Court File and Parties

Court File No.: CV-16-2267; CV-16-1298; CV-16-1891; CV-16-695; and 4275/14 Date: 2017-05-10 Superior Court of Justice - Ontario

Re: 2265535 Ontario Inc. and 2092225 Ontario Inc., Applicants And: Vijayant Sood, Rakesh Sood, Jyotika Sood, Ashima Sood, Nisha Sood, Nazira Lalju, Jundal Holdings Inc., 2138629 Ontario Inc., Sandhu-Malwa Holdings and 10 Acre Store & Restaurant Inc. and Sulkarain Lalji, Respondents

Before: Ricchetti, J.

Counsel: J. Kulathungam and M. Cesared (student at law), for the Applicants J. Berkow, A. Wygodny, and P. Smiley, for the Respondents

Heard: April 13, 2017 and May 1, 2017

Costs Endorsement

Background

[1] 209225 Ontario Ltd. is a 50% shareholder in Sandhu-Malwa Holdings Inc. ("Property Co.), the owner of the property on which a gas bar and restaurant are located just off Highway 401 near Belleville (the “Property”).

[2] 2265535 Ontario Inc. is a 50% shareholder of 10 Acre Store & Restaurant Inc. ("Restaurant Co."), the restaurant operated on the Property. 2265535 Ontario Inc. is also a 50% owner of 2138629 Ontario Inc. ("Gas Bar Co."), the gas bar operated on the Property.

[3] Property Co., Restaurant Co. and Gas Bar Co. are hereafter referred to as the "Various Businesses".

[4] The remaining respondents are the directors, officers and/or shareholders of either Property Co., Restaurant Co. and/or Gas Bar Co. ("Remaining Respondents"). The Remaining Respondents currently have the day-to-day management of the Various Businesses.

[5] The Applicants commenced this Application in early 2016. The Applicants allege that the Remaining Respondents have committed various acts and omissions amounting to oppression under the Ontario Business Corporations Act ("OBCA"). The allegations include the misappropriation of funds by the Remaining Respondents from the Various Businesses or some of them.

[6] On February 12, 2016 (as repeated by the endorsement of April 4, 2017), this court ordered the Respondents to produce financial records, statements, journals, ledgers and other such records (the "Records") of the Various Businesses. (the "February 12, 2016 Order").

[7] The February 12, 2016 Order was made to maintain the status quo and to ensure that complete financial disclosure was available to the Applicants who were not involved in the day-to-day operations of the Various Businesses pending the determination of the Application.

[8] Schedule A of the February 12, 2016 Order set a timetable for the delivery of materials for the Application to be heard expeditiously. On April 22, 2016, the Application was adjourned to give the Respondents more time to produce all the Records as ordered and to permit the Applicants time to inspect the Records to be produced.

[9] On August 9, 2016, the court heard a motion by the Applicants seeking an audit under s. 149(8) of the OBCA. For the reasons given, Justice Price granted the order (the "Audit Order").

[10] Despite the submission by the Respondents that all the Records had been produced, Justice Price determined that, as of August 9, 2016, the Respondents had failed to produce all the Records. Based on the record before the court and the submissions of the parties, Justice Price made an explicit finding that the Respondents had, as of the date of the motion, failed to produce all the Records as ordered.

[11] There was a considerable delay in taking out the Audit Order.

[12] In November, 2016, the Respondents brought a motion to set aside the Audit Order. Justice Price heard the motion. This motion was dismissed.

[13] On February 24, 2017, the Applicants brought this motion for contempt and for an order permitting them to proceed with a derivative action.

[14] In the proposed derivative action, the Applicants allege that payments under leases between the Property Co. and the two tenants, the Gas Bar Co. and Restaurant Co. (the “Leases”) have not been paid and that the Respondents have taken no steps to collect or enforce such payments. The Respondents submit that no monies are owing under the Leases and all lease payments have been made.

[15] For the reasons set out below, this court finds that the Respondents had not produced all the Records until after the contempt motion had been brought and prior to the hearing of the contempt motion.

The Position of the Parties

[16] The Applicants seek costs on the basis that the contempt motion was necessary and that production of all the Records in accordance with the February 12, 2016 Order only took place because and after the contempt motion had been brought. As a result, the Applicants submit costs should be awarded to them on a substantial indemnity basis.

[17] The Respondents submit that: a) they had fully complied with the February 12, 2016 Order and produced all the Records; b) alternatively, the Respondents submit they acted in good faith and made best efforts to produce all the Records in accordance with the February 12, 2016 Order; c) in the further alternative, the Respondents submit that the contempt motion would not have succeeded because the Applicants had brought the Application in bad faith and sought the Records for the purpose of assisting a competitor who wanted to buy the Various Businesses (but had failed to do so directly because the Respondents did not want to sell).

[18] The Respondents submit that they should be entitled to costs on a substantial indemnity basis.

The Issues

[19] On the return of the motion, the parties advised this court that: a) the motion for leave to commence a derivative action was to be adjourned. It is hoped that the financial status of the Leases in questions would be answered by the audit. This portion of the motion was adjourned; and b) the Applicants advised that complete disclosure of the Records had now been made (as of the commencement of the hearing that morning). As a result, the Applicant submitted that the contempt had been purged and the only remaining issue was costs. The Respondents denied they were or had been in contempt but agreed that the only remaining issue was costs.

[20] The parties agreed that the reasonable quantum of costs would be $46,000 all-inclusive on a partial indemnity basis, $76,000 all-inclusive on a substantial indemnity basis and $86,000 all-inclusive on a full indemnity basis.

[21] As a result, the court needs to decide is whether costs should be awarded, to which parties and on what scale.

The Analysis

Determining whether the Respondents are in contempt is not necessary

[22] The thrust of much of the Respondents’ submissions is that the Respondents were concerned the Applicants had brought this Application for the purpose of forcing the Respondents to sell the Various Businesses and that the Records would be disclosed to the prospective purchaser/competitor, BVD Petroleum (“BVD”). BVD had wanted to by the Various Businesses. The Respondents submit that the Applicants wanted to sell the Various Businesses to BVD but the Applicants refused to do so. Shortly thereafter, this Application was brought.

[23] In these circumstances, the Respondents submit that, even if there was failure to comply with February 12, 2016 Order, this court would have exercised its discretion to not find the Respondents in contempt.

[24] The difficulty with this submission is that, unless the court finds that the Applicants have proven all the essential elements of contempt beyond a reasonable doubt, there is no discretion to apply. Essentially, the Respondents’ counsel's submission would require this court to determine whether the Respondents were in contempt.

[25] This court rejects the Respondents’ submission that it is necessary and this court should determine whether or not a finding of contempt against the Respondents would have been made. In my view, it is neither necessary nor desirable that I do so. The primary purpose of contempt proceedings is to encourage compliance. Compliance has not been completed. Findings of contempt are a last resort and should not be made unless the court is required to do so.

[26] To embark upon such a determination when the parties agreed at the outset that the only remaining issue was costs would be inappropriate.

Had the Respondents produced all the Records prior to the Applicant's contempt motion?

[27] Having reviewed the voluminous materials filed by both parties, I am satisfied that the Respondents had not produced all the Records by the date the Applicants brought the contempt motion. To be clear, this is not a finding of contempt but a factual finding on the balance of probabilities to determine whether it was reasonable and/or necessary for the Applicants to bring this contempt motion as this is a factor to determine on the issue of costs. The purpose of this finding is to assess under Rule 57 (1) of the Rules of Civil Procedure: (f) whether any step in the proceeding was, (i) … unnecessary, or (i) any other matter relevant to the question of costs.

[28] Let me briefly deal with the four areas which took a significant portion of the submissions.

Corporate Records

[29] The Applicants have requested a copy of the Corporate Minute Books of the Various Businesses since April 2016. There appeared to be issues raised which suggested possible corporate changes in the manner the Various Businesses operated. As a result, these documents were significant to the Applicants.

[30] The Respondents responded that they would provide copies of the Corporate Minute Books on February 22, 2017 but sought to impose certain terms of confidentiality. The Respondents were not in a position to impose conditions on the production of these records since the production of the Records was pursuant to a court order.

[31] Nevertheless, it is noteworthy that the February 12, 2016 Order already had a confidentiality provision including a provisions which specifically prohibited the Applicants from disclosing any Records to BVD.

[32] In addition, the February 12, 2016 Order specifically required the Respondents to produce to the Applicants all records they were entitled to under the OBCA which would include the corporate records under s. 145 of the Ontario Business Corporations Act. As such, the Applicants were entitled to view the corporate records in any event.

[33] The delay in producing the Corporate Records is unexplainable and without any basis.

[34] Eventually, the Respondents included copies of the Corporate Records in its responding motion materials.

[35] Clearly, the Respondents failed to produce the Corporate Records as required under the February 12, 2016 Order and had failed to do so prior to the Applicant's contempt motion.

General Ledgers

[36] It is clear that even after August 9, 2016 finding by Justice Price, the Applicants continued to request a complete set of general ledgers for the Various Business. They did so in November 2016, January 2017 and March 21, 2017.

[37] The evidence on this is not entirely clear. There are allegations that, after August 9, 2016, all the general ledgers were deposited into a drop box. This is disputed by the Applicants but they admit that some general ledgers were in the drop box. The Applicants submit that it wasn’t until late February 2017 that all the general ledgers were found in the drop box.

[38] I make no specific finding regarding the production of the general ledgers except to state that it is clear all the general ledgers were not produced within a timely fashion after the February 12, 2016 Order.

Cardlock Agreement

[39] The Cardlock Agreement is the agreement between the petroleum supplier which permits commercial vehicles to obtain fuel at all hours by inserting an authorized card. The current petroleum supplier wants to assign this agreement.

[40] The Respondents have been inconsistent in their position regarding this agreement. On February 22, 2017 the Respondents advised they would provide a copy of the Cardlock Agreement. On March 30, 2017, the Respondents advised they did not have a copy of the Cardlock Agreement. It is difficult to accept that the Respondents, who have day to day management of the Various Businesses, would not have the Cardlock Agreement or have it readily available to them.

[41] At the commencement of the hearing on April 13, 2017, a copy of the Cardlock Agreement was included in the Respondents’ materials for cross-examination. Clearly, the Respondents had a copy of this agreement but did not produce it as soon as it was available to them.

[42] I am satisfied that the Cardlock Agreement was not produced prior to the Applicant's contempt motion.

The Leases

[43] The Applicants sought a copy of the Leases between the Various Businesses. No copy was forthcoming.

[44] Eventually, the Applicants' counsel sent the Respondent's counsel a copy of the Leases but these were copies of leases which had expired. The Respondents' counsel submit this is evidence that the Applicants had copies of what they were asking for – the Leases.

[45] The Respondents have produced no copies of Leases but the Respondents submit that the rent under the Leases (the current leases) are up to date. Again, it is difficult to accept that the Respondents would not have copies of current leases while they are operating the Various Businesses. The Respondents couldn’t possibly know whether all payments under the current leases had been made unless they had copies of the current leases.

[46] This position by the Respondents becomes more confusing when the Respondents’ counsel suggested during submissions that the money is moved between the Various Businesses as needed for operational purposes. This makes having copies of the current leases and the rental payment record important in these circumstances. The Various Businesses are separate entities having separate obligations.

[47] The Applicants specifically requested copies of the Rent Rolls so that they could determine whether the proper rent was paid under the Leases. A document showing the rental payments was only produced late and, quite frankly, appears to raise questions regarding whether the document shows the actual payments made or just accounting entries given the described flow of monies between the Various Businesses described by the Respondent's counsel.

[48] The reason that payment under the Leases is significant to the Applicants is that the underlying beneficial ownership in 2265535 Ont. Inc. and 2092225 Ont. Inc. are not the same.

[49] Clearly, the Respondents did not produce the current leases and Rent Rolls as required under the February 12, 2016 Order until after the Applicant's contempt motion.

Generally

[50] The Respondent’s counsel submits that the documents were “largely” provided before February 24, 2017. Clearly, this implies that all the Records had not been produced. One year had elapsed since the February 12, 2016 Order. There is no reasonable excuse for not complying with a court order for the financial records for this lengthy period of time by the parties operating the Various Businesses.

[51] The Respondents’ counsel also submits that, if there was a breach of the February 12, 2016 Order, it was not deliberate. I reject this submission as it is clear the Applicants’ counsel wrote many letters requesting the disclosure yet, it was not forthcoming. Some requests went unanswered for some time. Even when, in August 2016, the court found that disclosure had not been made, the Respondents did not comply with the February 12, 2016 Order with any reasonable dispatch.

[52] This court is not persuaded that the Respondents made good faith efforts to produce all the Records. There was refusal and delay in the production of all the Records.

[53] In any event, whether or not the Respondents acted in good faith does not diminish the Applicants’ need to bring the contempt motion to finally produce all the Records.

[54] It was only when faced with contempt, that all the Records were produced.

Conclusion

[55] I make no finding of contempt. Such a finding could only be made if the Applicants established the essential elements of contempt beyond a reasonable doubt. However, I am satisfied on a balance of probabilities that the Remaining Respondent failed to comply with the February 12, 2016 Order to produce all the Records within a reasonable time and only complied with the February 12, 2016 Order after the contempt motion had been brought. Without this contempt motion, it is not clear whether all the Records would have been produced.

[56] Given the allegations in the Application; the fact the Remaining Respondents have control of the financial records of the Various Businesses; and the purpose of the February 12, 2016 Order to maintain the status quo by providing continuing accurate financial information to all parties, the lengthy delay was unacceptable making the bringing of the contempt motion reasonable and necessary in the circumstances.

Is the Applicants' motivation for this proceeding or possible disclosure of the Records to BVD relevant to the award of costs?

[57] The production ordered by the February 2, 2016 Order provided the Records were not to be disclosed to BVD because of the Remaining Respondent's confidentiality concerns.

[58] The Respondents submit those concerns were well founded. Those concerns may be well founded given that one of the principles of the Applicants obtained a loan from BVD, the timing which was suspicious, and executed a loan agreement which provided disclosure and control of this proceeding to BVD.

[59] This evidence only came forward when this court ordered production of the loan agreement just a few days before the hearing.

[60] Whether this evidence would have been sufficient to persuade this court to exercise its discretion not to find the Respondents in contempt (if contempt had been found) is not an issue this court needs to decide.

[61] There was a court order. Until that court order is set aside, the court order must be complied with. It is somewhat hollow to say a year after the order was made: I didn’t comply with the order because of these concerns regarding BVD.

[62] To start with, the February 12, 2016 Order specifically provided that the Applicants could not produce the Records to BVD. While there is a great deal of speculation by the Respondents, there is no evidence that the Applicants did breach this provision.

[63] While there may be valid concerns on the part of the Remaining Respondents that the Applicants have brought this application for ulterior and improper motives or that the Records might be disclosed to BVD in breach of the February 12, 2016 Order, that is not a basis for ignoring and not complying with the February 12, 2016 Order.

[64] This court made an order on February 12, 2016. The February 12, 2016 order was clear and required production by the Remaining Respondents. They failed to do so for a long period of time and only did so when faced with a motion for contempt.

[65] This court is not persuaded that the concerns regarding the Application motivation for bringing this proceeding is relevant as to whether it was reasonable and necessary for the Applicants to bring the contempt motion to enforce compliance of the February 12, 2016 Order.

Entitlement to Costs

[66] Having determined that it was reasonable and necessary for the Applicants to bring the contempt motion, there is no reasonable basis to deny the Applicants their costs.

Scale of Costs

[67] The controlling principle for awarding costs is that the sum awarded reflect the fair and reasonable expectations of the unsuccessful litigant: Boucher v. Public Accountants Council for the Province of Ontario (2004), 71 O.R. (3d) 291 (C.A.) at para. 24.

[68] In exceptional cases, costs may be awarded on a substantial indemnity scale. See Foulis v. Robinson (1978), 21 O.R. (2d) 769 (C.A.). Costs on a substantial indemnity scale are reserved for rare and exceptional cases, where the conduct of the party against whom costs is ordered is reprehensible or where there are other special circumstances that justify costs on the higher scale. See St. Elizabeth Home Society v. Hamilton (City), 2010 ONCA 479.

[69] Substantial indemnity costs may be awarded where one party to litigation unnecessarily "runs up" the costs of litigation. Where there has been a breach of an order requiring the opposing party to bring a contempt motion to force compliance with a court order – this may amount to special circumstances.

[70] Costs are often awarded on a substantial indemnity basis in contempt matters. See 307347 Ontario Inc. v. 1243058 Ontario Inc. and Astley v. Verdun, 2013 ONSC 6734.

[71] As stated in Point on the Bow Development Ltd. v. William Kelly & Sons Plumbing Contractors Ltd., 2006 ABQB 809 affirmed 2007 ABCA 209 at paragraph 115 was as follows: (8) if a motion is needed to compel someone to do something that they should have done in any event and they do it before the motion is heard, it is open to the applicant to continue the motion for the purpose of asking for costs thrown away, but this is not normally a matter of contempt;

[72] The logic expressed by Justice Rooke in Point on the Bow Development applies to this case.

[73] In this case, the failure by the Respondents to comply with the February 12, 2016 Order continued for a long period of time and continued despite a prior judicial determination that the Respondents had failed to produce all the Records. The contempt motion should have been unnecessary.

[74] Given the allegations of misappropriation; The lengthy delay of complete financial disclosure by the Respondents who have control of the Various Businesses and the financial records; ignoring the August 9, 2016 judicial determination that all the Records had not been produced; and forcing the Applicants to bring a contempt motion to force the Respondents to comply with the February 12, 2016 Order unnecessarily added to the costs in this litigation.

I am satisfied that substantial indemnity costs should be awarded in these circumstances against the Remaining Respondents in the amount of $76,000 all inclusive, payable forthwith. To be clear, these are not costs awarded against the Various Businesses nor should the Various Businesses have to pay these costs.

Ricchetti, J. Date: May 10, 2017

COURT FILE NO.: CV-16-2267; CV-16-1298; CV-16-1891; CV-16-695; and 4275/14 DATE: 20170510 ONTARIO SUPERIOR COURT OF JUSTICE BETWEEN: 2265535 Ontario Inc. and 2092225 Ontario Inc. Applicants AND: Vijayant Sood, Rakesh Sood, Jyotika Sood, Ashima Sood, Nisha Sood, Nazira Lalju, Jundal Holdings Inc., 2138629 Ontario Inc., Sandhu-Malwa Holdings and 10 Acre Store & Restaurant Inc. and Sulkarain Lalji Respondents COSTS ENDORSEMENT Ricchetti J. Released: May 10, 2017