Court File and Parties
COURT FILE NO.: CV-13-1432-00 DATE: 2018-12-14 ONTARIO SUPERIOR COURT OF JUSTICE
B E T W E E N:
ALEKSANDRA MIELCZAREK Applicant – and – HANNA EID, ISSA EID, LE ROYAL LUX INC., LE ROYAL RESTO & LOUNGE INC., OKO BLUE MEDITERRANEAN RESTAURANT AND LOUNGE INC., BARWA RASHID, AMEER SULAIMAN and DALIA SULAIMAN Respondents
Application pursuant to section 248 of the Business Corporations Act
Counsel: Applicant, Self-represented Joseph Irving, for the Respondents
HEARD: April 6, 2018, at Brampton, Ontario
Price J.
Reasons For Order
OVERVIEW
[1] Renata Mielczarek (“Ms. Mielczarek”) was a 50% shareholder in Oko Blu Mediterranean Restaurant and Lounge Inc., which operated a restaurant and banquet facility in the City of Mississauga. In 2013, Ms. Mielczarek applied to the court for remedies under section 248 of the Business Corporations Act, whose purpose is to protect shareholders from oppression by their fellow shareholders. In September 2013, Miller J. found that Ms. Mielczarek was an oppressed shareholder, whose fellow shareholders were trying to remove from the business and deprive of the value of her shares. Justice Miller ordered that Oko Blu be valued and that the respondents buy Ms. Mielczarek’s shares.
[2] Before Miller J.’s Order could be implemented, the respondents caused Oko Blu to become bankrupt and transferred its assets, including its lease, to two new corporations that Dalia Sulaiman and others have operated, namely, Royal Resto & Lounge Inc., which operates the restaurant, and Le Royal Lux Inc., which operates the banquet hall. When the respondents prevented the Valuator from having access to the records of the business by asserting that the new corporations and, in particular, Le Royal Lux Inc., which operated the more profitable banquet hall, were not subject to Miller J.’s Order, the Court appointed the Valuator as a Supervisor with a mandate to report to the Court.
[3] The Supervisor has submitted three reports to the Court but states that certain questions raised by Ms. Mielczarek could not be answered because they are outside the Supervisor’s mandate. Ms. Mielczarek now seeks an expansion of the Supervisor’s mandate to permit it to provide the evidence necessary to implement Justice Miller’s original Order requiring the business to be valued. The respondents seek to limit the further inspection and require that it be paid for by Ms. Mielczarek.
BACKGROUND FACTS
[4] Renata Mielczarek is a shareholder of Oko Blu Mediterranean Restaurant and Lounge Inc., which operated a restaurant under the name Oko Blu (“Oko Blu”). In 2013, she alleged that two brothers, Hanna Eid and Issa Eid, who had become 50% shareholders of Oko Blu, had conspired with each other and with others to remove her from the business and deprive her of the value of her shares. Because Renata’s daughter, Aleksandra Mielczarek, is more fluent in English than her mother, Renata made a written assignment of her cause of action to Aleksandra, who applied to this court in Court File No. CV-13-1432-00 for a remedy under section 248 of the Business Corporations Act as an oppressed shareholder.
[5] On September 16, 2013, Miller J. found that Hanna Eid and Issa Eid had oppressed Ms. Mielczarek. Justice Miller ordered Ms. Mielczarek to retain a Chartered Business Valuator (CBV) to give an opinion as to the fair market value of her shares of Oko Blu, ordered the respondents to give the CBV access to Oko Blu’s records, pay for the costs of the CBV, and not interfere or obstruct the CBV, and that, upon receipt of the CBV’s opinion, the respondents were to purchase Ms. Mielczarek’s 50% interest in Oko Blu, failing which their shares were to be transferred to Ms. Mielczarek. She further ordered that the Shareholder Agreement of Oko Blu be terminated and ordered the respondents to jointly and severally indemnify Ms. Mielczarek for certain liabilities, and granted leave to Ms. Mielczarek to return the matter to Court for a determination of an amount of compensation for the oppression.
[6] In 2015, Ms. Mielczarek complained that the respondents had impeded the Valuator’s access to the business by causing the original corporation, Oko Blu, to become bankrupt and transfer its assets, including its lease, to a new corporation with a similar name, Oko Blue Lounge Inc., and later, Royal Resto & Lounge Inc. to operate the restaurant, and another corporation, Le Royal Lux Inc., to operate the banquet hall, the most profitable part of Oko Blu’s business, and refused the Valuator access to the records of that business on the basis that it was owned by a different corporation than was the subject of Justice Miller’s Order.
[7] On December 4, 2014, this Court appointed Paddon & Yorke Inc., the Chartered Business Valuator who had been appointed to value the business, as a Supervisor of Le Royal Lux Inc., and ordered that no shares be issued by it and no assets be sold until the issues in the proceeding were determined. It ordered that Le Royal Lux Inc. and its principals, Dalia Sulaiman and Ammer Sulaiman, be added as parties to the action, and that the issues of Hanna Eid’s and Issa Eid’s liability, and the ownership of the common shares of Le Royal Lux Inc. be determined at a long motion on April 23, 2015. It reserved the costs of the motion to that hearing. The respondents appealed unsuccessfully from that Order to the Divisional Court.
[8] Ms. Mielczarek made a new application to the court in Court File No. CV-15-0103-00 for remedies against the original respondents, Hanna Eid, Issa Eid, and Oko Blu, and the new companies, Le Royal Lux Inc. and Le Royal Resto & Lounge Inc. and their principals, Barwa Rashid, Dalia Sulaiman, and Ameer Sulaiman. She later moved to consolidate the first and second application, which resulted in an Order dated August 9, 2017, consolidating them under Court File No. CV-13-1432-00, naming Hanna Eid, Issa Eid, Le Royal Lux Inc., Le Royal Resto & Lounge Inc., Oko Blu Mediterranean Restaurant and Lounge Inc., Barwa Rashid, Ameer Sulaiman, and Dalia Sulaiman as respondents.
[9] Ms. Mielczarek asserts that Hanna Eid and Issa Eid breached Justice Miller’s Order by refusing to provide information to the CBV, thereby preventing him from determining the value of Oko Blu, and conspired to transfer the business of Oko Blu to new corporations, by the following means:
a) Dalia Sulaiman, the sister of the then fiancée of Hanna Eid, incorporated a new Ontario corporation, Oko Blue Lounge Inc., of which Dalia Sulaiman held 50% of the shares and Hanna Eid and Issa Eid each held 25% of the shares;
b) The respondents caused Oko Blu to default in its obligations to its landlord, thereby causing the landlord to transfer Oko Blu’s lease to Oko Blue Lounge Inc. Dalia Sulaiman’s father, Ammeer Sulaiman, furthered the conspiracy by paying $5,000 to the bailiff and $15,000 to the landlord’s representative to transfer the lease, previously held by Oko Blu, and the assets of Oko Blu to Oko Blue Lounge Inc.
c) The respondents then changed the corporate name of Oko Blue Lounge Inc. to Le Royal Resto & Lounge Inc.
d) Dalia Sulaiman and Ameer Sulaiman’s friend, Barwa Rashid, then incorporated another corporation, Le Royal Lux Inc., which became the lessee for the banquet hall, being the more profitable part of the premises formerly operated by Oko Blu.
[10] On December 4, 2014, this Court appointed Paddon & Yorke Inc. as Supervisor of the companies outlined above and ordered that no shares be issued and no assets be sold until the issues in the proceeding were determined. It ordered that Le Royal Lux Inc. and its principals, Dalia Sulaiman and Ammer Sulaiman, be added as parties to the action, and that the issues of Hanna Eid’s and Issa Eid’s liability, and the ownership of the common shares of Le Royal Lux Inc. be determined at a long motion on April 23, 2015. Costs of the Supervisor was ordered to be paid for by the companies. The respondents appealed unsuccessfully from that Order to the Divisional Court.
[11] On May 25, 2016 this Court ordered a report to be completed regarding the financial activity of the Royal Resto & Lounge Inc., and Le Royal Lux Inc. The Oko Blu Mediterranean Restaurant and Lounge Inc. is currently an inactive company.
[12] A. Farber & Partners Inc. (“Farber”), the successor of Paddon & Yorke Inc. was retained on June 2, 2016 as Supervisor of the above named companies to complete this report. A retainer of $20,000 was paid by the companies to cover the cost.
[13] The first report was completed on July 25, 2016. In its report, Farber highlighted discrepancies in the companies’ financial reporting due to inadequate records regarding cash sales and recommended that cash flow forecasts be created.
[14] Farber stated that it relied on unaudited financial information, the companies’ books and records, financial information prepared by the companies and its advisors, and discussions between Farber and Ms. Sulaiman to complete the report. Farber confirmed that it did not audit or attempt to verify the accuracy of any of the information provided.
[15] The parties were permitted to deliver written questions to Farber and a supplementary report was completed on August 30, 2016.
[16] Following both reports, the applicant submitted “Questions from the Applicant to be Answered by an On-site Inspection of the Business”. This document outlined the applicant’s ongoing concerns regarding the valuation of the business, including:
a) Concerns regarding the accuracy or reasonableness of the financial information provided to the Supervisor, and therefore the reliability of the accounting statements as to the true nature of the operations of the Business;
b) Concerns that the cash revenue is not being accounted for properly;
c) Concerns over discrepancies regarding rental deposits and lease requirements for the units rented by the companies, the value of assets sold and reported revenues; and
[17] The applicant suggested that an on-site monitor should be hired to verify the cash and credit card receipts of the companies to verify that these sales are properly accounted for in the valuation of the companies.
[18] In response to the concerns listed above, Farber completed a third report on September 22, 2016. Therein, Farber explained that many of the concerns expressed by the Applicant would require a reconstruction of the information using only original source documents. This reconstruction can only be accomplished through a forensic review and analysis of the source document material.
[19] Farber estimated that an additional investigation of the financial information would cost an additional $62,312.50 minimum, using Farber Financial Group to conduct a more detailed analysis.
[20] Farber also provided a separate estimate for an onsite supervisor to monitor the sales and expense purchases of approximately $1,400.00 weekly, based on a 56 hour work week plus applicable taxes. The estimate did not outline the costs required for the completion of a report following the onsite supervision.
THE ISSUE
[21] The Court must determine whether it is appropriate and reasonable to order an additional investigation, namely the appointment of an on-site monitor and creation of a subsequent report, to evaluate the financial activity of Le Royal Lux Inc. and Royal Resto & Lounge Inc. and determine who will bear the associated costs.
PARTIES’ POSITIONS
[22] The applicant submits that the accounting prepared for, and given to Farber by the respondents is inaccurate and inadequate to assess the fair market value of the companies.
[23] The applicant further submits that the financial statements presented to Farber are based on a compilation accounting records provided by the respondents. There was no attempt to verify the numbers provided. As a result, the applicant submits that the accounting is incorrect and, among other discrepancies, the reports do not account for revenue generated by cash sales.
[24] The applicant requests that a monitor be placed in the business for four weeks to ensure that the accounting numbers are accurate and to assess any cash revenue and that a report is generated on the financial activity observed. The applicant states that a complete reconstruction of the financial statements at this time is unnecessary. Costs associated with the on-site supervisor should be paid by the respondents.
[25] The respondents submit that they have no issue with the work proposed by Farber regarding the on-site monitor of the operations of the companies. However, they argue that the costs associated with the on-site supervisor should be covered by the applicant, since the applicant is requesting the additional work.
ANALYSIS AND EVIDENCE
[26] Section 248 of the Business Corporations Act allows the court to make any order it sees fit to remedy a finding of oppression.
[27] The companies in question are a restaurant and banquet hall, businesses which typically have a high volume of cash transactions.
[28] Based on the concerns outlined by the applicant, namely that the financial information provided to Farber was in no way confirmed or verified, the high volume of cash transactions that could easily be misappropriated, and the alleged discrepancies in the reported revenue, it would be appropriate and reasonable to order additional investigation into the finances of the companies.
[29] At this time, the applicant is only requesting that an onsite supervisor be placed in the business for four weeks to monitor all sales and transactions during that time. The estimated cost is reasonable: $1,400 weekly for a total of $5,600 plus HST for on-site supervision. Although the estimate does not include the time to draft a report, it would be reasonable to assume that this additional cost would be minimal.
[30] I find that this additional investigation is necessary and appropriate to determine the proper valuation of Le Royal Lux Inc. and Royal Resto & Lounge Inc. As such, the costs of this investigation shall be borne by the respondents.
CONCLUSION AND ORDER
[31] For the foregoing reasons, it is ordered that:
The respondents shall forthwith retain Farber, for a four-week period to be determined by the applicant, to monitor all sales and transactions of Le Royal Lux Inc. and Royal Resto & Lounge Inc. during that period, and to report to the Court.
The respondents shall pay the costs associated with this investigation and report.
If the parties are unable to agree on the costs of this motion, they shall submit written arguments, not to exceed 4 pages, and a Costs Outline, by January 15, 2019.
Price J.
Released: December 14, 2018