Zap Holdings Ltd v. Roman Cheese Products Ltd

CITATION: 2022 ONSC 4166

COURT FILE NO.: 13328/20

DATE: 2022-07-15

SUPERIOR COURT OF JUSTICE – ONTARIO

RE: Zap Holdings Ltd, Anthony Zappitelli and Constance Zappitelli, plaintiffs

AND: Roman Cheese Products Ltd, Garvar Ltd, Alfredo Varalli, Romzap Ltd, 1149948 Ontario Limited, Waters Meredith & Partners LLP, and Broderick & Partners LLP, defendants

BEFORE: Mr Justice J.A. Ramsay

COUNSEL: Michael A. Polvere and James R. Leslie for Zap Holdings Ltd, Anthony Zappitelli and Constance Zappitelli;

J. Thomas Curry and Madison Robins for Roman Cheese Products Ltd, Garvar Ltd and Alfredo Varalli

Lisa Munro for Waters Meredith & Partners, LLP

No one appearing for Romzap Ltd, 1149848 Ontario Limited or Broderick & Partners LLP

HEARD: July 14, 2022 at Welland by videoconference

ENDORSEMENT

[1] The plaintiffs have sued the defendants for $7.5 million for conspiracy, fraud, oppression within the meaning of s.248 of the Business Corporations Act, wrongful dismissal and so on. Before me today is the plaintiffs’ motion for an interlocutory injunction. Alfredo Varalli, Roman Cheese Products Ltd and Garvar Ltd (the Varalli defendants) oppose the motion. Waters Meredith & Partners LLP take no position. The remaining defendants did not appear. Romzap Ltd and 1149948 Ontario Limited have not filed a statement of defence or appointed counsel.

[2] The defendant Alfredo Varalli and the two companies controlled by him (Roman Cheese and Garvar) together form the majority of shareholders in Romzap Ltd. Romzap owns 1149948 Ontario Limited. The plaintiff corporation, Zap Holdings Ltd is owned by Mr and Mrs Zappitelli. Zap Holdings is a minority shareholder in Romzap Ltd. The other minority shareholder, Frances Santini, is not a party to the action.

[3] Romzap Ltd and its subsidiary, 1149948 Ontario Ltd, owned the Fallsview Hotel. It was sold in 2010. More property was sold in 2019. Since then, Romzap has not carried on any active business.

[4] On December 30, 2020 the plaintiffs filed the present action. They brought a motion to prohibit their removal as directors. They were removed as directors before the motion was heard. They have since amended the motion to seek, among other things, their reinstatement.

[5] On November 26, 2021, Romzap’s accountant gave it the following advice:

Based on the preliminary estimates of the 2021 fiscal activity for 1149948 Ontario Ltd, we would recommend the following dividends be declared from 1149948 Ontario Ltd to Romzap Ltd.

1. A capital dividend in the amount of $14,666,100 to be declared on or before December 31, 2021 to pay out tax free amounts.

2. An ineligible dividend in the amount of $6,260,700 to be declared on or before December 31, 2021 to recover $2,399,926 in non-eligible refundable dividend tax on hand. Declaring this dividend as of December 31, 2021 reduces 1149948 Ontario Ltd’s tax due for its fiscal 2021 taxation year by $2,399,926.

Once the dividends have been declared in 1149948 Ontario Ltd. the following dividends can subsequently be declared from Romzap Ltd to the appropriate shareholders

1. A capital dividend in the amount of $17,613,500 to be declared on or before September 30, 2022 to pay out the tax free amounts. This amount includes the $14,666,100 that was paid from 1149948 Ontario Ltd on or before December 31, 2021 as well as the $2,947,400 that was available in the capital dividend account previously (to be verified).

2. An ineligible dividend in the amount of $6,430,000 to be declared on or before September 30, 2022 to recover $2,464,793 in non-eligible refundable dividend tax on hand.

3. An eligible dividend of $6,782,500 to be declared on or before September 30, 2022 to recover $2,599,982 in eligible refundable dividend tax on hand.

[6] The Zappitellis took the position that the accountant’s advice should be followed. The Varalli defendants did not. On December 7, 2021 a special meeting of shareholders was held. Mr and Mrs Zappitelli were removed from the board of directors. Vittoria Varalli, the daughter of Alfredo Varalli, was elected. The Varalli defendants, who formed the majority of shareholders, supported these acts. The Zappitellis and Frances Santini in the minority dissented. Since then the board has consisted of Alfredo Varalli, Vittoria Varalli and Frances Santini.

[7] Today the plaintiffs seek an interim remedy for oppression under s.248 of the Business Corporations Act on the following bases:

a. The dismissal of the Zappitellis from the board and their replacement by Vittoria Varalli was done in retaliation for the Zappitellis seeking to vindicate their legal rights;

b. Romzap is sitting on about $40 million in assets which should be distributed in the form of dividends now that the company is inactive;

c. Varalli obtained a majority shareholding by falsifying transactions in 1991 and 1995 in which Garvar Ltd obtained shares. The shares were security for loans given by Garvar that have since been repaid. The shares should since have been cancelled. Garvar should be considered to own 4% of the shares, not 8%, with the result that the Zap Holdings and Frances Santini between them would be in the majority.

[8] The defendants’ position is

a. It was necessary to remove the Zappitellis from the board because their lawsuit put them into a conflict of interest.

b. The company cannot be wound up while it is defending the Zappitellis’ lawsuit. It is only once the liability, if any, is known that the company will know how much it has to distribute in dividends.

c. Garvar owns 8% of the shares of Romzap. It acquired these shares in 1995 by exercising an option it was given in exchange for an investment of capital (Mr Varalli’s money) in Romzap.

[9] The plaintiffs seek relief in the form of mandatory orders including the reconstitution of the board of directors of Romzap, a declaration of dividends from Romzap and 1149948 in the full amount available for dividends and access to the companies’ records.

[10] The Varalli defendants submit that there is no danger of dissipation of the assets of the corporation. Through their counsel they have undertaken that pending the disposition of the present motion no actions or decisions will be taken by the board of directors of Romzap and no monies of Romzap or its subsidiary 1149848 Ontario Limited will be committed or expended other than in the ordinary course of business.

[11] Since the December 2021 meeting 1149848 declared a dividend of about $6 million to its only shareholder, Romzap.

The oppression remedy

[12] Section 248 of the Act is identical to s.241 of the Canada Business Corporations Act. According to the case law decided under the federal law, the oppression remedy is broad and flexible, allowing any type of corporate activity to be the subject of judicial scrutiny. Nevertheless, the legislative intent of the oppression remedy is to balance the interests of those claiming rights from the corporation against the ability of management to conduct business in an efficient manner. The remedy is appropriate only where as a result of corporate activity, there is some discrimination or unfair dealing amongst corporate stakeholders, a breach of a legal or equitable right, or appropriation of corporate property. See Budd v. Gentra Inc., 1998 CanLII 5811 (ON CA), [1998] O.J. No. 3109 (C.A.), approved in Wilson v. Alharayeri, 2017 SCC 39.

[13] As set out by the Supreme Court in Re BCE Inc., 2008 SCC 69, paragraph 68, the court must ask two questions:

a. Does the evidence support the reasonable expectation asserted by the claimant? and

b. Does the evidence establish that the reasonable expectation was violated by conduct falling within the terms "oppression", "unfair prejudice" or "unfair disregard" of a relevant interest?

[14] I take the following principles from that case:

a. An essential component of a corporation is its capital stock, which is divided into fractional parts, the shares. While the corporation is ongoing, shares confer no right to its underlying assets.

b. Oppression is an equitable remedy. It seeks to ensure fairness – what is "just and equitable". It gives a court broad, equitable jurisdiction to enforce not just what is legal but what is fair. It follows that courts considering claims for oppression should look at business realities, not merely narrow legalities.

c. Like many equitable remedies, oppression is fact-specific. What is just and equitable is judged by the reasonable expectations of the stakeholders in the context and in regard to the relationships at play. Conduct that may be oppressive in one situation may not be in another.

d. At the outset, the claimant must identify the expectations that he or she claims have been violated by the conduct at issue and establish that the expectations were reasonably held. To complete a claim for oppression, the claimant must show that the failure to meet this expectation involved unfair conduct and prejudicial consequences within the meaning of the legislation.

Interim mandatory injunctions

[15] The plaintiffs are asking for mandatory injunctions. They would not simply have the court order the defendants to abstain from certain conduct; they seek orders that the defendants take positive action. According to the Supreme Court in R. v. CBC, 2018 SCC 5, to obtain a mandatory interlocutory injunction, an applicant must meet a modified RJR – MacDonald test (1994 CanLII 117 (SCC), [1994] 1 S.C.R. 311), which proceeds as follows:

a. The applicant must demonstrate a strong prima facie case that it will succeed at trial. This entails showing a strong likelihood on the law and the evidence presented that, at trial, the applicant will be ultimately successful in proving the allegations set out in the originating notice;

b. The applicant must demonstrate that irreparable harm will result if the relief is not granted; and

c. The applicant must show that the balance of convenience favours granting the injunction.

Application

Removal of the Zappitellis from the board of directors

[16] The plaintiffs have not shown a strong prima facie case that they had a reasonable expectation of remaining on the board of directors. They were suing the corporation for a significant amount of money. They were in a conflict of interest with the corporation. The shareholders’ reasonable expectation is that the directors will act in the best interests of the corporation.

The Garvar fraud

[17] The plaintiffs have not shown a strong prima facie case that the Garvar investment was a loan as opposed to a capital investment. Numerous pieces of contemporary documentation, signed by Tony Zappitelli, confirm Garvar’s ownership of 8% of the shares of Romzap. The allegations of fraud and forgery cannot realistically be maintained on the evidence. The scandalous accusations against the accountants and lawyers are even more baseless, if such a thing is possible. The ownership of shares is as follows:

Roman Cheese Products Ltd 33.95%

Alfredo Varalli 9.61%

Garvar Ltd 8.00%

Total 51.56%.

Zap Holdings Limited 28.44%

Frances Santini 20.00%

Total 48.44%.

Oppression by refusing to declare a dividend

[18] At some point, the plaintiffs will be able to show a strong prima facie case that they have a reasonable expectation that the corporation will be wound up and its assets distributed proportionally among the shareholders. It is unfair and prejudicial for the majority to sit on the assets of an inactive corporation and deprive the minority of their value. At the moment, however, the corporation still has important business to do defending the lawsuit. Until the damages claim and the Garvar issue are determined, the corporation does not know how much it is worth and therefore how much to distribute in dividends. At this point the plaintiffs have demonstrated only that there is a serious issue to be determined. They have met the first step in the RJR Macdonald test for a non-mandatory interim injunction.

Irreparable harm

[19] The plaintiffs say that if interlocutory relief is not granted they will suffer irreparable harm. They are in their seventies. They cannot wait to receive the fruit of their lives’ work while the litigation works its way through the system. If that is so, they might reconsider the wisdom of pushing their extravagant claims and instead allow the parties to concentrate on the real issue – distribution of the assets of the corporation to the shareholders now that it is no longer developing hotels. The plaintiffs have established that they will suffer irreparable harm if the assets of the corporations are dissipated. If not, the plaintiffs can be compensated by damages. To preserve the present state of affairs I propose to make a non-mandatory injunctive order.

Balance of convenience

[20] The balance of convenience favours the plaintiffs. Romzap and 1149948 are inactive.

Alternative relief

[21] The plaintiffs argue that if I am not inclined to order a dividend in the amount of all assets available, I should order a partial distribution. Whatever the liability implied by their lawsuit, it is not likely more than a quarter of the value of the corporation. I decline to make such an order. For one thing, it is rather a final step to take in an interlocutory order. Moreover, the plaintiffs’ conduct in bringing scandalous and frivolous accusations against respectable firms of accountants and lawyers to my mind disentitles them to such relief.

Access to company records

[22] The plaintiffs’ access to company records can be dealt with through the provisions of the Rules of Civil Procedure that apply to production and disclosure.

Conclusion

[23] I make the following orders:

a. The board of directors of Romzap Ltd and 1149848 Ontario Limited will not expend or commit any monies of the corporations other than in the ordinary course of business.

b. The said companies will do no business apart from defending the present action.

c. No costs are sought or ordered for or against Waters Meredith, Broderick & Partners, Romzap Ltd and 1149848 Ontario Limited. As between the plaintiffs and the Varalli defendants, the costs of this motion are reserved to the trial judge.

J.A. Ramsay J.

Date: 2022-07-15