Georghiades v. Georghiades, 2024 ONSC 6168
Court File and Parties
Court File No.: CV-24-716996-00CL and CV-24-718367-00CL Date: 20241106 Superior Court of Justice – Ontario (COMMERCIAL LIST)
Re: 340268 ONTARIO LIMITED, Plaintiff And GEORGE GEORGHIADES, RALPH DEITERDING, LEXINGTON PARK HOLDINGS INC., LEXINGTON PARK REAL ESTATE CAPITAL INC., PM365 INC., NICKOLAS GEORGHIADES, 2328693 ONTARIO INC., 2349197 ONTARIO INC., 2382460 ONTARIO INC., 2425955 ONTARIO INC., 2683569 ONTARIO INC., 2702116 ONTARIO INC., 2702117 ONTARIO INC., 2762507 ONTARIO INC., 1000127196 ONTARIO INC., 2762508 ONTARIO INC., 2702115 ONTARIO INC., 2683568 ONTARIO INC., and 2260098 ONTARIO INC., Defendants
And Re: NICKOLAS GEORGHIADES, Plaintiff And GEORGE GEORGHIADES, LEXINGTON PARK HOLDINGS INC., LEXINGTON PARK REAL ESTATE CAPITAL INC. and LPMR HOLDINGS INC., Defendants
Before: W.D. Black J.
Counsel: Paul Steep, Steve Tenai and Simon Dugas, for Nickolas Georghiades Tom Curry, Madison Robins, Samantha Hale, and Blerta Gjoci, for George Georghiades
Heard: October 17, 2024
Endorsement
Overview
[1] The claim within which this motion is brought relates to irreconcilable differences between two brothers, Nickolas Georghiades (“Nick”) and George Georghiades (“George”) in the operation of a business they co-founded.
[2] The determination of the claim will involve assessing claims of oppression and misappropriation of funds, among other allegations, and deciding how best to decouple the brothers from one another in their dysfunctional business relationship, and how best to divide or otherwise account for the business that they built together.
[3] In the meantime, Nick seeks, through this motion, to:
enforce a shareholder’s undeniable statutory right to audited financial statements. [The motion] also seeks to ensure a director and officer receives timely and reliable information, through court appointed officers, and is able to exercise oversight over the business he founded.
[4] More particularly, Nick asks the court to:
(a) Appoint an auditor, who is independent of the parties, to carry out an audit; (b) Appoint an inspector, as a court officer, to investigate, for the financial years 2021, 2022 and 2023, the use of revenues derived from the respective properties managed by the corporate respondents, the use of proceeds from loans and other financings in respect of such properties, and how such uses are recorded in the books and records maintained and managed by the corporate respondents; (c) Direct the respondents to provide to Nick direct access to the premises of the corporate respondents, and to the employees and books and records of the respondents to obtain information about the ongoing business and financial affairs of the properties managed by the corporate respondents; (d) Appoint a monitor, as a court officer, to independently observe and report monthly to the court and the parties on the ongoing business and financial activities of the corporate respondents and those properties managed by any of them, relative to: (i) The cash balance position of the corporate respondents and measures taken to address any cash deficits; (ii) Building development or acquisition/disposition plans; (iii) Tenant inducements or forbearance of financial obligations; (iv) Efforts being undertaken in relation to new or existing financings for the corporate respondents or any of the properties managed by any of them; (v) Negotiations relating to contractual obligations involving the corporate respondents, or properties managed by any of them, greater than $100,000.00; (vi) Use of proceeds from financings or tenants in relation to any property owned by a company managed by the corporate respondents for purposes related to another property owned by a separate company managed by the respondents, and how that is recorded in the books and records maintained and managed by the corporate respondents; (vii) The nature and amount of expenses reimbursed to George, or other forms of financial benefits directly or indirectly received by George, and how such benefits/amounts are recorded in the corporate respondents’ books and records; (viii) Changes to employees and to compensation and benefits; and, (ix) Other matters potentially to be added.
[5] George maintains that, other than an auditor and an audit, to which he agrees (as discussed below), there is no need for the proposed court officers, and no need to burden the business with the additional costs and complication of having external third parties inserted into the mix.
[6] The potential appointment of the auditor (“Auditor”), inspector (“Inspector”) and monitor (“Monitor”, and the Auditor, Inspector and Monitor collectively the “Proposed Appointees” or individually a “Proposed Appointee”) requires consideration of the tests and basis for such appointments, and consideration about the precise roles envisioned for each of the Proposed Appointees.
[7] There is considerable overlap and ostensibly some degree of confusion in the relevant case law about the respective tests for, and roles of, each type of Proposed Appointee. In my view it is helpful, in considering each such request, to consider the specific problem or circumstance for which the Proposed Appointee is said to be necessary, the overlap between and among their proposed roles, and the nature and extent of amelioration to be achieved by the proposed appointment. The benefits must be balanced against the potential disruption to the business and the additional costs of having the appointee(s) in place. It may be helpful, as discussed below, to delineate more specifically which test applies to which category of proposed court officer, but in every instance the court’s task is to balance these various considerations and risks.
[8] This balancing exercise, accounting for the specific facts at hand, is what the court has actually done in various ostensibly divergent decisions. That is, the test employed in each case, and its precise application, is in each instance a product of the particular facts, and the nature and extent of the precise remedy required to bring order to dysfunction.
Conclusion
[9] I find that in this case, in addition to the agreed auditor and audit(s), it is appropriate to appoint a Monitor with a prescribed mandate. I am also ordering the updated draft order proposed by the respondents. In my view there is overlap between the appropriate role for a Monitor here, and that of an Inspector pursuant to s. 161 of the Business Corporations Act, R.S.O. 1990, c. B.16 [“OBCA”]. I rely in part, in appointing a Monitor, on the test and case law discussing s. 161 Inspectors, but I decline to appoint a separate Inspector per se at this time. However, depending on how matters progress, and the content of reports to be received from the Monitor, I may be prepared to revisit the potential appointment of an additional court officer, or to expand the scope of the Monitor’s mandate; that determination will depend on the extent of cooperation with the Monitor, and between the parties, as matters progress.
Background Facts
(A) Nick and George and the Formation of the LP Business
[10] Nick and George are co-founders, co-directors, officers and 50% shareholders of Lexington Park Holdings Inc. (“LP Holdco”), LPMR Holdings Inc. (“LPMR”) and Lexington Park Real Estate Capital Inc. (“LP Capital”, and together with LP Holdco and LPMR, “LP”). As the names confirm, LP Holdco and LPMR are holding companies and LP Capital is the operating company. In addition to their 50-50 ownership of these entities, Nick and George also hold equal shares of various underlying property-specific companies.
[11] The LP business was started in 2010 as a real estate investment and asset management company focused on commercial and multi-residential properties in Kitchener-Waterloo.
[12] It is common ground that at the time of formation of the LP business, Nick, who had worked in the commercial real estate sphere, contributed the initial properties that formed the basis of the initial LP operations. These properties were valued by the brothers at $8.9 million.
[13] It also appears to be agreed that although Nick contributed essentially all of the assets with which LP started, the brothers each took 50% ownership of the business, and the intention was to operate LP as equal partners.
[14] George, for his part, has particular expertise in financial matters. Before joining with Nick in LP, he had worked as a management consultant with McKinsey & Company, with a particular focus on alternative asset investing.
[15] Based on many parameters, LP has been a very successful business. It owns and operates a portfolio of 46 properties, almost all located in Kitchener-Waterloo. There is no doubt, however, that LP is currently suffering ongoing liquidity problems.
(B) LP’s Growth and Current Holdings
[16] LP’s portfolio comprises three main groups of properties (collectively, the “Portfolios”):
(a) LP has a portfolio of 10 wholly owned properties (the “Wholly Owned Portfolio”) of which one (646 Erb Street) was among the original assets initially contributed by Nick to launch the LP business. Nine of these 10 properties are commercial properties, and one is a residential condominium in Florida which Nick has used as a residence since 2019; (b) The “340 Portfolio” – which has been contentious in this proceeding and in closely related litigation, discussed in detail below – consists of 12 commercial properties in Kitchener-Waterloo, co-owned by 340268 Ontario Limited (“340”) and LP. Each of the properties in the 340 Portfolio is owned by a single purpose holding company (the “340 Joint Companies”). Nick has a longstanding relationship with the principal of 340, Pat George (“Pat”) which relationship was important in developing the 340 connection and the 340 Portfolio; and (c) There are a number of other properties (the “Co-Ownership Portfolios”) co-owned by LP and several different groups of third-party investors. At present there are 24 properties in the Co-Ownership Portfolios, all of which are commercial, multi‑residential or development properties in Kitchener-Waterloo.
[17] LP has 16 employees, involved in various aspects of the management, operation, and construction of the Portfolios. Given the respective roles of Nick and George, and the dynamic between them, the employees appear by and large to be in the “George camp” in this litigation.
(C) Nick’s “Step Back” From LP in 2014-2015
[18] Part of that likely relates to the fact that, in or about 2014 or 2015, Nick made a deliberate decision to step back to some extent from the day-to-day operations of the LP business. It appears that Nick had always been the brother more prone and suited to be “in the field” whereas George’s strengths and experience were best deployed in running the day-to-day office-based operation, but in 2014 or 2015, as a result of his wife’s illness and no doubt prompted by other considerations, Nick gave up an office earmarked for his use in LP’s office premises, and took a diminishing role in the day-to-day administration.
[19] George makes much of Nick’s partial withdrawal from the business, and it is fair to say that George shouldered the administrative burden of the business, which had always to a considerable extent been his intended role, even more so than in the early years of the business.
[20] On the other hand, as Nick fairly responds, Nick at all times remained a 50% owner of the business, a director, and an officer, and continued at all times to bear the risks and responsibilities associated with those roles.
(D) 2017 Attempt to Develop Shareholders Agreement and the Resulting MOU
[21] It is also noteworthy that in November of 2017 the brothers met specifically with a view to formalizing their relationship by way of a shareholders agreement. They were joined in the initial meeting for that purpose by Mark Young, LP’s external accountant, who was a friend to both of the brothers.
[22] Coming out of the meeting or meetings, Mr. Young prepared a memorandum (Nick refers to the memorandum as a “memorandum of understanding” and I will refer to it hereafter as the “MOU”). The MOU is not drafted as a formal agreement, and there is a disagreement between Nick and George as to its significance.
[23] Nick notes that after the brothers had a chance to review Mr. Young’s draft, neither brother made any changes. He asserts that the MOU confirms the brothers’ agreement about enumerated LP business matters that would require both shareholders’ approval, and that the MOU also confirms and clarifies Nick’s ongoing role and responsibilities with LP. In that regard, Nick emphasizes that the MOU contemplated that Nick would continue in his advisory role, that his responsibilities would include construction-related matters and deal flow, and that Nick and George would meet weekly to discuss the business.
(E) Early Efforts to Follow MOU
[24] The evidence confirms that, at least for a time following the November 2017 meeting from which the MOU was developed, there was a tangible effort at enhanced exchange of information and discussions, in a fashion consistent with the contents of the MOU.
[25] That is, George would for a time send calendar invitations to Nick titled “Principals Meeting”, and the brothers convened semi-regular meetings to discuss LP’s operations.
[26] In that context, George provided Nick with operational reports, and other information contemplated in the MOU.
[27] Nick also emphasizes that during this timeframe, George did not question Nick’s right to request and access information from various LP employees. A representative example to which Nick points is an email that George sent to LP’s CFO Ralph Deiterding and Controller Lora Gatto in September of 2021. In the email, George asked them to provide Nick “whatever information he requires, in a timely manner, balancing the other responsibilities that you have on your plate” and said that “He is unequivocally entitled to any piece of information regarding LP that he reasonably requests.”
(F) Effect of the MOU
[28] In sum, Nick’s position is that George committed to the matters memorialized in the MOU, and that it is and should be binding.
[29] George’s position on the MOU is to the contrary.
[30] He maintains that the MOU is in the nature of an outline of points discussed at the meeting and a list of action items. Both he and Mr. Young characterize the MOU as minutes of the meeting, and not an agreement. He points out that in cross-examination Nick could not explain how various aspects of the MOU would work in fact, and that many of the items captured in the MOU were never actually implemented, or were implemented sporadically or were short-lived.
[31] I would not find the MOU to be a binding or all-encompassing agreement.
[32] For one thing, during the period from November of 2017 to the fall of 2022, the brothers each met with their advisors to develop a framework for a comprehensive shareholder agreement. If the MOU had itself been a comprehensive agreement, no such effort would have been required. I also agree with the observation that many aspects of the MOU remained inchoate.
[33] In addition I am not certain, given the fundamental nature of Nick’s claims – that as a founder, co-owner, officer, and director of the business he was nonetheless shut out from meaningful participation in its operations – that the efforts in 2017 and following at crystallizing respective day to day roles will prove determinative of the dispute.
(G) Post‑2017 Deterioration of the Brothers’ Relationship
[34] That said, the MOU is useful as evidence to understand the actions and positions of the brothers during the period following 2017 in which their relationship steadily deteriorated.
[35] In broad strokes, I would characterize that deterioration as follows.
[36] George increasingly felt that the administration of the business was left to him, and that Nick did not productively contribute to the day-to-day operations. While this was perhaps a natural and predictable outgrowth of the brothers’ respective strengths and weaknesses, it clearly came to be an irritant to George. As a consequence, ironically, and perhaps in part unconsciously, George doubled down on his office stronghold, and tightened his grip on control of day-to-day operations.
[37] For his part, having stepped back from the office-based operations, Nick clearly felt increasingly excluded from, and not valued within, the inner workings of the business. Again ironically, because it seems clear that his strengths were in the field, Nick increasingly resented that sense of exclusion, and increasingly insisted, in a way that was at times erratic, on being allowed back in as part of the business brain trust.
[38] The meeting leading to the MOU was at an early phase of the continuum. Nick had only been partially removed from the engine of the business for a couple of years at that point, and my impression is that George was prepared, at that point, to see if Nick could be re-assimilated and again to assume what George would view as a productive role.
[39] However, as time passed Nick – again predictably – bristled at the strictures of the inner workings of what had become a sizable business. There is a passage from Nick’s cross‑examination, quoted in George’s factum, which I think aptly illustrates Nick’s disinclination for, and his genuine lack of interest in, the corporate and accounting minutiae necessarily associated with a business of a particular size, even when it came to calculating his own entitlements. In answer to a question about the MOU, Nick said:
A. I didn’t have the capacity to challenge, understand, or even gauge what needed to be done to make this work. I trusted that Mark [Young] and George, and at that time Ralph [Dieterding] as well, would do what is in the best interests of the shareholders and get it done. It’s a recurring theme here.
[40] Elsewhere in the cross-examination, Nick’s frustration and limited appetite for details is evident when asked a question about the reconciliation and settlement of a shareholder loan differential:
Q. The following was agreed, right:
The shareholder loan differential (including the additional $2 million of reconciling items) will be settled as of December 31, 2017 on an after‑tax basis (by way of increased compensation – to be determined.
And that’s increased compensation to you, right?
A. I don’t know. I just said figure it out. And if you guys agree, I’m good with it.
Q. You are relying on, Nick, for your claim, this memorandum and what was agreed at this meeting. And one of the things that was agreed in this memorandum was that you were going to receive an additional $2 million of reconciling items by December 31, 2017 on an after-tax basis. Do you agree with that?
A. When I read this, it reads that we could increase the loan differential by $2 million. It doesn’t say for me or for George. And like I previously stated, I left it to George, Mark, and if they needed to pull Ralph in to pull Ralph in. This is an area of the business that I did not understand, and I relied on my brother fully. This is the reason why I brought him in as a partner.
[41] Nick’s frustration with the “paperwork” is evident in these exchanges. It is clear that he wanted to trust George to do what was fair and wanted for George to continue to respect Nick’s role and stature as a founder of the business.
[42] Increasingly, however, the level of mutual trust between the brothers continued to erode, and their differences about their respective positions and privileges within the business became more and more pronounced.
[43] By 2020, LP had hired a new “Director of Construction”, effectively foreclosing or at least delimiting Nick’s ongoing participation in one of the two main areas staked out for him at the time of the discussion of the MOU.
[44] With respect to the other main area, George acknowledged in cross-examination that although Nick had some involvement in deal flow, he was not involved in all of LP’s deals, and did not contribute in “any significant way”.
[45] There is a great deal of evidence as to who bears responsibility and blame for Nick’s increasing exclusion from the business: George for keeping a tight grip on the inner workings and not allowing Nick access; or Nick for “checking out” and making no meaningful contributions.
[46] My suspicion is that both propositions contain some truth, and that the brothers’ tendencies creating and exacerbating this division were mutually reinforcing.
(H) Pronounced Dysfunction by 2021-2023
[47] By June of 2021, George cancelled altogether the regular meetings at which the brothers discussed aspects of LP’s business, and which had still been happening albeit with decreasing regularity since the discussion of the MOU. By the fall of 2022, efforts to develop a shareholder agreement stopped. By early 2023, the brothers’ relationship had become frankly dysfunctional, as reflected in emails they exchanged in January and February of that year. In one particularly poignant passage, Nick says “I feel as though I’ve lost the brother that was once my partner.”
The Court’s Task at this Stage re Oppression Allegations
[48] Assuming this matter proceeds through trial, the court will necessarily make specific findings about fault and responsibility in evaluating the oppression claims.
[49] It is not my task to do so at this stage, at least not in any definitive way, and indeed I must be circumspect about purporting to reach definitive findings on a paper record in the face of a looming oppression hearing (even with a paper record as voluminous as this one).
Differences Between Brothers’ Evidence re 340 Portfolio and Implications of LP “Borrowing” Funds from 340
[50] In this vein, there was considerable debate about what I ought to make of certain evidence about the 340 Portfolio, which is the subject of a parallel proceeding in which 340 is the plaintiff and George and Nick are co‑defendants.
[51] The brothers have very different accounts of the issues with 340 and the 340 Portfolio.
[52] Nick alleges that in late 2022, without Nick’s knowledge or consent, George approached 340 for a loan – despite the fact that all interactions with 340 had historically included both of them, and despite the fact that LP’s closest relationship with 340 was Nick’s relationship with Pat.
[53] Moreover, and most concerningly, it has become apparent that LP has used millions of dollars from the Joint Companies in the 340 Portfolio (including proceeds from financings or properties co-owned with 340, unremitted HST collections, and tenant deposits) to fund cash shortfalls.
[54] Nick maintains that he was not aware of these practices, and that, in circumstances in which it is now acknowledged by all sides that there is a cash shortfall, George is and has been making decisions about which creditors, suppliers and business partners are paid, and which are not. Nick emphasizes that these choices clearly have implications for him as an equal shareholder in LP, putting his capital at risk, and yet he is not even made aware of them, let alone given the opportunity to provide input.
[55] At a certain point LP simply stopped making monthly interest payments to 340, leading to 340 in turn ceasing to make monthly property management payments to LP, and, ultimately, leading to the discovery by 340 of the roughly $15 million not properly accounted for and at the core of 340’s claims against LP, George, and Nick.
[56] George’s version of the 340 events is very different than Nick’s account.
[57] George asserts that, despite Nick’s “general absence from the business” Nick insisted on remaining the primary contact with Pat.
[58] George says that Nick told him expressly that he (Nick) had gone to Pat to request loans from the 340 Joint Companies, and that Pat had approved of LP borrowing funds from the 340 Joint Companies.
[59] Leaving aside the significant difference in the brothers’ accounts of how the funds came to be “borrowed” from the 340 Portfolio companies, it seems clear that Pat actually knew nothing about the practice of removing funds from those Joint Companies to cover LP’s cash shortfalls, and, when he became aware, Pat refused to approve two proposed refinancings for the 340 Portfolio, and ultimately commenced litigation.
[60] Frankly, given George’s control over the finances, books and records of LP, and Nick’s close relationship with and allegiance to Pat, it is difficult to conceive of Nick as the author of the apparent misappropriation of the funds from the 340 Portfolio companies. While the specific determination of who did what doubtless remains to be finally determined in the oppression hearing, it is nonetheless inescapable that the practice of taking funds from the 340 Portfolio companies to cover cash shortfalls in the LP business has created considerable legal and financial risks for both brothers. Inasmuch as Pat was unaware of the practice, this will mean that LP will ultimately be held to account, and that as co-owners, regardless of who orchestrated the evident defalcations, both brothers’ financial positions will deteriorate. I note here that a parallel process to provide information has been agreed in the 340 litigation, and the expectation is that a settlement of that claim will be reached. Whatever the resolution, it seems inevitable that LP will have to make 340 whole.
Other Disputes Between Nick and George
[61] There are many other allegations back and forth between Nick and George.
[62] George takes issue with Nick’s investment in a seven‑story commercial property in Waterloo called “Allen Square”, which Nick apparently intends to convert to condominiums through Nick’s new company Axia GeoCapital. George asserts that Allen Square will compete with LP, and that Nick’s acquisition of it represents a breach of Nick’s fiduciary duties to LP. George also alleges that Nick has improperly obtained assistance and information from LP employees solely for the benefit of Nick’s allegedly competing project at Allen Square.
[63] In terms of Nick’s interactions with LP employees, George maintains that Nick has been disruptive and demanding, and has prevented LP employees from doing work they ought to be doing for LP.
[64] George alleges that Nick’s disruptive demands for information and answers from LP employees is despite George having set up a data room, after the brothers agreed in early 2023 that they would have to separate their interests in LP, to provide Nick with access to information about the business and operations of LP.
[65] Nick’s response to these various allegations is that, following from June of 2021, when George began unilaterally cancelling the meetings to discuss LP’s business, Nick learned about certain deals that George had orchestrated, in particular involving LP’s partnership with a local family called Broadbent. Nick maintains that he was not consulted about these investments and alleges that George not only entirely controlled LP’s participation but also made certain last‑minute demands of Nick to agree to steps that had already been taken, threatening that there would be “catastrophic consequences” if Nick did not sign off.
[66] As noted, Nick maintains that he knew nothing of George’s “scheme” of borrowing funds from the 340 Portfolio companies to address LP’s cash shortfalls.
[67] Nick says that as these revelations made him increasingly concerned, he sought to obtain more and better information from LP about what was happening, only to be met with directions and protocols devised by George to further limit Nick’s access to LP’s books, records, and employees. Nick alleges that George tightly controls what information gets into the data room, and that the available information in that setting is limited, stale, and of little or no utility.
[68] While George has acknowledged that LP is facing and operating through an ongoing liquidity shortfall, Nick’s evidence is that, again because of George’s unwillingness to share financial and operational details, Nick has no visibility into how LP is managing the ongoing cash crunch.
[69] Nick asserts that therefore he faces ongoing risks as a co-owner, but without any ability to protect those interests.
[70] To compound matters from Nick’s perspective, LP is currently undertaking one of its largest construction projects, worth approximately $120 million, and pursuing other redevelopment projects, all of which are being pursued, Nick alleges, without meaningful information being shared with him.
[71] These are but a few examples, among numerous others, illustrating the extent of the falling out between the brothers, and the extent of the distrust and dysfunction in the LP business.
The Brothers Agree that they Need to Part Company
[72] As noted, the brothers themselves acknowledge their need to part company, and it seems likely that the oppression hearing will lead to a division of assets.
[73] In the meantime, however, the credible premise for this motion is that something needs to be done to clarify LP’s current and ongoing finances, to control the flow of financial and operational information in a way that is transparent and equitable between the brothers, and to eliminate or attenuate current structures that conceal or delay information and breed continuing distrust.
Discussion of the Interim Relief Sought
(A) The Need for Auditor and Audits
[74] As set out above, the motion first seeks the appointment of an auditor, and the preparation of audited financial statements. Up to this point, somewhat surprisingly for an entity of its size and sophistication, LP’s financial information has been recorded only on a “Notice to Reader” (“NTR”) basis, the level of financial reporting with the lowest level of assurance, on which little or no reliance can reasonably be placed.
[75] In the face of Nick’s motion, George has agreed that an auditor should be engaged, and that the auditor should be tasked with preparing audited financial statements for the last three years.
[76] This is a good start. It is frankly not much of a concession, inasmuch as there is a clear body of case law standing for the proposition that the obligation for a company to provide audited annual financial statements is one of its core obligations to its shareholders (see for example Packall Packaging v. Ciszewski, 2016 ONCA 6, 344 O.A.C. 180). The obligation is confirmed in sections 153 and 154 of the OBCA.
[77] The law is also clear that the cost of an audit, and the alleged strain it may impose on cash flow, does not provide grounds to exempt a corporation from its statutory duty to obtain and provide audited financial information (Smith v. Eco Grouting Specialists Ltd., [2001] O.J. No. 2784 (Sup. Ct.)). The cost cannot be imposed directly on a shareholder: in Fakih v. AHM Investments Corporation, 2022 ONSC 2384, Penny J. in rejecting an assertion by the plaintiffs that they would be “happy to have audited financial statements prepared as long as the defendants pay for them” confirmed that “the receipt of audited financial statements is a mandatory right that shareholders can assert without explanation”: at paras. 35-36.
[78] Also in Fakih, making a point that I think is equally apposite here, Penny J. said, “given the competing claims and counterclaims being made in these proceedings, audited financial statements will be an important and necessary tool for evaluating those claims and resolving this litigation”: at para. 36.
[79] While I agree with that sentiment, and while there is no doubt that Nick is entitled to insist on audited financial statements and for LP to pay for them, audited financial statements will be of limited immediate utility in the case at hand.
[80] The agreement being finalized, I am told, is for an agreed auditor (there were candidates under discussion, but no choice of auditor yet made when the parties were before me), to prepare audited financial statements for 2021, 2022 and 2023.
[81] While again this is valuable in and of itself, and will yield at least some information of benefit to understanding the financial status and general flow of funds within LP, the information will, by definition, be retrospective and not current. In circumstances in which it is agreed that LP’s liquidity issues continue apace, information about past years will not give assurance about current financial parameters.
[82] Moreover, a retrospective audit of three past years, in an entity whose financial reporting has been exclusively limited to NTRs, and is alleged to be inaccurate in many respects, will inevitably take time, likely many months, further limiting the immediate benefit of the agreed exercise.
[83] As such, while again the right to audited financials, and the eventual benefit of having financial statements with a much higher level of assurance is unquestionable, I find that for LP, in its current circumstances, the promise of audited statements down the road is not enough.
[84] Of the options to supplement in the near term the information eventually to be supplied by audited financial statements, there are three options on the table: one proposed by George and two sought by Nick.
(B) Proposed Expanded Consent Order – Good but not Enough
[85] To understand George’s proposed option, it is helpful to understand that, during the course of case managing this case and the parallel 340 proceedings, the parties agreed to, and I endorsed, a consent interim order pursuant to which it was agreed that LP, under George’s directions, would provide certain additional financial information.
[86] That order, dated June 26, 2024, required timely production of such items as quarterly income statement variance analyses, semi-monthly cash-flow reporting, aged accounts payable and accounts receivable reporting (property-by-property), and summaries of upcoming financings.
[87] The June 26 order also required that Nick be provided with information about any proposed financing or refinancing “contemporaneously” and that Nick would provide his consent (or opposition) to any such proposed steps in a timely fashion.
[88] There are differing perceptions of the effectiveness of the June 26, 2024 order.
[89] Nick acknowledges that the order helped to some extent in exacting financial information beyond that which had been provided before the order was made.
[90] On the other hand, Nick notes that the provision of financial information was still in George’s control, that George continued to be selective in what was included, and that often financial information was not provided in a timely way, thus undermining the utility of what was produced.
[91] George’s stated view is that the interim order has in fact been beneficial, by creating a structure for the sharing of financial information that avoids Nick’s allegedly aggressive, sporadic, and disruptive demands for material regarding various aspects of LP’s financial and operational status.
[92] Consistent with his view that the earlier interim order has been helpful, George proposes that pending the hearing of the oppression claims, a further interim order be put in place, which takes the June 26, 2024 order and amends and expands it (the “Proposed Amended Order”).
[93] The terms of the Proposed Amended Order are reasonable, and potentially productive. In addition to language to confirm the appointment of an auditor and to suggest the scope of the auditor’s engagement, the Proposed Amended Order also includes provisions, among others, to make LP’s CFO and Director of Finance available to either brother on a bi-weekly basis to provide financial and operational information about the business and to “respond to reasonable enquiries.”
[94] Subject to the parties confirming that they agree on final language with respect to the auditor and the scope of the auditor’s engagement, I am prepared to sign the Proposed Amended Order. Were we at an earlier stage of this proceeding, I might leave it at that.
[95] However, the recent history of this matter makes it highly probable that, even assuming the best intentions of all concerned, the Proposed Amended Order, if that is the only measure imposed (in addition to the agreed audits) will yield as much conflict as it does calm.
[96] It is predictable that George will accuse Nick of making unreasonable demands for information (the words in the Proposed Amended Order limiting cooperation to “reasonable enquiries” foreshadow that potential conflict) and that Nick will accuse George of continuing to control and limit the flow of current and meaningful information.
[97] The brothers’ relationship is badly fractured, and leaving it to the two of them to work out ongoing information sharing between them courts further disputes.
[98] As such, in my view, some additional independent input will be beneficial to all concerned, not only to get a handle on the current financial status of LP’s business, but also to regularize and rationalize the flow of information in a way that is reliable, timely, and clear.
[99] Having reached that conclusion, the question then becomes: what type and extent of third‑party involvement is permissible and appropriate?
(C) Discussion of Other Potential Officers, and of the Basis in Statutes and Case Law
[100] That in turn requires consideration of the statutory authority and caselaw relative to court‑appointed third-party professionals, and measuring Nick’s request for the Proposed Appointees against those yardsticks.
[101] Despite LP’s acknowledged cash flow issues, there is no formal request before me for a finding of insolvency (as might be the case, for example, under the Bankruptcy and Insolvency Act “(BIA”)), and so the relevant statutory touchstone is section 101 of the Courts of Justice Act, R.S.O. 1990, c. C-43, which provides the court with the power to grant “an interlocutory injunction or mandatory order” to appoint a receiver, or receiver and manager, “where it appears to a judge of the court to be just or convenient to do so.”
[102] It is noteworthy that, as will be seen, this statutory starting point is invoked by the court with respect to not only the appointment of receivers and receiver/managers per se, but relative to other creatures of the court, including monitors, “investigative” receivers, and sometimes inspectors (and other slight variations on these categories).
[103] In each category, case law confirms that the appointment of the relevant court officer is generally interlocutory (see Illidge (Trustee of) v. St. James Securities Inc., 60 O.R. (3d) 155 (C.A.), and Shehrazad Non Profit Housing Inc., 2007 ONCA 267, 85 O.R. (3d) 81 (although see Akagi v. Synergy Group (2000) Inc. et al, infra, for an example of such an order found to be a final order).
[104] It is worth observing at the outset that there are in fact two statutory bases cited by Nick in this motion, and in the authorities discussing these issues, being section 101 of the Courts of Justice Act and section 161 of the OBCA. There are of course many receivership cases under section 243 - 245 of the BIA, but, while the test of “just and convenient” under the BIA is shared with s. 101 of the CJA, most often the BIA cases feature a contractual right within security instruments to appoint a receiver, which the caselaw confirms renders the appointment of a receiver less “extraordinary” than where no such contractual right exists.
[105] It is also worth noting that, despite different nomenclature for the different categories of Proposed Appointees, neither the statutory provisions nor the caselaw provide discreet definitions for each such separate role.
[106] Illustrating this point, in the portion of his factum following his request to appoint an inspector “to investigate” under s. 161 of the OBCA, Nick notes that “investigative receivers” have been appointed, in some cases, pursuant to s. 101 of the CJA.
[107] In reviewing the case law, it is apparent that, although appointments are in each case considered under one or both of these statutory provisions, there are a range of court-appointed offices, with differing mandates, that are treated under these same provisions.
[108] The title “monitor” does not appear in either statutory provision invoked by Nick (it appears to find its genesis in the CCAA and perhaps elsewhere). Section 161 of the OBCA contemplates an “investigation” in certain defined circumstances and provides (in s. 162) for an “inspector” to be appointed to conduct an “investigation” if one is warranted, but it appears to me that the titles “monitor” and “inspector” have been used to some extent interchangeably in relevant cases. It is also important to observe that one of the bases for requiring an investigation and appointing an inspector under ss. 161 and 162 tracks the language from s. 248 of the OBCA regarding oppression remedy claims, and so clearly is intended to allow for an investigation, if appropriate, within the setting of an oppression proceeding.
[109] An “investigative receiver” appears to capture a broad array of potential mandates, sometimes limited to basic and relatively unobtrusive information-gathering akin to a monitor, and sometimes where more extensive forensic investigations are called for: see e.g. Akagi v. Synergy Group (2000) Inc., 2015 ONCA 368, 125 O.R. (3d) 401; Boutin v. Boutin, 2022 ONSC 4776. At the most expansive end of the spectrum, under s. 101(1) of the CJA one finds a “receiver and manager” (often referred to as a “receiver/manager”): Shehrazad Non Profit Housing Inc., 2007 ONCA 267, 85 O.R. (3d) 81.
[110] Again, while these various titles (and perhaps other variations on these themes) are used throughout the relevant case law, based on the same statutory sources and often with little discussion about a particular choice of title, it is readily apparent that the different titles are used to describe court-appointed officers with differing powers, whose respective appointments are intended to be and are tailored to the precise circumstances into which they are respectively deployed.
[111] Stating the point somewhat simplistically, “monitors” tend to be appointed when relatively non-forensic information gathering and reporting is sought and are at the end of the spectrum with the least expansive powers. Commentary in the part of the CCAA describing a Monitor’s role (part 22.75) characterizes it as “observing and reporting on the management and governance of the debtor company to the court.” At the other end of the spectrum, receiver/managers tend to be appointed effectively to take control of the business at issue, imbued with such powers as the ability to manage operations and/or liquidate assets.
[112] To illustrate the way in which the tests for appointing this array of court officers are stated, and sometimes lumped together, I now turn to an overview of relevant decisions.
[113] Three cases, decided in this court (on the commercial list) within two years or so of one another underline the need to carefully consider the proposed role of a given court officer in identifying the correct test for their appointment.
(i) Adshade v. TDCI Bracebridge
[114] In Pattillo J.’s 2015 decision in Adshade v. TDCI Bracebridge, 2015 ONSC 1275, His Honour was asked to appoint BDO Canada as Receiver/Manager of TDCI Bracebridge. Justice Pattillo noted that the applicants relied on s. 101 of the CJA, as well as s. 248(3) of the OBCA (so in the context of an oppression remedy application, as in the case before me, but without express reference to s. 161 of the OBCA). Justice Pattillo quoted from those provisions, and recited the “just and convenient” test relative to s. 101 of the CJA.
[115] Albeit Pattillo J. made the order appointing BDO as receiver/manager in that case, he emphasized that “there is no doubt that the appointment of a receiver-manager is an intrusive and extraordinary remedy”: at para. 28.
(ii) Halsey v. Genoil
[116] Two years or so later, in 2017, in Halsey v. Genoil, 2017 ONSC 4817, Pattillo J. was again dealing with an oppression case in which, again, the applicant sought the appointment of an “interim receiver-manager” to manage the respondent corporation’s business and affairs.
[117] In discussing the potential appointment, Pattillo J. echoed his earlier caution about the stringency of the test, saying that “The appointment of a receiver-manager (whether interim or permanent) is very strong extraordinary relief” which “should only be granted cautiously and sparingly”: at para. 12.
[118] Justice Pattillo stated his view that while the moving party’s motion was under s. 241(3)(b) of the CBCA (relative to oppression), the test is “similar to the test for an interlocutory injunction as established by the Supreme Court in RJR-MacDonald Inc. v. Canada (Attorney General)” requiring the party to establish: 1) a serious issue to be tried; 2) that he or she will suffer irreparable harm if the motion is refused; and 3) the “balance of convenience” favours the appointment: at para. 13.
[119] His Honour went further to say that, where the order sought was for interim relief in an oppression action, as in the case before him, the “moving party must establish a strong prima facie case which is a higher standard than serious issue”: at para. 14.
[120] Applying these stringent tests, Pattillo J. concluded that the moving party’s evidence did not meet the necessary thresholds, and dismissed the motion.
[121] I note in passing that George argues that, like Pattillo J. in the Halsey case, I ought to apply the RJR-MacDonald test, including the higher standard of “strong prima facie case” at the first branch, to Nick’s motion. I also note that George urges this test despite the fact that Nick does not seek to appoint a receiver/manager, or even a receiver without management capacity.
(iii) Jones v. Mizzi
[122] Sandwiched between Pattillo J.’s decisions in Adshade in 2015 and Halsey in 2017, Hainey J., in 2016, decided Jones v. Mizzi, 2016 ONSC 4907, 61 B.L.R. (5th) 95.
[123] In that case, Hainey J. was dealing with a request to appoint an inspector under section 161(2) of the OBCA, in the context of a claim alleging oppression.
[124] Justice Hainey, in considering the basis for the potential appointment of an inspector in that setting, first referenced the following passage from the Court of Appeal for Ontario’s decision in Akagi v. Synergy Group (2000) Inc., 2015 ONCA 368, 125 O.R. (3d) 401, at n. 3 (about which more below):
In general, this relief is available at the instance of a shareholder where it is apparent that the corporation’s books and records are not properly kept or are inaccurate, or where there has been some deceit or oppressive conduct practiced against the shareholders… Its purpose is to ensure that a corporation discharges its core obligation to provide shareholders with an accurate picture of its financial position… The court has broad powers to make any order it thinks fit, but, in particular, is empowered to appoint an inspector to conduct an investigation and to authorize the inspector to enter any premises in which the court is satisfied there might be relevant information, to examine anything and to make copies of any document or record found on the premises, and to require any persons to produce documents or records to the inspector…
[125] Justice Hainey observed that the jurisprudence makes it clear that the evidentiary threshold required to appoint an inspector pursuant to s. 161 of the OBCA is “low”: at para. 13.
[126] In support of that observation, Hainey J. quoted an excerpt from Eberle J.’s decision in Consolidated Enfield Corp. v. Blair, 19 B.L.R. (2d) 9, at para. 83, in which Eberle J. concurred with Galligan J. that,
Having regard to the fact that the relief provided for in the section is an investigation, it seems to me that a Court is entitled to make an order for an investigation if it appears on the face of the material submitted to the court that there is good reason to think that the conduct complained of may have taken place.
[127] Justice Hainey also quoted from the decision of Campbell J. in Catalyst Fund General Partner I Inc. v. Hollinger Inc., 48 B.L.R. (3d) 194, at para. 39, as follows:
In the case of an oppression remedy, the reasonable expectation is determinable on the material before the Court. In the case of inspection relief, there must be at the very least an index of suspicion or appearance that reasonable shareholder expectations have not been met in viewing the actions or non-actions of management and directors. It is then appropriate to test that prima facie case with an inspection to determine whether further relief is warranted.
[128] Justice Hainey applied these tests to the matter before him, found that there was “an appearance of oppressive conduct” and that the failure to provide certain financial statements “raises an index of suspicion that reasonable shareholder expectations have not been met.”
[129] Although Hainey J. does not in Jones reference s. 101 of the CJA (and presumably no party raised it before him), he was dealing, as Pattillo J. had been in Adshade the year before Hainey J.’s decision and in Halsey the year after, with a motion to appoint a court officer in the context of an oppression application.
[130] It is also important that Pattillo J., in each of Adshade and Halsey, was being asked to appoint a receiver-manager, with the fulsome powers attached to that position, whereas Hainey J. was asked to appoint an inspector under s. 161 of the OBCA, the powers of whom are largely up to the court but, however conceived, do not go as far as the powers of a receiver-manager.
[131] Just as George urges that in considering the proposed appointment of a court officer in the case before me I ought to apply the stringent RJR-MacDonald case, heightened to “strong prima facie” case because we are in an oppression claim, Nick responds that I ought instead to apply the low threshold posited by Hainey J. in Jones (also within an oppression claim) and appoint an inspector based on an index of suspicion.
(iv) ONCA Decision in Akagi v. Synergy Group
[132] In the Akagi case quoted above, the Court of Appeal for Ontario provided helpful guidance about the potential appointments of various types of court officers and gave useful examples from past cases about how choices between types of officers have been made, depending on the context for the proposed appointment.
[133] In Akagi, the court below had appointed a receiver on an ex parte basis, and then, in a series of ex parte and other attendances, expanded the powers of the receiver into a “wide-ranging ‘investigative receivership’” at the behest of an unsecured judgment creditor: at para. 4.
[134] The court emphasized the unusual nature of the receivership from the outset and moreso as it expanded, saying, at para. 62:
This is not the case of a secured creditor requesting the appointment of a receiver under its security instrument by court order rather than by private appointment. Nor is it a case involving the appointment of a receiver under insolvency legislation, such as the BIA, or under the Securities Act, R.S.O. 1990, c. S.5 (where the court has the power to appoint a receiver to protect investors in certain circumstances). As noted earlier, it is not a class proceeding or other form of representative action.
This is a case where a judgment creditor seeks to use an unsatisfied judgment as an entrée to obtain a receivership in order to freeze the assets and investigate the affairs of not only the debtors, but also of a complex mix of related and not-so-related entities and individuals.
[135] In granting the appeal, the Court of Appeal for Ontario discussed the recent emergence of a “receiver or monitor” with investigative powers. The court noted that it had not previously been asked to consider whether, or in what circumstances, a s. 101 receiver may be empowered in this fashion. While finding that the concept had been the subject of runaway use in the case before it, Blair J. for the court observed that imbuing a receiver with certain investigative powers was “not itself unsound” and that “there is much to be said in favour of such a tool…when it is utilized in appropriate circumstances and with appropriate restraints”: at paras. 65-66.
[136] Justice Blair emphasized, at para. 67, that the “root principles” governing the appointment of a receiver would remain in place in the consideration of enhanced “investigative” powers, and that “two ‘bookend’ considerations are particularly germane”:
On the one hand, the authority of the court to appoint a receiver under s. 101 of the CJA where it appears… ‘just and convenient to do so’ is undoubtedly broad and must be shaped by the circumstances of individual cases. At the same time, however, the appointment of a receiver is an extraordinary and intrusive remedy and one that should be granted only after a careful balancing of the effect of such an order on all of the parties and others who may be affected by the order.
[137] Justice Blair then conducted a review of various authorities to “illustrate how these tensions have been resolved in the particular context of a receivership clothed with investigative powers”: at para. 68.
[138] The first case Blair J. discusses, Stroh v. Millers Cove Resources Inc. (1995), [1995] O.J. No. 1376 (Gen. Div.) aff’d [1995] O.M. No. 1949 (Div. Ct.), was a decision of Farley J. involving an oppression remedy claim, such that “the appointment of an inspector under the OBCA was an available option”: Akagi, at para. 69. According to Justice Blair, Justice Farley instead appointed a receiver with power to take control of the assets of a company and to “investigate and conduct an independent review of certain self-dealing transactions by the company’s majority shareholder, of which the company’s directors were unaware”: Akagi, at para. 69.
[139] In discussing Stroh, Blair J. said it was important to note that “Farley J. only granted the receivership remedy after giving counsel the opportunity to… make further submissions about whether the officer to be appointed should be a receiver/manager, a monitor, an inspector or something else”: at para. 70.
[140] In other words, Blair J. that Farley J. in Stroh carefully fashioned the remedy to meet the needs of the oppression remedy claimants in the proceeding.
[141] Justice Blair goes on to discuss two subsequent cases. Justice Ground in Udayan Pandya v. Courtney Wallis Simpson (2005), Court File No. 05-CL-6159 (S.C.J.), and Morawetz J. (as he then was) in Century Services v. New World Engineering Corp. (2006), Court File No. 06‑CL‑6558 (S.C.J.) each, Blair J. notes, appointed a receiver “for the primary purpose of monitoring and investigating the assets and affairs of defendants”: Akagi, at para. 72.
[142] Justice Blair cites for particular mention Morawetz J.’s reasoning (in Century) that “the appointment of a receiver was ‘necessary to monitor the affairs of the defendants so that a more fulsome investigation [could] be undertaken”: Akagi, at para. 73. Justice Morawetz was clear, in making the order, that “No power was given to seize or freeze assets” and that the receiver “shall not operate or unduly interfere with the business of the corporate defendants”: Akagi, at para. 73.
[143] In brief summary, Blair J. lauded these decisions in which “the relief granted was carefully designed to meet the needs of the particular proceeding itself,” (which Blair J. went on to say was unlike the underlying decision(s) in the matter before him): at para. 74.
[144] Justice Blair then distilled from these and other cases some “consistent themes”, including that, at para. 90:
- The appointment of an investigative receiver is necessary to alleviate a risk posed to the plaintiff’s right to recovery.
- The primary objective of investigative receivers is to gather information and “ascertain the true state of affairs concerning the financial dealings and assets of a debtor… One authority characterized the investigative receiver as a tool to equalize the “informational imbalance” between debtors and creditors with respect to the debtor’s financial dealings.
- Generally, the investigative receiver does not control the debtor’s assets or operate its business, leaving the debtor to continue to carry on its business in a manner consistent with the preservation of its business and property.
- Finally, in all cases the investigative receivership must be carefully tailored to what is required to assist in the recovery of the claimant’s judgment while at the same time protecting the defendant’s interests, and to go no further than necessary to achieve these ends [citations omitted].
[145] Finally in this vein, Blair J. points out that in this context the three‑part RJR-MacDonald test is “often applied where the receivership order is purely interlocutory and ancillary to the pursuit of other relief claimed – where it is, in effect, execution before judgment”: at para. 91.
[146] It seems fair to observe that, in his discussion and in the summary above, Blair J., consistent with the cases to which he refers, effectively treats the various types of court officers, including inspectors, monitors, investigative receivers and receiver/managers, all as subtypes of receivers, the stringency of the test for the appointment of which, and the role and mandate of which, vary to suit the circumstances at hand.
[147] Before attempting to apply some of these principles to the matter before me, I should touch on three additional cases, two of which are reasonably recent.
(v) Other Relevant Decisions
[148] First, I note Broad J.’s decision in 829194 Ontario Inc. v. Garibotti et al, 2013 ONSC 5857, in which, again in the setting of a claim of oppression (among other claims), His Honour commented that there was no reasonable basis for limiting a director’s role in the overall care and management of a corporation, and ordered “for the protection and comfort of the plaintiffs” that “a monitor be appointed to examine the financial records and affairs of the Corporation on a regular basis and to report to the shareholders and to the Court”: at para. 27. Justice Broad characterized the relief as a “compliance order” under s. 253(1) of the OBCA, and observed, notwithstanding that the motion before him was framed as seeking a mandatory injunction, that “there is no requirement that the three-pronged test for an interim injunction be satisfied in order for a compliance order to be made under s. 253(1) of the OBCA”: at para. 21. I note that Broad J., in reaching that decision, emphasized that he was making the order in circumstances in which “there is nothing in the evidence to indicate that Paul G. and Warren are currently capable of working together cooperatively and effectively on a day-to-day basis to run the ongoing business operations of the Corporation”: at para. 23.
[149] Although Broad J. does not expressly reference any test that must be satisfied other than non-compliance with providing statutorily required information, it is apparent that His Honour felt the threshold was a low one, akin to that described by Hainey J. in Jones relative to s. 161 of the OBCA and/or akin to the three-part test for a mandatory order entailing a low bar for the prima facie case required.
[150] With a view to having the court appoint a monitor, Nick also relies on Paulpillai v. Yusuf, 2020 ONSC 851, in which, in the context of allegations about mismanagement of a medical school in the Caribbean for which termination and dissolution of a partnership was being sought, the court appointed a monitor, finding that without a monitor the applicant would suffer irreparable harm, as “Currently, the Applicants do not have sufficient knowledge or control of the partnership assets to adequately protect their interests”, which interest, with the passage of further time, would “be eroded in an unquantifiable manner”: at para. 62.
[151] In addressing a motion to quash an appeal, the Court of Appeal for Ontario confirmed that although the motions judge had not specified the statutory basis for the appointment of the monitor, she had noted her ability to appoint a receiver under s. 101 of the CJA: Paulpillai Estate v. Yusuf, 2020 ONCA 655. Jamal J.A. (as he then was), referring to Akagi, observed that “a receiver with investigative powers is often appointed to gather information and determine the true state of affairs about the parties”: at para. 20. In my view this conception of an “investigative receiver” closely resembles what is elsewhere called a monitor.
[152] Finally, I note the 2023 decision of Osborne J. in Kerbel v. Morris Kerbel Holdings Limited, 2023 ONSC 529. In that case, His Honour was again dealing with a motion seeking to appoint an inspector under s. 161 of the OBCA in the context of an oppression claim (among other claims). The proceedings were complex, and intertwined with a related claim challenging the authenticity of a newly discovered will.
[153] In addressing the proposed appointment of an inspector, Osborne J. used a three-part test for the determination of whether or not to appoint an inspector, arising from Trackcom Systems International Inc. v. Trackcom Systems Inc., 2014 QCCA 1136, and employed in Khavar v. Mizrahi, 2016 ONSC 4934, 61 B.L.R. (5th) 313.
[154] The three parts of the test are:
(a) whether or not the applicant is a security holder; (b) is there a prima facie case that one of the circumstances set out in s. 161(2) has been met; and (c) the court must consider the appropriateness of the proposed investigation, bearing in mind its usefulness and reasonableness under the circumstances, with due consideration to its expected costs and benefits.
[155] Justice Osborne found in that case that the second and third parts of the test were not met. He confirmed that an investigation was an extraordinary remedy and “is not intended to assist the court in making findings of oppressive conduct, and nor should it be used to assist parties to prepare for litigation”: at para. 59.
[156] He held that “while the threshold for oppressive conduct in order to satisfy the first branch of the test may be low, it is not sufficient for an applicant to merely allege misconduct or raise suspicion”: at para. 60.
[157] On the third branch of the test, Osborne J. recounted a number of factors to which the court should pay attention, including whether or not the applicant needs access to the information, whether or not there are better, less expensive means to acquire the information, whether the proposed investigation would give the applicant a tactical advantage, and comparing the expense of the investigation to its benefits.
[158] Justice Osborne found that certain undertakings given by the respondents would satisfy the applicants’ need for materials in relation to certain key transactions, and was concerned that the applicants had not put forward information in their possession and control.
[159] It was also important in Osborne J.’s decision that the matter was essentially at the outset, and he observed that the applicants had material facts sufficient to prepare a claim (and would obtain additional information through the usual litigation channels), such that the appointment of an inspector at that early stage was not warranted.
Factors Emerging From the Statutes and Case Law
[160] I find that the following items emerge from the case law that I have reviewed, as factors to be considered in relation to Nick’s Proposed Appointees:
(a) The precise nature and stringency of the test to be applied relative to a Proposed Appointee depends upon the precise nature of the role and mandate at issue, and: (i) It is only where the applicant seeks the appointment of a receiver‑manager, to take control of the business and secure assets for potential judgment that the elevated RJR-MacDonald three-part test, including a requirement for a strong prima facie case, is apt; (ii) Where the mandate and role is as a monitor, or as an inspector with a limited mandate to obtain and report on a company’s financial status and on transactions of interest, there is a relatively low threshold, in the nature of a prima facie case, for which a raised index of suspicion may be a sufficient basis; (iii) If the appointment of a court officer is sought pursuant to s. 101 of the CJA, then in assessing whether the proposed appointment is “just and convenient” the court should consider the array of factors underpinning injunctive relief, but, unless a full-blown receiver/manager is sought, the first prong of the test is a prima facie case, which can as noted be a relatively low threshold depending on the specific circumstances and request; (iv) As the proposed powers and mandate for the suggested court officer increase, so too does the stringency of the test to be applied, and in particular, the greater the proposed forensic scope of the mandate, and the greater the scope of control proposed (over assets and management) the clearer and more compelling the evidence need be, approaching the strong prima facie case threshold; (v) The extent to which the assets of the corporate entity or entities are at risk of eroding factors into the analysis of irreparable harm, particularly if those are the only assets available for satisfaction of any judgment; (vi) The balance of convenience is a factual matter to be determined in each case, and the analysis should import such factors as cost, disruption, alternative means of obtaining the information sought, and whether or not the request for information is in fact an effort to gain a tactical advantage; (vii) In every case, if considering a remedy, the court should strive to tailor the remedy to the situation at hand, and only order what is necessary to preserve the claimant’s ability to recover a judgment as balanced against what is necessary to protect the defendant’s interests, including allowing it to carry on business as appropriate.
Application of these Factors to this Case
[161] Applying these various factors to the case before me, I find that Nick has met the relatively low threshold of a prima facie case of oppression. I hasten to add that this does not constitute a definitive or final finding of oppression. Rather, it is apparent to me that Nick has not been fully and in a timely way furnished with a level of information appropriate to his stature as co-owner, officer, and director. While this outcome has been driven in part by the brothers’ respective strengths and weaknesses and the roles into which they have fallen, it is also fair to observe that George has controlled the flow of information, and that Nick has not been privy to all of the same information that George has.
[162] I also find, as Broad J. did in Garibotti, that there is no realistic prospect of the brothers working effectively together in the day-to-day management of the company, and part of the rationale for the relief here is that inserting an independent professional between Nick and George is important to safeguard the assets and viability of LP pending the determination of the oppression and related claims.
[163] George’s recent agreement that there should be an audit and an auditor, and his recent proposal of an expanded consent order are positive developments, but also underline that these steps, and the corrections of the imbalance of information that they will yield, ought to have been taken long since. This conclusion alone supports a finding that the low threshold to appoint a monitor or inspector is met.
[164] Again, as with all aspects of this case, the brothers’ fractious relationship has made the exchange of information fraught, and considerably more difficult than necessary – and Nick’s impatience and frustration have not helped in this regard – but the notion at this stage is to introduce means to facilitate, routinize, and supervise the flow of information.
Conclusions
[165] To that end, as set out above, the parties have agreed to an auditor and to audits and are to finalize the details of the appointment. I am also ordering George’s proposed expanded consent order.
[166] In addition, I am appointing a single person to function as a Monitor. The appointment is justified, in my view, by reference to s. 101 of the CJA (under which the Monitor can be seen as a form of receiver with relatively limited powers), and/or by reference to s. 161 of the OBCA (in respect of which the Monitor I am appointing can be seen as subsuming the role and functions of an Inspector as contemplated by s. 162 of the OBCA).
[167] In other words I find, for the reasons described, that it is just and convenient under s. 101 to bring in a third party to function as a monitor, and that, as set out above, there is sufficient evidence before me to meet the relatively low threshold, in the nature of a prima facie case, under s. 161 of the OBCA. The ongoing risk to LP’s assets, which are the available assets that will have to answer any judgment, in my view meets the “irreparable harm” test. With respect to balance of convenience, I find that the addition of one external professional with a specific mandate is preferable to leaving it to the brothers to work matters out between them (which has proven to be illusive to this point). I also find that the appointment of a monitor will assist in ensuring George/LP’s compliance with the OBCA as contemplated under s. 253(1). While engaging a Monitor will also entail additional cost to LP, in my view the cost and minimal disruption associated with inserting a Monitor are easily justified when compared to the abiding distrust and dysfunction of the status quo.
[168] The mandate of the Monitor will be as set out in paragraph (f) of Nick’s amended notice of motion, and I direct the parties to identify a Monitor and to develop an order confirming the identity and mandate of that individual.
[169] If the parties are unable to identify an agreed individual to serve in that role, then Nick is to provide three names of candidates to George, and George is to pick one of the candidates within one week of being provided with the three names.
[170] LP is to pay the cost of the Monitor, but counsel are to work with the individual chosen to develop a budget for his or her services, which budget can be quarterly.
[171] The parties are also to discuss and attempt to agree on a protocol for reporting by the Monitor, which is to include regular reporting to the court.
[172] I am declining at this stage to appoint an investigator with the powers contemplated in paragraphs (c) – (d) of Nick’s amended notice of motion. My hope and expectation is that the expanded draft consent order, together with the activities of the Monitor, will be sufficient to ensure a balance of information and a cessation of disputes over those issues.
[173] However, to the extent that the Monitor reports any ongoing difficulties, either in the demands for or provision of information, then I may be spoken to.
[174] I am not making any order as to costs at this stage. In my view, while Nick has succeeded in demonstrating the need for an independent court officer to be appointed, the brothers are both implicated to some extent in the difficulties with the exchange of information to this point, and in any event my concern is to fix, or at least substantially improve the flow of information going forward and to remove this as an item in dispute.
W.D. BLACK J. DATE: November 6, 2024