COURT FILE NO.: CV-20-72698

DATE: 20220811

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Compass Mechanical Contracting Inc., Plaintiff

AND:

AIM Recycling Hamilton and The Toronto-Dominion Bank, Defendants

BEFORE: MacNeil J.

COUNSEL: Jonathan Goode – Lawyer for the Moving Party/Defendant, AIM Recycling Hamilton

Rosamund Taylor – Lawyer for the Responding Party/Plaintiff, Compass Mechanical Contracting Inc.

No one appearing for the Defendant, The Toronto-Dominion Bank

HEARD: July 5, 2022 (via Zoom videoconference)

ENDORSEMENT

Overview

[1] This motion is brought by the Defendant, AIM Recycling Hamilton (“AIM”), for an order requiring the Plaintiff, Compass Mechanical Contracting Inc. (“Compass”), to pay into court security for costs under Rule 56.01 of the Rules of Civil Procedure. AIM is seeking that Compass post security for costs in the amount of $37,833.15, an amount that is comparable to the amount posted by AIM as security for Compass’s costs of the action.

[2] Compass argues that the motion should be dismissed as the matter has been set down for trial and, in the alternative, because it has no assets and no ability to raise capital to pay the security requested and so it would be forced to declare bankruptcy if AIM is successful. Compass submits that it has a reasonable chance of succeeding in its claim if it can proceed to trial.

Background

[3] Compass is a corporation that carries on business as a mechanical contractor specializing in industrial repair and construction and the installation of new equipment. It has two directors who are also its two shareholders.

[4] Compass had been hired by AIM to supply and install equipment that sorts scrap metal. The work was provided from August to November 2019 when AIM terminated the contract. AIM paid some invoices but refused to pay the last invoices, totaling $151,332.61. On January 3, 2020, Compass registered a lien for this amount.

[5] On April 15, 2020, Compass commenced an action under the Construction Act, R.S.O. 1990, c. C.30 (“the Construction Act”), as against the Defendants seeking payment for the outstanding invoices amount. Pleadings closed in September 2020.

[6] Examinations for discovery were completed in December 2021. During the examination for discovery of Compass, AIM learned that it had not engaged in any large projects since November 2019. AIM then undertook searches to ascertain the financial status of Compass and its shareholders. As a result of its inquiries, AIM formed the opinion that Compass lacks sufficient assets, or any assets at all, in Ontario to satisfy a costs order made against it in the action.

[7] On April 12, 2022, Compass served a Trial Record. Counsel for the parties have had some communication regarding trial dates.

[8] On April 29, 2022, AIM served its motion record for this security for costs motion.

[9] In May 2022, AIM filed a motion in writing to vacate the Compass Claim for Lien. AIM has submitted a lien bond in the amount of $189,165.76, which sum consists of $151,332.61 respecting the lien amount together with the sum of $37,833.15 as security for Compass’s costs.

[10] On May 20, 2022, Compass served its responding motion record which included supporting affidavits from its two directors/shareholders, F.P. and A.E., who attested that Compass does not have significant assets, does not have the ability to secure financing, and is not presently engaged in any projects. In his affidavit, F.P. further stated that he has two mortgages and a line of credit secured against his house, which he is the process of refinancing to consolidate; and that he is the primary earner in his family. He is a shareholder of a separate company that currently has funds in a bank account but he asserted that this company is unrelated and the full amount of these funds is needed to release his second mortgage and allow for the consolidation of his debts. His evidence was that he has just under $5,000 available on his credit card and limited funds in his chequing account, and that he is not able to receive any further funds from the bank at this time. His line of credit shows more than $15,000.00 in available funds but, in his affidavit, he stated that these funds go towards paying for food and daily costs of providing for his family and, if he was ordered to pay more than $5,000.00, he would lose his house which would have a substantial impact on his family. He attested that he does not have access to funds from family or friends to post more than $5,000.00.

[11] When cross-examined on his affidavit, however, F.P. admitted that Compass has worked on “a couple of various small job[s]” since November 2019, contrary to the statement made in his affidavit that Compass “was not able to start any new projects since finishing the project for AIM”. Further, he admitted on cross-examination that he has a job, in his personal capacity, and is earning an income from that job which is contrary to a statement made in his affidavit that “neither Compass Mechanical nor I have an income at this time”. On cross-examination, he also indicated that he had recently applied for a business Mastercard.

[12] In his affidavit, A.E. stated that he has been working in a factory as he has no savings, that he does not have sufficient credit to obtain a loan, and that he has been denied financing. He relied on the evidence of F.P. that Compass does not have the ability to post security by securing financing or selling off assets at this time.

Issues

[13] The following are the issues to be determined:

a. Is AIM statutorily barred from bringing the motion for security for costs?

b. Should security for costs be ordered?

c. If so, what is the appropriate amount of security for costs?

Analysis

a. Is AIM statutorily barred from bringing the motion for security for costs?

[14] Compass argues that AIM is barred from bringing the motion for security for costs under Rule 48.04 of the Rules of Civil Procedure and/or under s. 13 of O. Reg. 302/18 made under the Construction Act.

Rule 48.04

[15] Rule 48.04(1) provides that, subject to subrule (3), a party who has set an action down for trial shall not initiate or continue any motion or form of discovery without leave of the court.

[16] In this case, AIM was not the party that set the action down for trial and it submits that it has not consented to having the matter set down for trial. AIM also contends that it acted quickly in delivering its motion record within two weeks of Compass serving the Trial Record.

[17] In the circumstances, since AIM did not set the action down for trial, I find that r. 48.04(1) does not apply to prohibit it from bringing this motion.

Section 13 of O. Reg. 302/18

[18] By virtue of s. 13 of O. Reg. 302/18: Procedures for Actions Under Part VIII, made under the Construction Act, AIM requires leave to bring this motion for security for costs. Section 13 provides:

13. Interlocutory steps, other than those provided for under the Act, shall not be taken without the consent of the court on proof that the steps are necessary or would expedite the resolution of the issues in dispute.

[19] Counsel for AIM argues that, given the evidence of Compass regarding its lack of assets, the test of “necessity” has been met and leave should be granted. AIM relies on the decision in Proxema Ltd. v. Birock Investments Inc., 2016 ONSC 5686, wherein the court explained that “[t]he purpose of security for costs is to even the playing field by ensuring that an ‘insolvent plaintiff should not be given risk-free opportunities to pursue litigation’ [citation omitted]” (para. 15). In that case, the court cited European Flooring Contract Services Ltd. v. Toddglen ILofts et al, 2013 ONSC 6445, which held that, where it is shown there is good reason to believe that a corporate plaintiff does not have sufficient assets in Ontario to pay the defendant’s costs, the defendant has met the test of necessity for leave under s. 67(2) of the Construction Lien Act, the provision that is now effectively s. 13 of O. Reg. 302/18 (para. 14).

[20] Compass argues that AIM should not be granted leave since it has failed to show that the motion is necessary or would expedite the resolution of the issues in dispute.

[21] Compass also submits that AIM did not move to vacate the lien until after it brought this motion, that the action has been proceeding, and that trial dates are being discussed between counsel. Given how this litigation has progressed, it argues that AIM’s security for costs motion is a tactic intended to bring an early end to the action and should not be granted. It relies on Chinese Publications for Canadian Libraries Ltd. v. Markham (City), 2017 ONCA 968, at paras. 21-22, in this regard.

[22] I do not find anything in the evidence before me that supports a reasonable inference that AIM had an improper motive in seeking security for costs. I accept that the impetus for this motion was AIM learning at discovery that Compass had not worked on large scale projects after November 2019. AIM investigated the matter, found that there was good reason to believe that Compass lacked sufficient assets to satisfy a costs order, and then brought its motion. I am also satisfied that there has been no inordinate delay by AIM in bringing the motion.

[23] I find that the evidence is that Compass appears to have insufficient assets to pay AIM’s costs. Compass does not dispute this.

[24] Accordingly, the test of “necessity” has been met in these circumstances. Leave is granted to AIM to bring the motion for security for costs.

(b) Should security for costs be ordered?

[25] Rule 56.01(1)(d) of the Rules of Civil Procedure provides that, on a motion by a defendant for security for costs, the court may make such order for security for costs “as is just” where it appears that the plaintiff is a corporation and there is good reason to believe that it has insufficient assets in Ontario to pay the costs of the defendant.

[26] The test to be applied was explained by the court in Melco Construction Inc. v. Frost Sparkling Springs Co. Ltd., 2011 ONSC 2197, at paras. 21, 24-25:

21 In a motion for security for costs, the defendant must show that the plaintiff has insufficient assets in Ontario to pay the costs of the defendant if the plaintiff is unsuccessful at trial. The plaintiff must then show that it is impecunious and unable to access funds.

24 On a motion such as this, “[a] corporate plaintiff carries a significant burden of establishing direct and indirect impoverishment”. [Crudo Creative Inc. v. Marin, 2007 CanLII 60834 (ON SCDC), [2007] O.J. No. 5334 (Div. Ct.) at para. 33.]

25 What is required of the plaintiff has been described as follows:

In motions of this nature, the financial evidence of plaintiffs must be set out with robust particularity. There should be no unanswered material questions, as is the case here. It is worth remembering that the financial status of the plaintiffs is known only to them. As I mentioned earlier, they bear the burden of proving the effect upon them of an order for security for costs. … Full financial disclosure is required and should include the following: the amount and source of all income; a description of all assets (including values); a list of all liabilities and other significant expenses; an indication of the extent of the ability of the plaintiffs to borrow funds; and, details of any assets disposed of or encumbered since the cause of action arose. Morton v. Canada (Attorney General) (2005), [2005 CanLII 6052 (ON SC)](https://www.canlii.org/en/on/onsc/doc/2005/2005canlii6052/2005canlii6052.html), 75 O.R. (3d) 63 (S.C.J.) at para. [32].

(See also Goldcrest Drywall & Acoustics Company Ltd. v. Remo General Contracting Ltd., 2017 ONSC 4580, at para. 17; and Reset Electronics Inc. v. Hydro One Networks Inc., 2016 ONSC 921, at paras. 22-26.)

[27] If it is established that a plaintiff corporation has insufficient assets, the onus then shifts to the plaintiff to show that there is no money available to it from its shareholders to fund the action and post security for costs: Melco Construction, at para. 28.

[28] Compass submits that it is impecunious and its shareholders are not able to come up with the funds to pay an order for security for costs. It contends that if a security for costs order were made, it would effectively end the action in its entirety by forcing Compass into bankruptcy. Compass argues that it would be unjust for this to happen since it was AIM’s refusal to pay the outstanding total that has put Compass in the situation it finds itself. Compass relies on Reset Electronics, involving a motion for security for costs in a negligence action, where the court described the relevant analysis to be as follows (at para. 21):

21 In determining whether to order security for costs where a corporate plaintiff has insufficient assets in Ontario to satisfy a costs order, a court must do a three step analysis:

a. If a corporate plaintiff is found to have insufficient assets in Ontario to pay the costs of a defendant or respondent, the plaintiff must show that it is either impecunious or that it has sufficient assets to pay costs to the defendant: see Smith Bus Lines Ltd. v. Bank of Montreal (1987), 1987 CanLII 4190 (ON SC), 61 O.R. (2d) 688 (Ont. H.C.), at p. 704.

b. If the plaintiff can show that it is impecunious it needs to demonstrate that its claim is not “devoid of merit”: John Wink Ltd. v. Sico Inc. (1987), 1987 CanLII 4299 (ON SC), 57 O.R. (2d) 705 (Ont. H.C.), at pp. 708-709.

c. If on the other hand, the plaintiff is found not to be impecunious, it must prove that its claim has a “good chance of success”: see Zeitoun v. Economical Insurance Group, 2009 ONCA 415, 96 O.R. (3d) 639 (Ont. C.A.).

[29] Compass primarily relies on the ruling in John Wink wherein Reid J. held that, where a plaintiff has proven its impecuniosity, the claim should be allowed to proceed unless it is “plainly devoid of merit”. It argues that this court should accept the affidavit evidence of its two directors at face value where their evidence is uncontroverted that they have no assets to be liquidated. Compass submits that its claim has merit and ought to proceed to trial. It cites Crudo Creative Inc. v. Marin, 2007 CanLII 60834 (ON SCDC), [2007] O.J. No. 5334, 90 O.R. (3d) 213 (Ont. S.C.J. (Div. Ct.)), wherein the motions court judge, at first instance, had referred to John Wink and dismissed a motion for security for costs brought by the defendants concluding: “An order for security for costs would entirely defeat the right of the Plaintiff to seek a remedy. That right should not be readily defeated where a cause of action has been asserted.” However, I note that the Ontario Divisional Court allowed an appeal of the motion’s dismissal and found that there was an inadequate analysis done of the evidence relating to the plaintiff’s ability to access funding through its shareholder or any related company in order to post security for costs. It held that determining whether it is “just” to make an order for security for costs is not an onerous threshold and that a balancing is essential with due regard to the purpose of affording defendants a reasonable measure of protection for their costs but also with regard to the potential impact on a plaintiff (para. 28). The Divisional Court held that the key question is whether the plaintiff has access to assets or funds, and it concluded that the plaintiff had not established that it did not have access through its shareholder to funds to post security for costs (paras. 32 and 34).

[30] Counsel for AIM contends that this court should consider caselaw specifically addressing the test for impecuniosity in construction lien and/or matters under the Construction Act, and not Reset Electronics which is not a construction lien action. In this regard, it relies on Melco Construction and on Goldcrest Drywall. AIM argues that there is a “high evidentiary threshold” that must be met by Compass to satisfy the court that it is impecunious, and that Compass has not produced complete and accurate disclosure of its income, assets, expenses, liability and borrowing ability as required: Goldcrest Drywall, at para. 9. Compass must “put its best foot forward” and it is not sufficient for it to rely only on statements that it cannot borrow money. Rather, documentation should have been filed to show that attempts were made to secure financing and that those attempts were unsuccessful: see Goldcrest Drywall, at para. 22.

[31] It is AIM’s position that impecuniosity is different than simply a lack of assets: Goldcrest Drywall, at para. 11. And that, while Compass may have insufficient assets to pay a costs award, it has nonetheless failed to provide the degree and quality of financial documentation typically required in construction lien cases to meet the test for impecuniosity and discharge its burden. AIM argues that since Compass has not established impecuniosity, the court should not engage in the second stage identified in Reset Electronics of considering the merits of Compass’s action.

[32] Based on the record before me, I am of the view that Compass has not adduced financial disclosure with the required “robust particularity” and, therefore, has not met its onus of establishing impecuniosity and that Compass and its shareholders are unable to post any security for costs.

[33] The facts in Reset Electronics, a decision relied upon by Compass, are different from those in the present case. There, in dismissing the defendant’s motion for security for costs, the court found that the plaintiff had been placed into receivership and its director/sole shareholder had been assigned into bankruptcy, had lost his house under power of sale, was unemployed, was being supported financially by a partner, and had been denied financing for the litigation by lenders. Here, Compass is not in receivership and its shareholders have not been assigned into bankruptcy. Compass is still an active corporation, and the evidence is that it has worked on some small jobs since its termination from the AIM project and it is anticipated that Compass will commence taking on projects again in the future. There were no tax returns, financial statements, balance sheets, bank statements or other documentation provided setting out information concerning Compass’s assets and liabilities. Further, there was no documentary evidence showing that Compass has been denied financing by any lenders.

[34] With respect to information provided on behalf of Compass’s directors/shareholders, one did provide more detailed financial documentation than the other but neither filed any personal income tax returns or proof of employment income even though both are currently working and earning income. They also have provided only general information about their expenses. Both state that they could not borrow money but no documentation was filed to show any unsuccessful attempts made to secure financing. One shareholder attests that he has two mortgages against his house, however, there was only one mortgage statement adduced in evidence and it indicates a last payment required on August 7, 2020.

[35] While counsel for Compass argued that AIM’s lawyer could have asked more detailed questions on cross-examination in order to ascertain any missing financial information, I agree with AIM that it was Compass’s responsibility to place this information before the court in putting its “best foot forward”. I also share the concern expressed by AIM’s counsel about the fact that one of the shareholders neglected to include information in his affidavit that he is working and earning an income. If he had not been cross-examined, this information would have remained unknown.

[36] In my view, the evidence adduced by Compass is not sufficient to establish that it is truly impecunious or that there is no money available to it from its shareholders to fund the action and post a reasonable amount as security for costs.

Justness of the Order

[37] Where a court finds that a plaintiff is not impecunious, a defendant is entitled to security for costs in the action unless justice requires otherwise: European Flooring, at para. 21.

[38] In determining what is “just”, the court must balance the purpose of the rule, which is to afford defendants a reasonable measure of protection for their costs, and the potential impact on the plaintiff’s access to justice: Melco Construction, at para. 20. As explained by the court in 2232117 Ontario Inc. v. Somasundaram, 2020 ONSC 1434, at para. 7 (citing the Ontario Court of Appeal’s decision in Yaiguaje v. Chevron Corporation, 2017 ONCA 827, at paras. 22-25):

In assessing the justness of an order for security for costs, the Court of Appeal has confirmed that there is no static list of factors to be used. The correct approach is for the court to consider the justness of the order holistically, examining all the circumstances of the case and guided by the overriding interests of justice to determine whether it is just that the order be made.

[39] From my review of the materials before me, I am satisfied that Compass’s claim is not devoid of merit. While AIM denies that it is liable to pay the outstanding invoices because of deficiencies and breaches of contract on the part of Compass, that is argument for trial.

[40] I am of the view that the following factors are also relevant:

a. The evidence establishes that Compass is experiencing financial difficulties.

b. The evidence does not establish that Compass or its shareholders are unable to access any funds to post security for costs.

c. Compass is not in receivership and its shareholders have not been assigned into bankruptcy.

d. Compass has limited assets available to it.

e. Compass has performed some small jobs since November 2019.

f. There may be some merit to Compass’s assertion that its poor financial situation is due to AIM’s conduct.

g. AIM has posted security in order to vacate the lien.

[41] In the circumstances, I conclude that it is just to order that Compass post a reasonable amount of security for costs.

(c) If so, what is the appropriate amount of security for costs?

[42] Some courts have found that procedural fairness dictates that a reasonable quantum of security to be posted is an amount proportionate to the amount of security that had to be posted by a defendant to vacate a lien: see Proxema, at paras. 39-41. However, when considering a just result, the court has the discretion to order less than the requested amount of security: see Melco Construction, at para. 39; and Crudo, at para. 36.

[43] Where a counterclaim is separate from the defence, the court must be careful not to award the defendant (as plaintiff by counterclaim) security for costs of the counterclaim: 2232117 Ontario Inc., at para. 32; and Melco Construction, at para. 45. In European Flooring, at paras. 33-34, Master Wiebe found that the counterclaims in that action were based in large part on the same facts and circumstances raised in the plaintiff’s claim, and that this militated against the requested order for security for costs. He relied on Justice Farley’s decision in Better Business Bureau of Metropolitan Toronto Inc. v. Tuz, [1999] O.J. No. 1359 wherein a motion was denied in part on similar grounds.

[44] AIM requests an amount of $37,833.15 as security for costs. It provided a bill of costs setting out estimated costs for the completion of the litigation. There is no separate breakdown for costs relating to its counterclaim. In my view, AIM’s counterclaim arises from the same facts and circumstances that ground Compass’s action. The counterclaim seeks damages in the sum of $260,874.05, which is larger than the amount claimed by Compass. Both the claim and the counterclaim allege breach of contract and it appears that there will be a good deal of overlap in terms of the evidence to be led and arguments made by the parties. As a result, I am not prepared to order the amount sought by AIM.

[45] Based on the material before me, I order that Compass post security for costs in the amount of $20,000.00 within 60 days of this endorsement.

Costs

[46] In my view, the justness of an award of costs on this motion depends on who is successful at trial. If Compass succeeds against AIM, then this motion was unnecessary. Under the circumstances, I order that costs of the motion before me be in the cause.

B. MacNeil J.

MacNEIL J.

Released: August 11, 2022