COURT FILE NO.: CV-18-77039
DATE: 2020/09/09
COURT OF ONTARIO,
SUPERIOR COURT OF JUSTICE
RE: DOTALITY CANADA INC., Applicant
AND:
JOHN DAVID HUNT, also known as Jack Hunt, DAVID HILL, and NETCELERATE CORPORATION, Respondent
BEFORE: Mr. Justice Calum MacLeod
COUNSEL: Martin Z. Black, for the Applicant
Scott Kugler & Joel Reinhardt, for the Respondent
HEARD: June 29, 2020
REASONS FOR DECISION
[1] This motion takes place in the context of an application for oppression remedies under the CBCA. In simplest terms, the applicant seeks reinstatement of shares of the corporate defendant which the applicant alleges were improperly cancelled. Alternatively, the applicant seeks compensation for the value of such shares.
[2] This motion is to enforce undertakings and refusals from a cross examination on the affidavits of the respondents. The applicant also seeks leave to rely on a supplementary affidavit it has served on the respondents and seeks a timetable for the hearing of the application itself.
The Application
[3] The application relates to a 2011 agreement under which the applicant claims to have transferred certain technology to the respondent corporation in exchange for shares. The technology was said to be valued at $2 million and the applicant was to receive 8 million shares.
[4] The applicant claims that between 2015 and 2017, the individual respondents caused the corporation to issue additional shares to themselves or family members at a discount such that the applicant's shares were diluted by a significant amount. Subsequently, in December of 2017, the corporate respondent purported to cancel the applicant's shares altogether.
[5] This application was commenced in January of 2019. There were cross examinations in August of 2019 and a timetable established in September of that year. The application was scheduled to be heard the week of March 24, 2020. The timetable originally required that follow up examinations arising from undertakings be completed by November 5, 2019 and any motions arising from the cross-examinations be served by November 19, 2019. Examinations did take place in October of 2019, but no motions were launched despite the fact that there were outstanding undertakings and a number of refusals.
[6] Now the applicant moves to compel answers to the refusals and to file a supplementary affidavit. The motivation for this request was information that was produced by the respondent in December of 2019 and reviewed by the applicant in January of 2020. In particular, the respondent delivered audited financial statements for the years ending September 30, 2018 and 2019. Notes to those statements referred for the first time to rescission of a Technology Acquisition Agreement and to rescission of the applicant's shares. In addition, the 2018 statements cast doubt on the continued financial viability of the respondent corporation.
[7] In light of this new disclosure, the applicant sought to adjourn the application, to move on the refusals and to introduce a supplementary affidavit. I adjourned the hearing of the application and scheduled this motion at a case conference held on February 21, 2020. Shortly thereafter the court suspended its regular operations due to the COVID-19 health emergency.
[8] The motion was argued by Zoom on June 29, 2020.
Refusals
[9] Turning firstly, to the issue of the refusals, these were questions asked of the respondent, John David Hunt, at his cross examinations on August 19 and October 22, 2019.
[10] Q. 90 & 91 asked for production and particulars of a policy of insurance. Q. 286 is a question about the extent of insurance coverage.
[11] The applicant argues that the existence of insurance is relevant in the context of an oppression application because the corporation has now indicated in its newly produced financial statements that it may be insolvent. The applicant may have a choice of remedies including claims against directors and officers and the existence of directors' and officers' insurance would inform which option it might exercise, or which remedies it might pursue.
[12] There is no doubt that the purpose of Rules 30.02 (3) and 31.06 (4) which deal with production and discovery in actions is to "assist the making of informed and sensible decisions by parties involved in litigation in circumstances where recourse may be had to any available insurance money".[^1] The question posed by this motion is whether that policy justifies an extension of this policy to applications and other procedures that are not "actions" and in which discovery is not available. To put this another way, should the Court make such an order without a statutory basis for doing so?
[13] Traditionally, insurance was not discussed at the liability phase of a trial. That is because the law was supposed to be administered impartially. There is not one law for the wealthy and one for the poor nor should decisions on liability be skewed by pursuit of the "deep pocket". Although it is arguable that this idea (which was never absolute) should be jettisoned in an age where cost, efficiency and access to justice demands more surgical and precise litigation, we have still not reached the stage where ability to pay is generally relevant to liability or to the determination of remedy at least prior to judgment.
[14] While not directly on point, because it dealt with settlement privilege, the Supreme Court of Canada decision in Sable Offshore Energy Inc. v. Ameron International Corp is instructive.[^2] In that case, the Court found that the amount of a Pierringer Agreement need not be disclosed. At paragraph 27, the Court had the following to say about the disclosure of the amount paid by the settling party:
"It is true that knowing the settlement amounts might allow the defendants to revise their estimate of how much they want to invest in the case, but this, it seems to me, does not rise to a sufficient level of importance to displace the public interest in promoting settlements."
[15] Similarly, in a line of cases relating to pleading of insurance reserves, the Court has consistently held that absent special circumstances involving specific pleadings of bad faith, the amount of money set aside by an insurer to satisfy an insurance obligation is irrelevant and an improper pleading.[^3] By analogy, it seems to me the policy which the Rules Committee legislated for discoveries does not automatically render insurance policies relevant. To the contrary, the provision in the discovery rules rendering insurance policies producible would not be necessary if ordinary principles of relevance made them so.
[16] It is important to remember that in Ontario Civil Procedure, there is a significant difference between an "action" which commences with a statement of claim and an "application" which is commenced by a notice of application. The former involves pleadings, production and discovery and presumptively leads to a trial. The latter is what once was called an "originating notice of motion", supported by affidavit evidence and presumptively determined on a paper record. While there is some overlap in procedure and some applications can be quite broad, an application is generally more focused. The procedure for obtaining documentary production is quite different in an application than in an action.[^4]
[17] Similarly, there is a significant distinction between the scope of cross examination on an affidavit and the scope of a discovery.[^5] This is important because while both types of examination are governed by Rule 34, Rule 31 only deals with discovery. Absent a specific rule dealing with disclosure of insurance policies in applications, the question is one of relevance based on the issue to be determined by the application judge. Relevance is not determined by information the applicant would like to know for tactical reasons. It is determined by the information the moving party requires to know and present its case.[^6]
[18] Measured in this way, the availability of insurance is not relevant as to whether or not the applicant has been wronged and whether or not the behaviour of the respondents amounts to oppression. Although the remedies under the CBCA are statutory, they are equitable in nature. The applicant must first establish that the facts support such a remedy before a remedy is granted. The question of insurance is not relevant to finding liability against the directors and officers nor is it relevant to the question of whether or not the issue can be determined without a trial.
[19] In conclusion, these questions need not be answered.
[20] Q. 230, 241, 250, 251 and 256 are questions directed at the financial statements of the corporation and to the engagement of auditors. At the time of the cross examinations, the audited financial statements had not been produced but the statements do not answer these questions. The manner in which the corporation was operated, the salaries and benefits paid to the individual respondents, the valuation of the shares and the use of the transferred technology are all related to the issues which will be argued on the application. These questions are to be answered.
Leave to Serve a New Affidavit
[21] There is no prejudice at this stage in permitting the applicant to serve a Supplementary Affidavit. The affidavit deals with the information said to be disclosed by the audited financial statements for 2018 and 2019 and information which came to light as a result.
[22] I hereby grant leave to file a Supplementary Affidavit.
[23] The respondent may of course file a Reply Affidavit and may cross examine on the Supplementary Affidavit if it chooses to do so.
Further Examination of Mr. Hunt
[24] The applicant also seeks to examine Mr. Hunt in relation to this evidence, his answers to undertakings and the refusals. While such an examination is not automatic, it is usual. It appears appropriate in this case. Given the ongoing restrictions imposed by COVID-19, the examination may take place in writing or by videoconference or as otherwise agreed between counsel.
Timetable
[25] A timetable is required for delivery of the Supplementary Affidavit, Reply Affidavit and Cross Examination as well as a new date for the hearing of the application.
[26] I encourage counsel to agree on the timetable and the time needed to argue the application. If they reach such agreement, they may file the necessary form with the Case Management Co-ordinator and obtain a date for the hearing.
[27] If they are unable to agree, they may request a case conference with one of the Masters and the Master shall be empowered to establish a timetable and a hearing date.
Costs
[28] If the parties are unable to agree on costs, I will entertain submissions in writing. Counsel may obtain further directions on costs submissions from my office within 30 days should that be necessary.
Mr. Justice C. MacLeod
Date: September 9, 2020
COURT FILE NO.: CV-18-77039
DATE: 2020/09/09
ONTARIO
SUPERIOR COURT OF JUSTICE
RE: DOTALITY CANADA INC., Applicant
AND:
JOHN DAVID HUNT, also known as Jack Hunt, DAVID HILL, and NETCELERATE CORPORATION, Respondent
BEFORE: Mr. Justice Calum MacLeod
COUNSEL: Martin Z. Black, for the Applicant
Scott Kugler & Joel Reinhardt, for the Respondent
reasons for decision
Mr. Justice Calum MacLeod
Released: September 9, 2020
[^1]: See Pye Bros. Fuels Ltd. v. Imperial Oil Ltd., 2012 ONCA 153 @ para. 9 and Fleming v. Brown, 2017 ONSC 1430 (SCJ)
[^2]: 2013 SCC 37;
[^3]: See for example, Kanani v. Economical Insurance, 2020 ONSC 7201 (SCJ)
[^4]: See Friends of Lansdowne v. Ottawa (City), 2011 ONSC 1015 (Master)
[^5]: See Ontario v. Rothmans, 2011 ONSC 2504; 5 CPC (7th) 112 (SCJ) cited with approval, Canada v. Mennes, 2014 ONCA 690 @ para. 26 (CA). See also P & A Holdings Inc. v. Jim, 2019 ONSC 3680 (SCJ)
[^6]: See Sable Offshore Energy Inc. v. Ameron International Corp., 2013 SCC 37 @ para. 27 – while that case deals with settlement privilege, the Supreme Court was not persuaded that information which would help the moving party decide how much it was willing to invest in the case, rose to the level of importance necessary to compel disclosure of the amount of a Pierrenger Agreement.