her acceptance and acknowledgment of the gift.

[20] Ms. Curle and Ms. Gustafson assert that they have not transferred their shares in NGI to any other person and have not executed any declaration of trust in relation to the shares. There is no indication of a subsequent transfer or trust arrangement in the shareholders' register.

[21] Gina Gustafson deposed that the same gifting mechanism was used with respect to Bruce Johnson's transfer of his NGI shares to Jeanette Johnson. Ms. Johnson agrees that the structure for holding the Johnson shares was the same as for the Curle and Gustafson shares; however, she disagrees about the effect of the share transfer.

[22] In view of the documentary record and the rationale set out by Mr. Gustafson, I accept that the Johnson shares were also gifted to Ms. Johnson.

[23] The shareholders' register for NGI shows that on January 1, 2006, Bruce Johnson transferred 8,000 shares previously issued to him to Ms. Johnson. There is no indication that these shares were subsequently transferred or held in trust.

[24] Nevertheless, Bruce Johnson and Allan Curle plead that they transferred their shares to their wives to be held in trust [page208] for their families. Jeanette Johnson maintains that she holds her shares in both corporations in trust for her family. Her position is at odds with the corporate record.

[25] Messrs. Curle, Johnson and Gustafson incorporated Norall Group Contracting Inc. ("NGCI") in 2002, and acted as directors of NGCI, managing its operations.

[26] At incorporation, the subscribing shareholders were their spouses. Juanita Curle was issued 98 shares, Gina Gustafson 70 shares and Jeanette Johnson 32 shares, purchased at a cost of $1 each. The subscriptions are contained in the record. These shareholders are also named as shareholders in NGCI's corporate income tax filing for 2010 and in the year-end corporate minutes prepared by the corporate solicitor.

[27] Allan and Juanita Curle separated in August 2011.

[28] At the shareholders' meeting of NGCI held on April 10, 2012, Allan Curle presented a document entitled "Voting Share Register as of March 26, 2012". It purports to show Allan Curle as shareholder of 49 shares of NGCI, Gina and Carl Gustafson as joint shareholders of 35 shares, and Bruce Johnson as the holder of 16 shares.

[29] The veracity of the voting share register proffered by Mr. Curle is doubtful. Gina Gustafson deposed that she never held her shares jointly with or in trust for her husband. In his affidavit, Carl Gustafson confirms that upon incorporation, for liability reasons, shares in NGCI were issued to his wife.

[30] Mr. Gustafson, Ms. Gustafson and Ms. Curle all maintain that Mr. Curle told the April 10 meeting that the NGCI shares issued to Ms. Curle were transferred as a result of a solicitor's error and that Mr. MacIvor had been given instructions to correct the mistake. Mr. Curle's claim that he held shares in NGCI does not make sense based on the corporate record which shows Ms. Curle and others subscribing for the shares. Apart from Mr. Curle's allegation, there is no credible evidence that these shares were ever transferred.

[31] Mr. Gustafson, Ms. Gustafson and Ms. Curle also deposed that during the shareholders' meeting, Mr. Curle confirmed that he transferred his shares in NGI to Ms. Curle. That was a correct statement.

[32] Generally, the evidence of Mr. Curle is not credible. His position is at odds with the corporate records, including documents signed by him. He has adopted varying and conflicting positions: that Ms. Curle holds the shares in trust; that he is the sole shareholder; or that he has no interest in the shares. His position changes depending upon the exigencies of the moment. [page209] Where his evidence conflicts with that of the applicants, I prefer their evidence to his.

[33] Section 141(1) of the Business Corporations Act requires a corporation to maintain a record of shareholders. The record identifies shareholders who are entitled to notice of shareholders' meetings, and therefore entitled to vote in accordance with s. 100 of the Act.

[34] As to the Johnson shares, Ms. Johnson subscribed for 32 shares, or 16 per cent of the stock in NGCI at incorporation. Later, she presented a document dated March 23, 2012, addressed to NGCI and signed by her which states:

I, Jeanette Johnson, state that the owner of the 16% of Norall Group Contracting Inc. is my husband, Bruce Johnson.

[35] Evidence about who owns the Johnson shares is also a moving target, full of contradictions. Bruce Johnson deposed in his affidavit sworn October 25, 2012 that his wife may be the legal owner of his shares but she is not the equitable owner.

[36] In Ms. Johnson's affidavit sworn January 28, 2016, she declared herself to be the shareholder of record of 16 per cent of NGI and NGCI shares, in trust for her family.

[37] Later in the same affidavit, with respect to the NGCI shares, she deposed that

. . . the shares are held in trust by myself for my respective family and are a family investment for the benefit of my family members.

(Emphasis added)

This contradicts her previous statements that her husband owns the shares outright; or that she owns them in trust for her husband. Now she says she holds them in trust for her family members. She does not identify the members of that group.

[38] Jeanette Johnson is still shown as a shareholder on the shareholders' register for NGCI which was last updated some time before 2012. The shareholders' register makes no mention of a trust. No document evidencing a trust has been presented.

Equitable Relief

[39] In order to determine the shareholders, the respondents plead the equitable doctrines of

(1) estoppel by convention; (2) resulting trust; and (3) constructive trust arising from unjust enrichment. [page210]

[40] In my view, for reasons that follow, none of these equitable remedies apply in this case.

[41] It is noteworthy that Mr. Gustafson does not make any claims against his wife in this application. Mr. Curle and Mr. Johnson take the position that their wives hold their shares in the corporations in trust for them or for their respective families. Having taken this position, neither man has suggested why Ms. Gustafson should be liable to them on the grounds of estoppel by convention, resulting or constructive trust. Nor is there any evidence of a joint family enterprise or other facts to support such claims.

[42] Presumably, if any claims for equitable relief were being advanced based on allegations of trust, Mr. Johnson would claim against his wife and Mr. Curle would claim against his former wife. Yet Mr. Johnson makes no claim against Ms. Johnson, either in this application or in the outstanding action.

[43] The equitable relief sought in respect to Ms. Gustafson's shares is entirely without foundation and is dismissed. Similarly, Mr. Johnson has not provided any evidentiary basis for equitable relief against Ms. Curle. Those claims are also dismissed.

[44] I will next consider the application of equitable relief to Mr. Curle's claims.

Estoppel by Convention

[45] Estoppel by convention was discussed by the Supreme Court of Canada in Ryan v. Moore, [2005] 2 S.C.R. 53, 2005 SCC 38. In Ryan, the court considered whether an action against a deceased person survived when the plaintiff was unaware of the death of the party. The plaintiff argued that the doctrine of estoppel by convention applied to prevent the defendant from raising a limitation defence following death.

[46] At para. 59 of Ryan, the court developed the following criteria underpinning the doctrine of estoppel by convention:

1. The parties' dealings must have been based on a shared assumption of fact or law: estoppel requires manifest representation by statement or conduct creating a mutual assumption. Nevertheless, estoppel can rise out of silence (impliedly).
2. A party must have conducted itself, i.e. acted, in reliance on such shared assumption, its actions resulting in a change of its legal position.
3. It must also be unjust or unfair to allow one of the parties to resile or depart from the common assumption. The party seeking to establish estoppel therefore has to prove that detriment will be suffered if the other party is allowed to resile from the assumption since there has been a change from the presumed position.

[Emphasis in original] [page211]

[47] The doctrine of estoppel by convention does not apply to Mr. Curle's claims against Ms. Curle. There is no credible evidence that the parties shared an assumption that the shares would be held in trust for Mr. Curle. In addition, there is no evidence that Mr. Curle acted in reliance on the shared assumption and changed his legal position. On the contrary, he relied on his wife's ownership of the shares to shelter from creditors. He could not have done so by claiming a beneficial interest in the shares.

[48] Ms. Curle's evidence is that since becoming a shareholder of NGI, she did not transfer her shares to any other person and did not execute any declaration of trust to indicate that she holds the shares as a trustee for another person. There is no evidence that the shares were impressed with a trust, either in the corporate records or elsewhere. It would have been an easy thing for the corporate solicitor to draw a deed of trust instead of a deed of gift, if he was so instructed, but he didn't.

[49] If there is a trust, as Mr. Curle contends, what are its terms? Who are the beneficiaries? The record is silent on these matters.

[50] In addition, there is no evidence of a shared assumption of trust in relation to the NGCI shares, which Ms. Curle purchased by subscription. During matrimonial litigation between the Curles, Mr. Curle filed financial statements sworn October 5 and October 31, 2011, in which he swore he had no business interests and no shareholdings, either as a beneficial owner or otherwise. By contrast, Juanita Curle's sworn financial statement dated September 7, 2011 disclosed business interests in the Norall corporations. No shared assumption of fact or law arises from these sworn statements.

Resulting Trust

[51] The respondents also claim that the applicants' shares are subject to a resulting trust. They cite Farkas v. Bedic, [2016] O.J. No. 474, 2016 ONCA 82 as authority for this proposition.

[52] The Court of Appeal defined a resulting trust in Farkas [at para. 18] as

. . . an arrangement where one person holds property for the benefit of another and typically is created or implied when title to the property is transferred to a party who did not provide any value for it. Unless the transfer is held to be a gift, the party is required to return the property to the true owner.

(Emphasis added)

[53] In Pecore v. Pecore, [2007] 1 S.C.R. 795, 2007 SCC 17, para. 24, the court discussed the burden of proof required in connection with resulting trusts. The court stated: [page212]

The presumption of resulting trust is a rebuttable presumption of law and general rule that applies to gratuitous transfers. When a transfer is challenged, the presumption allocates the legal burden of proof. Thus, where a transfer is made for no consideration, the onus is placed on the transferee to demonstrate that a gift was intended: see Waters' Law of Trusts, at p. 375, and E.E. Gillese and M. Milczynski, The Law of Trusts (2nd ed. 2005) at p. 110. This is so because equity presumes bargains, not gifts.

[54] In order to answer the respondents' submission that a resulting trust arises from the transfer of the Curle shares, the onus is on Ms. Curle to prove that the NGI shares were a gift. I find that she has done so by tendering the deed of gift given by Mr. Curle, together with the acknowledgment and receipt of gift that she signed. The documents provide clear and unambiguous proof that a gift was intended. Accordingly, Ms. Curle has rebutted the presumption of resulting trust by proof of gift. No resulting trust arises in respect of the NGI shares.

[55] With respect to the NGCI shares, Ms. Curle, Ms. Gustafson and Ms. Johnson subscribed for and purchased their shares at a cost of one dollar per share. The subscriptions were accepted by the new corporation and duly recorded in the shareholders' register. The shares were not therefore transferred. As well, the issuance of the shares upon incorporation was not gratuitous but made for consideration. Therefore, the presumption of resulting trust with respect to gratuitous transfers does not apply.

[56] As can be seen by the directors' actions in gifting NGI shares to their wives, their intention was also to place NGCI shares beyond the reach of creditors. If the directors had retained a beneficial interest in the shares, their interests would have been subject to seizure, including by Canada Revenue Agency. Having implemented that strategy and reaped the benefits of it, Mr. Curle is estopped from arguing now that he has a beneficial interest in the shares. The fact of the Curles' marital separation is not effective to create a resulting trust retrospectively.

Unjust Enrichment

[57] Mr. Curle also alleges that Ms. Curle has been unjustly enriched by the transfer of shares and that a constructive trust should be imposed to remedy the unjust enrichment.

[58] The elements of unjust enrichment were first considered in Pettkus v. Becker, [1980] 2 S.C.R. 834. The remedy has been revisited by the Supreme Court, most recently in Kerr v. Baranow, [2011] 1 S.C.R. 269, 2011 SCC 10. The case considers a variety of claims and remedies for unmarried spouses. [page213]

[59] The court in Kerr observed that, in the absence of legislation governing unmarried spouses, resort to common law was the only avenue of redress for these individuals. The court recognized that "contributions to the acquisition of a property, which were not reflected in the legal title, could nonetheless give rise to a property interest": paras. 1 and 2. However, the court noted that these claims are not limited to inter-spousal relationships.

[60] In order to establish unjust enrichment, the claimant must prove that the opposing party has been enriched by the claimant; that the claimant has suffered a corresponding deprivation; and there is no juristic reason for the enrichment: para. 32.

[61] If I assume, for the sake of argument, that Mr. Curle can prove that Ms. Curle has been enriched by the transfer of NGI shares, and that he has suffered a deprivation thereby, has the benefit and the deprivation occurred without a juristic reason?

[62] In Kerr, the court describes "absence of juristic reason" as "no reason in law or justice for [Ms. Curle's] retention of the benefit conferred by [Mr. Curle], making its retention 'unjust' in the circumstances of the case": para. 40.

[63] Even if a deprivation is proven, is there a reason in law to find there was no unjust enrichment? One of the legal reasons to deny recovery for unjust enrichment may be a gift. See Kerr, para. 41.

[64] In Waters' Law of Trusts in Canada (4th ed.) (Donovan Waters, Mark Gillen and Lionel Smith) (Carswell: Toronto, 2012), the editors discuss developments in the law of unjust enrichment. At p. 489, the authors comment: "But of course, not every transfer of wealth is reversible; a gift or the payment of a debt are obvious examples."

[65] In Peter v. Beblow, [1993] 1 S.C.R. 980, at para. 13, the court described the "central element of a gift at law" as the "intentional giving to another without expectation of remuneration".

[66] Mr. Curle made a business decision to put his NGI shares beyond the reach of creditors, including Canada Revenue Agency, by gifting them to his wife. The corporate record corroborates his donative intention. (See Kerr, para. 41.) He cannot now complain that the gift should be reversed. The gift represents a juristic reason to deny a constructive trust based on unjust enrichment.

[67] With respect to the NGCI shares, the evidence establishes that Ms. Curle subscribed for and purchased the shares and continues to hold them to this day. There is no evidence that [page214] Mr. Curle was not compensated for his work with NGCI. Rather, the fact that he was prosecuted for significant tax evasion in relation to NGCI suggests that he was well paid. For these reasons, Mr. Curle's claim for unjust enrichment is dismissed.

[68] It is puzzling to me that Mr. Curle made no claim for equalization of the Norall shares in the matrimonial litigation. This would have been the obvious proceeding in which to bring such a claim.

[69] The respondents placed much emphasis on the fact that the applicants took no role in running the corporations. Just because the shareholders left the day-to-day management of the corporations to the directors does not mean they did not hold the shares outright. Corporate management is not a prerequisite to shareholding. Nevertheless, it is evident that the shareholders remained involved in corporate governance. Ultimately, the majority shareholders intervened when they became concerned about the management of the corporations.

[70] Ms. Johnson has not joined in this litigation, and does not seek a declaration of ownership of shares; nevertheless, it is necessary to identify all shareholders in order to facilitate liquidation of the corporations.

[71] For the reasons above, with respect to NGI and NGCI, I find that Juanita Curle is a 49 per cent shareholder; Gina Gustafson is a 35 per cent shareholder; and Jeanette Johnson is a 16 per cent shareholder.

Who are the Directors of the Corporations?

[72] Initially, the applicants sought a declaration identifying the directors of the corporations; however, they abandoned this claim on the grounds that it is now irrelevant.

[73] The respondents maintain there is sufficient evidence on the record to determine the identity of the directors of the corporations and ask for such a finding.

[74] A substantial portion of the pleadings and the argument was devoted to the identity of the directors. The respondents allege that the shareholders' meeting that deposed them as directors was illegally called with insufficient notice.

[75] In my view, it is no longer necessary to identify the directors of corporations that no longer function. Such a determination would involve a waste of scarce judicial resources. Accordingly, I decline to do so.

Should the Corporations be Wound Up?

[76] The respondents and Ms. Johnson agree that the assets of the corporations should be liquidated; however, they say that the [page215] proceeds should be held until their action has been decided. They submit that their action will identify the legal and equitable shareholders and directors of the corporations and determine whether the corporations have sustained damages. Currently, the action involving the corporations is stayed.

[77] By virtue of s. 208 of the Ontario Business Corporations Act, a shareholder or others may apply to have a corporation wound up or seek a remedy under s. 248 of the Act. Winding up is a serious step.

[78] The jurisdiction of the court to order a corporation wound up is discretionary. It is found in s. 207(1) of the Act. Section 207 provides:

207(1) A corporation may be wound up by order of the court,

(a) where the court is satisfied that in respect of the corporation or any of its affiliates,

(i) any act or omission of the corporation or any of its affiliates effects a result, (ii) the business or affairs of the corporation or any of its affiliates are or have been carried on or conducted in a manner, or (iii) the powers of the directors of the corporation or any of its affiliates are or have been exercised in a manner,

that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer; or

(b) where the court is satisfied that,

(i) a unanimous shareholder agreement entitled a complaining shareholder to demand dissolution of the corporation after the occurrence of a specified event and that event has occurred, (ii) proceedings have been begun to wind up voluntarily and it is in the interest of contributories and creditors that the proceedings should be continued under the supervision of the court, (iii) the corporation, though it may not be insolvent, cannot by reason of its liabilities continue its business and it is advisable to wind it up, or (iv) it is just and equitable for some reason, other than the bankruptcy or insolvency of the corporation, that it should be wound up; or

(c) where the shareholders by special resolution authorize an application to be made to the court to wind up the corporation.

(2) Upon an application under this section, the court may make such order under this section or section 248 as it thinks fit. [page216]

[79] The applicants proceed on two grounds: first, that pursuant to s. 207(1)(b)(iv), it is just and equitable to wind up the corporations; and second, that pursuant to s. 207(1)(c), the shareholders have authorized an application to the court to wind up. In this case, Ms. Curle and Ms. Gustafson who together hold a majority of the shares in each corporation, ask for a winding up order.

[80] The term "just and equitable" is given a broad interpretation. In Gold v. Rose, [2001] O.J. No. 12, [2001] O.T.C. 4 (S.C.J.), at para. 16, the court commented:

The courts have held that a deadlock between shareholders is sufficient to trigger the just and equitable jurisdiction under s. 207. In addition, "continued quarrelling, and such a state of animosity as precludes all reasonable hope of reconciliation and friendly co-operation" has been sufficient to justify such a finding in corporations which are analogous to partnerships (Re Bondi Better Bananas Ltd. and Vollario, [1951] O.R. 845 (C.A.) at 855)[.]

[81] The applicants' expectations are key to deciding whether to grant an order for winding up. In order to satisfy the court that it would be just and equitable to grant the remedy, the applicants must prove

(a) that there are rights, expectations and obligations not "submerged" in the corporate structure; (b) such rights, expectations and obligations must not have been satisfied or discharged, whether as a result of a breach by one party, a dispute among the parties or otherwise; (c) the resulting circumstances must generate unfairness or prejudice to one or more shareholders; and (d) the unfairness must be sufficiently serious that it can only be rectified by a winding up or by s. 248(3) relief.

See Animal House Investments Inc. v. Lisgar Development Ltd. (2007), 87 O.R. (3d) 529 (S.C.J.), para. 50.

[82] In this case, the corporations became so dysfunctional that they ceased to operate. Some examples follow.

(a) In their capacity as directors of NGCI, Messrs. Curle, Johnson and Gustafson passed a resolution effective January 22, 2005, by which the corporation resolved to hire individuals described as "natural persons" who would act as agents for the corporation. These individuals would work for the corporation and provide the corporation with necessary expertise. (b) In June of 2011, Canada Revenue Agency executed search warrants at the homes of the parties and at the offices of the [page217] corporations and their accountant, searching for evidence of income tax evasion on the part of three directors, Messrs. Curle, Johnson and Gustafson. (c) In September 2011, Canada Revenue Agency executed a second search warrant at the Curles' family camp in relation to suspected tax evasion. (d) As a result of this investigation, all three directors were prosecuted for and convicted of tax evasion. NGCI pleaded guilty to conspiracy to commit tax evasion and paid a substantial fine. In addition, NGCI incurred substantial legal fees to defend itself. The press release circulated by Canada Revenue Agency states in part:

Thunder Bay, Ontario . . . (June 16, 2014) -- The Canada Revenue Agency (CRA) announced today that Allan Curle and Bruce Johnson were sentenced on June 2, 2014, in the Ontario Court of Justice in Thunder Bay, to a total of 24 months in jail and a total fine of $305,073. On March 21, 2014, Curle and Johnson, as directors of Norall Group Contracting Inc. (Norall), were found guilty, in the same court, of one count each of tax evasion and conspiracy to commit tax evasion. Curle was given 14 months jail time and fined $174,729 and Johnson was given 10 months jail time and fined $130,344. The fines represent 100% of the federal taxes each evaded plus 50% of the cumulative total of federal income taxes evaded by the parties involved in the conspiracy to evade taxes. Curle, Johnson and a third individual involved, evaded a total of $196,428 in federal income taxes.

Also in a related matter, on December 2, 2013, Norall pleaded guilty, in the Ontario Court of Justice in Thunder Bay, to one count of conspiracy to commit tax evasion and was sentenced to a fine of $32,118.

A CRA investigation found that Curle and Johnson followed a tax evasion scheme based on the "natural persons" argument and in doing so failed to report $629,842 in income. The unreported income was paid to Curle and Johnson by Norall, for services rendered. The natural persons argument is based on the principal [sic] of treating oneself as two people (natural and legal), where the legal person is obligated to file an income tax and benefit return and that income received as a natural person is not subject to Canadian income tax.

(e) Since the seizure of corporate records, Messrs. Curle and Johnson stopped bidding on new contracts. No new work was bid on after June 2011. (f) Mr. Gustafson alleges that the other two directors failed to demonstrate accountability in day-to-day operations. For example, he alleges that Mr. Johnson approved payment of hours billed by a contractor whose billings did not correspond with time worked. He also grew concerned about Mr. Curle's unconstrained attitude toward directors' draws. [page218] (g) Ms. Gustafson and Ms. Curle, in their capacities as shareholders of NGCI, requisitioned a shareholders' meeting that was held on April 10, 2012. The meeting degenerated when a dispute broke out over the identity of the shareholders. (h) The formal meeting adjourned to April 25, 2012, but informally, Ms. Gustafson and Ms. Curle questioned the directors about corporate operations. They wanted to know why the corporation had not sought new business since June 2011. Mr. Johnson advised that it was not in the best interests of the corporation while the company was in turmoil. Mr. Curle added that the corporation could not bid on contracts when the directors could not work together, and while the directors had issues with Canada Revenue Agency. (i) Ms. Gustafson and Ms. Curle also questioned the directors about why no steps had been taken to reduce the corporate expenses for NGCI in view of the lack of contracts. Mr. Curle responded that they did not want to lose any core employees during the downturn. (j) Mr. Curle refused to answer whether he had driven a corporate vehicle while his driver's licence was under suspension. It became evident that Mr. Curle had not provided a copy of his driver's licence for insurance purposes while the other directors had done so. Subsequently, Mr. Curle was convicted of driving a company vehicle while his licence was suspended, and without proof of insurance. (k) The directors refused to acknowledge that each had entered into personal service contracts with the corporation. It was these contracts that triggered the tax prosecution. (l) The resumption of the shareholders meeting on April 25, 2012 was fractious. Messrs. Curle and Johnson fell out with Mr. Gustafson. They purported to pass a resolution in their capacities as shareholders of NGCI removing Mr. Gustafson as director. Mr. Gustafson learned of the resolution from accounting staff a couple of weeks later. (m) Mr. Johnson picked up a cheque payable to NGI in the amount of $662,726.89 and refused to deposit it into the corporate bank account until a court order compelled him to do so. (n) Messrs. Curle and Johnson neglected or refused to sign cheques to pay various liabilities of the corporations, including payroll. It became necessary for the applicants to sell equipment to generate funds to cover expenses. [page219] (o) At least one contract was left incomplete. (p) In 2015, the corporations were served with requirements to pay issued by CRA. Mr. Curle is liable for $401,571.52 and Mr. Johnson $196,027.35. (q) The applicants state that they have lost all confidence in the directors of the corporations.

[83] Were the rights, expectations and obligations of the applicants, as shareholders, met by the former directors of the corporations? The answer is no.

[84] On May 4, 2012, the applicants convened an emergency meeting of shareholders and passed a resolution removing the directors. The circumstances of the calling of the meeting are contentious. Whether the resolution was effective to replace the directors is now moot. However, the fact that the applicants retained counsel and passed a resolution ousting the directors is indicative of just how frustrated they had become with the management of the corporations. As Ms. Gustafson observed, there was no one to run the corporations and no credible offers were made to purchase the applicants' shares. Rightly, they became concerned that the value of their shares would erode.

[85] What were the reasonable expectations of the applicants as shareholders? They expected that the corporations would be run in a business-like manner; that the corporations would seek out new contracts; that directors' draws would be reasonable; and that costs would be scaled back to reflect reduced corporate income, in order that the value in the corporations would be preserved.

[86] Instead, the management of the corporations was distracted. It became mired in disputes that included tax evasion schemes and fractured working relationships among the directors. The result was that the corporations could not and did not function. Two directors went to jail for significant periods. The corporation was fined. To make matters worse, the directors failed to account for revenue, pay liabilities or pursue new work. Consequently, the reasonable expectations of the shareholders were not satisfied. The cumulative effect of this chaos was to prejudice the shareholders and jeopardize the value of their shares. The only remedy for unfairness to the shareholders in these circumstances is winding up.

[87] Despite the submissions of the individual respondents and Ms. Johnson, I am not persuaded that the assets of the corporations should be simply liquidated and held in trust to await the outcome of a trial. Although Ms. Johnson is not a party to [page220] the application, she is a plaintiff in the action. In this application, she filed affidavit material, placing her position before the court. Her position and interests coincide with those of her husband, Bruce Johnson, and with Allan Curle, who are respondents in the application. The position of the respondents and Ms. Johnson that assets of the corporation should be held, amounts to an attempt to secure execution before judgment. The respondents have not sought an injunction to prohibit payment to the shareholders, of which Ms. Johnson is one.

[88] In their action for damages to the corporations, the plaintiffs must prove that the defendants caused damages. In considering liability, the court may also consider

• the effect on the corporations of the breakdown of the working relationship between Allan Curle, Bruce Johnson and Carl Gustafson;
• the effect on the corporations of the directors' convictions for conspiracy to evade income taxes, resulting in a significant fine to NGCI and related legal fees;
• the effect that incarceration of two directors had on corporate productivity;
• the effect of the directors' failure to pay expenses of the corporation, such as payroll, statutory deductions, rent and other expenses;
• any lapses in directors' accountability, such as paying accounts that were not properly rendered or taking excessive draws;
• the failure of the directors to bid on new contracts; and
• the failure of the directors to ensure that outstanding contracts were completed.

[89] The corporations have long since ceased to function. As shareholders, the applicants and Ms. Johnson are prima facie entitled to receive the value of their shares after the liabilities of the corporations have been paid. Until the corporations are wound up, interim fees and expenses will continue to bleed the corporations of their capital, to the prejudice of the shareholders. As well, the applicants continue to spend time managing what remains of the corporations on an interim basis.

[90] For reasons I have discussed, there has been no activity in the action since 2014. It may be years until the case proceeds to trial. If the pace of litigation governing this application is [page221] a guide, the parties will exhaust themselves and their assets paying legal fees to bring the action to trial.

[91] Consequently, I have concluded that it is just and equitable that the corporations, Norall Group Inc. and Norall Group Contracting Inc., be wound up. An order will issue accordingly.

Payment of Outstanding Accounts

[92] There are now two outstanding accounts that have not been paid by the corporations. The first is an account for legal fees for the corporate solicitor approximating $77,000. It appears that this account dates from the defence of the corporation in the tax prosecution. The particulars of that account are not in the application record.

[93] I am satisfied that special circumstances exist to warrant ordering the assessment of Mr. MacIvor's outstanding account, pursuant to the Solicitors Act, R.S.O. 1990, c. S.15. As part of the winding up process, the applicants are ordered to have Mr. MacIvor's outstanding account assessed, on notice to the solicitor, and to provide the respondents with a certificate of assessment. Once the amount due to Mr. MacIvor is assessed, the applicants shall pay his account. The applicants are also ordered to provide Mr. MacIvor with a copy of these reasons.

[94] The second outstanding account arises from two invoices dated March 17, 2014, rendered to NGI and NGCI by Mr. Gustafson's company, Aegus, to complete their outstanding contracts. These invoices total $27,471.30 and $42,459.08.

[95] The respondents object to the payment of the Aegus accounts for several reasons:

• there was no bid process for performance of the outstanding work;
• the invoices for work allegedly done in 2012 were not submitted until 2014;
• Aegus used equipment owned by NGI and NGCI to complete the work; and
• Aegus issued two invoices to NGCI in different amounts for the same work.

Unfortunately, the respondents have not proposed what might be a reasonable amount to complete the corporations' outstanding work.

[96] The respondents also complain that Aegus used equipment owned by NGCI on its own projects and that it purchased equipment from the corporations. The evidence in this regard is [page222] scant. On cross-examination, Carl Gustafson indicated that Aegus has not used any of the corporations' equipment since 2013. He indicated that his company purchased a job trailer from NGCI for the same price he paid when purchasing it for NGCI. He also stated that the billing of equipment used to complete NGCI's work was consistent with industry rates.

[97] There is no evidence that any equipment was purchased under value. The applicants accounted for proceeds of sale of one piece of equipment. The proceeds were used to pay debts of the corporations.

[98] It is not possible from the state of the record to determine the propriety of the two invoices rendered by Aegus to NGI and NGCI. In cross-examination, Mr. Gustafson could not explain the differences in the accounting, even though detailed schedules were appended to the invoices.

[99] Unless the parties can agree, a trial of an issue is ordered to determine whether the invoices dated March 17, 2014 from Aegus to NGI and NGCI should be paid and, if so, in what amount.

Liquidation of Remaining Chattels

[100] There is also scant information in the record about the value of the corporations' remaining chattels. I am advised that the chattels are limited to a few vehicles, construction equipment and miscellaneous items. The respondents propose that the accounting firm, Grant Thornton, be retained to sell these chattels.

[101] In my view, retaining a professional liquidator to arrange sale of the limited remaining chattels would involve unnecessary delay and unreasonable expense to the corporations. It must be remembered that the ultimate value of the corporations will accrue to the shareholders after payment of all liabilities. In these circumstances, it is reasonable to expect that the shareholders will pursue the best possible price on the sale of the corporations' assets as the value will return to them.

[102] The applicants are ordered to arrange for sale of the remaining chattels of NGI and NGCI at fair market value and to document and account to the respondents, Jeanette Johnson and the court for the proceeds of sale of these chattels.

Taking of Accounts

[103] Following the trial of an issue concerning payment of the Aegus invoices (if necessary), assessment of the MacIvor account and the sale of the remaining corporate chattels, the applicants are directed to take out an appointment before me on [page223] notice to the respondents, for the purpose of taking account of the corporations' assets and liabilities. At that time, the court will consider orders for dissolution of the corporations, pursuant to s. 218(1) of the Business Corporations Act, and for disposition of corporate records.

[104] Once the corporate assets and liabilities have been settled, and any remaining steps for winding up have been addressed, the court will consider an order for the distribution of the remaining assets rateably among the shareholders of the corporations.

Costs

[105] Costs of the application are reserved, pending the taking of accounts.

Application allowed.

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