Court File and Parties

COURT FILE NO.: CV-17-584853 DATE: 20181025

ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

RAMZI ALHARAYERI Plaintiff/Creditor – and – ANDRUS WILSON Defendant/Debtor – and – Wi2Wi CORPORATION Garnishee

Counsel: Daniel Rosenbluth, for the Plaintiff/Creditor No one appearing on behalf of Mr. Wilson John J. Chapman, for the Garnishee

HEARD: August 22, 2018

Koehnen J.

Endorsement

[1] In May 2007 Ramzi Alharayeri was the CEO and a director of Wi2Wi Corporation. In addition he held common, Class A and Class B shares of Wi2Wi. The Class A and B shares were convertible into common shares provided Wi2Wi achieved certain benchmarks.

[2] After disputes arose between himself and other board members, Mr. Alharayeri resigned as CEO. Shortly after Mr. Alharayeri’s resignation, the board issued additional common shares pursuant to a private placement in which all common shareholders as of a certain record date were entitled to participate.

[3] All holders of convertible shares were permitted to convert them into common shares before the record date, thereby increasing their ability to participate in the private placement and avoid dilution of their common shares. All that is, except Mr. Alharayeri. The board took the position that Mr. Alharayeri was not entitled to convert his class A and B shares because of certain conduct he had engaged in and because the financial conditions for conversion had not been achieved. The board turned out to be incorrect.

[4] In 2010 Mr. Alharayeri commenced a proceeding in the Superior Court of Quebec seeking damages against a number of directors for oppression. The main target of the action appears to have been Andrus Wilson, the informal “leader” of the group of directors with whom Mr. Alharayeri had disagreements. The Quebec Superior Court ordered Mr. Wilson and one other director to pay damages to Mr. Alharayeri. Mr. Wilson appealed unsuccessfully to the Court of Appeal for Quebec and to the Supreme Court of Canada. The Supreme Court of Canada released unanimous reasons dismissing the appeal in July 2017.

[5] Mr. Alharayeri has been unable to collect on the Quebec judgment. As a result, in October 2017 he commenced this action against Mr. Wilson seeking to have the Quebec judgment recognized and enforced in Ontario where Mr. Wilson resides. Mr. Wilson did not defend and judgment was granted by this court in December, 2017 in the amount $954,147.92.

[6] Mr. Wilson appears to be judgment proof but is the beneficiary of an indemnity from Wi2Wi. As a result, Mr. Alharayeri served a notice of garnishment on Wi2Wi demanding payment of the judgment. After Wi2Wi refused payment, Mr. Alharayeri began this garnishment proceeding against Wi2Wi.

[7] Wi2Wi says it should not have to honour the notice of garnishment because it has no obligation under the indemnity. It advances six arguments in this regard:

(a) Indemnity in the circumstances of this case is prohibited by the Canada Business Corporations Act R.S.C. 1985, c. C-44, s. 124; (b) The language of the indemnity does not cover Mr. Wilson’s situation; (c) Mr. Alharayeri’s claim is not a “debt” for purposes of garnishment; (d) A garnishment proceeding is inappropriate because liability should be apportioned between Mr. Wilson and Wi2Wi; (e) The garnishment is an abuse of process by Mr. Alharayeri because it is based on allegations that are inconsistent with allegations he made in the Quebec action; and (f) A claim under the indemnity is barred by the Limitations Act, 2002, S.O. 2002, c. 24, Sched. B.

[8] Ground (d) above, that garnishment is inappropriate because liability should be apportioned between Mr. Wilson and Wi2Wi, arises out of grounds (a) – (c). As a result, my reasons with respect to grounds (a) – (c) should be read together with my reasons with respect to ground (d).

[9] For the reasons set out below I grant the relief Mr. Alharayeri seeks and order Wi2Wi to pay the current amount owing on the judgment against Mr. Wilson.

A. Indemnity Not Prohibited by CBCA

[10] Wi2Wi submits that it should not be liable on the notice of garnishment because the CBCA prohibits indemnity in the circumstances of this case. I disagree.

(i) Wording of the CBCA

[11] Section 124(1) of the CBCA permits corporations to indemnify directors and officers. Section 124(3) limits indemnity to circumstances where the individual:

(a) acted honestly and in good faith with a view to the best interests of the corporation…

[12] Section 124(5) of the CBCA contains a further, similar limitation and provides that, despite subsection 124(1), an individual is entitled to indemnity only if he or she:

“(a) was not judged by the court or other competent authority to have committed any fault or omitted to do anything that the individual ought to have done; and (b) fulfils the conditions set out in subsection (3)” (i.e. acted honestly and in good faith with a view to the best interests of the Corporation).

[13] Wi2Wi concedes that none of the Quebec Superior Court, Quebec Court of Appeal or Supreme Court of Canada found that Mr. Wilson had acted dishonestly, in bad faith or contrary to the best interests of the Corporation.

[14] The absence of such a finding is significant because directors are presumed to act in good faith, and the corporation bears the onus of demonstrating that indemnification is prohibited. [1]

[15] Wi2Wi relies heavily on the fact that Mr. Wilson acted to Mr. Alharayeri’s detriment and secured a personal benefit in doing so. While that may be so, a corporate decision that results in a personal benefit to a director is not, without more, evidence of bad faith by that director. [2]

[16] Wi2Wi invites me to deny Mr. Wilson the benefit of the indemnity because it submits that the language of the courts in Quebec indicates “more than a healthy degree of skepticism” towards Mr. Wilson’s conduct and that their comments “border on bad faith.” Even if that characterization is accurate, which I do not necessarily accept, the CBCA does not prohibit indemnity because of judicial skepticism or because of conduct “bordering” on bad faith. The CBCA requires a finding of bad faith or dishonesty. There is no such finding.

[17] As noted above, section 124(5) of the CBCA provides that an individual is entitled to indemnity only if he or she has not committed any fault. The finding against Mr. Wilson is of oppression. Oppression is not necessarily a fault in the sense that is does not focus on the nature of the defendant’s conduct but focusses on the effect of the conduct on the defendant.

[18] The decision of the Supreme Court of Canada arising out of the Quebec litigation draws a clear distinction between oppression and bad faith or similar misconduct. In doing so the Supreme Court of Canada noted that:

(a) “bad faith is not a necessary condition to imposing personal liability” in oppression; [3] (b) an oppression remedy may lie in response to conduct that falls short of bad faith but nevertheless has unfair consequences; [4] and (c) a director may be held personally liable for oppression where he has obtained a personal benefit, even where he has acted in good faith. [5]

[19] Mr. Wilson’s concern that the benchmarks for the conversion of Mr. Alharayeri’s Class A and B shares had not been met turned out to be incorrect. The trial judge noted at para. 54 that whatever doubts Mr. Wilson may have had, they “proved not to be well-founded.” There was, however, no finding of fault, negligence, bad faith or a failure to act in the best interests of the Corporation.

B. Language of the Indemnity Covers Mr. Wilson

[20] Wi2Wi submits that the language of the indemnity does not cover Mr. Wilson’s situation because it provides an exclusion for negligence or dishonesty.

[21] The relevant portion of the indemnity provides:

“…this indemnity shall not apply to the extent that a court of competent jurisdiction in a final judgment that has become non-appealable shall determine that:

(i) [Andrus Wilson] has been negligent or dishonest or had committed any fraudulent act in the course of such performance; and (ii) The expenses, losses, claims, damages or liabilities as to which the indemnification is claimed were directly caused or occasioned by the negligence, dishonesty or fraud referred to in (i) above.

[22] This is essentially the same argument that Wi2Wi advances with respect to the CBCA prohibition on indemnity. I reject it for the same reasons. There has been no finding of negligence or dishonesty.

C. Mr. Alharayeri’s Claim is a Garnishable “Debt”

[23] Rule 60.08 of the Rules of Civil Procedure allows a judgment creditor to garnish debts owed to a judgment debtor and provides:

“A creditor under an order for the payment or recovery of money may enforce it by garnishment of debts payable to the debtor by other persons.”

[24] Wi2Wi submits that there is no debt owing by Wi2Wi to Mr. Wilson because Mr. Wilson has not obtained a judgment against Wi2Wi.

[25] I cannot accept that submission.

[26] As long ago as 1941 the Supreme Court of Canada defined “debt” as:

“a sum payable in respect of a liquidated money demand, recoverable by action.” [6]

That definition has been adopted in the context of garnishments [7] and more generally. [8] The critical element of the definition for present purposes is the future tense of the words “recoverable by action”. That language does not require that judgment have been rendered against the garnishee but that the liquidated money demand be capable of being subject to a judgment. In the event that Mr. Wilson wanted Wi2Wi to indemnify him, he would be legally capable of pursuing the corporation. His claim is therefore a “money demand recoverable by action.”

[27] The wording of rule 60.08 is consistent with this. It speaks of garnishing a “debt” not garnishing a “judgment debt.”

[28] In the analogous insurance context, an insurer’s obligation to indemnify an insured under a policy constitutes a debt subject to garnishment by judgment creditors under rule 60.08. [9]

D. Liability Should Not Be Apportioned

[29] In its decision arising out of Mr. Alharayeri’s claim action in Quebec the Supreme Court of Canada stated that in cases of this nature, liability may belong to the corporation, the director or may be apportioned between the two, depending on the circumstances.

[30] Wi2Wi submits that, since the Supreme Court of Canada held Mr. Wilson fully responsible to Mr. Alharayeri, it would be inappropriate to hold the corporation liable under the indemnity. In the alternative, Wi2Wi submits that, at a minimum, the court should consider apportioning liability between Wi2Wi and Mr. Wilson in a separate proceeding.

[31] Wi2Wi raises this argument in relation to its submissions that the CBCA does not permit indemnity, that the language of the indemnity agreement does not cover Mr. Wilson and that the debt is not a liquidated demand for purposes of Rule 60.08.

[32] With respect to its argument that indemnity is prohibited by the CBCA, Wi2Wi submits that since the Supreme Court of Canada held Mr. Wilson and one other director solely responsible to Mr. Alharayeri, it would be inappropriate to allow Mr. Wilson to seek indemnity from Wi2Wi.

[33] With respect to the submission that the indemnity agreement does not cover the facts of this case, Wi2Wi points to a provision in the indemnity that calls for apportionment of liability between Mr. Wilson and the Corporation which reads as follows:

“If for any other reason…the foregoing indemnification is unavailable to [Mr. Wilson] … then the indemnitor shall contribute to the amount paid or payable by [Mr. Wilson] as a result of such expense, loss, claim, damage or liability … in such proportion as is appropriate to reflect not only the relative benefits received by the Indemnitor on the one hand and [Mr. Wilson] on the other hand but also the relative degrees of fault of the Indemnitor and [Mr. Wilson] as well as any other relevant equitable considerations ” (emphasis added).

[34] With respect to the definition of “liquidated money demand”, Wi2Wi submits that the indemnity cannot be a liquidated money demand given that it is open to the court to apportion liability between Wi2Wi and Mr. Wilson.

[35] I cannot accept any of these arguments.

[36] Although the Supreme Court of Canada held Mr. Wilson fully liable, it was not asked to consider apportionment between Mr. Wilson and the Corporation nor was it asked to consider whether it was appropriate to hold the Corporation liable. It was asked only if this was a case in which Mr. Wilson could be held liable. Holding that Mr. Wilson is liable is not the same as holding that the Corporation should not be held liable either independently or by way of an indemnity.

[37] While there might be cases in which the allocation of responsibility between a director and the corporation might be an issue on a garnishment proceeding, this is not one of those cases.

[38] Wi2Wi was named as a mise en cause (an impleaded party) in the Quebec litigation. Under the Quebec rules of procedure, a mise en cause has all the rights of a defendant in the action. [10] As a result, had Wi2Wi wanted to argue that Mr. Wilson’s conduct was outside of the indemnity, it had the opportunity to do so but chose not to. Its failure to do so is significant.

[39] Mr. Wilson was concerned about the indemnity. He asked about it several times. Wi2Wi assured him that it would honour the indemnity. Wi2Wi went further. It had its own lawyers defend Mr. Wilson at trial and in the Quebec Court of Appeal.

[40] Wi2Wi knew during the course of the Quebec litigation that Mr. Wilson would be calling on the indemnity if he were found liable. As a mise en cause with the full rights of a party, Wi2Wi could have argued that Mr. Wilson should not have recourse to the indemnity. It could have argued that Mr. Wilson was not acting honestly, in good faith or in the best interests of the Corporation. It did not do so. To the contrary, it assured Mr. Wilson that the indemnity would be available.

[41] Even though Mr. Alharayeri has established liability against Mr. Wilson, Wi2Wi’s argument on this motion would require him to defer recovery on the judgment until Mr. Wilson pursued a separate lawsuit against Wi2Wi to a final judgment. If Mr. Wilson did not have the means to or chose not to pursue Wi2Wi, Mr. Alharayeri would either be left without a remedy or would somehow have to obtain an assignment of Mr. Wilson’s cause of action against Wi2Wi and pursue the action on his behalf.

[42] A further action on the indemnity is unnecessary. Wi2Wi knew it would be called on to pay under the indemnity and could have taken steps to clarify its liability or lack of liability on the indemnity during the Québec litigation. Having failed to do so during the course of seven years of litigation, Wi2Wi should not be permitted to force Mr. Alharayeri into yet another round of protracted litigation.

[43] As the Supreme Court of Canada noted at paragraph 73 of its reasons, “a right of appeal is not a backstop for procedural choices made prior to trial.” Just as a right of appeal provides no such backstop, nor does a garnishment proceeding.

[44] Moreover, the facts of this case do not make it unfair to hold Wi2Wi responsible on the indemnity.

[45] From Mr. Wilson’s perspective, his conduct can be seen to have been in the best interests of Wi2Wi.

[46] The best interests of the corporation are the best interests of shareholders and other stakeholders as a whole. Mr. Alharayeri’s complaint is based on the directors’ refusal to allow him to convert his class A and B shares into common shares before the private placement. Mr. Wilson refused to permit conversion because he believed the financial statements that Mr. Alharayeri had overseen were inaccurate, the financial targets for the conversion of Mr. Alharayeri’s shares had not been met and Mr. Alharayeri’s conduct with respect to a potential conflict of interest disentitled him to conversion. In those circumstances it was in the interests of the shareholders as a whole not to have their shareholdings diluted by Mr. Alharayeri’s improper participation in the private placement. The fact that Mr. Wilson benefitted by not having his common shares diluted does not detract from the legitimacy of the concern to avoid improper dilution more generally.

[47] The detriment that Mr. Alharayeri suffered by being unable to convert was mirrored in a corresponding benefit to all other shareholders. The other shareholders could participate in the private placement without having their participation diluted by the conversion of Mr. Alharayeri’s class A and B shares. Given that the shareholders as a whole benefitted from Mr. Alharayeri’s exclusion from the private placement, it is not unfair to have the shareholders as a whole “pay” for the harm that Mr. Alharayeri suffered by having the Corporation honour the indemnity. The shareholders of course are not paying directly but only indirectly insofar as payment on the indemnity reduces share values.

[48] No separate proceeding is necessary to determine the need for any allocation of liability between Mr. Wilson and Wi2Wi. Garnishment is an equitable, discretionary remedy. [11] Rule 60.08(16) allows the court on a garnishment hearing to:

“(b) determine the rights and liabilities of the garnishee, the debtor, any co-owner of the debt and any assignee or encumbrancer; (d) determine any other matter in relation to a notice of garnishment.”

[49] The Court of Appeal for Ontario has held that these particular powers should be applied broadly, equitably and without an unduly technical approach. They allow the court to make whatever order it deems just in the particular circumstances of a given case. [12]

[50] Given the court’s power to determine the rights and liabilities between the garnishee and the debtor and to determine any other matter in relation to a notice of garnishment on a motion of this nature, a separate apportionment proceeding between Mr. Wilson and Wi2Wi is not necessary. If there are issues of apportionment to consider, they can be considered on a motion of this nature.

[51] Wi2Wi has had the opportunity to raise any arguments it wished about the propriety of requiring it to honour the indemnity. It has raised such arguments. I have simply found them unpersuasive.

E. No Abuse of Process

[52] Wi2Wi submits that Mr. Alharayeri’s garnishment proceeding amounts to an abuse of process because, in the Quebec action, he alleged that Mr. Wilson’s conduct was not in the best interests of Wi2Wi and its shareholders. Wi2Wi submits that Mr. Alharayeri is now in effect saying the opposite of what he said in the Quebec action. Moreover, in the Quebec action Mr. Alharayeri converted Wi2Wi’s status from that of the defendant to an impleaded party thereby allegedly recognizing that it would not be fair for the Corporation to pay for Mr. Wilson’s oppressive conduct.

[53] I cannot agree with that submission.

[54] The doctrine of abuse of process engages the court’s power to prevent the misuse of its procedure in a way that would bring the administration of justice into disrepute. [13] One way in which it is applied is to prevent parties from arguing diametrically inconsistent facts in different actions and knowingly advancing irreconcilable positions that are not articulated as alternative claims. [14]

[55] The position is, however, more nuanced than Wi2Wi submits. It is not that every pleading of inconsistent facts amounts to an abuse of process. Rather it is only in certain circumstances that taking contrary positions on the same issue in separate proceedings may constitute an abuse of process. Whether an abuse of process arises will depend upon the circumstances of each case. [15]

[56] One precondition to an abuse of process is that the party pleading have full knowledge of the facts. [16]

[57] The circumstances of the current cases do not give rise to an abuse of process. Mr. Alharayeri made a number of allegations in the Quebec litigation. At the time Mr. Alharayeri made those allegations he did not have full knowledge of the facts. The trial judge accepted some of Mr. Alharayeri’s allegations and rejected others. This notice of garnishment is based on the findings of fact that the trial judge accepted and which were upheld by the Quebec Court of Appeal and the Supreme Court of Canada. There is nothing abusive about a garnishment proceeding that is based on and is consistent with the underlying judgment.

[58] Indeed, if I were to give weight to Wi2Wi’s argument that would mean that any judgment creditor who succeeded at trial on anything less than 100% of his claims and allegations could be deprived of the ability to garnish the judgment debtor’s debts because the judgment he received was potentially inconsistent with one of the theories he advanced in the litigation. That would be unjust and impractical.

[59] If there is any concern about abuse of process it is with Wi2Wi being a mise en cause in the Quebec litigation, assuring Mr. Wilson that it would honour the indemnity, knowing that it would be liable under the indemnity if Mr. Alharayeri succeeded, remaining silent about corporate liability and then reversing course and denying liability on the indemnity when called upon to pay.

F. Garnishment Not Barred by Limitations Act

[60] Wi2Wi submits that the notice of garnishment is time barred by the Ontario Limitations Act, 2002. [17] Section 18(1) of that Act provides:

18 (1) For the purposes of subsection 5 (2) and section 15 , in the case of a claim by one alleged wrongdoer against another for contribution and indemnity , the day on which the first alleged wrongdoer was served with the claim in respect of which contribution and indemnity is sought shall be deemed to be the day the act or omission on which that alleged wrongdoer’s claim is based took place. 2002, c. 24 , Sched. B, s. 18 (1) .

[61] Wi2Wi submits that, in principle s. 18 required any proceeding against Wi2Wi on the indemnity to be commenced within two years of the date that Mr. Wilson was served with Mr. Alharayeri’s statement of claim in the Quebec action.

[62] Wi2Wi acknowledged in oral argument that it may be estopped from taking this position given that Wi2Wi represented to Mr. Wilson that it would indemnify him for any liability on the claim but argues that any such estoppel expired on September 24, 2015 when Wi2Wi advised Mr. Wilson that it would no longer indemnify him in light of the decision of the Quebec Court of Appeal.

[63] I have serious reservations about the application of s. 18 to the facts of this case in the way Wi2Wi urges. It would effectively require any judgment creditor to sue not only the party who allegedly did him wrong but also anyone who owed the defendant money. The failure to do so would potentially deprive a plaintiff of the right to garnishment proceedings against those who owe the defendant money, assuming that a plaintiff even had standing to sue debtors of the defendant before judgment, something which I doubt, although the point was not argued before me.

[64] Wi2Wi’s position would also allow defendants to undermine indemnity agreements of which they are the beneficiary, perhaps with the collusion of the indemnitor. By way of example, a judgment proof defendant (which Mr. Wilson appears to be) could simply fail to join an indemnitor as a third party to a claim. The defendant could then easily ensure that the action did not proceed to judgment within two years of being served. After judgment was issued against the defendant, he could ensure that the indemnitor was aware of s. 18 of the Limitations Act and refuse to pay. That cannot have been the intention behind s. 18.

[65] Although the parties did not argue the point, I have serious doubts about the extent to which Wi2Wi is a “wrongdoer” for purposes of section 18. No wrongdoing was alleged against Wi2Wi in the Québec litigation. [18] Wi2Wi is alleged to be an indemnitor, not a wrongdoer.

[66] On the facts of this case, the issue can be resolved by the language of the indemnity agreement and I do not need to address Wi2Wi’s argument about the effect of s. 18.

[67] The indemnity effectively provides that is not triggered until a final, non-appealable judgment has been issued:

“…this indemnity shall not apply to the extent that a court of competent jurisdiction in a final judgment that has become non-appealable shall determine that:

(i) [Mr. Wilson] has been negligent or dishonest or had committed any fraudulent act in the course of such performance; and (ii) The expenses, losses, claims, damages or liabilities as to which the indemnification is claimed were directly caused or occasioned by the negligence, dishonesty or fraud referred to in (i) above.

[68] As a result, the wording of Mr. Wilson’s indemnity agreement could only lead to an enforceable demand after a final, non-appealable judgment that did not find him to be negligent, dishonest or fraudulent had been issued against him. Until that occurred, he had no claim against Wi2Wi.

[69] A final, non-appealable judgment to that effect did not arise until the Supreme Court of Canada issued its reasons on July 13, 2017. As a result, s. 18 of the Limitations Act has no effect based on the indemnity language the parties agreed to.

Disposition

[70] For the reasons set out above I grant Mr. Alharayeri’s motion and order Wi2Wi to pay the sum of $962,219.53 plus accrued interest to the Sheriff in the city of Toronto pursuant to the notice of garnishment served upon it.

[71] If the parties cannot agree on costs, Mr. Alharayeri can make written submissions on costs within 14 days of these reasons. Wi2Wi will have 7 days to respond. Mr. Alharayeri will have 3 days for reply, if any.

Koehnen J.

Released: October 25, 2018

Footnotes

[1] Blair v. Consolidated Enfield Corp., [1995] 4 S.C.R. 5 at para 34. [2] Blair at para. 48. [3] Wilson v. Alharayeri, [2017] 1 SCR 1037, 2017 SCC 39 at para. 41. [4] Wilson para. 41, citing BCE Inc. v. 1976 Debentureholders, 2008 SCC 69 at para. 67. [5] Wilson at paras. 50-51. [6] Diewold v. Diewold, [1941] S.C.R. 35 [7] Building Solutions et al. v. Benazzi et al. 2015 ONSC 3948 at paras. 7-8, appeal dismissed on procedural grounds, 2016 ONCA 112. [8] Western Surety Co. v. National Bank of Canada, 2001 NBCA 15 at para. 76; Rocovitis v. Argerys Estate, 1988 CarswellOnt 380 at para. 12 (Ont. Div. Ct.); Tonolli Canada Ltd. v. Minister of National Revenue, 1991 CarswellNat 459 at para. 13 (T.C.C.), action”); Condominium Plan No. 7510189 v. Jones, 1997 ABCA 53 at para. 36. [9] Abuzour v. Heydary 2014 ONSC 6229 at para. 29. [10] Ego-Beltex Underwear, LLC c. AGI Logistice USA, LLC, 2009 QCCS 995 at para. 6 [11] Parker v. Parker, 2014 ONSC 3398 at para. 4 (Div. Ct.), citing 20 Toronto Street Holdings Ltd. v. Coffee, Tea or Me Bakeries Inc. (2001), 53 O.R. (3d) 360 at para. 5 (S.C.J.) [12] I.U.P.A.T., Local 200 v. S & S Glass and Aluminum (1993) Ltd., 185 O.A.C. 38 at paras. 19-20, 25, 27 (Ont. C.A.). [13] MyStar Holdings Ltd. v. 247037 Alberta Ltd., 2009 ABQB 480 at para. 47. [14] MyStar at para. 49. [15] MyStar at para. 53. [16] MyStar at para. 63. [17] Limitations Act, 2002, S.O. 2002, c. 24, Sched. B. [18] Although Wi2Wi was initially joined as a defendant, its status was changed shortly thereafter to that of a mise en cause.