Court File and Parties

COURT FILE NO.: CV-18-00596068-00CL DATE: 20230426 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Brian Cerson, David Thompson, David Greenwood and Reportech Computer Services Inc., Plaintiffs AND: McCarney Group LLP, Beck Hoffland, Robert Brent, Lloyd Mogul, Bruce Allan, Michael Sim, Allan Wedsworth and Larry Low, Defendants

BEFORE: Mr. Justice H.J. Wilton-Siegel

COUNSEL: Bobby Sachdeva and Stephanie De Caria, for the Defendants, Moving Parties Michael S. Hebert, for the Plaintiffs, Responding Parties

HEARD: January 13, 2023

Endorsement

[1] McCarney Greenwood LLP (“Oldco”) was an accounting firm. In March 2016, the business and affairs of Oldco were restructured through two loan and foreclosure transactions under which McCarney Group LLP (“Newco”) acquired all the assets and business of Oldco as a going concern, other than the claims of the defendants described below (the “Restructuring”). In this litigation, the defendants seek an order setting aside the transactions constituting the Restructuring under the Fraudulent Conveyances Act, the Assignments and Preferences Act, the Personal Property Security Act, and/or the Bankruptcy and Insolvency Act. On this motion, the defendants seek summary judgment in their favour pursuant to r. 20.01(3) of the Rules of Civil Procedure, R.R.O. 1990, Reg 194, as amended. They submit that there is no genuine issue with respect to any of the claims of the plaintiffs in this litigation against any of the defendants.

Factual Background

The Parties

[2] The plaintiffs, Brian Cerson (“Cerson”), David Thompson (“Thompson”) and David Greenwood (“Greenwood”), are each former partners in Oldco.

[3] The plaintiff Reportech Computer Services Inc. (“Reportech”) is an Ontario corporation. It is understood that the shareholders of Reportech are Greenwood, Cerson or Cerson’s holding company, and the defendant Bruce Allan (“Allan”) or his holding company. At the time of the Restructuring, Reportech’s only asset was an unsecured loan receivable from Oldco in the approximate amount of $581,256.

[4] The defendants, Beck Hoffland (“Hoffland”), Lloyd Mogul (“Mogul”) and Robert Brent (“Brent”) were the founding partners of Newco. Michael Sim (“Sim”), Allan Wedsworth (“Wedsworth”) and Larry Low (“Low”) joined Newco as associate partners immediately after the Restructuring.

[5] The defendant Allan was a partner of Oldco at the time of the Restructuring but retired at that time.

[6] The defendant Emgee Management Services LP (“Emgee”) was an affiliate of Oldco that managed Oldco’s operating expenses.

[7] Cerson departed Oldco in 2007. By a judgment dated October 20, 2015, Stewart J. awarded Cerson $595,486.01 together with costs in the amount of $200,000 (the “Judgment”) in an action that Cerson commenced against Oldco and Emgee. At the time of the Restructuring, Oldco owed Cerson approximately $477,418.53 in respect of the Judgment.

[8] Greenwood departed Oldco in March 2015. At the time of his departure, Greenwood was owed $2 million for future pension income pursuant to the Oldco partnership agreement, together with $70,788 in respect of the return of his capital loan and partnership equity and $132,520 in respect of vacation pay.

[9] Thompson also departed Oldco in March 2015. At the time of his departure, Thompson was owed $630,000 for future pension income pursuant to the Oldco partnership agreement, together with current vacation pay in the amount of $66,898 and future vacation pay of $55,096. In addition, Thompson was owed $50,313 in respect of his partnership equity and a capital loan and Thompson’s family trust was owed $70,788 in respect of its capital and a loan to Emgee.

Factual Background to this Action

[10] The defendants say that Oldco had been underperforming since before 2014. They say that matters became critical in 2015 after Greenwood and Thompson left Oldco for MNP LLP in March 2015 and Cerson obtained the Judgment against Oldco in October 2015.

[11] In addition, in December 2015, the Royal Bank of Canada (“RBC”) advised that it intended to demand repayment of the outstanding indebtedness of Oldco in the amount of $671,849.97 under credit facilities established in favour of Oldco (the “RBC facilities”). RBC agreed with Oldco to forbear enforcement proceedings for a limited period of time, initially to February 15, 2016, and subsequently extended to February 29, 2016, pursuant to a forbearance agreement dated December 23, 2015.

[12] Hoffland says that by the end of 2015 Oldco did not have sufficient assets to pay its liabilities and was operating at a loss on a monthly basis, although he suggests that most profit of an accounting firm is generated in the first quarter of each year.

[13] Specifically, the defendants say that, by the time of the Restructuring, Oldco was insolvent on a cash flow basis, as it was unable to pay its liabilities as they came due, and on a balance sheet basis, as its liabilities exceeded its assets. With respect to the latter, a comparison of the combined balance sheet of Oldco and Emgee as of June 30, 2015 and the balance sheet of Oldco on its own as of December 31, 2015 reveals that the balance sheet insolvency was essentially due to inclusion of the unfunded future pension obligations to the partners and former partners of Oldco, including the individual plaintiffs.

[14] With respect to the prospects for 2016, Hoffland says that Oldco was facing the possibility that it would not be able to generate sufficient cash flow to cover the costs of operation. The defendants say that the only available avenue of avoiding RBC enforcing against Oldco and appointing a receiver to liquidate the business was an immediate injection of outside funds. However, Hoffland says that “[n]one of the remaining partners of Oldco were able to personally contribute further amounts to enable Oldco to continue operations” and that Oldco was unable to secure financing to replace the RBC facilities on reasonable terms.

[15] Hoffland also states that Oldco was not generating enough net income to retain the existing partners. In this regard, a further partner, Sanjay Sanjani (“Sanjani”) left Oldco in February 2016.

[16] In his affidavit, Hoffland describes Oldco’s financial status and prospects at the time of the Restructuring in the following terms. He says that “Oldco was hopelessly insolvent and operationally unsustainable” and that its “collapse was imminent and the [R]estructuring was…necessary.” He also says that, for the partners, “[c]continuing with Oldco’s business was simply not a viable or realistic option” and that “there was no realistic prospect of [Oldco] surviving as none of the partners was prepared to continue with Oldco.” Hoffland says that “the only available decision was whether to try to fundamentally restructure [Oldco’s] business or discontinue and bankrupt it.”

The Restructuring

[17] The Restructuring was implemented in the following manner.

[18] First, Hoffland, Mogul and Brent incorporated Newco. They then arranged for Oldco and Newco to participate in the following two consensual foreclosure transactions.

[19] On March 24, 2016, Newco advanced Oldco the amount of $693,324.71 pursuant to a demand promissory note secured by a general security agreement of the same date (the “First Security Agreement”) [1]. The proceeds of this loan were used to repay the RBC facilities including its legal fees. As mentioned, Oldco says it was unable to repay the amount owing to the RBC without such loan for want of cash flow.

[20] On March 28, 2016, Newco demanded repayment of this loan and Oldco consented to the foreclosure of the assets secured by the First Security Agreement on the same date in full satisfaction of the loan. Pursuant to this foreclosure, Newco acquired specified Oldco accounts receivable having a book value in the amount of $503,104 and Oldco work-in-process (“WIP”) in the amount of $149,384 (collectively the “Initial A/R and WIP”) together with all the other non-accounts receivable and non-WIP assets of Oldco.

[21] Then, on March 29, 2016, Newco advanced Oldco the further amount of $300,000 pursuant to a second promissory note secured by a second security agreement of the same date (the “Second Security Agreement”). The proceeds of this loan were used to pay Oldco’s payroll and outstanding trade payables for which the defendants say there was also no cash flow available to satisfy such obligations.

[22] On March 31, 2016, Newco demanded repayment of this second loan and Oldco consented to the foreclosure of the assets secured by the Second Security Agreement on the same date in full satisfaction of this loan. Pursuant to this foreclosure, Newco acquired the remaining accounts receivable and WIP of Oldco. The remaining accounts receivable included accounts receivable having a book value of $300,062 and further accounts receivable having a book value of $269,560 valued at nil after a write-off of other accounts receivable totaling approximately $283,000. In addition, Newco acquired WIP in the gross amount of $1,395,137. The WIP had a book value of $822,141 after application of a “valuation discount” but was valued at nil for the purposes of the Restructuring.

[23] By these transactions, the business of Oldco as it existed at the time of the Restructuring was continued essentially seamlessly in Newco with Hoffland, Mogul and Brent as founding partners, with Sim, Wedsworth and Low as associate partners, and with most but not all of the former employees of Oldco. The only partner of Oldco who did not continue in Newco was Allan, who retired at this time. The principal, if not the only, purpose of the Restructuring was, as mentioned, to leave the plaintiffs’ claims against Oldco, as described above, in Oldco.

Observations Regarding the Financial Status of Oldco and the Restructuring

[24] The following observations and conclusions regarding the Restructuring inform the decision reached in this Endorsement.

[25] First, while the Restructuring was structured as two loan and foreclosure transactions, the Restructuring was in substance the sale to Newco of the business of Oldco as a going-concern as of late March 2016.

[26] The defendants appear to argue in their Factum that the Restructuring should instead be treated solely as a foreclosure of assets, rather than as comprising the entirety of Oldco’s professional practice on a going concern basis which entailed continuity of the involvement of the partners and an assumption of all ongoing liabilities including employee liabilities. Applying this perspective, the defendants suggest that any goodwill that Newco obtained resulted from the voluntary decision of the remaining partners to become partners of Newco after it acquired the Oldco assets and that this decision was not part of the Restructuring.

[27] I do not accept this characterization of the Restructuring for the reason that it was at all times intended that the partners and the associated partners and employees of Oldco, other than Allan, would continue to conduct Oldco’s professional practice in Newco without interruption. As discussed below, the Restructuring did not make sense on any other basis. Moreover, it can reasonably be assumed that The Toronto-Dominion Bank (the “T-D”) would not have financed the Restructuring, by lending Newco the amounts loaned by Newco to Oldco, if that had not been the case. The fact that the form of the Restructuring was a consensual foreclosure which complied with the requirements of the PPSA does not change the substantive reality of the transactions when viewed collectively.

[28] In short, the Restructuring was, in substance as discussed above, an acquisition by Newco of Oldco’s professional practice on a going-concern basis that was no different from any third-party acquisition of Oldco’s business on a going-concern basis.

[29] Second, the Restructuring was transparently a transaction between related parties. At a minimum, this calls for careful scrutiny of the consideration paid by Newco for Oldco’s assets and business.

[30] Third, in the absence of an arm’s length purchase of Oldco’s professional practice to establish the value of the Oldco’s business as a going concern, or of its assets separately, as of the Restructuring, the transactions could have been structured to provide that Newco would pay Oldco the amount of Newco’s actual recoveries from the transferred accounts receivable and WIP over some period of time. This would have resulted in a total consideration paid to Oldco which exceeded the amount paid pursuant to the Restructuring as discussed below.

[31] However, in lieu of such an approach, the defendants fixed the amount paid by Newco to Oldco as the amount required to satisfy the outstanding indebtedness of Oldco to the RBC at the time plus the amount necessary to retire the outstanding trade payables, to meet the current payroll and to fund some partner draws in order to maintain continuity of Oldco’s business. There was therefore no apparent direct relationship between the amount paid for the assets of Oldco and the value of the assets at the time.

The Procedural Background

The Bankruptcy Proceedings of Oldco and Emgee

[32] The plaintiffs filed applications for bankruptcy orders in respect of Oldco and Emgee dated March 24, 2017. On May 30, 2017, by order of Master Mills, Oldco and Emgee were adjudged bankrupt and msi Spergel Inc. was appointed the trustee in bankruptcy (the “Trustee”) of both entities.

[33] The Statement of Affairs of Oldco in the bankruptcy, or other evidence of its assets and liabilities at the time it was adjudged bankrupt, is not in evidence. While the defendants suggest that the claims of other unsecured creditors of Oldco, including those of Allan, Brent, Hoffland and Mogul, were left unpaid as a result of the Restructuring, the evidence on the record does not go this far. Instead, the evidence suggests only that the claims of the plaintiffs against Oldco described above were left unpaid. While the claims of the remaining partners of Oldco in respect of their unfunded future pension claims were also left unpaid as a result of the Restructuring, it is possible that such claims were addressed in the partnership agreement for Newco which is not in evidence.

This Action

[34] The action that is the subject of this proceeding was commenced by a Notice of Action issued on April 17, 2018 by the Trustee (the “Action”). The Action was subsequently assigned by the Trustee to the plaintiffs in furtherance of an order dated June 11, 2018 of Dunphy J. pursuant to s. 38 of the Bankruptcy and Insolvency Act, R.S.C., 1985, c. B-3 (the “BIA”). The plaintiffs issued the Statement of Claim in the Action on October 4, 2018 and the defendants served their Statement of Defence on January 31, 2019.

[35] As mentioned, in the Action, the plaintiffs seek to set aside the transactions constituting the Restructuring pursuant to the provisions of the Fraudulent Conveyances Act, R.S.O. 1990, c.F.29, the Assignments and Preferences Act, R.S.O. 1990, c. A.33, the Personal Property Security Act, R.S.O. 1990, c. P.10 (the “PPSA”) and/or the BIA.

[36] In the Statement of Claim, the plaintiffs seek among other things: (1) an order declaring that the transactions constituting the Restructuring are void as against the Trustee pursuant to s. 95(1)(b) of the BIA; (2) in the alternative, an order declaring the transactions constituting the Restructuring are transfers at undervalue and are void as against the Trustee under s. 96(1) of the BIA; and (3) an order directing the Defendants to return or pay to the estates of Oldco and Emgee the preferences described above in an amount equal to the difference between the fair market value of the property as stated by the Trustee, and the value of the actual consideration given or received by Oldco and Emgee.

This Motion

[37] On this motion, the defendants seek summary judgment in their favour pursuant to r. 20.01(3) of the Rules of Civil Procedure. They submit that there is no genuine issue with respect to the claims of the plaintiffs in the Action.

[38] The parties are agreed that the framework to be followed on a summary judgment motion under r. 20.01(3) is set out in Rule 20.04 as addressed by the Supreme Court in Hryniak v. Mauldin, 2014 SCC 7, [2014] 1 S.C.R. 87. The following statements from that decision are relevant for the present motion. First, there will be no genuine issue requiring a trial when the judge is able to reach a fair and just determination on the merits on a motion for summary judgment. This will be the case when the process (1) allows the judge to make the necessary findings of fact, (2) allows the judge to apply the law to the facts, and (3) is a proportionate, more expeditious and less expensive means to achieve a just result: see para. 49. In addition, the standard for fairness is not whether the summary judgment motion is as exhaustive as a trial, but whether it gives the judge confidence that the judge can find the necessary facts and apply the relevant legal principles so as to resolve the dispute: see para. 50.

[39] The following principles, which have not been displaced by Hryniak v. Mauldin, are also relevant.

[40] First, the moving party bears the onus of establishing that there is no triable issue and has an evidentiary burden of showing that summary judgment is in the best interests of justice: Aguonie v. Galion Solid Waste Material Inc., (1998), 38 O.R. (3d) 161.

[41] Second, on a motion for summary judgment, the responding party must “lead trump or risk losing”: 1061590 Ontario Ltd. v. Ontario Jockey Club (1995), 21 O.R. (3d) 547 (C.A.), at p. 557. Although the onus is on the moving party to establish the absence of a genuine issue requiring a trial, the responding party may not rest on the allegations or denials in the party’s pleadings, but must present by way of affidavit, or other evidence, specific facts showing that there is a genuine issue for trial.

[42] Third, as stated in Dawson v. Rexcraft Storage and Warehouse Inc. (1998), 164 D.L.R. (4th) 257 (Ont. C.A.), at para. 17, the motions judge is entitled to assume that the record contains all the evidence which the parties will present if there is a trial. It is not sufficient for the responding party to say that more and better evidence will or possibly may be available at trial. The respondent must set out specific facts and coherent evidence organized to show that there is a genuine issue requiring a trial: Pizza Pizza Ltd. v. Gillespie (1990), O.R. (2d) 225 (Gen. Div.), at p. 238; Canadian Imperial Bank of Commerce v. Mitchell, 2010 ONSC 2227, at para. 18.

[43] Lastly, both parties on a summary judgment motion have an obligation to put their best foot forward: see Mazza v. Ornge Corporate Services Inc., 2016 ONCA 753, at para. 9 citing Sweda Farms Ltd. v. Egg Farmers of Ontario, 2014 ONSC 1200, at para. 32, aff’d 2014 ONCA 878. While this statement has been interpreted in different ways, I think it means, at a minimum, that a party must put forward its best evidence on a matter or risk an adverse inference for its failure to do so. In Sweda Farms, for example, the motion judge drew an adverse inference from an appellant’s reliance on an affidavit of his wife rather than personal evidence when he was the more knowledgeable party.

The Expert Reports

[44] For the purpose of claims under s. 96 of the BIA, the Trustee is required pursuant to s. 96(2) of the BIA to state its opinion of the fair market value of the consideration received by each of the parties to an impugned transaction and, in the absence of evidence to the contrary, the values stated by the Trustee shall govern. However, in this case, the Trustee has not provided such an opinion. Instead, the parties rely on expert opinions which are summarized below.

[45] In the circumstances of a s.38 transfer, I do not think that the plaintiffs can substitute their own opinion of value for that of the trustee of the debtor. To do so would lose the benefit of whatever expertise a trustee would have in establishing its opinion of value. Accordingly, in the present circumstances I conclude that the burden of proving an undervalue lies with the plaintiffs. In any event, however, on this summary judgment motion, the defendants have the burden of demonstrating that no genuine issue for trial exists.

The BDO Report

[46] In support of its position that the Restructuring was conducted at the fair market value of the business and assets of Oldco, the defendants have obtained an expert report from BDO Canada Limited dated April 15, 2021 (the “BDO Report”) regarding the value of the accounts receivable and WIP acquired by Newco pursuant to the Restructuring. The defendants rely upon the BDO Report as a defence to the plaintiffs’ assertion that the fair market value of the accounts receivable and the work-in-process acquired by Newco exceeded the amount of the aggregate consideration paid by Newco to Oldco under the Restructuring, being $993,324.71.

[47] The BDO Report assessed the value of Oldco’s accounts receivable and WIP transferred to Newco pursuant to the Restructuring as of March 30, 2016. The analysis employed two approaches which will be summarized in turn.

Historical Approach

[48] The first approach valued those assets based on Oldco’s historical results in billing and collecting its accounts receivable and WIP. In respect of Oldco’s accounts receivable, this involved an evaluation of observed recovery rates realized as of three dates, the latest being June 30, 2015, which were then averaged to yield a mean average and a weighted average (giving more weight to recent analysis dates) of 60.26% and 59.34%, respectively, as well as comparable percentages for various aging categories of the accounts receivable as of such dates. These collection percentages were then applied to the aged accounts receivable categories which yielded an expected collection of the Oldco accounts receivable between $499,150, using weighted averages, and $537,487, using mean averages. It should be noted that, for this purpose, the Oldco accounts receivable were those described above which had a book value of $1,072,727 [2] and were valued at $803,167 in the Restructuring.

[49] BDO’s calculation of the expected collections of Oldco’s WIP on this first approach involved four steps. First, BDO analyzed Oldco’s historical realization of WIP at the same three analysis dates divided into the same aging categories used to analyze Oldco’s accounts receivable from which it derived billing percentages on a mean average basis and a weighted average basis for each of the aging categories for the WIP. BDO then applied the averages of these percentages against the gross total WIP of Oldco as of March 28, 2016, being $1,550,525, to get the expected billing amounts (i.e. accounts receivable) on a mean average and weighted average basis. BDO next applied the historical collection percentages derived as described above to get an estimation of the collections from these expected billings on each basis. Lastly, BDO deducted a further 50% from each of these results reflecting its assessment that the historical WIP experience of Oldco was not directly applicable to a valuation analysis as of the date of the Restructuring for three reasons expressed in the BDO Report. Using this approach, the estimated collections of Newco from the Oldco WIP transferred to it ranged from $336,995 (using weighted average rates) to $339,165 (using mean average rates) [3].

Receivership Approach

[50] The second approach of BDO valued the Oldco accounts receivable and WIP on a receivership basis, although in the hands of Newco which had the ability to complete the transferred work, rather than a receiver which would not. On this approach, BDO assessed a “collectability percentage” based on BDO’s judgment under high and low scenarios for each aging category of the accounts receivable as of the date of the Restructuring. Applying these percentages to the accounts receivable totaling $1,355,954, after deduction of the recorded allowance for bad debts totaling $319,804, yielded an estimated recovery range of between $434,000 and $674,000.

[51] In respect of the Oldco WIP, BDO applied a 37% “valuation discount” to the gross book value of WIP of $1,550,525 to estimate billings from this WIP. BDO says it understood that it was Oldco’s practice to apply a discount of this percentage to the WIP on its books. BDO then applied estimated realization rates, under high and low scenarios, against this amount of WIP. The estimated realization rates were also established based on BDO’s judgment after consideration of certain factors set out in the BDO Report. On the basis of this approach, BDO calculated that the estimated recovery on Oldco’s WIP on a receivership basis would fall between $142,000 and $235,000 before receiver’s fees and other operating costs that would be incurred in a receivership process.

Actual Recoveries

[52] While it was not part of its mandate, BDO also set out a calculation for comparison purposes of Newco’s actual recoveries from Oldco’s accounts receivables and WIP.

[53] BDO was able to track the actual recoveries in respect of Oldco’s accounts receivable. It calculated total collections to be $1,032,517. In respect of WIP, the analysis is more complicated. BDO calculates that Oldco transferred WIP having a book value of $971,524 (after adjustments/discounts of $579,000 for which there is no explanation other than that this reflects Oldco’s historical practice), that Newco incurred additional WIP of $3,020,792 during the period, much of which was necessary to realize the transferred WIP, that a total of $2,146,171 was billed in respect of all such WIP, that an additional $767,092 of WIP was written off and that $204,433 remained at August 31, 2016. Of this last amount, BDO expected that $189,831 would be collected based on Newco’s collection experience in respect of accounts receivable during the period from the Restructuring to August 31, 2016.

[54] Accordingly, based on the BDO calculations of actual and expected recoveries, Newco collected and would collect a total of $1,222,348 in respect of Oldco’s accounts receivable and WIP, being a difference of $229,023.29 or approximately 23%, over the $993,324.71 paid by Newco for substantially all of Oldco’s assets, including any goodwill.

[55] Lastly, I note that the BDO Report does not address, in any manner, the issue of whether Newco acquired any goodwill pursuant to the Restructuring. Accordingly, it does not address the quantum, if any, of any such goodwill.

The Kalex Report

[56] The plaintiffs provided an expert report dated February 16, 2022 of Kalex Valuations Inc. (the “Kalex Report”), which describes the three generally accepted bases employed by valuators to value a business interest, shares or net assets and, similarly, the three generally accepted bases for valuing intangible assets such as goodwill.

[57] The Kalex Report also described the key factors which, in the opinion of the author of the Kalex Report, affect the sale price and value of “an accounting/tax practice or book of business/client base”. In this regard, the Kalex Report opines that “accounting and tax practices and books of business/client lists have saleable/commercial value above the value of their related tangible assets” — that is, have an intangible value or goodwill. The author also opines that, in her experience, sales for such assets generally fall in the following ranges, depending on the particular point in time and factors specific to the vendor and purchaser: (1) 0.8 to 1.5 times revenue; and (2) 3.0 to 5.0 times normalized EBITDA or cash flow to the owner. The Kalex Report goes on to identify a number of factors that will influence the appropriate multiple of revenue or discretionary cash flow selected by a valuator for valuation purposes in any particular case and alludes to the range of definitions that could be selected for these variables.

[58] The Kalex Report does not however address the particular circumstances of Oldco and Newco in any manner. In particular, the Kalex Report does not purport to value any of the accounts receivable, WIP or goodwill, if any, of Oldco that was transferred to Newco under the Restructuring. The plaintiffs suggested at the hearing that this was due to a refusal of the defendants to provide Newco financial statements for 2016 which the author of the Kalex Report indicated were necessary for any such valuation. However, the plaintiffs have not sought production of such documentation pursuant to a motion or other legal proceeding. In addition, there is no reference in the Kalex Report to a mandate to conduct any such valuation or the need for such documentation to enable such a valuation.

[59] For the foregoing reasons, the Kalex Report fails to provide any evidence that is of assistance in addressing the valuation issues discussed below.

Analysis and Conclusions

[60] The principal issues on this summary judgment motion will be addressed after first considering certain preliminary matters and the plaintiffs’ claim that the defendants failed to comply with the PPSA in the implementation of the Restructuring.

Preliminary Matters

[61] As a preliminary matter, the plaintiffs accept that summary judgment should be granted in favour of the three associate partners of Newco at the time of the Restructuring, Sim, Wedsworth and Low, as well as in favour of Emgee. There is no evidence supporting the plaintiffs’ claims against any of these defendants. In any event, neither the Notice of Action nor the Statement of Claim specifies any particular claims in respect of these parties.

[62] In addition, s. 95(1)(b) of the BIA addresses the circumstances of a transfer of property made by an insolvent person in favour of a creditor that has the effect of giving that creditor a preference over another creditor. These are not the present circumstances. The issue in this litigation is an alleged transfer at undervalue from Oldco to Newco, not a preference in favour of a creditor of Oldco to the detriment of the plaintiffs’ claims against Oldco. Accordingly, to the extent that the plaintiffs continue to assert a claim under this provision as contemplated by the Statement of Claim, the defendants are entitled to summary judgment in their favour in respect of such claim.

The Plaintiffs’ Claim Under the Personal Property Security Act

[63] Section 65(2) of the PPSA requires that a secured creditor proposing to proceed by way of foreclosure give notice to the persons mentioned in clauses 63(4)(a) to (d) of that statute. These provisions do not include an unsecured creditor. The plaintiffs argue however that Cerson had a statutory right to receive notice as a person having an interest for the purpose of clause 63(4)(d).

[64] There is no merit to this argument. At the time of the Restructuring, Cerson was a simple judgment creditor. He had not registered a writ of seizure and sale. Insofar as the plaintiffs rely on the expansive language of the Supreme Court in Bank of Montreal v. Innovation Credit Union, 2010 SCC 47, [2010] 3 S.C.R. 3, at para. 18, such language refers to the ambit of a security interest. It has no application to the concept of a person having an interest in collateral under clause 65(4)(d).

[65] As the plaintiffs do not otherwise challenge the defendants’ compliance with the statutory requirements of the PPSA in respect of the Restructuring, I conclude that the defendants are entitled to summary judgment in their favour in respect of the plaintiffs’ claim to set aside the Restructuring for failure to comply with the requirements of the PPSA.

The Principal Issues Addressed on this Motion – Whether Oldco was Insolvent and Whether the Restructuring was Conducted at an Undervalue

[66] As mentioned, the plaintiffs base their principal claims on statutory remedies set out in s. 96 of the BIA, the Assignments and Preferences Act and the Fraudulent Conveyances Act.

The Relevant Statutory Provisions

[67] The following are the relevant statutory provisions pertaining to these claims.

[68] It is understood that the plaintiffs’ claim under the BIA for a transaction at an undervalue is asserted under s. 96(1)(b)(i) which reads as follows:

96 (1) On application by the trustee, a court may declare that a transfer at undervalue is void as against, … the trustee — or order that a party to the transfer or any other person who is privy to the transfer, or all of those persons, pay to the estate the difference between the value of the consideration received by the debtor and the value of the consideration given by the debtor — if

(b) the party was not dealing at arm’s length with the debtor and

(i) the transfer occurred during the period that begins on the day that is one year before the date of the initial bankruptcy event and ends on the date of the bankruptcy, …

[69] The relevant provision of the Assignments and Preferences Act is s. 4(1) which reads as follows:

4 (1) Subject to section 5, every gift, conveyance, assignment or transfer, delivery over or payment of goods, chattels or effects, … or of any other property, real or personal, made by a person when insolvent or unable to pay the person’s debts in full or when the person knows that he, she or it is on the eve of insolvency, with intent to defeat, hinder, delay or prejudice creditors, or any one or more of them, is void as against the creditor or creditors injured, delayed or prejudiced.

[70] The relevant provisions of the Fraudulent Conveyances Act are ss. 2 - 4 which read as follows:

2. Every conveyance of real property or personal property and every bond, suit, judgment and execution heretofore or hereafter made with intent to defeat, hinder, delay or defraud creditors or others of their just and lawful actions, suits, debts, accounts, damages, penalties or forfeitures are void as against such persons and their assigns.

3. Section 2 does not apply to an estate or interest in real property or personal property conveyed upon good consideration and in good faith to a person not having at the time of the conveyance to the person notice or knowledge of the intent set forth in that section.

4. Section 2 applies to every conveyance executed with the intent set forth in that section despite the fact that it was executed upon a valuable consideration and with the intention, as between the parties to it, of actually transferring to and for the benefit of the transferee the interest expressed to be thereby transferred, unless it is protected under section 3 by reason of good faith and want of notice or knowledge on the part of the purchaser.

[71] The defendants do not dispute that the Restructuring was implemented with a view to defeating the plaintiffs’ claims against Oldco. I note that, by virtue of the related party nature of the relationship between Oldco and Newco, the knowledge requirements under the Assignments and Preferences Act and the Fraudulent Conveyances Act are necessarily satisfied if either Oldco or Newco implemented the Restructuring with a view to defeating the claims of the plaintiffs.

The Issues on this Motion

[72] The plaintiffs’ claims engage two principal issues: (1) whether Oldco was insolvent or on the eve of insolvency at the time of the Restructuring; and (2) whether the Restructuring was conducted at an undervalue. I will address each issue in turn.

Was Oldco Insolvent at the Time of the Restructuring?

[73] The parties take very different positions regarding the issue of Oldco’s solvency at the time of the Restructuring.

[74] The defendants assert that Oldco was insolvent at the time of the Restructuring on a cash flow basis, being unable to pay its debts as they fell due, and on a balance sheet basis. They assert that the insolvency of Oldco not only explains their decision to implement the Restructuring but also compels a finding that there was no goodwill associated with the professional practice of Oldco that was transferred to Newco. It follows however that the defendants cannot dispute that Oldco was insolvent for the purposes of the plaintiffs’ claim under the Assignments and Preferences Act.

[75] The plaintiffs’ principal position is that the evidence does not support a finding that Oldco was insolvent on a balance sheet basis because Oldco’s professional practice had sufficient goodwill such that its assets exceeded its liabilities, even taking into account Oldco’s future pension obligations to its former partners. However, they also continue to assert a claim under the Assignments and Preferences Act which requires demonstration that Oldco was insolvent or on the eve of insolvency.

[76] The documentation before the Court on this issue consists of the opposing assertions of Cerson and Hoffland in their respective affidavits, the transcripts of their cross-examinations, and the financial statements of Oldco described above. The plaintiffs have not identified any relevant documentation, financial or otherwise, withheld by the defendants for which they have sought production. However, there is a significant difference of opinion regarding the conclusions to be drawn from the facts on the record regarding the financial position of Oldco as of the time of the Restructuring.

[77] With respect to Oldco’s solvency on a balance sheet basis, the most current financial statement of Oldco prior to the Restructuring in the record shows a slight excess of assets over liabilities as of December 31, 2015. The defendants say that in reality the realizable value of its assets was much less. The plaintiffs argue that Oldco was only insolvent on a balance sheet basis if the future pension obligations to the departed partners are included in Oldco’s liabilities as was done in the combined financial statements of Oldco and Emgee dated June 30, 2015 referred to above. Cerson submits that such obligations should be treated as “contingent” or otherwise of no relevance in assessing Oldco’s solvency at the time of the Restructuring. Further, as mentioned, the plaintiffs say that, when Oldco’s goodwill is included, the actual value of its assets exceeded its liabilities.

[78] I do not think that it is possible to reach a definitive conclusion on the issue of Oldco’s solvency on a balance sheet basis based on the record before the Court for at least three reasons. First, a determination of this issue would require a determination of the realizable value of Oldco’s accounts receivable and WIP at the time of the Restructuring which is addressed in detail below. Similarly, the determination of this issue requires a finding regarding the goodwill, if any, of Oldco’s professional practice which is also addressed below. Lastly, a court would also require a more detailed analysis than is in the record on this motion regarding the extent and timing, as well as the proper accounting treatment, of the future unfunded pension obligations. As discussed below, the defendants say in their Factum that the future pension obligations to Greenwood and Thompson were not payable at the time of the Reorganization as each of them had continued to practice accounting at MNP LLP and therefore were not yet retired for the purposes of the Oldco partnership agreement.

[79] The evidence regarding Oldco’s ability to pay its liabilities as they fell due is also, in my view, equivocal.

[80] The December 31, 2015 financial statements of Oldco indicate that, in that year, Oldco generated a profit of $952,078 from revenues totaling $5,480,459. The defendants point to the following considerations, and make the following arguments, which they suggest collectively support the conclusion that, at this level of profitability, Oldco was effectively insolvent on a cash flow basis.

[81] First, Oldco was unable to repay the amount outstanding under the RBC facilities out of its own cash flow. It required financing from the T-D which was only available to Newco on the strength of personal guarantees of Hoffland, Mogul and Brent. Similarly, Oldco was unable to pay its trade payables and its payroll at the time of the Restructuring out of its cash flow and also required the T-D financing for that purpose.

[82] Second, Oldco was unable to pay its obligations to Greenwood and Thompson, and affiliated parties. There is no evidence of any payments to these parties notwithstanding that almost a year had elapsed since their departure. Similarly, Oldco was unable to pay the amount of the Judgment obtained by Cerson against Oldco and Emgee out of its cash flow notwithstanding efforts to do so reflected in a partial payment. This insufficiency was further aggravated by the pension obligations owed to previously retired partners that would increase materially when the pension obligations to Greenwood and Thompson became payable.

[83] Third, there is no basis for Cerson’s belief that Oldco was solvent because “[c]onsiderable value attache[d] to the goodwill of the firm and with the legal fee expenses out of the way, the future should have generated significantly increased profits…”

[84] The issue of potential goodwill is addressed below. However, there is no evidence to support an alleged value of $4 million for any goodwill that may have existed and in any event no evidence that such goodwill could have been realized immediately in a sale transaction. Nor is there evidence that the anticipated elimination of legal expenses associated with the defence of Cerson’s claim would have allowed satisfaction of Oldco’s outstanding liabilities in 2016 as Cerson’s position seems to imply. These expenses totalled only $170,000 in 2015. The elimination of such expenses in future years, by itself, would not have addressed Oldco’s inability to satisfy its outstanding liabilities even before consideration of Oldco’s future pension obligations.

[85] Fourth, Oldco anticipated materially reduced revenues in 2016 and future years to the extent that the departing partners, in particular Greenwood and Thompson, were able to take their significant clients with them. It does not appear to be disputed that the Oldco financial results in 2015 included revenues to the end of the first quarter from clients of Greenwood and Thompson who subsequently left with them but the extent of the anticipated reduction in revenues in 2016 resulting from the departure of those clients is not in evidence.

[86] Fifth, it is not disputed that the partners of Oldco took reduced draws in 2015. It is also not disputed that, if reasonable draws had been paid, Oldco would have experienced a deficit in 2015. On this basis, Oldco could only have paid its outstanding liabilities if its partners were prepared to accept significantly reduced draws for an indefinite period of time. Such a scenario is unreasonable.

[87] On the other hand, the evidence suggests that the professional practice of Oldco appears to have been solvent in the hands of Newco after the Restructuring. A reconciliation of Oldco’s financial position before, and Newco’s financial position after, the Restructuring is therefore relevant both for determination of Oldco’s solvency status and for consideration of whether Oldco’s professional practice had any goodwill that was transferred to Newco.

[88] As a starting point, it is relevant that there is no suggestion that the Restructuring involved implementation of a new business plan for Oldco. As noted above, the record indicates that Newco carried on the professional practice of Oldco on a seamless basis with the only difference of any possible significance being the retirement of Allan. It is therefore necessary to examine the two principal arguments of the defendants a little more closely – that Oldco was unable to pay its current liabilities and that its level of profitability was insufficient to maintain the partnership in existence.

[89] First, with respect to Oldco’s ability to pay its current obligations, these consisted of its obligations to the RBC under the RBC facilities and ordinary course liabilities totaling $300,000, principally payroll and trade payables, apart from its liabilities to its former partners which is dealt with below.

[90] While Oldco was unable to repay the RBC facilities out of its cash flow, the partners of Oldco were able to obtain a refinancing of the RBC facilities in Newco from the T-D, albeit with personal guarantees. It is not clear whether this option was put to the RBC by the defendants. There is, however, no suggestion that Newco obtained a larger facility than Oldco had under the RBC facilities.

[91] With respect to the remaining trade payables that were outstanding at the time of the Restructuring, these were also funded by Newco by a draw under its facilities with the T-D. It is not clear whether this would have been an ordinary course borrowing in any event, reflecting an increase in WIP not yet billed and collected at the busiest time of the year for an accounting firm, or was a reflection of a longer-term cash flow deficiency. In summary, therefore, it is possible that Oldco was able to satisfy its cash flow needs by the replacement of one facility with another.

[92] With respect to Oldco’s obligations to its former partners, there is a lack of clarity regarding the extent to which such obligations were immediately due for two reasons. First, as mentioned above, the defendants state in their Factum that the pension obligations to Greenwood and Thompson were not immediately payable. Second, paragraph 74 of the Oldco partnership agreement capped required payments to former partners when they became payable. That provision limited payments to 50% of the net income of the firm in any year after reasonable draws. Admittedly, to the extent this cap came into play in any given year, the provision did not solve any long-term cash flow insufficiency. It did however provide room to pay other liabilities out of current cash flow by extending the length of time over which Oldco’s payments to former partners would be required to be made. In addition, the provision afforded an effective priority in favour of the existing partners to the extent of reasonable draws in any given year.

[93] Essentially, as the defendants appear to acknowledge in their Factum, the issue of solvency on a cash flow basis reduces to Oldco’s ability to repay the RBC facilities and the remaining amount of the Judgment owing to Cerson. Given the ability of the remaining partners to obtain financing from the T-D, the issue turns heavily on an assessment of Oldco’s ability to satisfy the Judgment.

[94] The other principal argument of the defendants is essentially that, while Oldco was profitable, it was not sufficiently profitable to support a level of draws by its partners that was satisfactory to them, let alone sufficient to attract new partners. I accept that, at some point, reduced profitability renders a professional partnership unsustainable. However, unsustainability from a profitability perspective is not the same as insolvency.

[95] In this case, there is no suggestion that the defendants acted for any motive other than the purely financial motive of preservation of the professional practice of Oldco, to the extent feasible, free of the current and future obligations owed to the plaintiffs. It made no sense to undergo the cost and dislocation, as well as the legal exposure, associated with the Restructuring unless the remaining partners were convinced that Newco was sufficiently profitable to retain the existing partners and employees with the benefit of the new financing arrangements with the T-D or could reasonably be expected to achieve satisfactory profitability within an acceptable period of time. There is, therefore, some evidence that suggests that Oldco was not in fact “hopelessly insolvent” even if in the short term, Oldco’s profitability was not satisfactory.

[96] This issue is highly dependent on the reasonable expectations of the Newco partners regarding their client base as of the time of the Restructuring. While the defendants suggest that they anticipated the loss of clients of Greenwood and Thompson, these individuals had departed Oldco a year earlier. In the absence of evidence in the record supporting this assertion, there is reason to question whether this loss had not already occurred during 2015 although I accept that any such loss would have negatively impacted the financial results for the first quarter of 2016.

[97] Given the foregoing, I am not persuaded, on the facts before the Court, that it is possible to determine the solvency status of Oldco with confidence. In addition to the issues raised respecting Oldco’s solvency on a balance sheet basis, it is not possible to establish on a probability standard Oldco’s reasonably expected cash flow in 2016 given the number of issues that bear on such determination and the absence of financial statements that are current as of the date of the Restructuring. In my view, the ability of Oldco to fund its cash flow needs on a going forward basis, and in particular to fund its current obligations to its former partners, can only be answered by (1) an examination of Oldco’s financial statements at the time of the Restructuring, that is for the first quarter of 2016 as compared to the first quarter of 2015; (2) evidence regarding Newco’s financing arrangements with the T-D; (3) evidence regarding the extent to which payments to the former partners of Oldco were actually owing or reasonably anticipated; and (4) the expectations of the Newco partners regarding future profitability based on their client base at that time, in the absence of any formal projection of profitability in 2016 in the record. It is also dependent on the value of the accounts receivable and the value of the WIP at the time of the Restructuring, that is, on the ability of Oldco to convert such assets into cash flow to satisfy Oldco’s current liabilities.

[98] To be clear, in setting out the foregoing, I am not making any determination regarding the solvency of Oldco at the time of the Restructuring. However, based on the foregoing, I conclude that the defendants have failed to establish that there is no genuine issue for trial regarding the insolvency of Oldco at the time of the Restructuring.

The Value of Oldco’s Assets at the Time of the Restructuring

[99] The plaintiffs acknowledge that, as a practical matter, regardless of any finding of insolvency, they would not be entitled to any damages pursuant to their claims described under any of s. 96 of the BIA, the Assignments and Preferences Act or the Fraudulent Conveyances Act unless they can demonstrate that the Restructuring was conducted at an undervalue. The defendants therefore seek summary judgment in their favour principally on the basis that the plaintiffs have failed to demonstrate a genuine issue for trial on this issue – that the Restructuring was conducted at an undervalue thereby excluding any valid claims pursuant to any of these statutes.

[100] The plaintiffs allege that the Restructuring was conducted at an undervalue in two respects, either of which would be sufficient to succeed in the Action. They allege that the Oldco accounts receivable and WIP had a fair market value in excess of the amount effectively paid for such assets in the Restructuring. The plaintiffs also say that Oldco had substantial goodwill which was effectively transferred to Newco for nil consideration. Accordingly, to succeed on this summary judgment motion, the defendants must establish that there is no genuine issue for trial regarding each of these assertions. I will address each issue in turn after first examining in slightly greater detail the consideration that was paid by Newco for the Oldco assets and an argument of the defendants that the plaintiffs cannot, in any event, establish that the Restructuring was conducted at an undervalue in the absence of an expert report that values the assets of Oldco.

The Consideration Paid by Newco

[101] As noted above, the Restructuring was conducted in two tranches. Notwithstanding the fact that the Restructuring involved two separate transactions, it is clear however that the intention at all times was to transfer all of the business of Oldco on a going concern basis, including all of the accounts receivable and WIP and any associated goodwill, to Newco. Accordingly, as mentioned, I have treated the two transactions as constituting a single transaction under which, notwithstanding the form of the Restructuring, Newco effectively purchased all of the assets comprising the business of Oldco on a going concern basis for a total consideration of $993,324.71.

[102] The BDO Report indicates that Newco acquired accounts receivable having a gross book value of $1,355,954, of which receivables having a book value of $803,167 were considered to have value, the balance having been written down pursuant to an allowance for doubtful debts or otherwise assigned a nil value. Newco also acquired WIP having a gross book value of $1,550,525 of which only the WIP included in the Initial A/R and WIP, valued at $149,384. was considered to have value.

[103] The defendants’ position is that the professional practice of Oldco had no goodwill value at the time of the Restructuring. Accordingly, of the total consideration of $993,324.71, $952,551 was paid in respect of Oldco’s accounts receivable and WIP and the excess was paid in respect of the remaining tangible assets. I have proceeded on this basis in the analysis below.

Is an Expert Report Required to Establish a Transaction at an Undervalue?

[104] As mentioned, a principal argument of the defendants on this motion, and in the Action more generally, pertains to the absence of an expert report of the plaintiffs that addresses the value of Oldco’s assets and goodwill and the evidentiary significance to be given to the BDO Report. The argument has three elements.

[105] The defendants suggest that expert evidence establishing the value of Oldco’s assets and goodwill at the time of the Restructuring is required to demonstrate a transaction at an undervalue. They rely for this proposition on dicta of Myers J. in 1100 Walkers Line Inc. and The Elliott Sports, 2022 ONSC 6291, at para. 45. The defendants also say that, where plaintiffs fail to tender such evidence, there can be no genuine issue for trial based on the decision in Ngo v. Toronto Western Hospital, [1994] O.J. No. 250 (Ont. Gen. Div.) at paras. 2-3. Lastly, the defendants suggest that the conclusions in the BDO Report should be determinative in the absence of an expert report from the plaintiffs. I do not agree with any of these propositions for the following reasons.

[106] First, there is no statutory requirement for an expert opinion to establish the occurrence of a transaction at undervalue under s. 96 of the BIA nor am I aware of any case law that requires an expert opinion for such purpose. To the contrary, while an expert report may be of probative value, it is not a requirement of s. 96 that an expert report be produced. Depending upon the particular facts of each case, it is certainly possible to establish the existence of a transaction at an undervalue on the basis of the particular circumstances surrounding an impugned transaction without an expert report that establishes the values of the assets that were transferred. There is extensive case law articulating the circumstances that a court may take into consideration in addressing this issue without recourse to an expert report including but not limited to the “badges of fraud” developed in the context of cases under the Assignments and Preferences Act and the Fraudulent Conveyances Act as well as s. 95 of the BIA. I would add that the imposition of a requirement for an expert opinion in the absence of any statutory basis for such a requirement would, in my view, be contrary to the principle that s. 96 is remedial in nature and accordingly should be given the fair, large and liberal construction and interpretation that best ensures the attainment of its objects: see Ernst & Young Inc. v. Aquino, 2022 ONCA 202, at para. 22.

[107] Accordingly, it is possible on the particular facts of this case for a court to find either that the accounts receivable and WIP had an aggregate value in excess of the consideration paid by Newco in the Restructuring or that Oldco had positive goodwill, notwithstanding the absence of an expert report establishing the values of such assets.

[108] I accept that if such a finding were made, it might be necessary for a court to receive expert evidence, or to require a reference, regarding the actual values of the Oldco accounts receivable and WIP or of the goodwill associated with the professional practice of Oldco, or both. However, that is not the same as requiring evidence to establish that the Restructuring was conducted at an undervalue. Moreover, a court is capable of directing a process for the determination of such values to the extent it becomes necessary to do so.

[109] I would add that I understand the statement of Myers J. to be consistent with this analysis and must be understood in the context of that case. In that case, Myers J. specifically rejected the argument that the balance sheet entry of goodwill proved the existence of goodwill. Unlike the present case, there was no other evidence of any goodwill prior to the impugned transfer. Myers J. did not say that a valuation was required in all cases to prove the existence of such a transaction. Rather, he observed that, given the facts of that case including the absence of any evidence of goodwill, an expert report establishing a value for goodwill would be the only remaining means of demonstrating a transaction at an undervalue.

[110] Second, the circumstances in this case are very different from those in Ngo v. Toronto Western Hospital. That decision involved a matter of medical malpractice for which expert medical advice was clearly required to establish liability, not the quantum of damages - that is, to establish that a valid claim existed. In contrast, in the present circumstances, the expert report envisaged by the defendants is not necessary to establish that a valid claim exists, although it may do so, but is a necessary means of establishing the quantum of damages if a transaction at an undervalue has been demonstrated.

[111] Lastly, the defendants have tendered the BDO Report to defend against the plaintiffs’ claim. They appear to suggest in effect that the Court must accept the conclusions of the BDO Report in the absence of a contrary expert report from the plaintiffs and, on such basis, find that no genuine issue for trial exists.

[112] I do not think there is any authority for such a proposition, at least in the context of a valuation of assets which is inherently judgmental in nature. Even in the absence of a contrary report, a court can only rely upon an expert report for the purposes proposed by a party if it is satisfied with the approach and the assumptions therein. In most cases, this comfort level requires the benefit of oral testimony and cross-examination of the author of such report.

[113] Accordingly, I think it is open to the plaintiffs to establish the existence of a genuine issue for trial on the issue of an alleged transaction at undervalue notwithstanding the absence of an expert report demonstrating an insufficiency in the consideration paid by Newco and notwithstanding the implied conclusion in the BDO Report that Newco paid more than the value of the Oldco accounts receivable and the WIP at the time of the Restructuring.

The Value of the Accounts Receivable and the Work-in-Process

[114] The plaintiffs assert that the defendants significantly understated the value of both the Oldco accounts receivable and the Oldco WIP as of the date of the Restructuring.

[115] As mentioned, the defendants assigned values of $803,167 to the accounts receivable and $149,384 to the WIP for a total of $952,551. BDO calculated the actual recoveries in respect of Oldco’s accounts receivable to be $1,032,517 and the expected collections from the Oldco WIP to be $189,831 based on Newco’s collection experience in respect of accounts receivable from the end of March 2016 to August 31, 2016. The plaintiffs accept BDO’s calculations of the actual recoveries from the accounts receivable. They do not address BDO’s method of calculating the expected collections in respect of the Oldco WIP, or the resulting calculation of $189,831, but suggest instead that such collections should have ranged between $1,125,641 and $1,135,784. I have disregarded this particular calculation as it fails to take into account all of the stages in the analysis applied by BDO – in particular, an estimation of billings followed by an estimation of collections.

[116] BDO’s calculations imply that Newco collected and would collect a total of $1,222,348 in respect of Oldco’s accounts receivable and WIP, representing a difference of $229,023.29 or approximately 23%, over the $993,324.71 paid by Newco for substantially all of Oldco’s assets, including any goodwill. The plaintiffs suggest that, on their own, these facts are sufficient to establish a genuine issue for trial on the fair market value of these assets and require a trial to determine the fair market value of the WIP and any goodwill.

[117] I accept that the mere fact that actual collections may exceed expectations at the time of a transaction does not automatically imply that the fair market value of the accounts receivable and WIP exceeded the expectations. However, for such expectations to be evidence of the fair market value at the time they must be grounded in an analysis that is demonstrably credible and disinterested. In this case, the defendants say that the values ascribed to the accounts receivable and the WIP for the purposes of the Restructuring are justified on three grounds, which I will address in turn, and that individually or collectively these three grounds exclude a genuine issue for trial regarding whether Newco paid fair market value for these assets.

[118] First, the defendants say that a difference of $229,023.29 or approximately 23% of recoveries over the ascribed values does not represent a sufficiently material difference to invalidate the determination of values made at the time of the Restructuring. I do not agree for three reasons.

[119] In absolute amount as well as proportion, the amount of $229,023 is not insignificant, even if it would not materially reduce the liabilities owing to the plaintiffs. In addition, the amount is dependent upon acceptance of the methodology applied in the BDO Report in the calculation of the expected collections from the Oldco WIP. Lastly, even if the amount of $229,023 is considered to be immaterial on its own, the issue on this motion is whether there is a genuine issue for trial regarding the alleged undervalue of the consideration paid by Newco for all of the Oldco assets, not merely the accounts receivable and the WIP. Given the finding below regarding the alleged goodwill of Oldco, the amount received in respect of the accounts receivable and WIP could be significant when aggregated with any finding of value for goodwill of Oldco.

[120] Second, the defendants say the values attributed to the accounts receivable and the WIP were established after a rigorous analysis of the accounts receivable and the WIP at the time of the Restructuring. However, there is no evidence of such an analysis at that time. This is consistent with the plaintiffs’ position that the values attributed to these assets reflected no more than the amount of financing necessary to transfer Oldco’s business as a going concern to Newco rather than a legitimate assessment of the value of its accounts receivable and WIP. In addition, given the related party nature of this transaction, to the extent an analysis was actually conducted, there is a real possibility that the defendants adopted an overly conservative position to their benefit and to the detriment of the plaintiffs in assessing the value of the accounts receivable and WIP. The fact that accounts receivable with a book value of $269,560 were valued at nil but yielded actual recoveries of $285,561 may well reflect such a bias, whether or not intentional.

[121] Third, the defendants say that the BDO Report establishes that the consideration paid by Newco under the Restructuring at least equaled if not exceeded the fair market value of Oldco’s accounts receivable and WIP at the time based on the two analyses applied in the BDO Report. However, in reaching its opinion under these two scenarios, BDO made a number of significant judgmental assumptions that are challenged by the plaintiffs.

[122] There are two issues with respect to the historical analysis. The collection rates used by BDO were significantly lower than the experience of Newco in respect of the Oldco accounts receivable transferred to it. The plaintiffs argue that the more recent collection experience is more appropriate. In addition, BDO applied a 50% discount to the amount that it estimated would be received in respect of the accounts receivable to be generated from the Oldco WIP based on Oldco’s historical collection experience. It justified this discount by reference to three factors. The plaintiffs say that the use of this discount was not justified given the continuity of Oldco’s business after the Restructuring in Newco.

[123] The alternative analysis based on a receivership approach also raises questions. As a general matter, the validity of a receivership approach is not instinctively obvious given Newco’s assumption of Oldco’s business as a going concern. In fact, BDO recognized the difference from a typical receivership situation in ascribing value to the WIP, as is noted in the BDO Report. In addition, in respect of the Oldco accounts receivable, BDO applied what it regarded as reasonable collectability percentages to the aged accounts receivable in a receivership context and, in respect of the Oldco WIP, BDO applied estimated realization rates after consideration of certain qualitative factors. In each case, the selection of the applicable rates involved the exercise of judgment, rather than any more precise formula, which the plaintiffs assert was unreasonable.

[124] In my view, a court cannot address these issues, and therefore cannot determine whether the values established by the defendants for the accounts receivable and WIP genuinely represented the best estimate of their fair market value at the time of the Restructuring, without the benefit of oral testimony from, and cross-examination of, the defendants who were involved in these decisions. Similarly, in my view, given the many judgmental factors that lie behind the BDO Report, a court cannot rely upon the conclusions therein as evidence of the fair market value of these assets in the absence of oral testimony from, and cross-examination of, the authors of the BDO Report which address the reliability of the approach and assumptions of the Report. In particular, the validity of the three factors justifying the 50% discount applied in calculating the estimated value of the WIP under the historical analysis is highly dependent on the clients involved, of which BDO had no specific knowledge. The factors applied in estimating collections of WIP under the receivership scenario, which broadly reflect the same three factors, also require a similar understanding and are subject to a similar limitation.

[125] Given the foregoing considerations, I conclude that the defendants have failed to establish that there is no genuine issue for trial regarding their assertion that Newco paid no more than the fair market value of Oldco’s accounts receivable and WIP pursuant to the Restructuring.

Whether the Oldco Professional Practice Had Any Goodwill Value

[126] While the foregoing conclusion may also be sufficient to determine this summary judgment motion, I will address the issue of whether a genuine issue for trial exists regarding the alleged goodwill of Oldco in case it becomes relevant.

[127] Effectively, the defendants say that a professional practice in Oldco’s financial state at the time of the Restructuring logically could not have had any goodwill. Given the conclusion above that the defendants have failed to demonstrate that there is no genuine issue for trial regarding the insolvency of Oldco, I think it necessarily follows that they have also failed to demonstrate that there is no genuine issue for trial regarding the existence of goodwill associated with the professional practice of Oldco. To the extent that a court were to find that Oldco was not insolvent at the time of the Restructuring, the court would have to find that there was a genuine issue for trial regarding the existence of goodwill.

[128] In any event, however, I find that the defendants have failed to demonstrate that there is no genuine issue for trial on this question even if a court were to find that Oldco was insolvent on a cash flow basis. In my view, even if Oldco were insolvent at the time of the Restructuring, that financial status would not necessarily imply that Oldco’s professional practice had no goodwill value given the evidence in the record discussed above for the following reasons.

[129] The plaintiffs rely on Cerson’s assertions in his affidavit that Oldco’s goodwill on its own had a value in excess of $4 million and that the defendants made no attempt to sell the Oldco professional practice. Elsewhere in his affidavit, Cerson suggests that Oldco could have been sold for $7 million, of which $5 million would have been for its goodwill, $1 million for its accounts receivable and $1 million for its WIP and remaining assets. Cerson does not however offer any support for these assertions and, as mentioned above, I agree with the defendants that they are not supported by the evidence before the Court.

[130] The defendants’ response to the implied assertion by Cerson that the defendants should have solicited a sale of the Oldco professional practice is that they were under no legal obligation to do so in order to fund the obligations of Oldco to the plaintiffs and that they had no desire to retire or to sell their respective practices. The defendants also say that a sales process was not viable given the need to deal with the RBC. Regardless of their validity, these statements do not support the defendants’ position. Indeed, a desire to maintain a professional practice may suggest the existence of goodwill and, given the extent of the financing made available by the T-D, there is reason to doubt the defendants’ position that the practice was not saleable because of the need to deal with the RBC facilities. In any event, as mentioned, there is no projection of future profitability that supports the defendants’ position.

[131] From the above summary of the positions of each of the parties, I conclude that neither has effectively addressed whether Newco obtained the benefit of goodwill associated with Oldco’s professional practice on the Restructuring. There is however the following evidence regarding the possible existence of goodwill associated with Oldco’s professional practice that is relevant for this issue.

[132] First, the professional practice of Oldco clearly had value when stripped of the liabilities to the plaintiffs. Newco carried on Oldco’s professional practice after the Restructuring essentially on a seamless basis. While there are no financial statements for Newco, it is reasonable to assume, given the statements of the defendants regarding their willingness to carry on at Oldco’s pre-Restructuring level of profitability, that Newco was sufficiently profitable, or at least was anticipated to be sufficiently profitable, after the Restructuring to support an adequate level of draws for the partners and associate partners. In this regard, as mentioned, there was no projection of future profitability that supports the defendants’ contrary position.

[133] Second, it appears that the T-D also considered that the former Oldco professional practice, in the hands of Newco, was a viable business for which it was prepared to establish an operating facility effectively replacing the RBC facilities. In this regard, it is important that the Restructuring did not alter that professional practice, apart from Allan’s retirement. Its purpose was to leave behind Oldco’s liabilities to the plaintiffs.

[134] Third, the remaining partners could have arranged for an orderly liquidation of Oldco and Emgee and gone their separate ways. They chose however to preserve their collective practice in Newco. While the benefit of at least some of the client relationships of Greenwood and Thompson had been lost, there remained the benefit of the client relationships of the remaining partners and associate partners. Further, the remaining partners chose to carry on under a name that spoke to the continuity of the existing firm. This suggests, if not implies, that Oldco had an established reputation in the business community that was worth preserving.

[135] Given the foregoing evidence, I conclude that it discloses a genuine issue for trial for the following reasons.

[136] First, for the reasons set out above, at least for the purposes of this summary judgment motion, the plaintiffs are not required to produce an expert report to demonstrate the existence of goodwill if the facts of any particular case can demonstrate a real possibility of goodwill obtained by Newco to the satisfaction of a court.

[137] Second, and more importantly, in the absence of any express allocation of a portion of the purchase price of a professional practice, the existence of any goodwill, or the absence of any goodwill, is primarily evidenced by the presence or absence of continuing client relationships that can be expected to generate continuing business. This is essentially a factual matter. Accordingly, in the present circumstances, in order to address whether the Oldco professional practice had any goodwill at the time of the Restructuring that was transferred to Newco, it would be necessary to have a more detailed understanding of the client relationships that were continued by Newco and an assessment of the reasonable prospects for the maintenance of those client relationships. It would also be necessary to understand the prospects for new business based on the existing relationships of the remaining partners beyond the bald assertions in the record.

[138] In my view, while none of this factual background necessitates an expert report, it does require oral testimony from, and cross-examination of, the Newco partners who are in a position to address these questions.

[139] Based on the foregoing, I conclude that the defendants have failed to establish that there is no genuine issue for trial regarding the existence of any goodwill associated with the Oldco professional practice at the time of the Restructuring.

Disposition of this Summary Judgment Motion

[140] Based on the foregoing, the defendants’ motion for summary judgment is denied.

[141] The plaintiffs seek costs on a partial indemnity basis of approximately $72,000, there being no grounds for costs on a substantial indemnity scale. However, the plaintiffs’ costs outline does not address certain matters raised by the defendants in their costs submissions that the defendants allege have unnecessarily increased the costs of this proceeding. If the parties are unable to agree on the disposition of the costs of this motion, they shall have thirty days to provide costs submissions not to exceed three pages in length limited to whether these matters are relevant to the determination of the costs of this motion.

Wilton-Siegel J. Date: April 26, 2023

Footnotes

[1] I note that the BDO Report (described below) uses a slightly different number for the amount advanced. I have used the number provided by the defendants in Hoffland’s affidavit in the responding motion record.

[2] I am unable to reconcile this figure with the net accounts receivable of Oldco at March 31, 2016 on Summary C of the BDO Report.

[3] I have relied for this number on the Summary rather than paragraph 5.18 of the BDO Report which appears to be in error.