Court File and Parties

COURT FILE NO.: CV-24-737 DATE: 2024/10/03 SUPERIOR COURT OF JUSTICE-ONTARIO

RE: JOSE ZEPEDA, Applicant (Responding party on motion) -and- ASIF QADAR, Respondent (Moving party on motion)

BEFORE: Gibson J.

COUNSEL: Mahyar Makki, Counsel for the Applicant Roger Gosbee, Counsel for the Respondent

HEARD: August 15, 2024

Endorsement

Overview

[1] By his Notice of Motion dated July 3, 2024, the Respondent, Asif Qadar (“Qadar”) moves under Rule 21.01(1)(a) and Rule 21.01(3)(b) of the Rules of Civil Procedure to dismiss the Application brought by the Applicant, Jose Zepeda (“Zepeda”), on a question of law based on the grounds that Zepeda is without the legal capacity to commence the action and has improperly brought the application in his personal capacity while seeking remedies on behalf of Empire Facility Management Inc. ("Empire"), the corporation of which both Qadar and Zepeda are directors.

[2] Qadar asserts that Zepeda has not sought leave to bring a derivative action under s. 246 of the Business Corporations Act, RSO 1990, c. B16 (the "OBCA"), and that Zepeda has attempted to circumvent the need to provide notice of a derivative action and seek leave of the court by improperly bringing an Application for oppression as against Qadar personally.

[3] In 2015, Zepeda met Qadar through his accounting corporation ESOL Connect Inc. when searching for financial assistance for his corporations. After various discussions, Zepeda decided to work with Qadar to incorporate a new corporation, Empire. On August 15, 2015, Empire was incorporated to operate as a sanitation and cleaning company. Zapeda and Qadar were equal shareholders and directors.

[4] Over time, the relationship between Zapeda and Qadar broke down. On May 3, 2024, Zepeda initiated an Application seeking various forms of relief.

[5] Zepeda has brought this Application in his personal capacity seeking several heads of relief against Qadar, which can be found in paragraphs 1 through 8 of the Notice of Application. The relief sought is as follows:

1. A declaration that Asif Qadar’s actions and conduct have severely oppressed and/or unfairly prejudiced Jose Zepeda as a director and shareholder of Empire Facility Management Inc.;
2. An Order that Empire is granted the right to redeem the shares owned by Qadar as set-off for all damages incurred by Empire;
3. An Order validating the removal of Qadar as a director of Empire;
4. An Order that damages be paid to Zepeda in the amount to be fixed by the Court;
5. An Order that Qadar is restricted from using, operating or otherwise withdrawing from Empire’s corporate bank account;
6. An Order that Empire retain possession of the property municipally located at 3606 Lobsinger Line, St. Clements, ON, M0B 2M0, to continue to operate its business and affairs;
7. Costs of this application on a substantial indemnity basis, together with applicable Harmonized Sales Tax payable pursuant to the provisions of the Excise Tax Act, R.S.C. 1985, c. E-15, as amended; and
8. Such further and other relief as the Court may deem just.

[6] Zepeda has brought this application in his personal capacity alleging that Qadar has failed his duties as a director of Empire by failing to maintain accounting and misappropriating funds of the corporation. Qadar submits that he has not been provided with any notice requesting the corporation to commence an action, nor has he been served with an application for leave to commence an action pursuant to s. 246 of the OBCA.

Issues

[7] The issues to be determined on this motion are:

1. Does Zepeda have the legal capacity to bring this Application?;
2. Should the Application be dismissed on the grounds that Zepeda has not sought leave to bring a derivative action under s. 246 of the OBCA ?
3. Whether the motion should be dismissed under Rule 21.01(1)(a) of the Rules of Civil Procedure?

Analysis

[8] The Respondent brings this motion to strike under Rule 21.01 of the Rules of Civil Procedure. This rule provides that a party may move before a judge to strike out a pleading on the ground that it discloses no reasonable cause of action. The moving party must show that it is plain and obvious, assuming the facts pleaded to be true, that the pleading discloses no reasonable cause of action. On a motion to strike under Rule 21.01(1)(b), the court must accept the allegations in the pleadings as proven unless they are patently ridiculous or incapable of proof. The pleadings must be read generously, with allowances for inadequacies due to drafting deficiencies, and may consider only the pleadings and the document to which it specifically refers and relies on, along with any answers to a demand for particulars. The party moving to strike the pleadings must show that it is “plain and obvious” that the claim has no chance of success: Apotex v. Canada, 2013 ONSC 986, at paras. 4 - 5; Hunt v. Carey Canada Inc., [1990] 2 S.C.R., at p. 980.

[9] The Applicant Zepeda submits that it is not plain and obvious that the case law precludes the Applicant from pursuing these claims as oppression claims in the present case. The claim asserted, he says, does not seek to recover solely for wrongs done to a public corporation. The Applicant and the Respondent are the only two shareholders and as such, it is a closely held corporation. This factor, he submits, taken together with the conclusion that most of the relief sought asserts individualized personal interests of the Applicant, supports the conclusion that the claim should be permitted to proceed and not be struck out under Rule 21.01.

[10] I do not agree with this submission.

[11] Rule 21.01(3)(b) provides that a motion may be brought to have an action stayed or dismissed on the grounds that the Applicant is without legal capacity to commence or continue the action. The long-established corporate law principle adopted in Canada, including in Hercules Managements Ltd. v. Ernst & Young, is that only the corporation itself can sue for wrongs done to it. This principle is codified in s. 246 of the OBCA, which provides a mechanism for shareholders and directors to seek leave to bring a derivative action on behalf of the corporation.

[12] Of the heads of relief sought by Zepeda in paragraphs 1 - 8 of the Notice of Application, paragraphs 2, 3, 5 and 6 are reliefs that would be granted directly to the corporation and not to Zepeda personally. Paragraphs 1 and 4 are the only reliefs that are being sought by Zepeda personally. As such, paragraphs 2, 3, 5, and 6 are claims of the corporation only and ought to be the subject of an action brought by the corporation and not Zepeda in a personal capacity.

[13] Paragraph 1 of the Notice of Application seeks a declaration that Qadar’s actions have severely oppressed and/or unfairly prejudiced Zepeda as a director and shareholder of the corporation. While this relief being sought is personal to Zepeda, all of the allegations set forth in paragraphs 13 through 35, if taken prima facie, are allegations of wrongdoing by Qadar as against the corporation. There is not a single allegation of wrongdoing as against Zepeda in any personal capacity.

[14] I agree with the submission of the Respondent that the Applicant, in bringing this application in his personal capacity, is attempting to circumvent the requirement to seek leave to bring a derivative action. This is improper and contrary to the established legal principles and statutory requirements. It is not consistent with the finding of the Court in Rea v. Wildeboer, 2015 ONCA 373.

[15] Section 246 of the OBCA requires that a complainant must seek leave of the court to bring a derivative action on behalf of the corporation. The purpose of this requirement is to ensure that the court can assess whether the action is in the best interests of the corporation and to prevent frivolous or vexatious litigation.

[16] Zepeda has not provided the necessary notice, nor sought leave to bring a derivative action. As such, the Application is procedurally improper, and Zepeda lacks the necessary capacity to commence or continue the Application. In these circumstances, it is plain and obvious that the claim cannot succeed.

[17] The allegations of oppression are set out in paragraphs 15 through 30 of the Notice of Application, which include a failure to maintain accounting and a misappropriation of funds. While there are very few details of any damages from the alleged conduct, it is clear from the Notice of Application that these alleged damages would have been suffered by the corporation. Despite this, the Notice of Application makes a claim for damages to be paid to Zepeda personally and not to the corporation. In seeking damages to be paid to Zepeda personally, Zepeda is attempting to use the remedies to oppression actions to directly advance his own personal interests rather than that of his interests as a director and shareholder of the corporation. Director liability cannot be a surrogate for other forms of statutory or common law relief, particularly where such other relief may be more fitting in the circumstances.

Conclusion

[18] The relief sought by Zepeda in this Application is properly the relief that can be provided by derivative actions under s.246 of the OBCA, as the relief sought is rightfully that of the corporation and not Zepeda personally. The attempt of Zepeda to bring this Application on the allegation of oppressive action is a surrogate for the relief that can be provided by bringing an Application under s.246 of the OBCA.

Order

[19] The Court Orders that:

1. The Respondent’s motion is granted. The Application is dismissed.

Costs

[20] The parties are encouraged to agree upon appropriate costs. If the parties are not able to agree on costs, they may make brief written submissions to me (maximum three pages double-spaced, plus a bill of costs) by email to my judicial assistant at mona.goodwin@ontario.ca and to Kitchener.SCJJA@ontario.ca. The Respondent may have 14 days from the release of this decision to provide his submissions, with a copy to the Applicant; the Applicant a further 14 days to respond; and the Respondent a further 7 days for a reply, if any. If no submissions are received within this timeframe, the parties will be deemed to have settled the issue of costs as between themselves. If I have not received any response or reply submissions within the specified timeframes after the Respondent’s initial submissions, I will consider that the parties do not wish to make any further submissions, and will decide on the basis of the material that I have received.

M. Gibson, J. Date: October 03, 2024