COURT FILE NO.: CV-21-4614-00
DATE: 2022 10 11
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: CHARLES LUO, PEPTURE INC., WAI SUM LIU, MEI YING HUANG, ORITE INGREDIENT LTD. and YUDO INC., Applicants
AND
9477322 CANADA INC., PUCCINI NEW HOMES LP, SIYUAN WENG a.k.a. STEPHEN WENG and YANG LI, Respondents
BEFORE: MCSWEENEY J.
COUNSEL: Monty Dhaliwal and Sarah Rustomji, for the Applicants
Tanya Walker and Alana Spira, for the Respondents
HEARD: July 27, 2022
ENDORSEMENT
[1] The Applicants are Charles Luo (“Luo”) and others. Luo is one of three Directors of Respondent Company 9477322 Canada Inc. (“947”). The other two Directors of 947 are the individual Respondents Stephen Weng and Yang Li (“Weng” and “Li”).
[2] The Applicants ask the Court to grant them leave to bring a derivative action on behalf of 947 against the Respondents pursuant to s. 239 of the Canada Business Corporations Act, R.S.C. 1985, C. c-44 (“CBCA”). They also seek various other relief including an order directing 2580867 Ontario Corp. (“258”) to return funds to 947, as well as costs of this application and indemnity for costs in the derivative action.
[3] The other Applicants are individuals and corporate investors involved in 947 as “Limited Partners.”
[4] 947 itself was not represented on the motion, nor did it file materials. Service on 947 was accomplished by service of the application on its Directors Weng and Li.
[5] The Respondents Weng and Li oppose the motion on the basis that Luo is not acting in good faith and that the proposed derivative action is not in the interests of 947.
Legal framework and position of Respondents:
[6] Test for leave: The parties agree that the applicable test for leave to commence a derivative action is set out in s. 239 of the CBCA.
[7] Standing: The Respondents do not dispute that Luo has standing to bring this motion because he is clearly a “complainant” within the meaning of s. 238(c) of the CBCA due to being a Director of 947. The Respondents dispute the standing of the other Applicants, who are Limited Partners of 947, but not Directors, to request the relief sought.
[8] Test for leave: Before granting leave to commence a derivative action, the Court must be satisfied of three things: (a) that the complainant has given 14 days’ notice of intention to apply for leave to commence the derivative action; (b) that the complainant is acting in good faith; and (c) that the action appears to be in the interests of the corporation.
[9] Regarding (a), the Respondents acknowledge that the Applicants gave the required notice. They dispute (b) and (c), however, arguing that Luo is not acting in good faith, and that the proposed action is not in the interests of the corporation.
[10] They also argue that the relief sought is disproportionate to the amount of funds in dispute and that the proposed derivative action is statute-barred.
[11] The materials filed on the motion were extensive, and included factums, extensive documentation and transcripts of cross-examinations. During argument, each counsel referred the Court to the portions of the record relevant to their clients’ position.
EVIDENCE AND FACTUAL FINDINGS:
[12] I find that for the purposes of this motion, the following facts are established on the evidence filed. Most are not significantly or at all in dispute:
[13] At all relevant times, Luo was one of the three Directors of 947. Weng and Li were the other two.
[14] In July 2017, Luo and Weng incorporated a company, 258, to purchase property at 599 Lyons Lane, Oakville. The parties referred to this purchase as part of the “Oakville Project.”
[15] On June 5, 2017, 258 entered into an Agreement of Purchase and Sale.
[16] On about July 4, 2017, 947 advanced $500,000 “Loan Funds” to pay the $500,000 deposit agreed to in the Agreement of Purchase and Sale.
[17] The transaction fell through on or about November 5, 2017. At first, the vendor refused to return any part of the $500,000 to 258.
[18] After negotiations led by Weng and Li, the vendor agreed to return $327,500 of the original $500,000 deposit to 258.
[19] It is not clear precisely when Weng and Li stopped involving Luo in their discussions and negotiations. The record establishes, however, that by the time the $327,500 was to be returned to 947, they were no longer communicating in the same interest.
[20] The sum of $327,500 [“Remaining Deposit Funds”] was returned to 258.
[21] I find that the Remaining Deposit funds should at that time have been returned to 947 as partial repayment of the $500,000 Loan funds.
[22] Weng and Li did not deliver the Returned Deposit funds to 947. Instead, they added themselves as directors to 258.
[23] As Directors of 258, Weng and Li then authorized distribution of much of the Returned Deposit funds. Funds were distributed to themselves, and to some of the “Limited Partners” of 947, excluding Luo and the Applicants herein.
[24] Both Luo and the Limited Partners of 947 controlled by or connected to Luo were omitted from the distribution of the Returned Loan funds, which Weng and Li described as “profits.”
[25] Weng and Li acknowledge that none of the Remaining Deposit Funds were returned either to Luo or to 947.
[26] In December 2019, Luo instructed 947’s counsel Pallett Valo LLP to commence an action against 258 and others for the return of the Loan Funds.
[27] On January 31, 2020, Weng and Li passed a resolution as majority Directors of 947 that Luo had commenced action CV-19-00005171-0000 without authority to act for the corporation and directed 947’s counsel to discontinue that action.
ANALYSIS:
[28] Leave to bring the proposed derivative action may be granted where the evidence establishes on a civil standard that the Applicants are acting in good faith and that that the proposed action appears to be in the interests of 947.
[29] Respondents Weng and Li argue that Luo the Applicants are not acting good faith, nor in the interests of 947. Their arguments are set out at paras. 53-71 of their factum.
[30] I have found that $500,000 of 947’s funds were provided to 258 as part of a real estate transaction which did not proceed. The Returned Deposit Funds of $327,500, were not repaid to 947 after the deal fell through.
[31] The evidence establishes that the two other Directors of 947, namely Weng and Li, added themselves as Directors to 258 and thereafter authorized the distribution of returned funds to themselves and select Limited Partners of 947.
[32] I find that, by diverting the funds away from 947, and by adding themselves as Directors to 258, and thereby deliberately excluding Luo from involvement in the distributions of the returned funds, Weng and Li preferred their own interests to those of 947. They did not act in the interests of 947, nor in good faith with respect to their obligations as Directors to act in the best interests of 947.
[33] I find that the way Weng and Li appear to have placed their obligation as Directors of 947 in conflict with their individual interests and the interests of 258.
[34] In these circumstances, the only Director remaining who can advance the proposed derivative claim on behalf of 947 is Luo.
[35] The Applicants’ proposed Statement of Claim for the derivative action alleges torts against the Defendants Weng and Li which include breach of trust, breach of fiduciary duty, fraud, oppression, conversion, theft, misappropriation of funds, and deceit. The facts established on the record establish a prima facie case against Weng, Li and 248.
[36] Luo has been precluded by the Resolution passed by Weng and Li in January 2020 as majority directors of 947 from continuing action CV-19-5171.
[37] I find that on the facts found above, Luo is acting in good faith in seeking to advance the derivative claim on behalf of 947.
[38] I find further that commencing an action to hold Directors Weng and Li accountable to 947 for the return of the Loan Funds is in the appears to be in the interests of 947 on the record before me.
[39] The three components of the test for leave to commence the proposed derivative action, referenced above, are therefore satisfied by Luo.
Number of Applicants needed, indemnity for costs, and proportionality:
[40] The Respondents argue that there is not enough money in dispute to justify starting a derivative action. In view of my findings regarding the actions of Weng and Li being contrary to their obligations to 947, this argument does not suffice as a bar to the corporation having a derivative action brought to redress the harm to the corporation.
[41] The Applicants’ request for an order for indemnity for costs to prosecute the derivative action is, however, relevant to the question of proportionality. It is, of course, important that the interests of 947 be advanced in a proportionate and cost-effective manner.
[42] I decline to grant advance costs to Luo to prosecute the action, as I am not satisfied that doing so is consistent with 947’s interests in timely, cost-effective resolution, given the amounts in issue between the parties.
Applicants other than Luo:
[43] Respondent’s counsel agreed that Luo has standing under the CBCA as a complainant to seek derivative relief. Applicant counsel agreed in submissions that Luo, as a matter of law, will represent the interests of the other proposed Applicants and that it is unnecessary that they all be named Applicants too. It is, in my view, neither necessary nor proportionate to grant leave to Applicants other than Luo to prosecute the derivative action.
[44] I therefore grant leave to Luo only, to commence the proposed action on behalf of 947.
[45] I decline to grant the further relief sought by Luo regarding combining the 2019 action with the proposed derivative action. Luo is not precluded from seeking such relief by motion once the derivative action is commenced.
[46] On this motion Luo also asks the Court to order that Weng and Li transfer funds held by 258 back to 947 for accounting and payment of 947’s legal costs.
[47] Weng and Li argue that I should find that the Applicant’s proposed claims are statute-barred. The record on the motion is insufficient to conclude on this issue. The Defendants may plead such positions as defences to the claim in the derivative action.
Costs of this motion:
[48] Luo was successful in obtaining leave to commence the derivative action. This motion was clearly necessary to obtain such relief. He is, accordingly, entitled to some costs.
[49] The Applicants’ Bill of Costs filed at the end of the motion seeks $40,745.63 in substantial indemnity and $27,412.73 in partial indemnity costs.
[50] The Applicants’ Bill of Costs was reasonable as to hourly rates and hours claimed for steps required to advance the motion.
[51] Considering the law and relevant factors regarding costs in civil actions, including efficient use of parties’ and court resources as well as proportionality between steps taken and matters in issue, I fix costs against the individual Respondents, Weng and Li, in the amount of $20,000. This amount includes fees, disbursement, and taxes.
[52] In considering the appropriateness of this amount, I have observed that the Defendants’ Bill of Costs for the same application totaled $89,057.71 and $60,078.97 at a partial indemnity scale. The costs ordered payable by the Weng and Li are, therefore, well within the range of what they would have expected to pay if unsuccessful on the motion.
CONCLUSION:
[53] For reasons given, I order as follows.
[54] Leave is granted to Charles Luo pursuant to s. 239 of the CBCA to commence a derivative action on behalf of 9477322 Canada Inc.
[55] Proposed statement of claim filed on motion to be amended to remove other named Applicants and must be served and filed by October 31, 2022.
[56] Remaining relief sought by the parties of the motion is dismissed.
[57] Costs fixed in the amount of $20,000 are payable to the Applicants, by the Weng and Li, jointly and severally.
[58] Costs to be paid by October 25, 2022.
[59] Weng and Li may not look to the assets of 947 to pay the costs ordered.
[60] Order accordingly.
I am not seized.
L. McSweeney J.
Released: October 11, 2022
COURT FILE NO.: CV-21-4614-00
DATE: 2022 10 11
ONTARIO
SUPERIOR COURT OF JUSTICE
B E T W E E N:
CHARLES LUO, PEPTURE INC., WAI SUM LIU, MEI YING HUANG,ORITE INGREDIENT LTD. and YUDO INC.,
Applicants
AND
9477322 CANADA INC., PUCCINI NEW HOMES LP, SIYUAN WENG a.k.a. STEPHEN WENG and YANG LI,
Respondents
ENDORSEMENT
McSweeney J.
Released: October 11, 2022