Falcon Motor Express Ltd. et al. v. Grewal et al.

[Indexed as: Falcon Motor Express Ltd. v. Grewal]

Ontario Reports Ontario Superior Court of Justice Emery J. April 11, 2019 145 O.R. (3d) 219 | 2019 ONSC 1529

Case Summary

Corporations — Oppression — A and J each owning 50 per cent of shares of F Ltd. — J and F Ltd. bringing action for declaratory relief and damages after A and others formed company to exploit and compete with F Ltd. — Plaintiffs obtaining interlocutory order removing A as director and officer of F Ltd. — F Ltd. unable to obtain financing as long as A was shareholder — Plaintiffs moving for interim order under s. 248(3) of Business Corporations Act requiring A to transfer his shares to J or F Ltd. immediately — Court having authority under s. 248(3) to make interim order for transfer of shares but doing so without terms would have effect of making order final — A ordered to transfer his shares to J on condition that J post security in amount of $2 million — Business Corporations Act, R.S.O. 1990, c. B.16, s. 248(3).

The plaintiff J and the defendant A each owned 50 per cent of the shares of the plaintiff F Ltd. A and others formed a company to exploit and compete with F Ltd. The plaintiffs brought an action for declaratory relief and damages. They obtained an interlocutory order removing A as a director and officer of F Ltd. and enjoining him and the other defendants from wrongful competition with F Ltd. F Ltd. was unable to obtain the financing necessary to operate and recover losses resulting from A's misconduct as long as A remained a shareholder. Consequently, the plaintiffs brought a motion under s. 248(3) of the Business Corporations Act ("OBCA") for an order, framed as an injunction, requiring A to immediately sell, transfer or surrender his shares in F Ltd. either to J or to F Ltd. immediately, without payment or security, leaving the issue of consideration for the shares to be determined at a later date.

Held, the motion should be granted in part.

The findings of the motion judge on the earlier motion that resulted in A being removed as a director and officer of F Ltd. provided a sufficient basis to conclude that the plaintiffs had shown a strong prima facie case. There was a strong likelihood that a judge at trial would find liability against A on the balance of probabilities by finding his conduct as an officer and director of F Ltd. was oppressive to, or alternatively, that his conduct unfairly prejudiced or unfairly disregarded, J's interests as a shareholder. F Ltd. would, in all probability, suffer irreparable harm if relief was not granted. The balance of convenience favoured the plaintiffs. Section 248(3) of the OBCA gives the court the authority to make an interim order for the transfer of shares, but the effect of that order would be final if it were made without terms. As the litigation was commenced by a statement of claim, that would amount to summary judgment. An order requiring A to transfer his shares to F Ltd. could not be made, as F Ltd. was not a "complainant" within the meaning of s. 245 of the OBCA and was unable to overcome the general solvency requirements of the OBCA to purchase its own shares under s. 30(2). J qualified as a complainant. A was ordered to transfer his shares to J, on condition that J first post security in the amount of $2 million.

Holt v. Telford, [1987] 2 S.C.R. 193; RJR-MacDonald Inc. v. Canada (Attorney General), [1994] 1 S.C.R. 311, apld

Aetna Financial Services Ltd. v. Feigelman, [1985] 1 S.C.R. 2; Canwest Pacific Television Inc. v. 147250 Canada Ltd., [1987] B.C.J. No. 1262 (C.A.); Quizno's Canada Restaurant Corp. v. 1450987 Ontario Corp., [2009] O.J. No. 1743 (S.C.J.), consd

Other cases referred to

820099 Ontario Inc. v. Harold E. Ballard Ltd., [1991] O.J. No. 1082 (Div. Ct.), affg 820099 Ontario Inc. v. Harold E. Ballard Ltd., [1991] O.J. No. 266 (Gen. Div.); Amaranth LLC v. Counsel Corp.; Ang v. Premium Staffing Ltd., 2015 ONCA 821; BCE Inc. v. 1976 Debentureholders, [2008] 3 S.C.R. 560; Bhasin v. Hrynew, [2014] 3 S.C.R. 494; Brant Investments Ltd. v. Keeprite Inc. (1991), 3 O.R. (3d) 289 (C.A.); Falcon Motor Xpress Ltd v. Grewal, 2018 ONSC 122 (S.C.J.); Naneff v. Con-Crete Holdings Ltd. (1995), 23 O.R. (3d) 481 (C.A.)

Statutes referred to

Business Corporations Act, R.S.O. 1990, c. B.16, ss. 30(2), 134 [as am.], 184 [as am.], 245, 246 [as am.], 248 [as am.], (1) [as am.], (2), (3), (f), (g), (6) Courts of Justice Act, R.S.O. 1990, c. C.43, ss. 101 [as am.], 111

MOTION for interim injunctive relief.

Robert B. Bell and Jameel Madhany, for plaintiffs (moving parties).

Eric Golden, for defendants.

[1] EMERY J.: — The plaintiffs bring this motion to access interim relief under s. 248(3) of the (Ontario) Business Corporations Act, R.S.O. 1990, c. B.16 (the "OBCA") and s. 101 of the Courts of Justice Act, R.S.O. 1990, c. C.43. Both sides agree that the relief requested is extraordinary. The plaintiffs are asking for an order, framed as a further injunction, requiring the defendant Arandeep Singh Grewal ("Andy") to immediately sell, transfer, or surrender the 50 per cent of all shares he holds in Falcon Motor Express Ltd. and Falcon Motor Freight Ltd. (collectively, "Falcon") to either Falcon or to the other 50 per cent shareholder, Jarnail Singh Sidhu ("Jarnail"). What makes the motion extraordinary is the plaintiffs' request for the court to make this order now without payment or security, leaving the issue of consideration for those shares to be determined at a later date.

[2] The plaintiffs seek this relief to build on the orders made by Ricchetti J. for reasons set out in his Endorsement of January 15, 2018, reported as Falcon Motor Xpress Ltd. v. Grewal, 2018 ONSC 122 (S.C.J.) (the "2018 Reasons"). In the 2018 Reasons, Ricchetti J. granted injunctive relief to enjoin Andy and other defendants from wrongful competition with Falcon. Ricchetti J. also made an order removing Andy as an officer and director of Falcon. The plaintiffs submit that Ricchetti J.'s orders provide the "on ramp" for this motion to carry out the intention of the court to effectively remove Andy from the operations of Falcon entirely.

[3] Jarnail has filed an affidavit giving evidence that Falcon cannot obtain the financing necessary to operate and to recover losses resulting from the misconduct of Andy and others because lenders will not provide financing to Falcon as long as Andy remains a shareholder. The plaintiffs submit that this evidence entitles them to further relief in the nature of a mandatory order because Falcon continues to suffer irreparable harm.

[4] Andy opposes the motion. He argues that relief of this nature at this stage of a proceeding has never been granted by a court. Andy submits that the court should make no order for the sale, transfer, or surrender of his shares to either Falcon or Jarnail unless and until there has been proper valuation of those shares, and the court has determined what amount, if any, should be paid to him.

The 2018 Reasons

[5] The plaintiffs brought a motion and obtained an interim order providing temporary relief against the defendants in June 2017. The interim order essentially gave financial control of Falcon to Jarnail. On December 13, 2017, Ricchetti J. heard the motion on a full evidentiary record, which resulted in the 2018 Reasons.

[6] There are passages in the 2018 Reasons that contain findings of fact and conclusions of law made by Ricchetti J. that speak for themselves. In my view, it is entirely appropriate to rely on those 2018 Reasons to decide the motion before me, as those findings and conclusions were made by the court on a comprehensive record, and have never been appealed.

[7] Jarnail and Andy started Falcon in 2004 along with another individual who is no longer involved. Falcon's sales were $27 million in 2014. In 2015, the sales of Falcon exceeded $45 million. Ricchetti J. concluded that by early 2016, Jarnail and Andy had built up Falcon as a successful trucking business. I consider that to be an accurate assessment. He then made the following observation, at para. 9:

As one would expect, a company of this size had credit facilities and banking relationships. Falcon's primary bank relationships were with TD Canada Trust ("TD") and the Canadian Imperial Bank of Commerce ("CIBC"). Arandeep was the person who primarily dealt with Falcon's financing, although both Jarnail and Arandeep were signing officers on the Falcon bank accounts.

[8] At paras. 76-78 of the 2018 Reasons, Ricchetti J. made the following findings that Andy and the co-respondents, Parminder Singh Sidhu and Kuljinder Singh Aulakh, formed and operated a corporation that later became Everest Transportation Inc. to exploit and to compete with Falcon:

I am satisfied that, the evidence on this motion, establishes Arandeep, Parminder and Kuljinder operated Everest in a manner that Everest:

(a) Used Falcon's trucks and trailers to deliver Everest loads and diverted to Everest revenue that should have gone to Falcon;

(b) Used Falcon's liability insurance for Everest's operations;

(c) Used false/altered copies of Falcon's CBSA certificates required for cross-border freight trucking, covering up Falcon's name on the certificate and replacing it with Everest Transportation; and

(d) Leased trucks from National Leasing and Daimler by using Falcon's credit in order to obtain trucks for Everest. As a result of these transactions, Falcon has unknown potential liabilities. Everest, as of December 1, 2017, continued to use and be on Falcon's National Leasing guaranteed by Falcon.

This is some of the evidence that shows the improper and illegal misappropriation by Arandeep, Parminder and Kuljinder of Falcon's assets and business for their own personal gain as owners of Everest.

There is additional specific evidence that supports the diversion of Falcon customers to Everest:

• a July 28, 2016 email by Parminder to a customer who had confirmed a load for Falcon, to re-direct the load to Everest;
• Morasse advised a Falcon customer (Precision Papers) by email on August 4, 2016 that Falcon had purchased Everest and that Falcon wanted to transition the customer's business to Everest. The customer was told there would be no changes to the rates or the equipment used to transport the customer's load. Parminder and Arandeep were copied on the email;
• Morasse dealt with one of Falcon's largest clients (Kruger) and on August 4, 2016 confirmed that Everest would take all the loads "already given to Falcon". Parminder and Arandeep were copied on this correspondence;
• Morasse wrote to another Falcon customer (Hood Packaging) on September 4, 2016 advising that Falcon had acquired another trucking company, Everest, which was a division of Falcon Quebec. Morasse advised the customer that he wanted to move the business to Everest. Morasse used his Falcon email address to further this diversion. Arandeep and Parminder were copied on the email;
• Morasse wrote to another Falcon customer (Unisource) on September 23, 2016 advising that Falcon had purchased Everest and wished to transition the business to Everest;
• Everest used a false CBSA approval (dated April 17, 2007) which showed Everest as the holder. It appears that the name Everest has been transposed over the Falcon name onto the real CBSA certificates. This forged CBSA approval was sent to a Falcon customer (Tenneco) on August 1, 2016 to show Everest was approved by CBSA for the Falcon customer's trucking needs. This same customer (Tenneco) was also provided with a certificate of insurance showing Everest as insured, but in reality it was a Falcon insurance policy. Who or how Falcon Quebec (not even Everest) was added to the Falcon insurance policy in June 2016 is not known. This is clear evidence of unfair or illegal business practice by Everest and the deliberate diversion of Falcon's customers through these improper practices;
• In September 2016, Trans Plus Corporation, the owner of the Fleet Manager Software, sent Falcon an invoice for adding Everest as a "division" of Falcon on Falcon's Fleet Manager Software. Parminder, while still at Falcon, on July 26, 2016 authorized this addition to Falcon's software use. It should also be noted, that by being a division of Falcon, Everest had full access to Falcon's information and data;
• Morasse between August 29, 2016 and September 4, 2016 emailed a Falcon customer (Kronos) asking that the Falcon business be transferred to Everest;
• Morasse reported by email to Parminder on September 12, 2016 the diversion of loads from one of Falcon's customers (Kruger);
• On November 7, 2016, one of Falcon's customers (Cascades), who had transferred loads to Everest, advised Falcon that it had been told that Everest was a division of Falcon;
• November 8, 2016 communications between a Falcon customer (Unisource) include a statement by Morasse that Everest would be the new carrier for Unisource on all lanes. When questioned by the customer, Morasse told the customer that they were separate companies but that "the owners has ownership in both";
• Everest starting leasing its own trucks at least on August 5, 2016 by utilizing Falcon's credit with National Leasing. The National Leasing credit showed Falcon as the lessees and guarantors of these leases. This information came to light in the fall of 2016. In addition, as admitted by Parminder, Everest used Falcon's trucks on some occasion. In November 2016, Falcon leased three trucks from Daimler, paid for by Falcon, but diverted to Everest's use. Arandeep was the Falcon authorized signatory with Daimler;
• It would appear that Falcon Quebec, in August 2016, purchased equipment, utilized a security interest relating to Falcon. A credit report by Equifax, tied these companies, Falcon, Falcon Quebec and Everest together;
• As Parminder was about to leave Falcon, Parminder, on August 3, 2016, made a copy of all Falcon business contacts, including customers and brokers who dealt with Falcon on Falcon's computer system and sent them to Parminder's Everest email address. The Defendants suggest this is public information. If so, why take a copy it from Falcon's records?; and
• When the Defendants left Falcon, many emails were permanently deleted from Falcon's servers. The logical inference being that when the personal Defendants joined Everest, what they did/said and who they communicated with, while at Falcon, could not be found or used against them.

(Emphasis in original)

[9] At para. 80, the 2018 Reasons describe how the Everest business was improperly started and continued by the three individuals to Falcon's detriment:

In any event, the Everest companies continue to build the Everest business based on its history of having been improperly and surreptitiously started and carried out in an unfair and illegal manner by Arandeep, Parminder and Kuljinder while at Falcon and afterwards.

[10] Further findings of fact are made at para. 89 that:

It was not enough for Arandeep, Parminder and Kuljinder to operate Falcon Quebec and Everest in competition with Falcon in the manner they had been doing. They:

a) continued to divert business from Falcon to their companies;

b) induced Falcon employees to leave Falcon and join Everest including the contract employees despite their non-compete agreements (Kumar, November 2016), Dhiman December 2016 and Khangura in February 2017; and

c) When Falcon wrote to its customers advising that Everest and Falcon Quebec were not related to Falcon, confusion continued to ensue with Falcon's customers. Arandeep and Parminder fought back by advising customers that Arandeep was a common owner of Falcon and Everest. This no doubt added to additional confusion and assisted in diverting more customers to them.

[11] These findings provided the basis for Ricchetti J. to reach the following conclusions, at paras. 104-105, about how Andy had breached his statutory and fiduciary duty to Falcon as a director:

In Arandeep's case, as a director of Falcon, there can be no dispute he owed and continues to owe a fiduciary duty to Falcon. Arandeep's theft of Falcon property, competing with Falcon, diverting Falcon's business, usurping Falcon's assets to operate Everest are all examples of clear violations of his fiduciary duty to Falcon.

It is clear from the cross-examination of Arandeep that he has done very little, if much, to comply with the June 1, 2017 court order. Of particular concern are failure to produce the complete BMO bank statements, any financial statements (or statements whatsoever!) of Falcon Quebec or Everest and the return/contents of the computer/ server which Arandeep stole from Falcon.

(Emphasis in original)

[12] In respect of whether there was a serious issue to be tried, the 2018 Reasons read, at paras. 156-157:

The Defendants do not dispute that the Plaintiffs have established "a serious issue to be tried" as it relates to Arandeep, Parminder and Everest. The Defendants "concede that there are serious issues to be tried with respect to the other allegations by" Falcon.

In this case, there is strong and convincing evidence of fraud, deceit, oppression, breach of fiduciary duty, breach of non-compete agreements (the reasonableness of the restriction not being the subject of any dispute by the Defendants), passing off, theft of corporate property, misuse of confidential information, breach of confidence and potentially other causes of action.

[13] At paras. 167-172, Ricchetti J. made the following findings that irreparable harm had been caused to Falcon by Andy and others:

Falcon spent years building its business. Competition yes - but this was not fair and legal competition. It was at best unfair competition and at worst fraud in the establishing and operations of Falcon Quebec and Everest at the expense of Falcon.

Falcon has produced evidence of lost sales. There can be no doubt from the trucking spreadsheets produced that Falcon's business was severely impacted in 2016. Falcon has demonstrated an impact on its reputation or goodwill.

Falcon has demonstrated that, at least for a period of time, there was confusion in the trucking marketplace. While that confusion may have subsided in 2017, what impact the confusion had on Falcon's business in 2016 and what impact that confusion carried forward can never be accurately determined. The Defence submits that Falcon's sales went up in 2017. That may be true but the real question to be asked is: what would Falcon's sales have been but for the confusion and impact of Falcon Quebec/Everest's unfair and improper actions. After all, there was a substantial increase in sales from 2014 to 2015, but the sales were negatively impacted in 2016. The consequences of that to Falcon's future business is, in my view, impossible to ascertain.

Falcon's evidence of loss is clear and not speculative. Falcon has demonstrated that its business (generally and from certain Falcon customers) has suffered considerably due to the actions of the Defendants. The fact there is "plenty of business to go around" does not assist in determining whether Falcon has suffered damages because of the actions of the Defendants.

The Defence submission that Falcon's "revenue or market share in 2016 was further caused by Andy [Arandeep] no longer being involved in the business" does nothing more than reinforce Falcon's position. Arandeep's involvement in the competing business while still a director and officer of Falcon was at least in part the reason for the loss of Falcon's business. The issue is: what was the short term impact and the long term impact of the Defendants' actions?

Falcon's bank financing has been impacted negatively and has yet to be fully repaired.

[14] There is no dispute apparent from a plain reading of the 2018 Reasons that Ricchetti J. found the balance of convenience on the record before him to favour Falcon and Jarnail. After making the findings that satisfied the test for an interlocutory injunction under RJR-MacDonald Inc. v. Canada (Attorney General), [1994] 1 S.C.R. 311, Ricchetti J. granted the orders Falcon requested. Those orders were in place at the time the current motion was argued, and they remain in place today.

Falcon's New Evidence

[15] Falcon and Jarnail submit that this motion for injunctive relief seeks a mandatory order that is aligned with orders already made. The motion relies on the 2018 Reasons and on Ricchetti J.'s conclusion that Falcon's bank financing has been impacted negatively by Andy's wrongful conduct, acting alone or with others. The moving parties argue that the further evidence they have filed shows that Falcon continues to suffer financial injury as long as Andy remains a shareholder, and that Falcon will not recover unless the order is granted.

[16] Jarnail provided the following evidence of financing efforts he has made on Falcon's behalf since Andy's misconduct:

(1) Falcon has historically banked at Toronto-Dominion Bank ("TD"). On May 8, 2017, Jarnail received a letter from TD dated May 4, 2017, demanding repayment of various credit facilities the bank had extended to Falcon. These credit facilities, for which Falcon had been extended $483,000 in credit, were critical to Falcon's operations. TD ultimately required repayment of those credit facilities in October 2017.

(2) Jarnail was advised by Andrew Hourigan, of TD Commercial Banking, that TD's decision to demand repayment of the credit facilities was motivated by Andy's attempt to withdraw $28,497.80 from Falcon's bank account. TD Commercial banking was also concerned about signing authority on the account, dating back to Andy's unauthorized removal of Jarnail's signature from the TD account in December 2014. Mr. Hourigan advised Jarnail that TD did not want to be exposed to any liability as a result of any further unauthorized withdrawals or unlawful conduct.

(3) Falcon made several attempts to find another banker to assist with financing. These efforts were unsuccessful before it had to repay the extended credit to TD.

(4) Falcon initially approached HSBC to replace these credit facilities. Jarnail was in contact with Arun Rebello at HSBC, who was receptive and appeared willing to assist Falcon. However, because of the ongoing dispute with Andy, HSBC retained counsel to assist with determining whether to provide credit facilities to Falcon. In the course of these discussions, Jarnail instructed Falcon's lawyers, Brian Radnoff and Jameel Madhany of Lerners LLP, to speak with the lawyers HSBC had retained to discuss the provision of credit facilities to Falcon.

(5) Jarnail deposes that Mr. Radnoff advised him that he had a telephone conversation with "one Williams" on or about September 14, 2017. Mr. Radnoff reports that at the time, Williams expressed concern that HSBC did not want to lend into a situation where the two shareholders of the company were engaged in a dispute and litigation between them. Furthermore, Mr. Rebello had advised Jarnail in September that HSBC had decided to not provide credit facilities to Falcon. Jarnail has deposed how Mr. Rebello advised him in an e-mail on February 2, 2018 that HSBC was still unable to provide credit facilities to Falcon due to the ongoing litigation and the shareholder dispute.

(6) Around the time that Jarnail was discussing credit facilities for Falcon with HSBC, he also contacted CIBC where Falcon had an operating account, but no credit facilities were extended. Jarnail had met with Amrinder Kooner, Falcon's relationship manager at CIBC in September 2017. Mr. Kooner reviewed Falcon's file and advised that CIBC would not be able to provide credit facilities to Falcon until Andy was removed from the company. Mr. Kooner further advised Jarnail that CIBC would reconsider their position after Falcon's injunction motion was argued. That motion was heard in December 2017.

(7) Following Falcon's unsuccessful attempts to obtain financing from HSBC and CIBC, Mr. Radnoff connected Jarnail with Michael Yhip, a contact at RBC Dominion Securities and Wealth Management. Jarnail understood from Mr. Radnoff that Mr. Yhip's group at RBC worked with companies to provide financing solutions.

(8) Jarnail met with Mr. Yhip multiple times in October 2017. The only solution RBC could offer was to seek financing from a factoring company, which would require Falcon to sell its accounts receivable at a discount. This solution was not acceptable to Falcon given its financial position.

(9) Jarnail has stated in his affidavit that the only way that Falcon can obtain further financing is if Andy is removed as a shareholder in Falcon.

[17] Falcon was unable to find a replacement for its credit facilities with TD before it had to repay the credit already advanced in October 2017. Jarnail was required to use his personal line of credit, and Falcon had to take private loans from five individuals in order to repay those credit facilities.

[18] Since October 2017, Jarnail has been using his own line of credit in place of Falcon's credit facilities so that Falcon is not forced to cease operations.

[19] Jarnail's evidence on the financial difficulties Falcon has encountered since Ricchetti J. made the order in January 2018 stands uncontradicted, as Andy has not filed a fresh affidavit to give evidence in response to this motion.

Andy Opposes the Motion

[20] Andy opposes the motion on two grounds. First, he argues that Falcon and Jarnail have not provided a basis that entitles them to the further relief they seek. Second, Andy argues that Falcon and Jarnail are in effect asking for execution before judgment. Andy submits that the plaintiffs seek an order requiring him to transfer his shares in Falcon before a finding of liability is made. The plaintiffs are asking the court for an order that forcibly takes the shares he holds in Falcon without first having the fair value of those shares determined, or an order as to what he should be paid at the time those shares are transferred or surrendered.

Analysis

Proper threshold test to apply

[21] The parties agree that the proper threshold for the plaintiffs to meet under the three-part test prescribed by RJR-MacDonald requires Falcon or Jarnail to establish a strong prima facie case. This standard is higher than showing there is a "serious issue to be tried", and is applicable where the court is asked to order another party to take an affirmative step pending trial.

[22] This consensus is consistent with the authorities. In Amaranth LLC v. Counsel Corp., C. Campbell J. concluded, at para. 11, that the moving party was required to show a strong prima facie case to meet the threshold. The applicant in Amaranth had asked for an interim order under s. 248(3) of the OBCA that the respondent place the equivalent of US$16 million in trust as security for the purchase price of the shares held by the applicant. The applicant alleged that the respondent had conducted two transactions that effectively divested itself of all or substantially all of its assets without the appropriate shareholder approval under the OBCA. The applicant brought its motion for interim relief in the context of its application pursuant to s. 184 for an order that the respondent purchase all of its shares for fair value as a dissenting shareholder. Campbell J. determined that the strong prima facie case was the proper standard under the circumstances.

[23] The plaintiffs in the action before this court bring the current motion seeking the reverse of the relief requested in Amaranth, as they seek to compel Andy to transfer his shares as the vendor. They are asking for an order compelling the transfer of those shares before liability has been determined, and without security. Although the court in Amaranth dismissed the motion for other reasons, the case stands as authority confirming the threshold the moving party must meet on the evidence to obtain similar relief.

Prima facie entitlement

[24] Falcon and Jarnail rely on the decision in Amaranth to demonstrate that the court has jurisdiction to grant an injunction in the form of an interim order requiring the defendant to transfer his shares pending the outcome of the application for an oppression remedy under s. 248(3) of the OBCA. They essentially seek the interim injunction to enjoin Andy from continuing to hold shares in either Falcon corporation, in order to prevent further harm to Falcon's business affairs and Jarnail's shareholdings.

[25] Jarnail's claim to acquire all of Andy's shares in Falcon is premised on the legal argument that his interests as a shareholder have been oppressed, unfairly prejudiced or unfairly disregarded by Andy because he breached the reasonable expectations regarding the operation of Falcon's business and affairs while he was an officer or director. These expectations were reasonable for each of the parties to form, hold and share at inception, and as the corporations grew. They informed the relationship between shareholders. These were reasonable expectations that could be said to be (or ought to have been considered as) the compact of the shareholders having a common understanding about operating an enterprise through the Falcon corporations for mutual benefit. The nature of this compact between shareholders was described by Farley J. in 820099 Ontario Inc. v. Harold E. Ballard Ltd., [1991] O.J. No. 266 (Gen. Div.), at para. 129, affd 820099 Ontario Inc. v. Harold E. Ballard Ltd., [1991] O.J. No. 1082 (Div. Ct.).

[26] In response, Andy argues that:

(a) Jarnail has exercised sole authority with respect to the finances of Falcon since June 1, 2017, when Falcon obtained an order on consent. Since that date, the defendants have been enjoined from holding themselves out as representatives of Falcon;

(b) Andy was removed as a director of both Falcon corporations under Ricchetti J.'s order made on January 15, 2018. This order prohibited the defendants from doing business with a list of Falcon's trucking and transportation customers, among other prohibitions;

10. The new evidence filed in support of this motion provides no evidence that Andy has held himself out as a representative of Falcon, or that he has purportedly exercised the powers of an officer or director of those corporations, or done business with the transportation and trucking customers to which Ricchetti J.'s order applies;

11. Contrary to what Falcon and Jarnail assert in the evidence, Ricchetti J. did not order Andy to repay $3.5 million to Falcon. While he was ordered to return any corporate property in his possession to the corporate plaintiffs, including but not limited to money, trucks, trailers, vehicles, mobile phones and laptops, the order made by Ricchetti J. in the 2018 Reasons did not specifically require him to repay those funds; and

12. Neither Falcon nor Jarnail have produced any evidence that the defendants have used Falcon's assets as security since the January 2018 order was made.

[27] Andy relies upon this lack of evidence to support his position.

[28] I consider the findings of Ricchetti J. to provide a sufficient basis to conclude that Falcon and Jarnail have shown a strong prima facie case on the strength of those uncontested findings and Andy's own admissions. The litany of acts taken by Andy against the best interests of Falcon is astounding. There is a strong likelihood that a judge at trial will find liability against Andy on the balance of probabilities by finding his conduct as an officer and director of the Falcon corporations was oppressive to, or alternatively, that his conduct unfairly prejudiced or unfairly disregarded Jarnail's interests as a shareholder. On making this finding of liability, the court may grant a remedy. See BCE Inc. v. 1976 Debentureholders, [2008] 3 S.C.R. 560, at paras. 89-95.

Execution before judgment

[29] The second argument Andy makes is more problematic. It has long been the general rule in Canada, and Ontario in particular, that the court shall not grant execution before judgment. This principle was discussed in Aetna Financial Services Ltd. v. Feigelman, [1985] 1 S.C.R. 2, where Estey J. defined the concept of execution and its application to the general rule in the following way [at para. 8]:

A second and much higher hurdle facing the litigant seeking the exceptional order is the simple proposition that in our jurisprudence, execution cannot be obtained prior to judgment and judgment cannot be recovered before trial. Execution in this sense includes judicial orders impounding assets or otherwise restricting the rights of the defendant without a trial. This was enunciated by Cotton L.J. in Lister & Co. v. Stubbs, [1886-90] All E.R. 797, at p. 799, as follows:

I know of no case where, because it is highly probable if the action were brought the plaintiff could establish that there was a debt due to him by the defendant, the defendant has been ordered to give a security till the debt has been established by the judgment or decree.

[30] Execution before judgment was discussed again in Canwest Pacific Television Inc. v. 147250 Canada Ltd., [1987] B.C.J. No. 1262 (C.A.) by McLachlin J.A., at the time a judge of the British Columbia Court of Appeal. After reviewing the statements of law in Aetna Financial Services Ltd., McLachlin J.A., at para. 18, extended the word "execution" in this context to mean "any order abrogating the defendants' rights prior to trial. Such orders, apart from certain exceptions, will not be granted." Such exceptions to the general rule would include orders to preserve assets, or to protect the courts process, or to prevent fraud on the court or an adversary, or where removal of goods from the jurisdiction is threatened.

[31] The court in Canwest upheld the refusal of the chambers judge below to grant the order for a transfer of shares before an order for payment was made. On the facts in Canwest, none of the exceptions to the general rule were found to apply.

[32] The difference between execution before judgment and an interim order can be determined by the authority under which the order is made, and its effect on the party whose interest is adversely effected. If I were to order on a final basis that Andy's shares shall be transferred or surrendered without terms, that would be a final order and therefore execution before judgment. Section 248(3) expressly gives the court authority to make an interim order, but its effect would be final if made without terms. As the litigation was commenced by a statement of claim, this would amount to summary judgment.

[33] Section 248(3) provides the court with the power to make any "interim or final order it thinks fit including, . . .". This language vests the court with the authority to make such order as is just, including but not limited to those remedies that are set out in the subsection. I am of the view that the legislature intended to provide the court with the power to make an order that includes one or more of those enumerated remedies along with ordering any other terms that would do justice between the parties and in accordance with guiding principles. An example would be if the court were to make an interim order for the purchase of securities, provided the purchaser first posts security on an interim basis instead of paying the vendor pending trial.

[34] The request that the court make an interim order for the transfer or surrender of shares under s. 248(3) is an important distinction. It is the means by which as the court may order interim relief authorized by statute on such terms it considers just. It is not a motion for summary judgment in whole or in part, and not subject to characterization as execution before judgment.

Threshold met

[35] The injury that Andy has caused to Falcon directly, and to Jarnail as a shareholder is deserving of a remedy. Andy is, in the words of Ricchetti J. at para. 146 of the 2018 Reasons, an admitted defrauder. I am also of the view that a person such as Jarnail, holding 50 per cent of the shares in a privately held corporation, has a legitimate expectation that the other 50 per cent shareholder will act in good faith because there is a reasonable expectation for equal shareholders to act in a manner consistent with an intention for the corporation to succeed. A deliberate failure to act in good faith should be considered a valid ground to disentitle the offending shareholder from holding shares in the corporation. This result is particularly important when the continued ownership of shares by that person will in all probability work to the detriment of the corporation, and contrary to the reasonable expectations of the other shareholder. While an equal shareholder does not owe the same duties to the corporation imposed upon an officer or director under s. 134 of the OBCA or at law, this expectation of good faith between shareholders seems a logical extension of the good faith principle existing at law between contracting parties examined in Bhasin v. Hrynew, [2014] 3 S.C.R. 494, at paras. 42, 43, 73.

[36] I therefore find that Falcon and Jarnail have met the required threshold for injunctive relief as the moving parties. This conclusion leads to next consider that part of the test concerning irreparable harm.

Irreparable harm

[37] In Quizno's Canada Restaurant Corp. v. 1450987 Ontario Corp., [2009] O.J. No. 1743 (S.C.J.), the court held that irreparable harm suffered by a business, in that case a franchisor, goes to the goodwill, reputation and responsibility to maintain the integrity of its business system. I consider those values to apply here.

[38] The irreparable harm that RJR-MacDonald requires the moving parties to show has been established on the evidence given by Jarnail. The term "irreparable" refers to the nature of the harm done, rather than its magnitude. The plaintiffs rely on the opinion evidence given by Andrew Cochran of Ernst & Young LLP in his report to analyze the harm done to Falcon, to the extent his opinion is based on the factual framework provided by Jarnail's affidavit and previous findings made in the 2018 Reasons. This evidence is given to show the effect of the harm on the value of Falcon's shares.

[39] Jarnail's evidence that Falcon cannot access appropriate financing, read together with Ricchetti J.'s reasons, makes it apparent that steps must be taken to allow the Falcon corporations to obtain financing to recover from the substantial damage to Falcon's business caused by Andy's wrongful conduct. This evidence supports the submissions of counsel that Falcon requires this financing to expand its capacity for customer retention and to re-grow its business to previous levels.

[40] In my view, these facts show that Falcon will in all probability suffer irreparable harm if the relief is not granted.

Balance of convenience

[41] Considerations of harm to a defendant as well as the plaintiff are properly given the balance of convenience branch of the test. Whether the test is more properly characterized as the balance of inconvenience or the balance of prejudice, the inquiry is the same: to which party will the order cause the least harm?

[42] Provided the status quo imposed by Ricchetti J.'s order prevails, the balance of convenience favours Falcon and Jarnail. It is difficult to imagine how an order to exclude Andy from continued ownership in Falcon will inconvenience him when he is an owner of competing corporations that are, or should be, operating independent of Falcon and its customers.

[43] I therefore conclude that granting the appropriate relief will cause less harm to Andy. The real issue on this motion how to protect Andy's interest if he exits as a shareholder prior to judgment, while at the same time providing Falcon with the ability to meet the apparent requirement of Falcon's proposed lenders to exclude Andy as a shareholder.

Appropriate interim relief

[44] In an action for relief commonly known as the "oppression remedy", the court has the statutory power to make any interim or final order that it thinks fit. The Court of Appeal for Ontario made it clear in Naneff v. Con-Crete Holdings Ltd. (1995), 23 O.R. (3d) 481 (C.A.) that the exercise of this discretionary power is subject to two important limitations:

(1) they (the powers) must only rectify oppressive conduct; and

(2) they may protect only the person's interest as a shareholder, director or officer as such.

[45] In my view, the purpose of the power to rectify the effect of oppressive or unfair conduct by tailoring the appropriate relief to address the wrong complained about, including the limitations on that power, applies as much to fashioning interim relief under s. 248(3) as it does to making a final order.

[46] There is a technical reason why granting an interim order for the requested relief is difficult. Falcon and Jarnail have not requested relief requiring Andy to sell, transfer or surrender his shares to either of them in the fresh as amended statement of claim. Currently, the fresh as amended statement of claim only asks for an order, among others, requiring Andy to pay Jarnail for his shares in Falcon, or otherwise to pay him compensation for the damage or loss in value of those shares. Therefore, any order I make will be subject to Falcon or Jarnail obtaining an order for leave to further amend the statement of claim accordingly.

[47] Generally speaking, I note that neither counsel have identified whether the Falcon corporations or Jarnail should be designated as the purchaser of Andy's shares. I was advised that an order transferring the shares to either of them would be sufficient at this time, with the actual purchaser to be determined later.

[48] This would not be a satisfactory answer in any boardroom, let alone a courtroom. The transferor must know the identity of the party purchasing his shares to understand whether the imputed or actual proceeds from the disposition of shares should be treated as a deemed dividend or a capital gain for tax purposes. As Falcon and Jarnail now seek the transfer of shares, it is important for Andy to know at this time if his shares are to be transferred to either Falcon or to Jarnail.

[49] In the absence of submissions one way or another, I must determine the logical transferee of Andy's shares based on the position set forth by the parties in the materials they have filed on this motion, and on the law.

Falcon

[50] Falcon takes the position that the appropriate order would require Andy to transfer or surrender all shares he holds in the respective Falcon corporations to those corporations. This position is no doubt taken to give Falcon the ability to set off the claim of at least $3.5 million in diverted funds against the ultimate purchase price for those shares. Andy has received the benefit of those funds personally, or has used those funds to form corporations to compete with Falcon. In a sense, Falcon is arguing that Andy has already been paid at least $3.5 million for his shares.

[51] Counsel for Andy disagrees with this reasoning. Mr. Golden argues that the fair value of Andy's shares is unknown, and will remain unknown until the court fixes the fair value after hearing all relevant evidence. As this motion was not framed as a motion for summary judgment, there was no evidentiary requirement compelling Andy to put his best foot forward to raise a genuine issue requiring a trial. To rely on the facts currently in evidence for the purpose of set off is to ignore all other evidence that may be given in the fullness of time.

Valuation of shares

[52] I have considered the expert evidence given by Deloitte on Andy's behalf, and by Ernst & Young on behalf of the Falcon corporations. Those experts can agree on approach and on several of the factual components to support their opinions. However, they differ on what and when value was lost because of Andy's conduct. These differences remain issues in contention.

[53] I am prepared to apply June 2018 as the valuation date for the purpose of this motion as it is the month by which the harm caused by the wrongful conduct of Andy and others was quantified. Andy should not profit by his own misconduct. It is appropriate that his shares should suffer the same diminution in value as the other shareholder, and for the same reasons.

[54] The reports were prepared on an estimate basis, and may not have been subjected to the level of scrutiny expected of a comprehensive report. On p. 4 of the Ernst & Young report, the $3.5 million of diverted funds are identified. Mr. Cochran then states that the full extent of the misconduct is not known by the plaintiffs. However, at para. 12.4 on p. 17, he makes the following acknowledgment:

We note that the above quantified diminution in value both by us and Deloitte does not consider the financial impact from the misappropriation of at least $3.5 million by Grewal. It is unclear the extent to which this would impact our valuation conclusions herein.

(Emphasis added)

[55] The logical inference to draw from this acknowledgment is to find that the effect of the diverted funds on the share value remains unknown to each valuator, and therefore to each of the parties and the court.

[56] Using the framework in its report, Deloitte has determined that the shares in the Falcon corporations had an en bloc value of $5.4 million on the valuation date. In contrast, Ernst & Young has valued those shares as of that date at $2.9 million. The mean value of all shares within that range would therefore be $4.15 million.

Impediments to Falcon as purchaser

[57] The Falcon corporations are the parties that have been injured by Andy's conduct. It is the Falcon corporations that would be entitled to the benefit of any set off against an amount payable for Andy's shares. Theoretically, they are the appropriate entities to purchase those shares, either by transfer or surrender.

[58] For Falcon to advance the claim for set off argued by Mr. Bell and Mr. Madhany, Falcon must be in a position to make its claim for damages or for restitution. There are three impediments that prevent Falcon from using this motion as a platform for its claim.

[59] First, the motion is brought under s. 248(3) of the OBCA. A motion brought under this subsection requires that any order must be made in connection with a proceeding under s. 248. Falcon has made its claim for declaratory relief and for damages. Neither of the Falcon corporations fits within the definition of a "complainant" within the meaning of s. 245 of the OBCA, and it is not an "offering corporation" to come within s. 248(1). As the Falcon corporations are bringing this motion under s. 248(3), there is no set off available because Falcon is not a complainant.

[60] Second, even if Falcon qualified as a complainant to utilize s. 248, or leave was obtained to continue this action as a derivative action and this motion was based on s. 101 of the Courts of Justice Act for a mandatory order that Andy transfer his shares to Falcon outside of s. 248, Falcon must overcome the general solvency requirements of the OBCA to purchase its own shares under s. 30(2). This solvency requirement applies to any corporation governed by the OBCA. Section 30(2) reads as follows:

Purchase of issued shares permitted

30(1) Subject to subsection (2) and to its articles, a corporation may purchase or otherwise acquire any of its issued shares or warrants.

Where prohibited

(2) A corporation shall not make any payment to purchase or otherwise acquire 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) its stated capital of all classes.

[61] The solvency issue also arises within s. 248 itself. The power of the court to make orders for the transfer of shares, or for payment for shares acquired under s. 248(3)(f) and (g) is expressly subject to subs. (6), which specifies that:

Where corporation prohibited from paying shareholder

(6) A corporation shall not make a payment to a shareholder under clause (3)(f) or (g) 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 its liabilities.

[62] There is no evidence apparent from the affidavits filed by Jarnail that either Falcon corporation separately or on a consolidated basis has sufficient assets to overcome the solvency test under either section. When pressed, counsel for the moving parties stated that the solvency test was satisfied by the report filed by Ernst & Young. However, Jarnail's evidence is directed to the various challenges facing Falcon to obtain financing from traditional sources. It cannot be repurposed to show that Falcon has sufficient assets to meet the solvency test. Jarnail's affidavit serves as the factual chassis for the opinion given by Mr. Cochran, and his report is only as probative as the evidence that supports it.

[63] Third, Falcon is not in a position to apply any amounts Ricchetti J. found Andy has diverted as a set off at this stage of the litigation.

[64] The concept of set off was developed by the common law, and later codified in s. 111 of the Courts of Justice Act. How and when set off is applicable was set out definitively by the Supreme Court of Canada in the case of Holt v. Telford, [1987] 2 S.C.R. 193.

[65] In Holt v. Telford, the Supreme Court held that a claim for legal set off must involve the same parties to satisfy the mutuality requirement for the remedy. Falcon as the injured party makes a straight claim against Andy for damages in the amount of $20 million for breach of fiduciary and other duties, and for the other causes of action pleaded in the fresh as amended statement of claim. There is little doubt in my mind that Andy will ultimately transfer his shares in Falcon voluntarily or by order of the court. He has a prima facie entitlement to receive the fair value of those shares, subject to any order the court might make to the contrary. The mutuality required for legal set off is therefore established.

[66] In Holt v. Telford, legal set off requires the set off of liquidated claims. This is where Falcon runs out of road. Falcon claims damages against more parties than just Andy. Those damages have not yet been quantified, let alone proven. It will require a trial to determine what damages are owed by which defendant, if any. The damages discussed by the expert reports filed on this motion are by the experts are estimates only, and subject to proof at trial. The damage or loss of share value discussed in those reports cannot be treated as a liquidated amount in the sense that they are not conclusive in their current state.

[67] Even if the Falcon corporations were able to set off the loss against the value of Andy's shares for the purpose of this motion, there is no evidence that Jarnail has the authority to commence or to continue this action as a derivative action on behalf of those corporations. There is no evidence before the court that Jarnail has either produced the necessary resolution as the director of each corporation, or that leave has been obtained under s. 246 of the Act. At the time this motion was argued, Jarnail had not moved the action forward on behalf of the Falcon corporations.

[68] I do not consider equitable set off to be available to Falcon in any event. The doctrine of equitable set off does not require mutuality in a strict sense, and permits competing claims for liquidated or unliquidated damages to follow suit. However, that flexibility comes with an important binder. To access equitable set off, the party seeking this relief must establish that the amount claimed for set off has arisen out of the same contract or series of events, or is closely connected with the contract or series of events in issue: Holt v. Telford, at p. 206 S.C.R.; Ang v. Premium Staffing Ltd., 2015 ONCA 821, at para. 11.

[69] Falcon has not made out the requirements for equitable set off. It has not proven the amounts it seeks to set off against the price of Andy's shares. There is also insufficient evidence on the record before me to find that Falcon's claims arise from the same series of events, or are closely connected to those events behind Andy claims for the fair value of his shares.

[70] I therefore conclude that Falcon cannot be the purchaser of Andy's shares within the context of this motion.

Jarnail

[71] As Jarnail is a shareholder in each Falcon corporation, he has a statutory right to bring this action in his personal capacity as a complainant. Accordingly, Jarnail brings this motion as a complainant for interim relief under s. 248(3).

[72] The motion to acquire Andy's shares is based on Andy's alleged conduct. The diversion of $3.5 million in gas rebates was a wrong suffered by Falcon. The subterfuge of Andy and others to take customers, lure away employees and to exploit Falcon's presence for leasing and marketing purposes injured Falcon, not Jarnail. Andy's conduct, however it is found to qualify as conduct under s. 248(2) or as a breach of his duties owed as an officer or director of Falcon at law or under s. 134 of the OBCA, caused harm directly to Falcon. Andy owed his duties to the corporations he served as an officer and director, not to another shareholder: see BCE Inc. v. 1976 Debentureholders, [2008] 3 S.C.R. 560, at para. 66. See, also, Brant Investments Ltd. v. Keeprite Inc. (1991), 3 O.R. (3d) 289 (C.A.).

[73] Jarnail has made claims in this action that have yet to be adjudicated, let alone quantified. Consequently, there is not yet a tangible element to any claim he is making, which means there is no liquidated or unliquidated amount that Jarnail can assert by way of set off. If the court is to grant an interim order for the transfer of Andy's shares, it must be to Jarnail, but without any set off.

[74] Jarnail's case against Andy in the action is founded on the claim that the value of his shares have been severely impacted because of Andy's conduct. Jarnail's position on this motion comes down to the argument that Andy's continuing rights as a shareholder will cause further negative impact on the value of his shares. As Jarnail does not have the ability at this time claim a set off to acquire those shares from Andy, he must pay for them or offer security to acquire them prior to trial.

[75] I therefore make the following orders:

(1) Jarnail shall have the option to acquire all issued and outstanding shares held directly or indirectly by Andy in both Falcon corporations;

(2) Jarnail has the right to examine Andy under oath to determine whether the shares are still held by him, if they have been hypothecated, pledged or encumbered, and generally to conduct due diligence with respect to his acquisition of those shares, before May 24, 2019;

(3) to exercise that option, Jarnail must give notice in writing to Andy or his lawyers by May 31, 2019, along with proof that he has posted security in the amount of $2 million with the accountant of the Superior Court, or by deposit to a lawyer's trust account on terms mutually satisfactory to the parties. This security shall then held in respect of those shares until further order;

(4) if and when Jarnail exercises the option, Andy shall transfer all such shares to him within 14 days of receiving notice;

(5) this order is made without prejudice to the right of any party to bring a further motion as to the form of that security, to increase or reduce the amount of the security ordered, or with respect to any further terms relevant to Jarnail's acquisition of Andy's shares.

[76] I shall remain seized of this matter for the purpose of hearing that motion, or any motion to enforce any of the above orders.

Costs

[77] The parties are encouraged to resolve the issue of costs between them. If the involvement of the court is required to award costs, the following terms shall apply:

(1) the party seeking costs shall file written submissions by April 24, 2019;

(2) the responding party shall then have until May 3, 2019, to file responding submissions;

(3) written submissions shall consist of no more than four double-spaced typewritten pages, not including offers to settle or bill of costs.

[78] No submissions in reply shall be permitted without leave. All written submissions shall be sent by fax or by e-mail to my judicial assistant at 905-456-4834 or melanie.powers

Motion granted in part.

End of Document