Court File and Parties

COURT FILE NO.: 18-75539 DATE: 2019/11/19

COURT OF ONTARIO, SUPERIOR COURT OF JUSTICE

RE: Paul Sun, Plaintiff AND: Duc-Tho Ma also known as Tom Ma, Defendant AND: Paul Sun and Ironyun Incorporated, Defendants by Counterclaim

BEFORE: Mr. Justice Calum MacLeod

COUNSEL: Shawn J. O’Connor, for the Plaintiff & Defendant by Counterclaim, Paul Sun Duc-Tho Ma (Tom Ma), In Person, Defendant and Plaintiff by Counterclaim No one appearing for Ironyun Incorporated

HEARD: November 18 & 19, 2019

Decision and Reasons

Introduction

[1] This matter came on before me for trial on the dates noted above. It is a claim based on a promissory note. There is a defence and counterclaim. At the conclusion of trial, I delivered an oral decision but I indicated I would provide the reasons in writing along with the disposition of costs. That is what follows.

[2] A debt claim supported by a promissory note is ordinarily straightforward but this particular claim is set against a complicated set of international business arrangements. By way of the counterclaim, the defendant seeks to bring before the court a myriad of issues and a set of facts that are intriguing but, as I will explain, are for the most part not properly before this court.

[3] The plaintiff is entitled to judgment. I am however imposing terms on Mr. Sun which must be fulfilled before the judgment will be enforceable.

Form of the Trial

[4] Pursuant to an order made by Master Fortier following a summary judgment motion, this was a summary trial. There had also been certain determinations made by Master Kaufman when he refused a motion to amend the counterclaim.[^1] By agreement between the parties, the affidavits for trial consisted of the original material used on the summary judgment motion, the material filed on the pleading amendment motion and certain supplementary affidavits. There was also limited viva voce evidence and live cross examination.

[5] The trial proceeded under the procedure set out in Rule 76 of the Rules of Civil Procedure[^2]. In deference to the fact that Mr. Ma was representing himself, however, I allowed him some leeway in his evidence in chief. Nevertheless, the evidence was completed in a single day with submissions the following morning. Mr. Ma chose to make submissions in writing.

[6] Although Mr. Ma had been represented by counsel throughout this proceeding and still has access to counsel during the trial, he advised the court he had elected to represent himself. Mr. Sun is a director and officer of Ironyun Incorporated which is a defendant to counterclaim and he was present in court but Ironyun itself did not appear. Mr. O’Connor does not act for Ironyun.

Background

[7] Without delving too deeply into the history, the parties are businessmen and entrepreneurs. Mr. Ma resides in Ontario. Mr. Sun resides Connecticut in the United States. Both men have a background in the high tech sector and have done business in Thailand, Taiwan and elsewhere. The plaintiff worked for many years for a company based in Taiwan.

[8] Together with another individual, the plaintiff and the defendant founded Ironyun Incorporated, a company registered in the Cayman Islands and intended to market facial recognition software developed in Taiwan. In January of 2015, the parties had entered into a “Founder Shareholder Agreement” pursuant to which each of the founders was to receive “founders shares” in the name of a nominee corporation. In the case of Mr. Ma he was to receive 15,713,250 common shares in the name of “IZ Incorporated”. From the documents it appears that IZ Incorporated has its registered office in Samoa and is “represented” by Mr. Ma.

[9] The founders shares under the agreement were restricted shares to be held in escrow and released upon certain terms. The agreement also contained a provision that the law of the agreement was the law of the “Republic of China” (Taiwan) and any dispute pursuant to the agreement was to be resolved by arbitration in Taipei.

[10] In March of 2015, Ironyun Incorporated was duly registered in the Cayman Islands by Articles of Association. There were other initial investors and employees who also had founders’ shares but Mr. Sun and Mr. Ma through their nominee companies were each holders of over 18% of the common shares. Mr. Ma became the Executive Chairman of the corporation and Mr. Sun became the President and CEO.

[11] All of these facts are apparent from the documents attached to the defendant’s own affidavit evidence. It is also apparent from the defendant’s affidavits that Ironyun attempted to raise $10 million by selling Class A Preferred shares. According to the defendant’s own evidence, in May of 2015 it was agreed that he and Mr. Sun would each purchase 1,000,000 Class A Preferred shares for a purchase price of USD $200,000.00. Mr. Ma agreed that Mr. Sun would lend him the funds and he would repay the amount in 12 months.

[12] While Mr. Ma claims that he was reluctant to make this agreement, it is his own evidence that he did so. Mr. Sun claims that the loan was evidenced by a promissory note which was subsequently destroyed when Mr. Ma signed a new promissory note; the one that this court action is attempting to enforce. Because of the nature of promissory notes, it is quite common for one note to be destroyed or cancelled when another is given in substitution but whether or not there was an original signed note, the defendant’s own evidence confirms the terms of the agreement.

[13] The point to be made is this. The loan of USD $200,000.00 was for the purchase of Class A Preferred shares. It was to be a personal loan between Mr. Sun and Mr. Ma. It was independent of the agreements contained in the Founders Shareholder Agreement. It was independent of any obligations between the defendant and Ironyun arising from his position as an officer, director and employee.

[14] Mr. Ma himself testified that he agreed to a loan from Mr. Sun to purchase the Class A Preferred shares. He denies that there was an original promissory note and he claims the agreement permitted him to transfer two million founders shares to Mr. Sun rather than paying cash. He also denies that the funds were ever advanced or that he was issued the Class A shares but he does not deny there was to be a loan and it was to be repaid in June of 2016.

[15] In October of 2016 Mr. Ma signed the promissory note in question. In that document, he agreed to transfer two million founders’ shares to Paul Sun effective July 20, 2016 and also to pay USD $200,000.00 to Paul Sun by December 31, 2017. He admits to signing the note but he alleges he misread it and that he signed it under duress. Mr. Ma argues that the note should be unenforceable. He argues that it was without consideration because he never did receive the USD $200,000.00

[16] To complete the narrative, there was a falling out between Mr. Ma and Mr. Sun as well as the other directors in 2017. Ironyun was apparently failing to make sales targets and needed to cut costs. Mr. Ma became deeply suspicious of how Mr. Sun was managing the corporation. Mr. Ma alleges Mr. Sun engaged in illegal transfers of technology to mainland China, death threats to another employee, unilateral reductions in compensation and that Mr. Sun stripped the corporation of value by transferring its intellectual property to a US corporation. In May of 2017 Mr. Ma was removed as an officer and director of Ironyun by Mr. Sun and the other directors. Mr. Sun describes this as termination for cause while Mr. Ma describes it as wrongful dismissal.

[17] In February of 2018, the plaintiff commenced this action. The defendant defended and also counterclaimed against the plaintiff and Ironyun. The counterclaim asks for rescission of the promissory note, production of the defendant’s Class A Preferred shares, production of the defendant’s founders shares, production of up to date shareholder registers, an audit of Ironyun’s financial statements, and damages against Mr. Sun for mismanagement of Ironyun.

[18] As noted above, Ironyun itself has not defended this proceeding nor has it appeared or attorned to the jurisdiction. On the other hand, Mr. Sun was present for the trial, is the CEO of Ironyun and is well aware of these proceedings. There can be no doubt that Ironyun has actual notice of the allegations made by the defendant and the relief that is claimed. The question is whether Ironyun itself is legally on notice and whether the court has jurisdiction over the corporation?

[19] On July 18, 2019 the defendant attempted to amend his counterclaim to add a corporation owned by Mr. Sun as a defendant, and to add a claim for misappropriation of his founders’ shares. This proposed amendment was refused by Master Kaufman. At the same time Mr. Ma sought an order for substituted service of the counterclaim on Ironyun. Both motions were refused for reasons set out in the decision.[^3]

[20] Of particular importance is the finding by Master Kaufman that all disputes under the Founders Shareholder Agreement are subject to a forum clause and an arbitration clause. As Master Kaufman points out, the defendant seeks to enforce that agreement and would be bound to pursue that dispute in Taipei. The defendant states that he intends to do just that. In fact he stated that he intends to sue the corporation and Mr. Sun in Taiwan and in the United States.

[21] As a consequence of the above, the only matter before this court is the validity and enforcement of the promissory note and whether or not any of the relief sought in the counterclaim can be granted. The finding that there is a valid and binding arbitration clause relating to shareholder disputes is binding on the parties. The finding that Mr. Ma does not have the right to pursue relief as a shareholder in his personal capacity is also binding.

[22] Mr. Ma may or may not be the beneficial owner of the shares issued to IZ Incorporated and may or may not have control of that corporation. But there is no question that all shares were vested in the name of IZ Incorporated at Mr. Ma’s own direction. IZ Incorporated was the legal entity which owned the shares and would be a necessary party to any litigation about those shares. Mr. Ma may also have rights against Ironyun as a former employee and may have rights in his personal capacity under the Founders Shareholder Agreement. The latter is subject to the forum and arbitration clause and the former would have to be litigated in a forum where Ironyun carries on business or has its registered office.

[23] I note that Mr. Ma asserts he has no documents showing his ownership of IZ Incorporated. He states that IZ was created for him by Mr. Sun but there is no documentary evidence of this before me. Mr. Ma denies having corporate records or minute books for IZ Incorporated or any current information about the status of IZ Incorporated. Whether or not something has subsequently occurred to the corporation is not clear but there is no doubt IZ Incorporated was designated by Mr. Ma as his nominee to hold his shares. This is apparent in all of the documents he himself has produced.

Analysis & Conclusion in Relation to the Promissory Note

[24] Dealing firstly with the promissory note, there is no dispute that the instrument was signed by Mr. Ma. There is no doubt that prior to signing that note, Mr. Ma was already indebted to Mr. Sun for USD $200,000.00 because he had agreed to such a loan the previous year.

[25] Mr. Ma complains that he did not believe funds were advanced to him nor that shares were issued. His evidence that he had no knowledge of these matters is belied by the documents that he himself produced in his affidavit evidence including the Certificate of Incumbency dated August 29, 2017. That certificate shows “IZ Incorporated (Represented by Ma, Tho-Duc)” as holding 12,804,917 Ordinary 1 shares and 1,000,000 Class A Preferred shares as of that date. The corporate records are consistent with the Class A shares having been issued to IZ Incorporated and with a reduction of two million in the number of founders’ shares owned by IZ. In other words, the records are consistent with the promissory note.

[26] It may well be that Mr. Ma did not receive documentation when he should have and it may even be that the corporate records were not updated in a timely manner. Nevertheless, I find as a fact that Alice Sun advanced USD $200,000.00 to Ironyun on behalf of Paul Sun for the purpose of purchasing the 1,000,000 Class A Preferred shares and issuing them to IZ Incorporated. I find that IZ Incorporated was the holder of 1,000,000 such shares as of the date when the promissory note was signed and continued to be the holder of such shares as of the last date that Mr. Ma was able to access corporate records.

[27] Mr. Sun gave evidence that he himself did not receive the two million founders shares but there is no doubt the corporation’s records show that the holding of founder’s shares by IZ was reduced by two million shares. In any event, Mr. Sun only seeks to enforce the monetary amount in the promissory note. Mr. Sun gave evidence that the IZ founders’ shares were forfeited due to breach of the Founders Shareholder Agreement. The agreement does contain terms that appear to provide for forfeiture or cancellation of shares under certain circumstances. As stated, disputes under that agreement and the validity of the share forfeiture would appear to be subject to the arbitration clause. Presumably, the three signatories and their nominee corporations would be the necessary parties. Mr. Sun did not state that the Class A shares had been forfeited.

[28] It appears that whatever difficulty there may have been in obtaining information in 2016, Mr. Sun did cause $200,000 to be paid to Ironyun and Ironyun did issue 1,000,000 Class A Preferred shares to IZ Incorporated. This was the essential purpose of the original loan agreement.

[29] Apart from the question of consideration for the original loan, the only issues raised by the defendant that could be a defence to enforcement of the 2017 promissory note are the issues of mistake and duress. Accepting that Mr. Ma was in a difficult situation because he feared for his financial future and the future of his team and even if I accepted his evidence that he was deeply concerned about how Mr. Sun was running the corporation, the evidence before me is insufficient to constitute duress. As established in the jurisprudence cited by Mr. O’Connor, duress sufficient to vitiate a debt instrument must be both illegitimate and such as to overcome the will of the person relying on duress.[^4]

[30] There is no evidence that subsequent to signing it, Mr. Ma sought to repudiate the promissory note or to take steps to avoid it. He knew he had signed the note and he had no reason to think that Mr. Sun would not seek to enforce it. It was a personal arrangement between the plaintiff and the defendant in their personal capacities.

[31] As for the suggestion that Mr. Ma would not knowingly have turned over two million founders shares and also have agreed to pay USD $200,000.00, I do not accept the evidence that Mr. Ma did not understand what he was signing. His evidence on this point is inconsistent. Mr. Ma purports to be a sophisticated businessman and as he admitted in cross examination, he knows how to retain and instruct lawyers. I find that the evidence in this case is not sufficient to disturb the presumption of validity that attaches to a negotiable instrument such as a promissory note.[^5]

[32] Assuming it is appropriate to look behind this note for additional consideration, the extension of the original loan would suffice. I accept the evidence of Mr. Sun that he never agreed to accept the 2 million founders’ shares in lieu of repayment and Mr. Ma’s evidence that the founders’ shares were worth more than the loan appears to be wishful thinking in light of the financial difficulty he deposes that Ironyun was facing in 2016.

[33] As a consequence of the above, I find that the promissory note is an enforceable debt instrument. There will be judgment against the defendant for the equivalent of USD$200,000.00.

Pre-Judgment Interest

[34] The promissory note does not bear interest, but it was payable when due on December 31, 2017. Demand for payment was made on January 29, 2018. Pre-judgment interest is claimed pursuant to the Courts of Justice Act[^6] from the date of demand. The pre-judgment interest rate is 1.3%. Judgment will therefore issue for USD $200,000.00 together with pre-judgment interest calculated at 1.3% from January 29, 2018 to the date of judgment. The judgment will be enforceable pursuant to s. 121 of the Courts of Justice Act by payment of the amount in in Canadian currency required to purchase the amount owing at the applicable exchange rate on the day prior to payment.

[35] Post-judgment interest will also apply at the rate specified by the Courts of Justice Act.

Disposition of the Counterclaim

[36] It remains to deal with the counterclaim. I note that the Peel Kitchens case cited by the plaintiff stands for the proposition that equitable setoff is not available against a promissory note.[^7] That was an appeal of a summary judgment motion heard by me in my capacity as a Master and my finding in that regard was upheld. Although I granted judgment against the defendant I did stay enforcement pending the resolution of the counterclaim.[^8] Although setoff cannot be used to diminish the amount owing under the negotiable instrument or to resist judgment for the amount owing, there is discretion in the court not to enforce that judgment until competing claims by the defendant have been resolved.

[37] In this case any disputes under the founders’ agreement must be arbitrated or adjudicated in Taiwan. It is doubtful that this court has any jurisdiction to deal with employment disputes or other claims against a corporation located in the Cayman Islands and carrying on business in various countries other than Canada. Mr. Sun deposes that Ironyun has no presence in Ontario and does not carry on business in Canada. Mr. Ma does not assert that it does so. Neither his employment by Ironyun nor the contracts and agreements in question have any relationship to Ontario.

[38] The promissory note was to secure a loan that had been advanced to the defendant to acquire Class A Preferred shares. I have determined that funds were advanced for that purpose and used to purchase shares in the name of the nominee company designated by Mr. Ma. There is no evidence that anyone has purported to forfeit the Class A Preferred shares and so far as I am aware based on the evidence, those shares continue to be vested in IZ Incorporated.

[39] Still, Mr. Ma appears to have a legitimate grievance that he is being denied information that Mr. Sun could easily provide. I am troubled by the evidence that Mr. Sun set up IZ Incorporated and has not provided Mr. Ma with information he requires to access his shares or control the corporation. It seems clear that Mr. Ma was always the beneficial owner of the founder’s shares and the Class A Preferred shares. Mr. Sun should not be allowed to be coy and uncooperative. As he is before this court seeking its aid in enforcing this debt, he will be required to provide information to Mr. Ma which he can readily access and Mr. Ma cannot.

[40] I am also troubled by Mr. Sun’s pretension that anything to do with Ironyun has nothing to do with him in his personal capacity including the pretension that Ironyun has not been properly served. The evidence is that Ironyun was served at its office in Taiwan and Mr. Sun who is the CEO was certainly served in the United States.

[41] It may very well be that there are legal arguments about the effect and legal validity of the manner of service. Perhaps there are issues about the manner of service in Taiwan, arguments under the Hague Convention on Service Abroad[^9] or other technical service requirements but no one was here to make such arguments. Mr. Sun knows perfectly well that the corporation is named as a defendant in this proceeding. The corporation could have appeared to resist jurisdiction without attorning.

[42] Under the circumstances, had I found that claims against Ironyun were justiciable in this court, I would have had no hesitation to validate service on the corporation by notice to its CEO and by service on its registered office.

[43] The counterclaim must be dismissed insofar as it purports to raise issues under the founders’ agreement and insofar as it seeks damages against Mr. Sun for mismanagement of Ironyun. On the other hand, there is no reason that Mr. Sun should not in his personal capacity be ordered to produce information that he has access to and is not prohibited by law from producing. In the counterclaim Mr. Ma seeks certain mandatory orders for the production of share registers and other corporate documents.

[44] Mr. Sun will be ordered to produce to Mr. Ma an original copy of the share certificate showing the Class A Preferred shares owned by IZ Incorporated. If IZ Incorporated continues to hold Class A Preferred shares in Ironyun, Mr. Sun shall ensure that the shareholder corporation continues to receive all communication and information it is entitled to as a shareholder and unless there is some legal reason he is precluded from doing so, he shall provide copies to Mr. Ma. Mr Sun shall also cause Ironyun to provide Mr. Ma with proof of the current number of shares held by IZ Incorporated or he shall produce the records showing how and when IZ Incorporated ceased to hold such shares.

[45] To the extent that he has possession, power or control of the corporate records of IZ Incorporated Mr. Sun shall deliver them or cause them to be delivered to Mr. Ma. If he cannot produce those records, Mr. Sun shall provide all information in the Ironyun records or in his personal knowledge regarding the whereabouts of the corporation, its records and Mr. Ma’s rights. If Mr. Sun has information to show that Mr. Ma ceased to have rights in relation to IZ Incorporated he shall provide that information to Mr. Ma.

[46] Enforcement of the judgment shall be stayed until this order is complied with or Mr. Sun demonstrates to the satisfaction of the court that he is unable to comply for legitimate reasons.

[47] I do not otherwise consider it reasonable to stay enforcement of the judgment indefinitely or to stay enforcement until the broader disputes of wrongful dismissal, breach of the founders’ agreement or mismanagement have been adjudicated. For one thing there are no current proceedings in Taiwan, the United States, Cayman Islands or elsewhere. These remain only a possibility. It might be otherwise if there were foreign proceedings in which security of some kind had been ordered.

Costs

[48] The plaintiff made an offer to settle earlier this month. The offer complies with Rule 49 of the Rules of Civil Procedure. The result of the trial is more favourable than the offer measured against the only real issue before the court, the validity of the promissory note.

[49] I note that the defendant also made an offer to settle which would have resolved all of the issues before this court and also any issues against Ironyun or any of the other parties anywhere in the world. The parties might well have been further ahead had there been a resolution along those lines but that offer deals with issues that are not before the court and so it cannot be measured in terms of Rule 49.

[50] As it happens, however, Rule 49 is not relevant. That is because the promissory note contains a provision that the cost of enforcement is fully recoverable. This entitles the plaintiff to recover the full costs of enforcing the debt. The defendant was warned about this result in the demand letter.

[51] The plaintiff has incurred actual costs of just over $44,000.00. Mr. Ma did not produce a costs outline but he did produce his legal bills showing that he had incurred approximately $40,000.00 to the date of trial. It is difficult for the defendant to argue that the costs incurred by the plaintiff were unreasonable since his costs incurred were similar. I would fix the costs at $40,000.00 on a full indemnity scale.

[52] The plaintiff was previously awarded costs of the two motions and the time spent on those motions is included in the total shown on the costs outline. Those costs were not awarded on a full recovery scale and the costs of the motions must be backed out of the amounts claimed for trial. Having regard to that previous award of $3,500.00 and in the exercise of my discretion, the costs awarded herein are reduced to $35,000.00.

Summary and Lifting the Stay

[53] Judgment will issue for the equivalent of USD$200,000.00 plus pre-judgment interest as discussed above together with CDN $35,000.00 for costs. Enforcement is stayed until Mr. Sun has complied with all terms imposed upon him or until further order of the court. Mr. Sun shall use his best efforts to comply with those terms by no later than the end of December, 2019.

[54] The stay shall be lifted immediately upon both parties certifying that compliance is complete. If the defendant will not sign a certificate to that effect or there is any dispute about whether or not there has been full compliance, I may be spoken to further. Plaintiff’s counsel may seek a date for that purpose by e-mail addressed to the trial co-ordinator.

Mr. Justice C. MacLeod

Date: November 19, 2019

[^1]: See 2019 ONSC 4586 [^2]: Rules of Civil Procedure, R.R.O. 1990, Reg. 194 [^3]: See Note 1, supra [^4]: See Taber v. Paris Boutique Bridal & Inc, 2010 ONCA 157, Gordon v. Roebuck, 1992 ONCA 7443 and Lei v. Crawford, 2011 ONSC 349 [^5]: Applejack Developments Inc. v. 2294894 Ont. Inc, 2017 ONSC 4000 [^6]: Courts of Justice Act, R.S.O. 1990, c.C.43, as am. [^7]: 2004 CanLii 11170 (Ont. SCJ Div Ct.) [^8]: [2003] O.J. No. 1635 (Master) [^9]: Convention of 15 November 1965 on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters.