Court File and Parties

COURT FILE NO.: CV-13-115180-00 DATE: 20160519 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

N-KRYPT INTERNATIONAL CORP. Plaintiff – and – ZILLACOMM CANADA INC., ZILLACOMM INC., OVER Z LLC, DAVID W. SHIFLETT and GLENN R. DAVIS Defendants – and – ASIF CHOKSI, MOHAMMED QASIM CHOKSI, N-KRYPT INTERNATIONAL CORP., and N-KRYPT GLOBAL SERVICES INC. Defendants by Counterclaim

Counsel: Jamie Spotswood, for the Plaintiff Brian Belmont, for the Defendants

HEARD: April 4, 2016

Reasons for Decision

CHARNEY j. :

Introduction

[1] The defendant/plaintiff by counterclaim, Over Z LLC (Over Z), brings this motion pursuant to Rule 60.11 of the Rules of Civil Procedure for an order finding the plaintiff/defendant by counterclaim, N-Krypt International Corp. (N-Krypt), in contempt of court for failing to comply with the consent order of Gilmore J. dated December 15, 2015 (the Order).

[2] The Order required N-Krypt to do the following acts:

Para. 1 - To hold a shareholders meeting by March 7, 2016 and give notice of this shareholders meeting in accordance with the Ontario Business Corporations Act (the OBCA) R.S.O. 1990, c. B.16.

Para. 2 - To produce audited financial statements for each of the years 2008 to 2015 by February 26, 2016 (i.e. at least 10 days before the shareholders meeting as required by the OBCA).

Para. 4 - To produce to Over Z an accounting of Over Z’s investment in N-Krypt, including supporting documents to the extent available, by February 26, 2016.

Para. 5 - To produce at the shareholders meeting the following seven documents:

• Shareholders register
• Over Z’s original share certificate in N-Krypt
• Minute book with respect to shareholders meetings
• Director’s register
• Audited financial statements (this is the same as para. 2)
• Notices of Assessment and Notices of Re-assessment
• Articles and by-laws of N-Krypt

[3] Paragraph 3 of the Order required N-Krypt and Over Z, through their counsel, to agree on an auditor to prepare the audited financial statements within 14 days of the date of the Order.

[4] Paragraph 9 of the Order provides that “either party may move for directions or enforcement with respect to any term of this Order”.

[5] Paragraph 10 provides that “any term of this Order may be varied by mutual agreement of the parties to this motion”.

Position of the Parties

[6] Over Z takes the position that N-Krypt has failed to comply with paras. 2 and 4 of the Order. With respect to para. 5, Over Z states that N-Krypt has failed or refused to produce Notices of Assessment and Notices of Re-assessment.

[7] N-Krypt does not dispute its failure to comply with para. 2, but takes the position that it is not in contempt of court because it has acted in good faith and retained an auditor to conduct the audit in accordance with the Order, but the auditor has advised N-Krypt that the audited financial statements will not be available until the end of July 2016. N-Krypt has asked for directions pursuant to para. 9 of the Order to permit it to provide the audited financial statements within that time frame. With respect to para. 4, N-Krypt interpreted the Order as indicating that the accounting would be derived from the audited financial statements - which were not available - and the Order itself is qualified by the phrase “to the extent available”. N-Krypt did provide the accounting on March 31, 2016. With respect to para. 5, N-Krypt has not provided the Notices of Assessment and Re-assessment because it does not yet have them.

Contempt

[8] Relying on the recent Supreme Court of Canada decision in Carey v. Laiken, 2015 SCC 17 (Carey), Glustein J. recently summarized the law of civil contempt in the case of The Catalyst Group Inc. v Moyse, 2015 ONSC 4388, at para. 59. I adopt the following summary from that decision:

(i) The contempt power rests on the power of the court to uphold its dignity and process. It is necessary to maintain the rule of law (Carey, at para. 30);

(ii) There are three elements which must be established beyond a reasonable doubt before a court may make a finding of civil contempt:

(a) The order that was breached must state clearly and unequivocally what should and should not be done;

(b) The party alleged to have breached the order must have had actual knowledge of it; and

(c) The party allegedly in breach must have intentionally done the act that the order prohibits or intentionally failed to do the act that the order compels (Carey, at paras. 31-35);

(iii) Any reasonable doubt must be resolved in favour of the person or entity alleged to have breached the order (Prescott-Russell Services for Children and Adults v. G. (N.), at para. 270);

(iv) The contempt power is discretionary and courts should discourage its routine use to obtain compliance with court orders. The contempt power should be used “cautiously and with great restraint” and as “an enforcement power of last rather than first resort” (Carey, at para. 36); and

(v) The court retains a discretion to decline to make a finding of contempt if the alleged contemnor acts in good faith (Carey, at para. 37).

[9] N-Krypt relies on the Court’s discretion to decline to make a finding of contempt if the contemnor acts in good faith. This discretion was described by the Supreme Court of Canada in Carey (at paras. 36-37, citations omitted):

The contempt power is discretionary and courts have consistently discouraged its routine use to obtain compliance with court orders…If contempt is found too easily, “a court’s outrage might be treated as just so much bluster that might ultimately cheapen the role and authority of the very judicial power it seeks to protect”…As this Court has affirmed, “contempt of court cannot be reduced to a mere means of enforcing judgments” … Rather, it should be used “cautiously and with great restraint”...It is an enforcement power of last rather than first resort…

For example, where an alleged contemnor acted in good faith in taking reasonable steps to comply with the order, the judge entertaining a contempt motion generally retains some discretion to decline to make a finding of contempt...

[10] The Supreme Court of Canada makes clear (at para. 41) that it is no excuse where a “person’s own actions contrary to the terms of a court order make future compliance impossible”. The Court explained that it would undermine the purpose of the contempt power to deter violations of court orders “to treat with special charity people whose acts in violation of an order make subsequent compliance impossible”. In order to benefit from the court’s discretion, the alleged contemnor must be acting in good faith to comply with the court order.

The Facts

[11] Pursuant to para. 3 of the Order, N-Krypt and Over Z agreed on December 28, 2015 to engage SRJ Chartered Accountants (SRJ) to conduct the audits of N-Krypt. An alternative auditor was also agreed to.

[12] On January 7, 2016, N-Krypt discussed the proposed audits with SRJ and provided SRJ with material to review for the audit on January 8, 2016. N-Krypt was advised that the court deadline of February 26, 2016 would be difficult to meet given the busy tax season.

[13] On February 19, 2016, SRJ’s auditor told N-Krypt that SRJ would not be able to begin the audit until May 2016 and did not expect to have it completed until July or August 2016.

[14] N-Krypt took steps to engage the alternative auditor. On February 19, 2016 N-Krypt contacted Nick DeLuca, Chartered Professional Accountant (DeLuca), the alternative auditor that the parties had agreed to conduct the audit. N-Krypt indicated that they were looking for a new audit firm to create audited financial statements for the years 2008-2015, indicating: “anything we can do to get these audits done ASAP would be greatly appreciated”. DeLuca was formally retained by N-Krypt on March 4, 2016.

[15] On February 19, 2016, N-Krypt’s lawyer emailed Over Z’s lawyer to advise him of the delay and indicated that N-Krypt was making inquiries to engage an alternative auditor. He indicated that the audited statements would not be available for March 7, 2016.

[16] Over Z’s lawyer did not respond until February 29, 2016. He stated his position that N-Krypt’s failure to comply with the February 26, 2016 deadline placed N-Krypt in contempt of the Order.

[17] N-Krypt’s lawyer replied the same day, stating: “our client is working diligently to ensure that the audit is completed as soon as possible. When the December 15, 2015 consent order was made, we contemplated that the audit could take longer than March 7 to complete given the pending tax season and that we might need to appear before the court to modify the timeline or agree to a modification. Paragraphs 9 and 10 of the order contemplate this”.

[18] N-Krypt’s lawyer advised that N-Krypt was prepared to hold the shareholder’s meeting on March 7, 2016, but sought to obtain an agreement pursuant to para. 10 of the Order to adjourn the shareholder’s meeting until after the audited financial statements were available, since “the principle purpose of the shareholders meeting was to review the audited financial statements”.

[19] No agreement was reached, and the shareholders meeting proceeded on March 7, 2016.

[20] David Shiflett, the authorized representative of Over Z, attended the shareholder’s meeting on March 7, 2016. He described the shareholders meeting as a “complete farce” because the audited financial statements were not available at the meeting.

[21] Shiflett’s affidavit states that Nick DeLuca attended a portion of the shareholder meeting, but when he “was questioned…he advised that he had not even been retained by N-Krypt International Corp. to prepare audited financial statements” (emphasis in original).

[22] There is a clear conflict in the evidence on this point. The affidavit of Asif Choksi, the President and CEO of N-Krypt, states that DeLuca was formally retained on March 4, 2016, and attaches a copy of the DeLuca retainer letter of that date. The fact that DeLuca did attend the shareholder meeting on March 7, 2016 confirms Choksi’s assertion that DeLuca was already retained.

[23] Neither Shiflett nor Choksi were cross-examined in advance of this motion. The party alleging contempt has the burden of proof, and contempt proceedings are subject to the criminal standard of proof beyond a reasonable doubt. Shiflett’s hearsay evidence, assuming that it is even admissible, does not come close to meeting this burden. In these circumstances I must resolve this factual dispute in favour of N-Krypt, and I accept, for the purposes of this motion, that DeLuca was retained prior to the March 7, 2016 shareholders meeting.

Analysis

[24] At the hearing of this motion, counsel for Over Z expressed his client’s frustration with N-Krypt’s repeated failure to comply with various provisions of the OBCA and with N-Krypt’s failure to account for the $875,000 invested in N-Krypt by Over Z since 2008. He characterized N-Krypt’s failure to comply with the December 15, 2015 Order as just another attempt to delay and avoid its legal obligations. He is prepared to agree to an extension of the February 26, 2016 deadline, but wants a fixed deadline to replace it.

[25] Counsel for N-Krypt takes the position that his client has acted in good faith to comply with the Order, but that his client cannot control when the third party auditor will have the audited financial statements available. He has proposed that the deadline be extended to the end of July 2016. He has proposed a second shareholder meeting for September 6, 2016, at which time the audited financial statements and the Notices of Assessment and Notices of Re-assessment should be available.

[26] In my opinion, the evidence in the present case does establish that N-Krypt has acted in good faith to comply with the Order.

[27] While it is clear that N-Krypt has not complied with para. 2 of the Order requiring it to produce audited financial statements by February 26, 2016, I am satisfied on the evidence before me that N-Krypt has acted in good faith and with due diligence to obtain these statements. This is an unusual case because N-Krypt’s ability to comply with the Order and deliver the financial statements is subject to a third party’s (the auditor’s) ability to prepare them. The evidence presented on this motion is that both auditors agreed to by the parties in accordance with para. 3 of the Order have indicated that, due to tax season, the February 26, 2016 date was not possible. N-Krypt has proposed a new date in accordance with the timetable proposed by the auditor.

[28] With regard to para. 4 of the Order, N-Krypt understood that the “accounting of Over Z’s investment in N-Krypt including supporting documents” would be derived from the audited financial statements. When Over Z insisted on receiving the accounting, N-Krypt provided an accounting on March 31, 2016. Para. 4 of the Order is expressly qualified by the clause “to the extent available”. I accept that N-Krypt was of the view that the accounting and supporting documents contemplated by the Order were not available until the audited financial statements were available. In any event, N-Krypt did provide an accounting on March 31, 2016, and I will not find them in contempt of court for being a month late as a result of a disagreement with respect to the interpretation of the Order. As Cullity J. stated in Jaskhs Enterprises Inc. v. Indus Corp. at para. 40:

[A] failure to comply with an order of the court will not be contempt if there are genuine, unresolved issues between the parties with respect to the manner in which it is to be carried into operation. A finding of contempt will not be made for breach of an order unless its meaning and requirements in the particular circumstances are clear and unambiguous…

[29] Finally, the evidence on this motion is that N-Krypt does not yet have the Notices of Assessment and Re-Assessment required by para. 5 of the Order. N-Krypt indicates that when these notices are available they will be provided to Over Z for inspection, and that N-Krypt has been advised by its auditor DeLuca that these notices will be available before the audit is complete. These documents fall into the same category as the audited financial statements, and I accept that N-Krypt, by retaining the auditor, has acted in good faith to obtain these documents.

Conclusion

[30] In all of these circumstances, I find that this is an appropriate case to exercise my discretion and decline to make a finding of contempt in accordance with para. 37 of the Supreme Court of Canada’s decision in Carey. I am satisfied that N-Krypt has acted in good faith in an effort to comply with the December 15, 2015 Order.

[31] N-Krypt has brought a cross motion for directions, as contemplated by para. 9 of the December 15, 2015 Order, that would require N-Krypt to produce its audited financial statements “by the earlier of July 31, 2016 or the date when the audited financial statements have been prepared by the auditor.” This appears to provide for the fixed date demanded by Over Z. N-Krypt also proposes that another shareholders meeting be scheduled for September 6, 2016.

[32] This proposal appears to be a preferable way of resolving the dispute between the parties. There is no evidence that a contempt order or penalty will result in the audited financial statements being ready any sooner.

[33] That being said, I do have some sympathy for Over Z in these circumstances. The schedule in the December 15, 2015 Order was agreed to by N-Krypt. Over Z has been trying unsuccessfully for some time to enforce its rights under the OBCA. While I have accepted that N-Krypt has acted in good faith and with due diligence, I understand that past interactions between the parties may have left Over Z and its counsel more sceptical. Accordingly, I am going to defer costs submissions on this motion and cross motion until after July 31, 2016. That will enable me to take into consideration whether N-Krypt has complied with this Order before awarding costs to either party.

Order

[34] This Court Orders that:

a. The defendant Over Z LLC’s motion for contempt is dismissed.

b. The plaintiff N-Krypt International Corp.’s cross-motion is allowed on the terms set out in the draft order contained in Schedule “A” to its Notice of Cross Motion.

[35] If the parties cannot agree as to costs of this motion and cross-motion, they may file written submissions on costs by August 12, 2016, such submissions to be limited to three pages plus cost outlines and any offers to settle. If either party wants to make reply submissions, it may do so by August 19, 2016.

Justice R.E. Charney Released: May 19, 2016