Court File and Parties
COURT FILE NO.: CV-18-606396-CL DATE: 20190731 ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
SANIIA AGISHEVA and ANDRII GRYNYSHYN in the name of and on behalf OF SUNBEX CORPORATION Applicants
– and –
DMITRI PETROV, NATALIA LOBANOVA, ALEX MIADELETS, VENTUS CONSULTING INC. and MIDSTREAM INFRASTRUCTURE PROTECTION TECHNOLOGIES INC. Respondents
COUNSEL: Vladimira M. Ivanov, for the Applicants Brian Illion, for the Respondents
HEARD: June 17, 2019
REASONS FOR DECISION
DIETRICH J.
[1] Two enterprising couples decided to go into business together. Dimitri Petrov (“Petrov”) and Natalie Lobanova (“Lobanova”) immigrated to Canada from Russia a number of years ago. Andrii Grynyshyn (“Grynyshyn”) and Saniia Agisheva (“Agisheva”) immigrated to Canada from Ukraine more recently. They all reside in Ontario.
[2] Initially, the couples undertook a commercial real estate venture to custom build and market a residence in Oakville, Ontario. Later, in 2015, they entered into a joint venture to source a polymer coating product from Ukraine for commercial and industrial uses in Canada and also to apply the coating.
[3] They conducted their polymer coating business through Sunbex Corporation (“Sunbex”). Each of them became a director and an officer of Sunbex and each subscribed for 25% of the shares of Sunbex.
[4] Grynyshyn and Agisheva (the “Grynyshyn shareholders”) now accuse Petrov and Lobanova (the “Petrov shareholders”) of misappropriating corporate opportunities by diverting business from Sunbex to themselves. Accordingly, they bring this application for leave to bring a derivative action on behalf of Sunbex. The Petrov shareholders deny this claim and accuse the Grynyshyn shareholders of sabotaging the business and misappropriating corporate funds. They bring a cross-application for leave to bring a derivative action on behalf of Sunbex.
[5] Without commenting on the merits of either of the two claims, for the reasons that follow, I find that the Grynyshyn shareholders’ claim that Sunbex has a valid cause of action for wrongful misappropriation of its polymer coating business is the more appropriate derivative action.
Issue
[6] The court is asked to determine the proper procedure to resolve a dispute between the Grynyshyn shareholders and the Petrov shareholders arising out of their joint venture undertaken through Sunbex.
Factual Background
[7] Through their connections in Ukraine, the Grynyshyn shareholders located and sourced the polymer coating product. It is understood to be a paint-like product suitable to coat and seal metal and concrete tanks for industrial and commercial uses. The product would be used to coat and seal large industrial oil storage tanks in eastern Canada.
[8] The Grynyshyn shareholders also sourced a team of labourers from Ukraine who could apply the product. They had Rope Access Technician certifications that allowed them to apply the coating without the use of expensive lifting equipment. They also offered cheaper labour than Canadian labourers with similar expertise.
[9] The Petrov shareholders brought to Sunbex its first large contract from the North Atlantic Refinery Limited Partnership (“NARL”) in Newfoundland in 2015. This contract, to apply the product to oil tanks in Newfoundland, was facilitated by the defendant Alex Miadelets (“Miadelets”), a commissioned agent and friend of Petrov. Miadelets was paid $30,000 for his role in securing the contract. The contract was an “evergreen” contract without a fixed term and each work scope award from NARL would be executed as a separate contract. The contract could be terminated on one month’s written notice. The contract between NARL and Sunbex has never been terminated.
[10] The shareholders agreement among the Grynyshyn shareholders, the Petrov shareholders and Sunbex provided that the Grynyshyn shareholders would receive a 50% share of the net proceeds of the NARL contract and the Petrov shareholders would receive a 50% share of the net proceeds of the NARL contract.
[11] The Grynyshyn shareholders received at least $800,000 from Sunbex, as did the Petrov shareholders, for their respective efforts regarding the NARL contract.
[12] The relationship between the two couples became strained in 2017 when their real estate venture became litigious. Around this time, Petrov was suggesting that NARL was demanding repairs to the work done on the tanks which may have arisen as a result of an inferior coating product.
[13] In June 2017, Petrov resigned as a director of Sunbex and advised the Grynyshyn shareholders that there would be no more work scopes from NARL for Sunbex.
[14] Subsequently, Grynyshyn discovered that Miadelets had formed a new company, Midstream Infrastructure Protection Technologies Inc. (“Midstream”). On July 1, 2017, it had entered into a contract with NARL to provide the same services that had been provided by Sunbex. The contract, signed by Miadelets, on behalf of Midstream, described Midstream to be “operating as Sunbex.”
[15] The Petrov shareholders had also formed a new company, Ventus Consulting Inc., which was providing consulting services to Midstream.
[16] The same crew from Ukraine that Sunbex had hired, and who had returned to the Ukraine when Petrov said that there would be no more work for Sunbex from NARL, had returned to Canada and was now working for Midstream.
[17] The final payment of $43,756.99 owing on the Sunbex contract with NARL was not deposited into Sunbex’s Royal Bank account, being the only bank account for the company known to the Grynyshyn shareholders. Instead, it was deposited into a Bank of Montreal bank account opened in the name of Sunbex, without the knowledge of or authorization by the Grynyshyn shareholders. Among the amounts withdrawn from the Bank of Montreal account was $14,525.02 paid to Ventus Consulting Inc., the directors of which are the Petrov shareholders.
Position of the Parties
[18] The Grynyshyn shareholders allege that Sunbex was stripped of its assets and revenue. They further allege that it has been unable to continue its business because of the conduct of the Petrov shareholders, whom they allege diverted Sunbex’ business to Midstream in 2017.
[19] The Petrov shareholders deny any such conduct and allege that it was the Grynyshyn shareholders who squelched any further business for Sunbex because their wrongdoing caused Sunbex to lose credibility with NARL. They allege that Grynyshyn ordered defective coating products, resulting in $240,000 in incremental costs; they made numerous improper expense claims; they wanted to shut Sunbex down without honouring warranty obligations to NARL; and they put Petrov’s professional reputation at risk with NARL. They further allege that the Grynyshyn shareholders refused to co-operate with Petrov in securing additional contracts with NARL and that the Grynyshyn shareholders bring this application in bad faith to leverage their position in a collateral proceeding involving their other business venture.
[20] The Petrov shareholders bring their cross-application seeking leave to bring their own derivative action on behalf of Sunbex. They allege that the Grynyshyn shareholders exposed Sunbex to warranty claims that they assert were brought by NARL, and the Grynyshyn shareholders misappropriated corporate funds by removing from Sunbex more than their agreed upon share of the profits and by improperly claiming expenses. They did not pursue this cross-application vigorously. Instead, they argued that none of the parties should be granted leave to bring a derivative action and that the claims by the Grynyshyn shareholders were more appropriately addressed in the context of a claim in oppression.
[21] The Grynyshyn shareholders oppose the Petrov shareholders’ cross-application and assert that no warranty claims ever materialized and that, even if they had, they would have been covered by an indemnity provided by Midstream. Further, they assert that the alleged misappropriation of corporate funds amounts to less than $15,000, which falls within the jurisdiction of the Small Claims Court.
Law and Analysis
[22] As set out in Jennings v. Bernstein (2000), 11 B.L.R. (3d) 259 (Ont. Sup. Ct.) at para. 33, in order to obtain leave to commence a derivative action, the applicants must satisfy the court that:
a) they are complainants within the definition contained in s. 245 of the Ontario Business Corporations Act, R.S.O. 1990, c. B.16 (the “OBCA”); b) the directors of the corporation will not bring, diligently prosecute or defend or discontinue the action; c) the complainant is acting in good faith; and d) the action “appears” to be in the interest of the corporation.
The Grynyshyn Shareholders’ Application
[23] On the evidence, I find that the applicants (the Grynyshyn shareholders) satisfy all four elements of the test for leave to commence a derivative action. They are directors, officers and shareholders of Sunbex and are therefore “complainants” within the meaning of s. 245. Given the nature of the allegations, the other shareholders of Sunbex, namely the Petrov shareholders, will not cause Sunbex to commence or prosecute Sunbex’s claim against the respondents for misappropriation and breaches of fiduciary duty.
[24] I find that the applicants are acting in good faith by advancing well-founded claims on behalf of Sunbex against the respondents for the benefit of all shareholders. Based on the record, there is reason to believe that the work that was being done for NARL by Sunbex is now being done by Midstream, with the assistance of the Petrov shareholders, and that Midstream may have passed itself off as Sunbex, in entering into a contract with NARL purporting to be “operating as Sunbex.”
[25] It appears that the same Ukrainian-resident labourers who worked for Sunbex were subsequently recruited and brought to Canada to work for Midstream. There is some evidence to suggest that, unbeknownst to the Grynyshyn shareholders, Sunbex, a company that had been in existence for some time, may have been used to assist Midstream in obtaining foreign workers’ licences. On the record, it appears that the labourers returned to Canada in September of 2017 to work for Midstream, but Midstream did not obtain work permits under its own name until November of 2017. The inference is that the labourers continued to work under their Sunbex work permits while doing work for Midstream.
[26] I do not accept the submission of the Petrov shareholders that the Grynyshyn shareholders are acting in bad faith because they are motivated by a personal interest unrelated to Sunbex. While the Petrov shareholders have alleged that the applicants are hoping to use the derivative action as leverage in a collateral litigious matter, there is no evidence of this ulterior motive before the court.
[27] If it can be proven that corporate opportunities were diverted from Sunbex to Midstream, any damages awarded to Sunbex would benefit all the shareholders.
[28] The proposed derivative action appears to be in the best interest of Sunbex. The action is aimed at recovering substantial revenues allegedly owed to Sunbex under the NARL contract and other potential business opportunities that would have been available to Sunbex had they not been diverted by the Petrov shareholders in breach of their fiduciary duties.
[29] The bar is relatively low. The applicants need only to show that the action “appears” to be in the interests of Sunbex. I am satisfied that they have met this test. I do not accept the submission of the Petrov shareholders that the claim of the Grynyshyn shareholders is in pith and substance a personal claim against the Petrov shareholders arising out of the shareholders agreement. The Grynyshyn shareholders continue to be shareholders of Sunbex and, based on the record, it appears that Sunbex, at least in name, had some involvement in the procurement of additional work from NARL, from which all the shareholders of Sunbex did not benefit.
[30] The statutory requirements for leave to bring a derivative action are to be given a liberal interpretation in favour of the complainant: LaRosa v. Brown, 2016 ONSC 407 at para. 19. In that case, the applicant alleged that the corporation suffered damages because the defendant misappropriated and diverted corporate assets and revenues to the defendant company and improperly withdrew funds for personal use. The applicant sought a constructive trust in favour of the corporation and/or damages to be paid to the corporation. The court found that it was evident from the nature of the allegations that the directors would not bring the proposed action or authorize the applicant to do so. The court also found that it was not necessary for the court, at this stage in the proceedings, to determine issues of credibility or resolve all issues in dispute.
[31] Given the nature of the allegations, aimed directly at the Petrov shareholders, it is evident that the directors of Sunbex, collectively, will neither bring the proposed action nor authorize the applicants to do so, irrespective of whether the action appears to be in the best interests of Sunbex. I find that the Grynyshyn shareholders have demonstrated an arguable case on the merits. At this stage in the proceedings, the court is not required to determine issues of credibility or to resolve all issues in dispute.
[32] I am also inclined to draw an adverse inference against the Petrov shareholders. The evidence is that on discovery and in subsequent answers to undertakings, the Petrov shareholders have failed to respond, or fully respond, to a number of relevant questions. Specifically, they have declined to disclose the entities for whom Midstream does work. They have also declined to produce the complete immigration application file with respect to the Ukrainian labourers who returned to work for Midstream after returning to Ukraine when the Grynyshyn shareholders were told that there would be no more work for Sunbex from NARL. The Grynyshyn shareholders allege that immigration documentation will show that when the labourers returned from Ukraine to work for Midstream, it was Sunbex that was named as the sponsoring corporation.
The Petrov Shareholders’ Cross-Application
[33] The cross-application by the Petrov shareholders is based on their allegations that the Grynyshyn shareholders exposed Sunbex to warranty claims by NARL and they misappropriated corporate funds.
[34] On the evidence, I find that the cross-applicants do not satisfy all four elements of the test for leave to commence a derivative action on behalf of Sunbex. They do satisfy some of the elements. Until Petrov’s resignation as a director in 2017, they were both directors of Sunbex. They are also officers and shareholders of Sunbex and are therefore “complainants” within the meaning of s. 245 of the OBCA. Given the nature of the allegations, which are aimed directly at the Grynyshyn shareholders, the Grynyshyn shareholders will surely not cause Sunbex to commence or prosecute Sunbex’s claim against themselves for exposing Sunbex to warranty claims and misappropriation of corporate funds.
[35] However, I do not find that the cross-applicants are acting in good faith by advancing well-founded claims on behalf of Sunbex against the Grynyshyn shareholders for the benefit of all shareholders. On the record, it appears that the alleged warranty claims against Sunbex do not exist and, in fact, were never been advanced by NARL. I find the $14,780 alleged to have been misappropriated from Sunbex by the Grynyshyn shareholders to be a de minimis amount in the context of the collective withdrawals of at least $1.6 million from Sunbex by both sets of shareholders. It cannot be said to be in the interests of Sunbex to commence a costly derivative action to recover this amount, if indeed it was misappropriated.
[36] The shareholders agreement provided for a sharing of the business proceeds on a 50/50 basis. The Petrov shareholders nonetheless allege that the Grynyshyn shareholders’ withdrawal of $800,000 from Sunbex amounted to misappropriation because it was unsupported by invoices or documentation and because it resulted in a payment to the Grynyshyn shareholders of an amount greater than that to which they were entitled under the shareholders agreement. The Petrov shareholders assert that the 50/50 sharing of profits was contingent on the netting out of certain expenses, which the Grynyshyn shareholders ignored. This disagreement appears to be more in the nature of a shareholders’ dispute requiring a determination of the meaning of certain terms used in the shareholders agreement relating to “profit” and “net proceeds” and what the parties intended when entering into the shareholders agreement as opposed to the subject matter of a derivative action. Disputes that involve personal contractual claims as between the parties have been held not to be appropriate for a derivative action: Khela v. Phoenix Homes Ltd., 2015 BCCA 202, paras. 68, 78.
[37] Accordingly, I do not find that the derivative action proposed by the Petrov shareholders would be in the best interests of Sunbex. I am not persuaded that they have shown an arguable case on the merits.
[38] The Petrov shareholders argue that the claims advanced by the Grynyshyn shareholders ought not be the subject of a derivative action and that they are more suited to a claim for an oppression remedy. They assert that most of the claims by the Grynyshyn shareholders are against the Petrov shareholders in their capacity as directors of Sunbex for actions taken by them in that capacity; for example, the failure of them to bring in more contract work for Sunbex from NARL or refusing work from NARL. They argue that these failures, if proven, could be addressed by an oppression remedy: the shares of Sunbex could be valued as if that contract work had been brought to and performed by Sunbex and one set of shareholders of the company could buy out the shares of the other set of shareholders to achieve a “corporate divorce.” The Petrov shareholders contend that it is open to the court to fashion the relief sought in the derivative action they seek to bring as an oppression remedy. They further argue that the Grynyshyn shareholders are in a conflict of interest and cannot be relied on to properly represent the interests of all shareholders given the animosity between the Grynyshyn shareholders and the Petrov shareholders.
[39] The Grynyshyn shareholders argue that this case is not a claim for a corporate divorce. It is a claim for breach of fiduciary duty and misappropriation of corporate opportunity. They argue that their claim has been appropriately brought against all alleged wrongdoers, including Midstream, and that the court, in a derivative action, has inherent jurisdiction to determine how Sunbex, and any damages it may recover as a consequence of the derivative action, will be dealt with going forward. They disagree that the Grynyshyn shareholders are in a conflict of interest and cannot act in the best interests of Sunbex given the relationship breakdown between the two sets of shareholders.
[40] I accept these arguments made by the Grynyshyn shareholders. Based on the record, it would appear that Sunbex has no ongoing business currently and is not a going concern. The role of the Grynyshyn shareholders would be limited to prosecuting their claim, which, if successful, would benefit all the shareholders of Sunbex.
Disposition and Costs
[41] Unlike the Petrov shareholders, I find that the Grynyshyn shareholders have met the test for leave to bring a derivative action. They have shown that the pursuit of their claims is in the best interests of Sunbex. They are not, at this stage in the proceeding, required to show that Sunbex will succeed, but I find that they have shown that they have an arguable case on the merits.
[42] Accordingly, the applicants (Grynyshyn shareholders) are granted leave to commence and prosecute a derivative action on behalf of Sunbex against the respondents (Petrov shareholders) as set out in their Statement of Claim submitted as part of their Notice of Application in this proceeding.
[43] The cross-application by the respondents (Petrov shareholders) is dismissed.
[44] The applicants shall be entitled to their costs in this matter to be paid by the respondents. The parties are strongly encouraged to agree on the matter of costs. If the parties cannot agree, the applicants shall serve and file written costs submissions not exceeding three pages in length (excluding a costs outline or bill of costs) within 14 days hereof. The respondents shall serve and file written costs submissions not exceeding three pages in length (excluding a costs outline or bill of costs) 14 days thereafter.
Dietrich J.