COURT FILE NO.: CV-16-0695-00 DATE: 2017-04-11 ONTARIO SUPERIOR COURT OF JUSTICE
B E T W E E N:
2265535 ONTARIO INC. and 2092225 ONTARIO INC. Applicants
Jonathan Kulathungam, for the Applicants
- and -
VIJAYANT SOOD, RAKESH SOOD, JYOTIKA SOOD, ASHIMA SOOD, NISHA SOOD, NAZIRA LALJI, JINDAL HOLDINGS INC., 2138629 ONTARIO INC., SANHU-MALWA HOLDINGS INC. and 10 ACRE STORE & RESTAURANT INC. and ZULKARIAIN LALJI Respondents
Jack Berkow, for the Respondents
HEARD: November 29, 2016, at Brampton, Ontario
Price J.
Reasons For Order
NATURE OF MOTION
[1] Two and a half months after this court made an order dated August 9, 2016, appointing an auditor to audit the financial affairs of the Respondent corporations 2138629 ONTARIO INC., SANDHU-MALWA HOLDINGS INC. and 10 ACRE STORE & RESTAURANT INC. (“Corporate Moving Parties”) from December 1, 2014, to such time period as the auditor may determine based on the results of the audit, and related relief, the audit has not been undertaken. The Applicants now seek to settle the form of the Order and to have it signed; the Respondents seek to vary or set aside the Order, pursuant to Rule 59.06(a) and (b), based on fraud or mistake.
BACKGROUND FACTS
[2] The Applicants are shareholders of the corporate Moving Parties. Bhagat Singh (“Mr. Singh”) owns a 50% interest in 2092225 Ontario Inc., which in turn owns a 50% interest in lands owned by Sandhu Malwa Holdings Inc. (“Sandhu Malwa”). Sandhu Malwa is a trustee of the shares in the Moving Parties.
[3] The Corporate Respondents collectively own and operate a gas station, restaurant, and store located at 902 Wallbridge Loyalist Road, Belleville, Ontario. Sandhu Malwa is the landowner, and leases the site to 213869 Ontario Inc. (“213”) and 10 Acre Store & Restaurant Inc. (“10 Acre”). 213 operates the gas station business, including the gas pumps, diesel pumps and a small store. 10 Acre operates the larger store and the restaurant at the site. 213 and Sandhu Malwa have operated since 2007, and 10 Acre began operations in 2010.
[4] On August 9, 2016, the Applicants obtained an Order of this Court directing, among other things, that an audit of the Moving Parties for the past two fiscal years (“the Audit”) be undertaken (“the August 9, 2016 Order”). When the parties attended on November 29, 2016, that Order had not yet been signed or entered.
[5] The Audit, which the Applicants proposed be conducted by Bateman MacKay, is likely to cost $7,500.
[6] In support of the motion for the August 9, 2016 Order, the Applicants tendered Mr. Singh’s affidavit, sworn July 25, 2016.
[7] Following the making of August 9, 2016 Order, the Moving Parties discovered the following information, which was not disclosed in Mr. Singh’s affidavit:
a) On June 21, 2012, all of the shareholders of the Moving Parties, including Mr. Singh, executed Shareholders’ Resolutions dated June 21, 2012, exempting the Moving Parties from the requirements of Part XII of the Business Corporations Act, R.S.O. 1990, c. B16, as amended, in regard to the appointment and duties of an auditor (the “Audit Waivers”);
b) The Audit Waivers were personally signed by Mr. Singh;
c) In September 2015, Mr. Singh was convicted of possession of 12,000 kilograms of dried opium poppies, having an estimated street value of $2.5 million, for the purposes of trafficking;
d) On June 3, 2016, Mr. Singh filed a consumer proposal under the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, as amended (the “Consumer Proposal”) which the Moving Parties say materially misrepresented Mr. Singh’s assets and liabilities, in that the Statement of Affairs that Mr. Singh swore in support of the Consumer Proposal disclosed only a debt of $180,000 owed to the Canada Revenue Agency, and failed to disclose further liabilities in the amount of 309,302.48, consisting of the following:
i) a promissory note dated September 29, 2015, in the amount of $85,000;
ii) debts or contingent debts evidenced by a Loan Agreement in the amount of $220,000, arising from an agreement he had made to pay the respondent, Zulkarain Lalji; and
iii) a debt in the amount of $4,302.48 owing under the Retail Sales Tax Act, R.S.O. 1990, c. R. 31, as amended, for which a writ of execution has been filed.
e) Mr. Singh was ineligible at law to make a Consumer Proposal at the time he made one;
f) At the time Mr. Singh swore his affidavit of July 25, 2016, his Consumer Proposal had not yet been approved by the Court;
g) In 2011, Mr. Singh was indicted for possession for the purpose of trafficking 12,000 kilograms of opium having a street value of $2.5 million. On September 14, 2015, he pleaded guilty and received a conditional sentence of two years less a day.
[8] The Moving Parties assert that the undisclosed facts were material to the decision which the court made on August 9, 2016, in that the waiver of the audit requirements of the Business Corporations Act, which Mr. Singh signed, deprived him of his automatic right to require such an audit, and Mr. Singh’s undisclosed liabilities and his conditional sentence for trafficking in opium are likely to render him unable to pay the Moving Parties’ costs of the present proceeding, including the costs of the audit, if he is unsuccessful.
[9] The Respondents first learned on November 14, 2016, of Mr. Singh’s Consumer Proposal dated June 3, 2016, when they received the results of a Bankruptcy Search they conducted. Prior to that time, they had no knowledge of Mr. Singh’s insolvency. The Respondents learned of the undisclosed facts on November 17, 2016, when they received material that had been filed with the Administrator of the Consumer Proposal.
[10] The Consumer Proposal was approved by the Court in September 2016.
ISSUES
[11] The court must determine whether the Moving Parties entitled to have the August 9, 2016, Order set aside or varied pursuant to Rule 59.06(a) and (b), based on fraud or mistake?
PARTIES’ POSITIONS
[12] The Corporate Moving Parties submit that the Applicants misrepresented the facts, by failing to include the undisclosed facts in Mr. Singh’s affidavit, and that these facts were material to the outcome. They therefore submit that the August 9, 2016 should be set aside or varied on the ground that it was the result of mistake or fraud.
[13] The Applicants submit that they were under no obligation to disclose the Audit Waiver, or Mr. Singh’s liabilities, and that the undisclosed facts would not have affected the outcome. The Applicants submit that the August 9, 2016 Order was not the result of fraud or mistake and should not be set aside.
ANALYSIS AND EVIDENCE
The Legislative framework
[14] Rule 59.06 entitles a party who is affected by an order to have the order set aside or varied where it was made as a result of fraud or mistake. Rule 59.06 provides:
59.06(1) An order that contains an error arising from an accidental slip or omission or requires amendment in any particular on which the court did not adjudicate may be amended on a motion in the proceeding.
(2) A party who seeks to,
(a) have an order set aside or varied on the ground of fraud or of facts arising or discovered after it was made;
(b) Suspend the operation of an order;
(c) Carry an order into operation; or
(d) Obtain other relief than that originally awarded,
may make a motion in the proceeding for the relief claimed. Rules of Civil Procedure, R.R.O. 1990, Reg. 194
The Jurisprudence
[15] Rule 59.06 provides for a very narrow jurisdiction to set aside or vary an order made in cases where the integrity of the process is at risk or a principle of justice is at stake. A court should re-open a motion sparingly and with the greatest of care, although it may do so in exceptional circumstances, when justice requires. Strugarova v. Air France (2009), 82 C.P.C. (6th) 298, Leave to appeal to Div. Ct. refused 191 A.C.W.S. (3d) 890.
[16] The test for the admission of new evidence in support of a motion pursuant to Rule 59.06 goes beyond whether, if presented at the hearing of the motion, it would probably have changed the result, and whether it could have been obtained before the motion by the exercise of reasonable diligence. It includes considerations of finality, the apparent cogency of the evidence, delay, fairness, and prejudice. Mehedi v. 2057161 Ontario Inc. (2015), 2015 ONCA 670, 391 D.L.R. (4th) 374, 76 C.P.C. (7th) 225 (Ont. C.A.)
[17] On a motion to set aside an order pursuant to Rule 59.06, the court is not entitled to consider issues properly dealt with by appeal, such as errors of law. [Zsoldos v. Ontario Assn. of Architects (2004), 128 A.C.W.S. (3d) 1051 (C.A.), leave to appeal to S.C.C. refused 198 O.A.C. 403 n]
Applying the principles to the present case
[18] The Applicants obtained the August 9, 2016 Order by motion on notice to the Respondents. They were not obliged to disclose the “undisclosed facts” to the Respondents or to the Court, as they would have been obliged to do had they made their motion without notice to the Respondents.
[19] The Respondents delivered responding material. They could have ascertained the undisclosed facts by reasonable diligence and submitted evidence of them to the court at the hearing of the motion.
[20] The undisclosed facts would not have affected the result. The Audit was ordered because one was required in the interests of justice, not because the Business Corporations Act granted the Applicants, or Mr. Singh, an automatic right to an audited financial statement.
[21] Mr. Singh states that he signed the Audit Waivers in the belief that it applied to the fiscal year ending September 30, 2011. At that time, the shareholders were not the individual Respondents in the present proceeding. The then shareholder was Phushap Jindal. At the time the Audit Waivers were signed, both Mr. Singh and Mr. Jindal had to sign any cheques before the cheques were issued. Mr. Singh was therefore fully informed of the financial dealings of the Corporate Respondents.
[22] Mr. Singh initially participated in the daily operations of the gas station, but after six months found it difficult to manage those operations as well as his other business interests. He agreed with Mr. Jindal that the Corporate Respondents would lease the gas station to third parties from late in 2008 until 2011. They resumed running the gas station with Mr. Jindal in 2011, and participated in operations until late 2012. In late 2012, Mr. Jindal agreed to assume responsibility for all day-to-day operations of the gas station while Mr. Singh and Jaspal Singh would be passive investors.
[23] Mr. Singh and Jaspal Singh had complete and unfettered access to the financial records for the Corporate Respondents. Mr. Jindal provided MR. Singh with financial statements, which Mr. Singh reviewed and then agreed to waive the requirement for an audit. Mr. Jindal advised Mr. Singh and Mr. Singh believed that it was a requirement of corporate law to sign annual waivers.
[24] The individual Respondents became involved with the Corporate Respondents and the business after the Audit Waivers were signed. Mr. Singh does not recall any further resolutions of shareholders or Audit Waivers being signed after November 1, 2013.
[25] Mr. Singh commenced the present proceeding because he was denied access to the financial records of the Corporate Respondents. This resulted in the Applicants’ initial appearance before Justice Ricchetti on February 12, 2016, resulting in Justice Ricchetti’s later Order for disclosure.
[26] The Business Corporations Act provides:
Copy of documents to shareholders, offering corporations
154 (1) The directors shall place before each annual meeting of shareholders,
(a) in the case of a corporation that is not an offering corporation, financial statements for the period that began on the date the corporation came into existence and ended not more than six months before the annual meeting or, if the corporation has completed a financial year, the period that began immediately after the end of the last completed financial year and ended not more than six months before the annual meeting;
(b) the report of the auditor, if any, to the shareholders; and
(c) any further information respecting the financial position of the corporation and the results of its operations required by the articles, the by-laws or any unanimous shareholder agreement. R.S.O. 1990, c. B.16, s. 154 (1).
Non-offering corporations
(4) Not less than 10 days before each annual meeting of shareholders or before the signing of a resolution under clause 104 (1) (b) in lieu of the annual meeting, a corporation that is not an offering corporation shall send a copy of the documents referred to in this section to all shareholders other than those who have informed the corporation in writing that they do not wish to receive a copy of those documents. 2006, c. 34, Sched. B, s. 30. Business Corporations Act, RSO 1990, c B.16
[27] The Act provides for an exemption from the requirement to provide audited financial statements in two circumstances. Section 148 provides:
Exemption from audit requirements
- In respect of a financial year of a corporation, the corporation is exempt from the requirements of this Part regarding the appointment and duties of an auditor if,
(a) the corporation is not an offering corporation; and
(b) all of the shareholders consent in writing to the exemption in respect of that year. 1998, c. 18, Sched. E, s. 23.
[28] The Moving Parties have tendered resolutions of shareholders of 2138620 Ontario Inc. and of Sandhu-Malwa Holdings Inc., each dated June 21, 2012, which stated:
EXEMPTION FROM AUDIT PROVISIONS
In accordance with Section 148 of the Business Corporations Act (Ontario), all of the shareholders of the Corporation hereby consent to the exemption of the corporation from the requirements of Part XII of the Business Corporations Act (Ontario) regarding the appointment and duties of an auditor in respect of fiscal year ended February 29, 2012 of the corporation, and in respect of each fiscal year thereafter until this consent is revoked.
THE FORGOING (sic) RESOLUTION is hereby consented to by all of the shareholders of the Corporation, as evidenced by their respective signatures hereto in accordance with the provisions of section 104(1) of the Business Corporations Act (Ontario), this 21st day of June 2012.
[29] Some waivers cannot be revoked. For example, section 169 of the Bankruptcy and Insolvency Act imposes an obligation on a Trustee to apply for a discharge of the Bankrupt, but provides that the Bankrupt may waive his right to such an application. The Act provides a mechanism by which the Bankrupt can obtain a date for his discharge hearing on his own and, accordingly, the court has held that the Bankrupt’s waiver of his right to have the Trustee do so is not revocable, as “Trustees must be able to have a degree of certainty on the point of whether they have an obligation to apply for a discharge hearing or not.” Zuker, Re, 2006 ONSC 22942, para. 12
[30] In other cases, the court has held that a waiver of a right, especially one given for no consideration, is revocable at any time, provided there has not been a detrimental reliance on it. Such was the result in Weeks et al. v. Rosocha, (1983), 41 O.R. (2d) 787, where the Court of Appeal held that a purchaser of real estate was entitled to a mortgage free of an optional maturity clause which imposed substantial obligations on him, and that a waiver of that right by the purchaser, if he gave one, could be revoked.
[31] There is no evidence that the Corporate Respondents gave Mr. Singh or the other shareholders any consideration in return for waiving their right to audited financial statements pursuant to section 148 of the Business Corporations Act of Ontario. Nor is there evidence of detrimental reliance. Moreover, the “Exemption from Audit Provisions”, by its own terms, applied “in respect of fiscal year ended February 29, 2012 of the corporation, and in respect of each fiscal year thereafter until this consent is revoked.”
[32] The Ontario Court of Appeal, in Packall Packaging Inc. v. Ciszewski, in 2016, set aside the decision of a motion judge who refused to order the defendant corporation to prepare and deliver audited financial statements. The Court upheld the shareholder’s right to the statements. Brown J.A., for the Court, stated:
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: Pandora Select Partners, LP v. Strategy Real Estate Investments Ltd. (2007), 27 B.L.R. (4th) 299 (Ont. S.C.), at para. 12. A shareholders right to information or material, including audited financial statements, as granted to her under the OBCA is a clear, mandatory right, and it is not necessary for a shareholder to give any reason in exercising her directly held rights under the OBCA: Labatt Brewing Co. v. Trilon Holdings Inc. (1998), 41 O.R. (3d) 384 (Gen. Div.), at p. 387. [Emphasis added]
[33] A shareholder’s right to audited financial statements is an important check on financial mismanagement by a corporation and must be protected. There is no reason for holding that the shareholders’ waiver of their right to annual audited financial statements cannot be revoked at any time, and that a shareholder may demand such a statement. In Labatt Brewing Company Ltd. v. Trilon Holdings Inc., in 1998, Farley J. stated:
A shareholder’s right to information or material (including audited financial statements) as granted to him under the OBCA is a clear and mandatory right prescribed by the legislature. That right is vested personally in the shareholder: see Cooper v. Premier Trust Co., [1945] O.R. 35, at p. 43, [1945] 1 D.L.R. 376 (C.A.). While Labatt gave a reason for requiring the audited financials as being necessary for the consideration of the EdperBrascan proposed offer, it is not necessary for a shareholder to give any reason in exercising his directly held rights under the OBCA: see Klianis v. Poole, [1992] O.J. No. 1172 at p. 5 and Dennis H. Peterson, Shareholder Remedies in Canada (looseleaf ed.) (Markham, Ont.: Butterworths, 1989-98) at para. 12.15. A shareholder need not negotiate with the corporation to obtain what he is entitled to: see Klianis at p. 5; Beck v. Graham, [1991] O.J. NO. 208 at p. 9. [Emphasis added]
[34] In Welcome Investments Ltd. v. Sceptre Investment Counsel Ltd., in 2000, a case in which the defendant forged his principal’s signature on Audit Waivers, Wilkins J. noted, “Apparently Lake forged Joseph J’s signature to Waiver of Audit Forms and from that day forward the cat was loose among the financial pigeons with neither check nor balance.”
[35] Mr. Singh’s liabilities were not material to the decision made. The motion was not one for security for costs, in which the Applicant’s impecuniosity may have been relevant. In Smith v. Eco Grouting Specialists Ltd., in 2001, Lax J., ordered the defendant corporation to produce audited financial statements, notwithstanding that they would cost more than the value of the minority shareholder’s investment. Rejecting the defendant’s argument that the shareholder should be required to pay for the statements, Lax J. stated:
While I am not unsympathetic to this submission, I do not think I can or should accede to it… In my view, it would be anomalous to require a shareholder who is merely exercising a statutory right, to pay for the very thing that the law provides to him. In view of the provisions of [the Ontario Business Corporations Act, R.S.O. 1990, c. B. 16], the company was always required to prepare audited financial statements. This is its legal observation. [Emphasis added]
[36] The B.C. Supreme Court, in Discovery Enterprises v. I.S.E. Research et al, in 2002, applied Lax J.’s decision in Smith. Lowry J. stated:
Justice Lax observed at paragraph 34 [of Smith], it may well be that when the relationship between the shareholders of a closely held company is harmonious, they may be content to forego the delivery of audited financial statements. However, when, as there, the relationship breaks down, for whatever reason, it is understandable that a disaffected shareholder will want an independent assessment of the company’s financial position which it is, by statute, entitled to have. It could be most unfair to a minority shareholder’s proprietary rights if such an assessment were to be denied.
[37] In the present case, the Applicants are entitled to their audit. The undisclosed facts, if known by the court on August 9, 2016, would not have resulted in a different outcome.
CONCLUSION AND ORDER
[38] For the foregoing reasons, it is ordered that:
The motion to set or set aside the August 9, 2016 Order is dismissed.
As the costs that counsel estimated at the beginning of the hearing were substantially different, they shall, if unable to resolve the issue, submit written arguments, not to exceed 4 pages, plus a Costs Outline, by April 30, 2017.