Ontario Securities Commission v. Kotton, 2017 ONSC 4947
CITATION: Ontario Securities Commission v. Kotton, 2017 ONSC 4947
COURT FILE NO.: 15-11178-00CL
DATE: 20170908
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: Ontario Securities Commission, Applicant
AND:
Lance Kotton, Titan Equity Group Ltd., Executive Leasing Capital Corp., Executive Leasing Inc., Titan 230 Major Mack Inc., Titan 10703 Bathurst Inc., Shan-Kael Group Inc., Tread Finance Corp., 230 Major Mack Holdings Inc., Titan 10703 Bathurst Holdings Inc., Titan Real Estate Acquisition & Development Corp., Titan Real Estate Equities Inc., 2216296 Ontario Inc. and 2302604 Ontario Inc., Respondents
BEFORE: Mr. Justice H.J. Wilton-Siegel
COUNSEL: H. Chaiton and M. Kril-Mascarin, for the Receiver P. Guy, J. Wilkes and I. Graham, for the Judgment Creditors listed below D. Magisano, for Xiao Ping Zhu
HEARD: May 8, 2017
ENDORSEMENT
[1] The moving parties on this motion are Ana Paula Pintado Mendes, Derry Jean Khan, Dhanraj Persad and Ashfaque Khan (collectively, the “Judgment Creditors”). Together, they seek an order that they have valid and enforceable independent unsecured debt claims against each of Titan 230 Major Mack Inc. (“230”) and 230 Major Mack Holdings Inc. (“MM”) that shall each rank pari passu for distribution purposes with the other debt claims against these companies that have been admitted by the court-appointed receiver of 230 and MM., Grant Thornton Limited (the “Receiver”). The motion is opposed by the Receiver and by Harry Qiao on behalf of Xiao Ping Zhu (“Ms. Zhu”), a holder of Class A Preferred Shares of MM, to the extent that Zhu’s investment in MM is not treated in the same manner as the interests of the Judgment Creditors.
[2] In addition, the Receiver seeks an order, among other things, approving a distribution of the proceeds of sale of the “Kotton Cachet” property previously owned by 230 and the proceeds of sale of the “Oxford on Bathurst” property previously owned by Titan 10703 Bathurst Inc. (“Bathurst Inc.”), in each case on the basis of a modified substantive consolidation by property described further below. The Receiver also seeks approval of its seventh and eighth report, as well as its tenth report dated January 3, 2017 as supplemented by supplements dated February 1, 2017 and March 20, 2017 (collectively the “Tenth Report”), and certain other administrative matters. The relief sought by the Receiver is not opposed except in respect of the proposed distribution of the proceeds of sale of the “Kotton Cachet” property, which requires a determination of the motion of the Judgment Creditors.
Factual Background
[3] Each of 230 and MM are corporations incorporated under the laws of Ontario. MM owns all of the outstanding shares of 230, which owned a property being developed by Titan Equity Group Ltd. (“TEG”) referred to as the “Kotton Cachet” property.
[4] Each of Bathurst Inc. and Titan 10703 Bathurst Holdings Inc. (“Bathurst Holdings”) are also corporations incorporated under the laws of Ontario. Bathurst Holdings owns all of the outstanding shares of Bathurst Inc., which owned a property also being developed by TEG referred to as the “Oxford on Bathurst” property.
[5] Executive Leasing Capital Corp. (“Executive”) and Executive Leasing Inc. (“Leasing”) are further corporations incorporated under the laws of Ontario. Each of 230, MM, Executive, Leasing, Bathurst Inc., Bathurst Holdings and TEG are controlled directly or indirectly by Lance Kotton (“Kotton”) and are members of a larger group of companies that are similarly controlled and are collectively referred to herein as the “Titan group of companies”.
[6] The Judgment Creditors purchased Class A Preferred Shares of MM in 2012 and early 2013. The Class A Preferred Shares were offered to the public as an equity investment in the “Kotton Cachet” property being developed by 230. The investment was expressed to have a two-year term and an estimated return of 14% per year. The Judgment Creditors say that they understood that development of the “Kotton Cachet” property would be completed within this two-year term thereby permitting repayment of their investment. At the same time, Tread Finance Corp. (“Tread Finance”), another member of the Titan group of companies, also offered an investment in the “Kotton Cachet” property in the form of notes executed jointly and severally by Tread, 230 and MM (the “Tread Finance Notes”).
[7] The evidence from the Inspector’s Report (defined below) and the Receiver is that the proceeds of sale of the Class A Preferred Shares and the Tread Finance Notes were placed in a general account of Executive. The monies in that account were co-mingled with the proceeds of sale of other investment products of the Titan group of companies allegedly to be used to develop two other properties, including “Oxford on Bathurst”.
[8] The Class A Preferred Shares were retractable in 2014. In June 2014, the holders of Class A Preferred Shares, including the Judgment Creditors, received a notice from TEG advising that their investment was maturing on August 1, 2014. The shareholders were offered four options including: (1) receiving a cheque for their investment and “accrued interest”; (2) reinvesting in a pooled mortgage investment product offered by the Titan group of companies; (3) reinvesting their investment in notes of Titan Real Estate Acquisition & Development Corp. (“Tread”); and (4) reinvesting in a note of Tread having the benefit of a collateral mortgage.
[9] The Judgment Creditors chose option (1) and forwarded their share certificates and an executed election form to TEG in late June or early July 2014. MM was unable to redeem their shares as it was unable to satisfy the solvency test under section 32(2) of the Business Corporations Act, R.S.O. 1990, c. B.16 (the “OBCA”), set out below, in respect of a redemption of the shares. The Judgment Creditors instead received cheques of Executive for the return of their investment. However, the cheques did not clear.
[10] The Judgment Creditors then commenced an application to enforce the Minutes of Settlement which was issued on February 9, 2015 (the “Application”). The respondents to the Application were MM, 230, Kotton, TEG, Leasing and Executive (collectively, the “Respondents”). In the Application, the Judgment Creditors alleged oppressive activity on the part of Kotton and Executive in respect of the business and affairs of MM and sought financial disclosure and an order requiring MM to redeem their Class A Preferred Shares.
[11] In response, Kotton filed an affidavit sworn April 1, 2015. In that affidavit, Kotton attached audited financial statements of MM and 230 for the period ending December 31, 2013. These financial statements indicate that each of 230 and MM was insolvent at that date in that their respective liabilities exceeded their respective assets. Kotton also stated in this affidavit that the financial statements of 230 and MM for the period ending December 31, 2014, which were in preparation but were overdue, would not differ materially in terms of demonstrating the inability of MM and 230 to meet the solvency tests under the OBCA in respect of any redemption of their shares.
[12] The Respondents sought an adjournment to complete the preparation of the overdue financial statements. The Judgment Creditors consented to such request but brought a motion seeking the appointment of an inspector to conduct an investigation of the affairs of MM, Executive, TEG and “such other TEG or Executive affiliates as this Honourable Court deems appropriate”.
[13] Pursuant to an order dated May 5, 2015 of Newbould J., the Judgment Creditors’ motion was granted and an inspector was appointed (the “Inspector”). The Inspector rendered an interim report dated August 27, 2015 (the “Inspector’s Report”) stating that, among other things, based on the accounting records reviewed by the Inspector, 230 and MM had deficits at December 31, 2014 of $1.7 million and $1.2 million, respectively.
[14] The parties agreed to settle the Application pursuant to minutes of settlement dated June 2015 (the “Minutes of Settlement”) under which Executive agreed to purchase the shares of the Judgment Creditors for $600,000. Executive also agreed to pay accrued interest in the amount of $123,123.30 to the date of the Minutes of Settlement, which was calculated by reference to the rate of dividends promised in respect of the Class A Preferred Shares but never declared for reasons of the solvency test. Additionally, Executive agreed to pay the outstanding legal costs of the Judgment Creditors, which were agreed in the amount of $83,088.43. Pursuant to the Minutes of Settlement, MM and 230, among others, agreed to be jointly and severally liable for such payments.
[15] Neither Executive nor any of the other parties liable to make the payments contemplated by the Minutes of Settlement made such payments.
[16] The Judgment Creditors then brought a motion to enforce the Minutes of Settlement. This motion was resolved by an order on consent of Penny J. dated September 15, 2015 (the “Order”). The relevant provisions of the Order are as follows:
THIS COURT ORDERS that the Respondents shall pay to the Applicants the sum of $600,000.00 on account of the purchase price of the Applicants’ combined 600 Class A Preferred Shares in 230 Major Mack Holdings Inc. (the “Shares).
THIS COURT ORDERS that the Respondents shall pay to the Applicants the sum of $141,764.60 on account of accrued interest and dividends to and including September 8, 2015.
THIS COURT ORDERS that the Respondents shall pay to the Applicants the sum of $101,003.89 for costs to and including September 8, 2015.
THIS COURT ORDERS that upon payment of the amounts provided for herein, The Applicants shall transfer the Shares to the Respondent Executive Leasing Capital Corp. or to whomever it may further direct.
[17] The Judgment contemplated by the Order remains unsatisfied. On October 14, 2015, the Judgment Creditors registered a writ of seizure and sale against MM and 230. On the following day, the writ was filed with the Enforcement Office in the jurisdiction in which the “Kotton Cachet” property was located, being the Regional Municipality of York.
[18] On November 16, 2015 the Receiver was appointed the receiver of the Titan group of companies, including MM, 230 and Executive.
The Receiver’s Treatment of the Claims of the Judgment Creditors and Other Creditors of 230
[19] The Judgment Creditors filed proofs of claim as unsecured creditors in the amount of their total claims against each of MM and 230. The quantum of their claims, as accepted by the Receiver, is not in dispute.
[20] The Receiver has reclassified the claims of the Judgment Creditors against MM as equity claims on the basis that these claims originated on the purchase of the Class A Preferred Shares of MM, with the exception of the award for costs of $101,003.89 in the Order (the “Cost Component”) which the Receiver has accepted as an unsecured claim against MM. The Receiver disallowed the claims of the Judgment Creditors against 230 in their entirety on the basis that that they were also equity claims.
[21] The Judgment Creditors filed notices of dispute asserting, among other things, that: (1) as a result of the Order, their claims should rank ahead of all other claims other than secured claims; and (2) to the extent their claims are not treated as priority claims, the Cost Component and their expenses of enforcement should have a preferred status over the claims of all general unsecured creditors and the remaining portion of their claims should be treated as an unsecured claim, rather than an equity claim.
[22] As noted above, in June 2014, the investors in the Class A Preferred Shares of MM received a notice from TEG offering four options in respect of their investment. The evidence appears to indicate that at least one investor converted her Class A Preferred Shares into an unsecured loan made jointly to Executive and 230. The loan was evidenced by a note executed jointly by Executive and 230 in favour of the Judgment Creditors (the “Executive Note”). It is unclear whether this was one of the options offered to investors by TEG in its notice or was a unique situation. The Receiver has accepted this claim as an unsecured debt claim against 230.
[23] In addition, the evidence appears to indicate that two investors converted their Class A Preferred Shares into secured debt obligations in the form of a pooled mortgage investment product of the Titan group of companies which was secured by a second mortgage on the “Kotton Cachet” property (the “Secured Claims”). This investment product may have been the investment referred to in option (2) in the TEG notice but this is not clear. The Receiver accepted the Secured Claims and paid them out upon the sale of the “Kotton Cachet” property.
[24] In addition the Receiver has accepted the Tread Finance Notes as unsecured claims against 230.
Applicable Law
[25] For the purposes of the discussion of certain issues in this proceeding, the following provisions of the OBCA are relevant:
28 (1) Except as provided in subsection (2) and sections 29 to 32, a corporation,
(a) shall not hold shares in itself or in its holding body corporate; and
(b) shall not permit any of its subsidiary bodies corporate to hold shares of the corporation. …
32 (2) A corporation shall not make any payment to purchase or redeem any redeemable shares issued by it if there are reasonable grounds for believing that,
(a) the corporation is or, after the payment, would be unable to pay its liabilities as they become due; or
(b) after the payment, the realizable value of the corporation’s assets would be less than the aggregate of,
(i) its liabilities, and
(ii) the amount that would be required to pay the holders of shares that have a right to be paid, on a redemption or in a liquidation, rateably with or before the holders of the shares to be purchased or redeemed, to the extent that the amount has not been included in its liabilities.
38 (3) The directors shall not declare and the corporation shall not pay a dividend if there are reasonable grounds for believing that,
(a) the corporation is or, after the payment, would be unable to pay its liabilities as they become due; or
(b) the realizable value of the corporation’s assets would thereby be less than the aggregate of,
(i) its liabilities, and
(ii) its stated capital of all classes.
Preliminary Jurisdictional Matter
[26] The Order and the Minutes of Settlement both constitute agreements of the parties without any judicial determination of the claims of the Judgment Creditors. The Receiver submits that it is entitled to go behind both the Order and the Minutes of Settlement, to the extent relevant, to determine whether the claims of the Judgment Creditors against 230 and MM are valid claims. The Receiver relies on the principle in Re Van Laun [1907] 2 K.B. 23 (C.A.) per Cozens-Hardy M.R. at pp. 29-30 as follows:
It is simply this – that the trustee says, “You are a person who comes in to prove a debt. It is my duty to see that this bankrupt’s assets are distributed amongst those who are justly, legally and properly creditors of the estate. In order to enable me to do my duty, I ask you to furnish me with such information as will enable me to do that which I am told to so by r.22 in the Second Schedule to the Act, to examine every proof and the grounds of the debt.” That is really all that the trustee has done here, and when we are asked to hold and asked to say that there is no authority hitherto for going behind a covenant of this kind, I cannot attach important to that argument, because it is conceded – and indeed clear by a long series of authorities – that, if a judgment had been obtained upon the covenant, it is competent and it is the duty of the Court of Bankruptcy to go behind the judgment, to open the judgment and to say, “That is the judgment, but the creditor can only prove for the amount which is justly and truly due upon it.” …
All that we now decide is, that the trustee is entitled to say, “I will not admit your proof until you have given me reasonable means of satisfying myself whether the debt in respect of which you are providing is to any and what extent justifiable and reasonable.”
I have not put my propositions in such terse and good language as Bigham J. did, but in effect they are identical with those which he has laid down in the passage which I will now read: “The trustee’s right and duty when examining a proof from the purpose of admitting or rejecting it is to require some satisfactory evidence that the debt on which the proof is founded is a real debt. No judgment recovered against the bankrupt, no covenant given by or account stated with him, can deprive the trustee of this right. He is entitled to go behind such forms to get at the truth, and the estoppel to which the bankrupt may have subjected himself will not prevail against him. …
[27] The Judgment Creditors did not challenge the jurisdiction of the Court to investigate the nature of their claims against 230 and MM in the present circumstances based on such principle.
Analysis and Conclusions
[28] I propose to address the issues in this proceeding by addressing first the characterization of the claims of the Judgment Creditors against 230, then the characterization of the claims of the Judgment Creditors against MM dealing principally with the claim for the Cost Component, and finally the Receiver’s motion for substantive consolidation given the Court’s previous findings.
The Characterization of the Claims of the Judgment Creditors Against 230
[29] The principal issue in this proceeding is the characterization of the claims of the Judgment Creditors against 230.
Position of the Judgment Creditors
[30] The Judgment Creditors say that the substance of their claims against 230 is debt not equity. They argue in their Factum that their claims against 230 “are rooted in an independent debt obligation of Executive to purchase their Class A Preferred Shares in [MM], which obligation was assumed on a joint and several basis by 230.” The independent obligation upon which they rely is the contractual obligation of 230 set out in the Minutes of Settlement.
[31] In their factum, the Judgement Creditors argue that the agreement of Executive in the Minutes of Settlement to purchase their shares constitutes a debt obligation that is analogous to Executive providing them with a promissory note. As such, it did not create any equity interest of the Judgment Creditors vis-s-vis Executive. As discussed below, I agree with this analysis regarding the obligation of Executive under the Minutes of Settlement.
[32] Furthermore, the Judgment Creditors argue that, similarly, 230’s agreement to be jointly and severally liable for Executive’s obligation under the Minutes of Settlement is also analogous to 230 providing them with a promissory note in regards to its payment obligation and, as such, did not create an equity interest of the Judgement Creditors in 230.
Preliminary Observations
[33] I agree with the Judgment Creditors that the question for the Court is “the substance” or “true nature” of the claim: see Bul River Mineral Corp., Re, 2014 BCSC 1732 at paras. 68-69.
[34] I also agree with the Judgment Creditors that an agreement to purchase their Class A Preferred Shares, whether made with Executive or 230, would give rise to a separate and independent debt obligation of Executive or 230, as applicable, provided the requirements for a binding and enforceable agreement are satisfied, including the provision of valid consideration by the Judgment Creditors. In this case, such an agreement appears to have been made initially between Executive and the Judgment Creditors when Executive provided the Judgment Creditors with cheques in the amount of their claims for the return of their investments and “interest”.
[35] Accordingly, I do not agree with the initial position of the Receiver on this motion, as expressed in its Factum, that the fact that the claims of the Judgment Creditors with respect to the purchase of their Class A Preferred Shares arose as equity claims against MM is determinative. This is not a case in which, as in Bul River, a creditor is seeking to elevate its claim from equity to debt in respect of the same party. There is, therefore, no reason why the claims of the Judgment Creditors would preserve their nature as equity claims following a bona fide transaction of purchase and sale with a third party.
[36] However, the fact that the Judgment Creditors’ claims against 230 arose in a separate transaction, being the execution of the Minutes of Settlement, does not fully determine the issue of either the nature or the enforceability of their claims. There are two further issues to be addressed in turn below.
Are the Minutes of Settlement or the Order Unenforceable for Lack of Consideration to 230?
[37] The claims of the Judgment Creditors are found, in the first instance, in the joint and several obligations of 230 in the Order. However, in view of the fact that the Order was granted on consent pursuant to a motion to enforce the Minutes of Settlement, rather than to give effect to a judicial determination, the Court is entitled to look behind the Order to the Minutes of Settlement to determine the validity of the underlying agreement in accordance with the principle in Van Laun. The Receiver submits that the Judgment Creditors have failed to provide evidence that they provided any consideration to 230 in return for its covenant under the Minutes of Settlement.
[38] The Receiver bases its submission on its assessment that the Application did not disclose any prima facie cause of action against 230. I have considerable sympathy for this submission. As the Receiver notes, the substance of the Application was the redemption of the Class A Preferred Shares of the Judgment Creditors. While the Judgment Creditors also sought, among other things, a declaration that the Respondents had conducted the business and affairs of MM in an oppressive manner, the Application contained very limited pleadings in respect of 230. Further, the Inspector’s Report contained little, apart from evidence of co-mingling of the accounts of the Titan group of companies, the payment of management fees to Executive, and the capitalisation of certain questionable expenses, which would ground a claim of oppression against 230.
[39] However, it is important to review the circumstances leading to the execution of the Minutes of Settlement. Initially, Executive agreed to purchase the Class A Preferred Shares of the Judgment Creditors and delivered cheques to them for the purchase price. 230 was not involved in this transaction. If, however, 230 had provided a joint and several covenant with Executive at that time as a condition of the agreement of the Judgment Creditors to enter into the transaction with Executive, 230 would have been considered to have received consideration in the form of such agreement on the part of the Judgment Creditors.
[40] I consider that essentially the same circumstances pertain to the execution of the Minutes of Settlement, even though it is in the context of the settlement of litigation. The fact that the Application did not disclose a cause of action against 230 is not relevant for this purpose. The covenant of 230 was a condition of the agreement of the Judgment Creditors to the Minutes of Settlement. Accordingly, 230 received consideration in the form of the agreement of the Judgment Creditors to enter into the Minutes with Executive and the other parties thereto.
[41] In addition, by entering into the Minutes of Settlement, 230 received consideration in the form of the avoidance of the risk of incurring non-recoverable costs in the action, even if ultimately successful in its defence.
[42] Given these circumstances, the covenant of 230 in the Order is not unenforceable for lack of consideration. In similar circumstances of insolvency, of course, such a covenant might be challenged on other grounds, particularly pursuant to fraudulent preference or similar provincial legislation. However, such issues are not before the Court on this motion and no determination is being made as to whether the facts would have supported any such claim.
The Application of the OBCA
[43] Given the court’s conclusion above that the obligations of 230 in the Order are not unenforceable in their entirety for want of consideration, it necessarily follows that such obligations are enforceable by the Judgment Creditors except to the extent that they contravene a provision of the OBCA. I will address each obligation in turn.
[44] In this regard, three provisions are relevant. First, section 28(1) prohibited 230 from holding shares in MM. In addition, section 32(2) prohibited MM from redeeming its shares pursuant to the retraction privilege granted to the holders of its Class A Preferred Shares. Lastly, section 38(3) prohibited MM from declaring any dividends on the Class A Preferred Shares, in each case as a result of MM’s inability to satisfy the solvency tests in those provisions.
[45] At the hearing of this motion, the Court raised the question of whether paragraph 1 of the Order was unenforceable on the basis that it entailed a contravention of section 28(1) of the OBCA. The parties were permitted to make additional submissions on this issue. The Receiver confirmed its position that the Minutes of Settlement were unenforceable for want of consideration. The Judgment Creditors delivered further written submissions.
[46] The Judgment Creditors agree that any agreement that required 230 to acquire shares of MM would violate section 28(1) of the OBCA. They submit however that, on a proper construction of the Settlement Agreement, the parties agreed that Executive would acquire the Class A Preferred Shares of the Judgment Creditors and that the other Respondents, including 230, would be jointly and severally liable for the payment obligations set out therein but would not acquire such Class A Preferred Shares. On the basis of this interpretation, they submit that neither the Settlement Agreement nor the Order contemplates an acquisition of shares of MM by 230.
[47] Accordingly, this issue turns on the proper interpretation of the Order. As the Order was granted on consent, this is essentially a matter of contractual interpretation: see Sweda Farms Ltd. v. Ontario Egg Producers, 2011 ONSC 3650 at para. 34, aff’d 2012 ONCA 337, leave to appeal dismissed, 2012 CarswellOnt 13939, NR 393. I will address, in turn, the Judgment Creditors’ claims in respect of the purchase of the Class A Preferred Shares, the dividends and accrued interest thereon, and the Cost Component, as reflected in paragraphs 1, 2 and 3 of the Order, respectively.
The Purchase of the Class A Preferred Shares of the Judgment Creditors
[48] The Judgment Creditors submit that the intention of the parties was that Executive would acquire the shares and that the other Respondents, including 230, would be liable to pay the amounts comprising the purchase price thereof. They say that neither the Settlement Agreement nor paragraph 5 of the Order requires 230 to hold shares in MM.
[49] In my view, the language of the Order governs this issue as the agreement between the parties. On its face, the essence of that agreement is clear. The Judgment Creditors were obligated to sell their Class A Preferred Shares, and the other Respondents, including 230, were bound to purchase their shares at the purchase price specified in paragraph 1 of the Order. Accordingly, each of the Respondents agreed to purchase the Class A Preferred Shares of the Judgment Creditors to the extent that another Respondent did not do so. In reaching this conclusion, I reject the position of the Judgment Creditors that the Order reflects an intention that Executive would be the purchaser for the following six reasons.
[50] First, the only evidence on the face of the Order to which the Judgment Creditors can point in support of their interpretation is paragraph 5. However, that provision is far from probative of the alleged intention of the parties. It is simply a provision dealing with registration of the legal title to the Class A Preferred Shares upon payment of the amount contemplated by the Order. It leaves entirely open the issue of the beneficial ownership of the shares. To be clear, I am also of the opinion that section 28(1) of the OBCA applies to the holding of the beneficial interest, as well as the legal interest, in shares of a parent corporation.
[51] There is a good reason why the parties might have provided that the Class A Preferred Shares of the Judgment Creditors would be registered in whole or in part in the name of Executive which have nothing to do with Executive being the intended purchaser of all of the shares. If payment of the purchase price had been split between Executive and one or more of the other Respondents, including 230, a single legal registration, even if the beneficial interest was held by two or more parties, would have been desirable for ease of transfer in the future.
[52] The second reason for the Court’s conclusion is that there is no evidence that the identity of the purchaser of the shares was relevant to the Judgment Creditors at the time of the Order. Nor is there any business reason why the Judgment Creditors would have wanted Executive to be the purchaser of their shares rather than any of the other parties to the Order, other than MM. Their concern was limited to having as many counterparties as possible to maximize the likelihood of payment.
[53] The third reason for the Court’s conclusion pertains to the absence of any language addressing the legal effect of any payment by a Respondent, including 230, pursuant to the Order. If, as the Judgment Creditors suggest, the parties had intended that Executive would be the only purchaser, I think that they would have expressed this intention in the Order by, among other things, making it clear that any payment by a Respondent other than Executive would give rise to a loan in favour of Executive rather than a direct purchase by such Respondent. There is, however, no language to that effect in the Order, only a simple joint and several obligation of all of the Respondents.
[54] Fourth, the Judgment Creditors submit that, in interpreting the Order, the Court should have regard to the factual matrix in which it was executed. They suggest that such factual matrix makes it clear that Executive was intended to be the purchaser. As stated above, in my opinion, the objective intention of the parties is clear from the plain meaning of the language of the Order, based on the ordinary and grammatical meaning of the words thereof. On this basis, it is not necessary to have recourse to the factual background to the Order.
[55] In any event, I do not think that the factual matrix supports the position of the Judgment Creditors for the reason set out above that the Judgment Creditors were concerned only with having a creditworthy obligor. Additionally, as there are differences between the language of the Minutes of Settlement and the language of the Order, the language of the Order must govern as it reflects the more recent agreement between the parties.
[56] Fifth, the Judgment Creditors submit that their claims should be treated in the same manner as the claims of other former holders of Class A Preferred Shares who elected to receive the Executive Note or the Secured Claims as described above. The Receiver has accepted these claims as debt claims of 230. The Judgment Creditors say that the origin of these claims is the same as the origin of their debt claims, namely the options offered to holders of Class A Preferred Shares upon the failure of MM to retract their shares.
[57] The Court does not have a complete record regarding these claims including, in particular, any relevant evidence from the holders thereof. The Court is therefore not in a position to make a definitive determination regarding the origin and nature of any of the Executive Note, the Secured Claims or the Tread Finance Notes and, accordingly, also makes no finding regarding the Receiver’s treatment of these claims including the proper characterization of these claims for purposes of the proposed distribution. It is also not clear to the Court whether the Receiver may re-characterize these claims as equity claims or as claims of Executive alone based on the principles applied in this Endorsement.
[58] For present purposes, I am therefore of the opinion that the argument of the Judgment Creditors for debt treatment of their claims based on the Receiver’s treatment of these other claims must fail. In the absence of a proper determination of the treatment of these claims on the basis of a complete record, the Court cannot find that the Receiver’s treatment of these claims is a basis for displacing the findings above that the claims of the Judgment Creditors in respect of the purchase of their Class A Preferred Shares are not enforceable against 230.
[59] Lastly, I note that the Judgment Creditors submit that, in the absence of any express wording requiring the Judgment Creditors to transfer their shares to 230, and in the absence of any evidence that Executive intended to direct the Judgment Creditors to transfer their shares to 230, the Order should not be interpreted in a manner that results in a contravention of section 28(1) of the OBCA. I think this argument misses the point. The issue for the Court is the intention of the parties. I see no basis for assuming that the parties did not intend to contravene section 28(1) in the absence of any evidence that they turned their minds to the application of that provision in the present circumstances.
[60] Based on the foregoing analysis, I find that paragraph 1 of the Order is unenforceable by the Judgment Creditors against 230. The Court’s conclusion does not, however, render paragraph 1 of the Order unenforceable against the other parties bound thereby, subject to the discussion below pertaining to MM.
The Amount on Account of “Accrued Interest and Dividends”
[61] The obligation in paragraph 2 is expressed to be “on account of accrued interest and dividends”. There is no dispute that this claim of the Judgment Creditors constitutes principally their claim for the return on their investment that the Judgment Creditors were promised. As discussed in the next section, it is also not disputed that such dividends were neither declared nor paid by MM because such actions would have contravened section 38(3) of the OBCA. As the Class A Preferred Shares, as equity, did not accrue interest, MM had no legal obligation to make this payment prior to execution of the Minutes of Settlement and the Order.
[62] Based on the language of the Order and this factual context, I have proceeded on the basis that the payment referred to in paragraph 2 was intended to be on account of the dividends that were accrued on the Class A Preferred Shares together with interest thereon from some date forward. This conclusion is reinforced by the explicit reference to dividends in paragraph 1.
[63] Accordingly, the analysis of this claim must start with the fact that, insofar as paragraph 2 constitutes an obligation of MM to pay dividends in the amount provided therein, such obligation contravenes section 38(3) and is therefore unenforceable.
[64] In interpreting the Order in respect of the obligation of 230, I think that this character of the payment must be respected to the extent possible. The interpretation of paragraph 2, insofar as it pertains to 230, therefore presents a serious issue of interpretation.
[65] Read literally, paragraph 2 could therefore be interpreted to require 230 to make a dividend payment in the amount set out therein. That cannot have been the intention, however, for the reason that the Judgment Creditors are not shareholders of 230. Moreover, if it were otherwise possible for 230 to do so, any such dividend would also contravene section 38(3) given its insolvent status.
[66] Alternatively, paragraph 2 could be read to require that 230 advance to MM an amount necessary to permit MM to make the contemplated dividend payment. However, I conclude that the parties did not have that intention for the same reason as I concluded that the parties did not intend a similar arrangement in respect of the obligation in paragraph 1.
[67] Accordingly, I think that the most probable interpretation is that the parties intended 230 to make this payment as part of the purchase price for the Class A Preferred Shares of the Judgment Creditors. That is, paragraph 2 of the Order contemplates the payment of an amount on account of the dividends which accrued in respect of their Class A Preferred Shares pursuant to the articles of MM but were never declared. Such a payment would have preserved the distinction between the amounts provided for in paragraphs 1 and 2 notwithstanding a single payment.
[68] However, as such accrued dividends are an incident of the Class A Shares of the Judgment Creditors, such a payment, being part of the purchase price to be paid by 230 to acquire and hold the Class A Preferred Shares, would also contravene section 28(1) of the OBCA for the reasons set out above.
[69] Based on the foregoing, I find that the obligation of 230 in paragraph 2 of the Order is also unenforceable by the Judgment Creditors against 230.
The Cost Component
[70] The obligation in paragraph 3 of the Order constitutes, in respect of 230, an obligation to pay the Judgment Creditors’ costs of the Application. As this provision does not contravene any provision of the OBCA in respect of 230, and as no other issue of enforceability has been raised in respect of this claim, I conclude that it is a valid debt claim of the Judgment Creditors against 230, subject to the outcome of a further issue pertaining to the Cost Component raised by Ms. Zhu that is addressed in the next section.
The Characterization of the Claims of the Judgment Creditors Against MM
[71] For the purposes of this motion, the Judgment Creditors have accepted that their claims for the return of their principal and the alleged return on their investment should be treated as equity claims. However, they assert that the Cost Component should be treated as a debt claim against MM. Ms. Zhu has challenged the treatment of such claims, apart from the claim for the repurchase of the Class A Preferred Shares. I will address each claim in turn.
The Amount on Account of “Accrued Interest and Dividends”
[72] The Judgment Creditors have proceeded on the basis that their claims for the amounts in both paragraphs 1 and 2 of the Order are valid equity claims. Ms Zhu submits that the claim for “accrued interest and dividends should be disallowed”. I agree.
[73] As discussed in the previous section, and for the reasons set out therein, the Judgment Creditors do not have valid claims for this amount against MM. The accrued dividends upon which such claims are based have never been declared and, therefore, have not become payable. Moreover, as discussed, payment of this amount by MM would contravene section 38(3) of the OBCA. This conclusion is reinforced by the fact that the Judgment Creditors remain the holders of their Class A Preferred Shares as a result of the failure of the parties to the Order to make the payments contemplated therein.
[74] Accordingly, the obligation of MM in paragraph 2 of the Order to pay this amount jointly and severally with any third party is not enforceable by the Judgment Creditors, even if such third party could validly agree to make such payment on its own.
The Cost Component
[75] The Trustee has accepted the claim of the Judgment Creditors for the Cost Component as a debt claim against MM. Ms. Zhu raises two issues pertaining to the Cost Component which I will address in turn.
[76] First, the Judgment Creditors say that the Cost Component was not a payment to purchase or redeem their Class A Preferred Shares and, accordingly, is not subject to the application of sections 32(2) and 36(1) of the OBCA. Ms. Zhu submits that legal costs incurred in pursuing an unenforceable claim against 230 should be treated as part of the equity claim of the Judgment Creditors against MM.
[77] I do not think that the submission of Ms. Zhu is correct as a matter of law in the context of a receivership. Insofar as the Court is addressing the claims of the Judgment Creditors against MM in such context, it would appear that the only relevant statutory provisions are the provisions of the OBCA cited in this Endorsement. These provisions do not extend to legal costs incurred to enforce a right of retraction. Accordingly, I conclude that, insofar as the Cost Component comprises the legal costs of the Judgment Creditors incurred in attempting to obtain the benefit of their right of retraction against MM, such costs are valid debt claims against MM.
[78] Ms. Zhu’s second submission is that there has been no judicial determination, and no analysis by the Receiver, regarding the reasonableness of the Cost Component asserted by the Judgment Creditors, including but not limited to the amount and the appropriate party to bear such costs. She argues that, in accordance with the principle in Van Laun, the Receiver should address these issues before such claim is accepted.
[79] As mentioned, the amount of the Cost Component was, however, the result of a negotiated agreement between the Judgment Creditors and Kotton in which Kotton was looking to stave off the collapse of the Titan group of companies, the principal corporations of which were apparently insolvent. There is, therefore, no necessary legitimacy to the amount agreed upon by the parties in the Minutes of Settlement and the Order. While the record suggests that the costs of the Judgment Creditors were incurred primarily in the enforcement of their rights of retraction as holders of the Class A Preferred Shares, the Court is not in a position to determine the reasonableness of this claim in the absence of any evidence regarding the costs actually included in the Cost Component.
[80] The Court is therefore not in a position to determine whether MM and 230 are obligated to pay the Cost Component pending a review of the reasonableness thereof, which is best done initially by the Receiver. Accordingly, the Receiver should advise Ms. Zhu of its position regarding these costs in light of the principles set out in this Endorsement. The parties should then schedule a 9:30 am conference if further proceedings are required regarding this matter.
Distribution on the Basis of Substantive Consolidation
[81] On this motion, the Receiver also seeks the approval of the Court to the distribution of the proceeds of sale of the “Kotton Cachet” property and the “Oxford on Bathurst” property on the basis of a modified substantive consolidation as described below.
[82] As mentioned, MM owns all of the shares of 230, which owned the “Kotton Cachet” property. Similarly, Bathurst Holdings owns all of the shares of Bathurst Inc., which owned the “Oxford on Bathurst” property.
[83] As further mentioned, all of the monies raised by companies affiliated with Kotton for the ostensible purpose of financing any of the three development properties were co-mingled in a general account in the name of Executive. It is therefore impossible to trace the ostensible investments of individual investors in preferred shares of MM or Bathurst Holdings into 230 or Bathurst Inc., respectively. Similarly, it is impossible to trace the Tread Finance Notes that were raised for the ostensible purpose of financing the “Kotton Cachet” property and the “Oxford on Bathurst” property into loans to 230 and Bathurst Inc., respectively. It is also impossible to reconcile the inter-corporate accounts between 230 and MM and between Bathurst Inc. and Bathurst Holdings.
[84] The Receiver proposes to distribute the proceeds of sale of “Kotton Cachet” and “Oxford on Bathurst” based on the claims of creditors whose investments were intended to be used to fund such developments, rather than on the basis of claims traced directly to investments in MM, 230 Bathurst Holdings and Bathurst Inc., given the inability to establish such investments with clarity in the records of those companies.
[85] On this basis, the Receiver proposes to consolidate in respect of “Oxford on Bathurst” all claims against Bathurst Inc., Bathurst Holdings and Tread Finance, in the last case to the extent related to this property. Similarly, the Receiver proposes to consolidate in respect of “Kotton Cachet” all claims against 230, MM, including the Class A Preferred Shares and trade creditors, and Tread Finance, in the last case to the extent related to such property. To be clear, in each case, the Receiver proposes to treat all of these claims as ranking pari passu irrespective of the ostensible nature of any claim (ie. debt or equity) and irrespective of whether the claim is against the corporate owner of the development property or against its parent.
[86] There are two principal issues to be addressed pertaining to the Receiver’s proposal for substantive consolidation of the claims in respect of the “Kotton Cachet” and “Oxford on Bathurst” properties: (1) whether the motion for substantive consolidation should be granted; and (2) if so, whether, given the determinations above, the Judgment Creditors have separate claims against MM and 230 for the Cost Component.
[87] With respect to the first issue, in the course of this motion, the Judgment Creditors have raised the treatment of other claimants against 230 in support of their position. As discussed above, the Court has not, however, directly addressed the characterization of the claims of such third parties. It is nevertheless possible that the principles articulated in this Endorsement are of relevance to the treatment of some of such claims for distribution purposes.
[88] Accordingly, I consider that it would be appropriate to refrain from addressing the issue of distribution on a consolidated basis in this Endorsement pending advice from the Receiver that no further proceedings are required in the claims process established in these receivership proceedings regarding the characterization of these third party claims. If it would be useful, the parties can schedule a 9:30 am conference with the Court through my assistant to address this matter.
[89] With respect to the second issue, I consider that the Court can determine the issue, however, as this is a discrete issue that pertains only to the Judgment Creditors.
[90] This issue is also resolved as a matter of the interpretation of the Order. Paragraph 3 of the Order constitutes a joint and several obligation of the Respondents, including 230. As such, it evidences a single obligation. This is also reflected in the origin of the costs involved as the costs of a single proceeding. This is not a circumstance in which the costs of such proceeding have been allocated among the respondents to an application. Moreover, they were all allegedly incurred in respect of the same matter, namely enforcement of the retraction rights of the Judgment Creditors as holders of Class A Preferred Shares. There is, therefore, no basis for the “double counting” that the Judgment Debtors urge on the Court.
Wilton-Siegel J.
Date: September 8, 2017