Court File and Parties
SUPERIOR COURT OF JUSTICE – ONTARIO
COMMERCIAL LIST
RE: ALBERT JONES and KATHARINA GROSS (Plaintiffs)
AND:
ENZO MIZZI also known as EMANUAL MIZZI and EMNAUEL MIZZI, EMANUELE MIZZI, MEGALY BIANCHINI, MARY CAMPISI, RON BROWN, BROWN PECK AND LUBELSKY LLP, 1543333 ONTARIO LTD. and 1544274 ONTARIO LIMITED (Defendants)
BEFORE: Hainey J.
COUNSEL: Arie Gaertner and William H.A. Levitt, for the Plaintiffs
Alistair Riswick, for the Defendants, Mary Campisi, 1543333 Ontario Ltd. and 1544274 Ontario Limited
Julian Binavince, for the Defendants Enzo Mizzi and Emanuele Mizzi
Greg Roberts, for the Defendant, Megaly Bianchini, and the New Proposed Defendants, George Michaels, John 2000 Limited and 756629 Ontario Limited
HEARD: July 8, 2016
ENDORSEMENT
Overview
1This is a motion by the plaintiffs for the appointment of an inspector pursuant to s. 161 of the Ontario Business Corporations Act, R.S.O. 1990, c. B.16 (“OBCA”) directing that an investigation be made of 1543333 Ontario Ltd. (“33”) and 1544274 Ontario Limited (“74”), with the costs of the investigation to be borne by 33 and 74.
2The plaintiffs also seek an order that certain of the defendants be held personally responsible for the costs of the investigation if sufficient funds are not available in 33 and 74 to pay for the investigation. I indicated during argument that I would deal with this issue at a later date if 33 and 74 are unable to fund the cost of any investigation that I may order.
3The plaintiffs also seek an order amending the Amended Amended Statement of Claim. This aspect of their motion is not opposed.
4The defendants oppose the motion to appoint an inspector on the grounds that the plaintiffs have not demonstrated that they are shareholders of 33 and 74 and they do not, therefore, have standing to request the appointment of an inspector pursuant to s. 161 of the OBCA. Further, they submit that the appointment of an inspector is premature and not justified.
5The plaintiffs claim that they own a one-third interest in each of 33 and 74 and that the affairs of these companies have been conducted in a manner that is oppressive, unfairly prejudicial or that unfairly disregards their interests as shareholders.
6The two defendant companies own and operate rental properties in the City of Toronto. The defendants claim that the plaintiffs are no longer shareholders in 33 and 74 and that they have not been treated in an oppressive or unfair manner.
Standing pursuant to s. 161 of the OBCA
7The defendants submit that the plaintiffs are not shareholders in 33 or 74 and do not have standing to apply under s. 161 of the OBCA. However, the plaintiffs are in possession of original signed share certificates confirming that they own one-third of the shares of 33 and 74. There is also a memorandum of understanding among the parties that refers to the plaintiffs’ ownership of one-third of the shares in 33 and 74.
8Section 161 (1) of the OBCA provides as follows:
A registered holder or a beneficial owner of a security or, in the case of an offering corporation, the Commission may apply, without notice or on such notice as the court may require, to the court for an order directing an investigation to be made of the corporation or any of its affiliates.
9As I indicated to counsel during argument, I am satisfied that the plaintiffs have the requisite standing to seek the appointment of an inspector pursuant to s. 161 of the OBCA because of this documentary evidence. I find that the original share certificates in their names makes them at least prima facie “beneficial owners of security” in 33 and 74 within the meaning of s. 161. In my view this is sufficient to give them standing to apply for the appointment of an inspector under s. 161 of the OBCA.
10I am, therefore, satisfied that the plaintiffs have standing to apply for the appointment of an inspector under this section.
Should an Inspector be appointed?
11Section 161 (2) of the OBCA states, in part, as follows:
(2) Where, upon an application under subsection (1), it appears to the court that,
(b) the business or affairs of the corporation or any of its affiliates are or have been carried on or conducted, or the powers of the directors are or have been exercised, in a manner that is oppressive or unfairly prejudicial to, or that unfairly disregards, the interests of a security holder;
(d) persons concerned with the formation, business or affairs of the corporation or any of its affiliates have in connection therewith acted fraudulently or dishonestly,
the court may order an investigation to be made of the corporation and any of its affiliates.
12In Akagi v. Synergy Group (2000) Inc., 2015 ONCA 368, the Ontario Court of Appeal confirmed that the purpose of appointing an inspector under s. 161 of the OBCA is as follows at footnote 3 in para. 69:
… In general, this relief is available at the instance of a shareholder where it is apparent that the corporation’s books and records are not properly kept or are inaccurate, or where there has been some deceit or oppressive conduct practiced against the shareholders: … Its purpose is to ensure that a corporation discharges its core obligation to provide shareholders with an accurate picture of its financial position: … The court has broad powers to make an order it thinks fit, but, in particular, is empowered to appoint an inspector to conduct an investigation and to authorize the inspector to enter any premises in which the court is satisfied there might be relevant information, to examine anything and to make copies of any document or record found on the premises, and to require any persons to produce documents or records to the inspector. …
13The jurisprudence makes it clear that the evidentiary threshold required to appoint an inspector pursuant to s. 161 of the OBCA is low. According to Eberle J. in Consolidated Enfield Corp. v. Blair, 1994 CarswellOnt 249 in which he agreed with Galligan J. as follows at para. 83:
… Having regard to the fact that the relief provided for in the section is an investigation, it seems to me that a Court is entitled to make an order for an investigation if it appears on the face of the material submitted to the Court that there is good reason to think that the conduct complained of may have taken place.
14An inspector will be appointed under s. 161 of the OBCA if there is an appearance of oppressive conduct and the applicant has made out a prima facie case. Campbell J. confirmed this in Catalyst Fund General Partner I Inc. v. Hollinger Inc., 2004 CarswellOnt 3782 at para. 39 as follows:
… In the case of an oppression remedy, the reasonable expectation is determinable on the material before the Court. In the case of inspection relief, there must be at the very least an index of suspicion or appearance that reasonable shareholder expectations have not been met in viewing the actions or non-actions of management and directors. It is then appropriate to test that prima facie case with an inspection to determine whether further relief is warranted.
15The plaintiffs submit that an inspector should be appointed for the following reasons:
a) There has been a general lack of financial transparency with respect to 33 and 74;
b) No audited financial statements or any other financial statements were ever prepared for 33 or 74 until 2012;
c) Certain financial information related to 33 and 74 produced during this litigation is inconsistent with the two companies’ corporate tax returns;
d) There are a number of promissory notes from 33 and 74 that appear on their face to be improvident promissory notes in favour of non-arm’s length parties related to the defendants;
e) 33 and 74 appear to have entered into improvident property management agreements.
16I agree with this submission. I am satisfied on the evidentiary record before me that there is an appearance of oppressive conduct and that the reasonable expectations of the shareholders of 33 and 74 have not been that. The failure to provide financial statements for 33 and 74 prior to 2012, in itself, raises “an index of suspicion” that reasonable shareholder expectations have not been met. The Ontario Court of Appeal recently emphasized the mandatory nature of audited financial statements in Packall Packaging Inc. v. Ciszewski, 2016 ONCA 6, at para. 28 as follows:
It is a core obligation of a corporation to its shareholders to provide them with an annual report card of the corporation’s financial position in the form of audited financial statements …
17I have, therefore, concluded that an inspector should be appointed pursuant to s. 161 of the OBCA.
Powers of the Inspector
18The plaintiffs have set out the issues they propose should be investigated by the inspector at para. 126 of their factum. The defendants submit that certain of these issues are statute-barred and should not form a part of the inspector’s investigative mandate. I agree with this submission. The inspector should not be permitted to investigate issues that cannot be pursued by the plaintiffs because of the two-year limitation provided for in s. 4 and the discoverability principle provided for in s. 5 of the Limitations Act, 2002, S. O. 2002, C. 24.
19For this reason I am not prepared to grant the inspector the very broad powers requested by the plaintiffs in para. 4 of their “Relief Requested”. I am of the view that the powers of the inspector should be limited to investigating issues that are not statute-barred and that can be pursued by the plaintiffs in this proceeding.
20As I suggested during the argument of this motion, I request that counsel confer and attempt to negotiate acceptable terms of the inspector’s investigative mandate. If counsel cannot agree upon all aspects of the inspector’s powers they should at least significantly narrow the issues of disagreement. If necessary, they may then schedule a further brief attendance before me and I will finalize this aspect of my order.
Conclusion
21The plaintiffs’ motion is granted. An inspector shall be in appointed pursuant to s. 161 of the OBCA to investigate 33 and 74. The powers of the inspector shall be agreed upon by counsel or determined by me at a further hearing. The plaintiffs are granted leave to amend their Amended Amended Statement of Claim.
Costs
22I urge counsel to attempt to settle the issue of costs. If they cannot they may file written submissions of three double-spaced pages or less and costs outlines.
23I wish to thank counsel for the professional manner in which they conducted this proceeding before me.
HAINEY J.
Date: August 3, 2016