COURT FILE NO.: 19-80252
MOTION HEARD: October 8, 2019
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: BOND DESIGN BUILD INC. v. WELLINGS OF STITTSVILLE INC. and NAUTICAL LANDS GENERAL CONTRACTORS INC.
BEFORE: Master Marie Fortier
COUNSEL: Andrew Ferguson, for the Plaintiff, Bond Design Build Inc.
David Debenham, for the Defendants, Wellings of Stittsville Inc. and Nautical Lands General Contractors Inc.
REASONS FOR DECISION
Introduction
- This is a motion brought by the defendants for:
i- Leave to bring this motion; and
ii- An order staying this proceeding pursuant to Rule 15.02 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 on the ground that a single director of the plaintiff had no authority, acting alone, to authorize the commencement of the present action on the plaintiff’s behalf.
Leave to bring the motion
This motion is brought in the context of a lien action (“the action”) arising out of a dispute concerning a contract entered into in October 2017 between the parties, whereby the plaintiff would provide labour and materials on the defendants’ project known as the Wellings of Stittsville.
Although leave of the court is no longer required to bring interlocutory motions within the context of a lien action under the Construction Act, R.S.O. 1990, c. C.30, the contract in this matter was entered into before the July 1, 2018—when the amendments in question came into effect. Therefore, section 67 of the Construction Lien Act, R.S.O. 1990, c. C.30 applies.
Section 67(2) of the Construction Lien Act requires that parties obtain leave of the court to proceed with interlocutory steps. For leave to be granted, the moving party must show that such steps are necessary or would expedite the resolution of the issues in the underlying dispute.
I am satisfied, based on the record, that the moving party has shown that the motion, if granted, would expedite the resolution of relevant issues. In particular, if the court determines that a resolution by the board of directors or by the shareholders needs to be enacted for the plaintiff to lawfully proceed with the action, such a determination may stay or terminate the action.
Accordingly, leave is granted to bring this motion.
The remaining issue is whether this proceeding should be stayed or dismissed pursuant to Rule 15 of the Rules of Civil Procedure.
Background
- The factual context within which this issue arises is fairly complex, such that an introduction of the following individuals and corporate entities—who are not parties to the action—is required to understand each party’s position on this motion:
a. Antonio Marcantonio (“Mr. Marcantonio”) is a director of the plaintiff Bond Design Inc. (“Bond”) and has been since the incorporation of the plaintiff in October 2015. He owns all the common shares of Bond.
b. Kirk Hoppner is the director of the defendant companies, Wellings of Stittsville Inc. (“Wellings”) and Nautical Lands General Contractors Inc. (“Nautical”)), as well as the director of Charlamara Holdings Inc (“CHI”) and York-Hop Corp (“Y-H.”). Although reference will not be made to Mr. Hoppner in this decision, it bears noting that Mr. Hoppner, as director of the defendant companies, is also a director of CHI and Y-H. Both CHI and Y-H are holders of 500,000 preferred shares in the plaintiff Bond.
In October 2017, Bond entered into a contract with the defendants to supply labour and materials for the Wellings of Stittsville project (“the Project”). Mr. Marcantonio signed the contract on behalf of Bond.
Bond subsequently registered a lien and commenced the present action against Wellings and Nautical relating to alleged non-payment for the supply of labour and materials on the Project.
The defendants have brought this motion pursuant to sub-rule 15.02(1) to stay the action on the ground that it was commenced without proper authority. The defendants maintain that Mr. Marcantonio had no authority acting on his own to commence this proceeding.
Bond’s Unanimous Shareholders Agreement requires Bond to operate through a three-person board of directors, of which a nominee of CHI must be a member. Mr. Marcantonio has never called a shareholders’ meeting to appoint / elect a board of directors. According to the defendants, the issue is not whether Mr. Marcantonio is a director, but whether he can act without a three-director quorum—as required by the Unanimous Shareholder Agreement.
The plaintiff is a company incorporated under Canada Business Corporations Act, R.S.C., 1985, c. C-44 (the “CBCA”). Pursuant to s. 146(1) CBCA, shareholders may validly restrict the powers of the board of directors and subject the exercise of powers granted to certain formalities.
The plaintiff’s Unanimous Shareholders Agreement, dated October 14, 2016, provides that the plaintiff’s board of directors shall consist of three (3) directors, including one nominee of CHI, and that a quorum of the board shall be a majority of the directors:
Section 3.1 Directors
(1) The Board shall consist of three Directors, including one nominee of Charlamara. The remaining Directors of the Board shall be mutually agreed to by a vote of each of the Directors.
(3) A quorum for a meeting of the Board shall be a majority of the Directors and must include the Director nominee of Charlamara …
(4) The Corporation may form an executive committee, as determined by the Board, which shall report to the Board and which shall meet as needed. The nominee of Charlamara shall be designated as a member of any committees of the Board. The Directors of the Corporation shall manage the Corporation's business and affairs except as such authority may be explicitly delegated to management or a committee of the Board by unanimous vote of the Directors from time to time and except as otherwise provided in this Agreement. Decisions of the Board shall be effective only if approved by the majority of votes cast at a meeting of the Directors or by written resolution signed by all directors of the Corporation.
As mentioned above, no board of directors was formally constituted as Mr. Marcantonio has never called a shareholders’ meeting to appoint / elect a board of directors.
Pursuant to Rule 15.02, the defendants inquired as to whether the plaintiff had properly authorized the commencement of the Action. In response, the plaintiff provided a resolution of the corporation signed by a single director, Mr. Marcantonio.
The defendants argue that the resolution cannot be said to properly authorize the commencement of the action because the number of directors signing the resolution fell below quorum. The defendants seek an order that this action be stayed until there is either a Unanimous Shareholders Agreement ratifying this proceeding or until the plaintiff properly constitutes its board of directors so that a proper quorum may be achieved in order to carry on the plaintiff’s business. The defendants submit that the plaintiff must act in accordance with both the applicable statutory framework of the CBCA and its own Unanimous Shareholders Agreement.
The defendants have also raised certain collateral issues. They allege that Mr. Marcantonio commenced the action for the purpose of rectifying an error he made as a director of Bond in paying CHI and Y-H the sum of $376,239.22 in dividends under a “royalty agreement” at a time when Bond still owed a large amount to a subtrade on the Project. This payment was said to constitute a breach of trust.
The plaintiff responds that the present action is a bona fide attempt to collect trade debts, was carried out in the ordinary course of business of the company, and, as such, the defendants have no grounds to assert that a resolution of the plaintiff’s board of directors is required to authorize the action.
The plaintiff maintains that the defendants are only now, for the very first time, challenging Mr. Marcantonio’s authority as director of the plaintiff to make decisions on behalf of the plaintiff. Mr. Marcantonio had previously signed a multi-million-dollar construction contract with the defendants and has entered into a lease with CHI and Y-H, all without a challenge to his authority. It is only now, once the present claim arose, that the defendants are taking the position that Mr. Marcantonio has no authority to unilaterally bind the corporation in the same manner as he has previously.
Disposition
- For the reasons that follow, the plaintiff’s action is stayed pending delivery by the plaintiff’s solicitor of a resolution property passed by the plaintiff’s board of directors, authorizing the commencement of the action.
Law and Analysis
- It is well settled that, if a corporation is to become involved in litigation, the decision to pursue such litigation must be duly authorized by the governing body of the corporation—generally, the directors or shareholders. Indeed, as was held in Curle v. Gustafson, 2014 ONSC 5865, at para. 53:
The law is well established that a lawyer who commences or defends an action on behalf of a corporation must be duly authorized to do so. Where a challenge to the authority of a lawyer to act for a corporation is brought by a party or parties who are related to the corporation, the court will generally scrutinize the authorization issue more carefully. The general principle is that if a corporation is to engage in litigation, either as a plaintiff or defendant, its actions must be duly authorized by the governing body of the corporation, ordinarily the Directors or ultimately the shareholders.
- Rule 15.02(1) provides that an opposing party is entitled to require disclosure of whether a client authorized their solicitor to commence a proceeding, and to require disclosure of whether a corporate plaintiff was properly authorized to instruct counsel to commence the proceeding. Rule 15.02(1) states that:
A person who is served with an originating process may deliver a request that the lawyer who is named in the originating process as the lawyer for the plaintiff or applicant deliver a notice declaring whether he or she commenced or authorized the commencement of the proceeding or whether his or her client authorized the commencement of the proceeding.
Where an action is commenced by a corporation, and notwithstanding the application of the indoor management rule, counsel is required to demonstrate that he or she has the authority to act on behalf of the corporation when asked. In the normal course this is done by providing a resolution passed by the corporation’s board of directors authorizing the litigation: Roselee Holdings v. Marlton Holdings, 2000 CarswellOnt 2800, at para. 42; Thomas C. Assaly Charitable Foundation v. BMO Nesbitt Burns Inc. (2008), 2008 CanLII 2757 (ON SC), 44 B.L.R. (4th) 268 (Ont. S.C.), at para. 26.
If the action was commenced without proper authority, Rule 15.02(4) provides that the court may stay or dismiss the proceeding.
Courts have found that, if a proceeding is not properly authorized by a resolution passed by the board of directors, the action must be stayed until a resolution is properly ratified: Beaver Rock Roastery Inc. v. Saso, 2017 ONSC 740, at paras. 58-63; Mega Blow Moulding Ltd. v. Sarantos (2001), 2001 CanLII 28374 (ON SC), 16 B.L.R. (3d) 52 (ONSC).
In Mega Blow Moulding Ltd., Mesbur J. stayed the action of the plaintiff corporation because the board resolution authorizing the proceeding was signed by a single director, whereas the articles of the corporation required the resolution to be signed by no fewer than two directors.
The plaintiff in Mega Blow argued that, although it lacked the de jure qualifications to authorize the claim, the signatory director had the authority to institute the proceeding as the de facto principal of the company. The court disagreed, noting that the plaintiff corporation was “a creature of both statute and its articles of incorporation” (para. 2). As such, the court stated (at para 3):
Thus, since a quorum, as defined by the CBCA and the articles, is two directors, the resolution signed by only one director cannot properly authorize this lawsuit. Pursuant to the provisions of rule 15.02(3), the court may stay or dismiss a proceeding where a solicitor has commenced a proceeding without the authority of his or her client. I must find that the proceeding was commenced without the proper authority of the plaintiff. The action must therefore be stayed, until the resolution of the single director is properly ratified by the plaintiff corporation.
In my view, based on the evidence before me, this action was not duly authorized by the governing body of the corporation.
It is clear from Bond’s Unanimous Shareholders Agreement, outlined in paragraph 14 above, that Bond’s board of directors must consist of three (3) directors, including one nominee of CHI, and that a quorum of the board shall be a majority of the directors. The board of directors was not constituted in accordance with these provisions.
When the defendants sought disclosure as to whether the plaintiff was properly authorized to instruct counsel to commence the Action, the plaintiff provided a resolution of the corporation signed by a single director—Mr. Marcantonio.
Notwithstanding the application of the indoor management rule, counsel for the plaintiff is required to demonstrate that he has the authority to act on behalf of the corporation when asked: see Roselee Holdings; Thomas C. Assaly Charitable Foundation.
The indoor management provides that a court may assume that a manager has been delegated the authority to sue by the board of directors in routine matters within the ordinary course of business. However, that is a rebuttable presumption and in the present case I am satisfied on the evidence that the presumption has been rebutted.
In my view, the plaintiff cannot rely on the indoor management rule in alleging that the action is a simple collection of trade debts brought in the ordinary course of business. Rather, this action involves a dispute between Mr. Marcantonio, owner of the common shares of the plaintiff, and one of the plaintiff’s preferred shareholders, CHI over an allegedly improper dividend payment of $376,239.22. This dispute is “beyond the genre of simple collection matter” and accordingly the indoor management rule does not assist the plaintiff: see Roselee Holdings, at para. 39.
In my opinion, since a quorum—as defined by the CBCA and the articles—is three directors, a resolution signed by a single director cannot properly authorize this lawsuit: see Mega Blow.
If an action is commenced without proper authority, Rule 15.02 (4) provides that the court may stay or dismiss the proceeding. As this proceeding is not properly authorized by a resolution passed by a quorum of the board of directors, I exercise the jurisdiction provided by rule 15.02(4) and stay the action until a valid resolution is passed by a properly appointed board of directors. (see Beaver Rock Roastery; Mega Blow).
In the circumstances I decline to say more about the dispute between the parties relating to background corporate governance matters, nor will I speculate on the effect of this order on whether the plaintiff will take the required steps to obtain a valid board resolution to allow this action to proceed.
If the parties cannot agree on costs, they may file written submissions not exceeding three pages, exclusive of their respective bills of costs. If necessary, the defendants shall file their costs submissions within 20 days of the release of this decision. The cost submissions of the plaintiff shall be filed within 10 days thereafter.
DATE: December 16, 2019 ______________________
Master Fortier