Court File and Parties

Court File No.: CV-24-00724436-00CL
Date: 2025-03-06
Court: Superior Court of Justice - Ontario

Applicants:

• Spass Inc.
• Yonghwan Kim
• Happysona Inc.
• Jong OK Ko

Respondents:

• Jong OK Ko
• Happysona Inc.
• SpassMed Inc.
• Spass Co., Ltd.
• Sanghoon Lee

Before: Sean F. Dunphy

Counsel:

• Sandra Barton, Matthew Karabus, and Jenny Zhou, for the Applicants Spass and Kim
• Hilary Book and William McLennan, for the Respondents Happysona Inc. and J. Ko
• Simon Bieber and David Ionis, for the Respondent Lee

Heard: 2024-12-20

Endorsement

Overview

[1] Two shareholders of SpassMed Inc. ("SpassMed"), a company incorporated under the Canada Business Corporations Act ("CBCA"), commenced separate applications and sought relief under s. 241 of the CBCA, as well as other relief.

[2] By Order dated September 3, 2024, Steele J. ordered that the second application shall be consolidated with the first application and that they proceed as one application under Court File No. CV-24-00724436-00CL. Under this Order, the issues to be heard in the consolidated application are set out in the notices of application in each application.

[3] The issues in the consolidated application relate primarily to the business carried on by SpassMed. The competing claimants, Yonghwan Kim ("Kim") and Jong OK Ko ("Ko") were both directors and shareholders of SpassMed. There was also a third director.

[4] Some of the relief claimed in the consolidated application is made by Spass Inc. ("Spass Korea"), a Korean company that, according to Kim's evidence, was developing medical technology using artificial intelligence to diagnose and predict septic shock. Kim's evidence is that SpassMed was formed in October 2020 to provide Spass Korea with Canadian research capacity and access to the U.S. consumer market as the Canadian extension of Spass Korea and that Spass Korea allowed SpassMed to access its artificial intelligence so that SpassMed could assist in the development of the medical technology.

Relief Originally Sought in the Two Applications

[5] Kim and Spass Korea commenced the first application by notice of application issued on July 24, 2024. The respondents are Ko, Happysona Inc. (a company owned by Ko) ("Happysona"), and SpassMed.

[6] In their original Notice of Application, Kim and Spass Korea claimed:

(a) Declarations: (i) that a meeting of the Board of Directors of SpassMed on June 7, 2024 was duly constituted and properly convened and approving the resolution passed at this meeting removing Ko as President and CEO of SpassMed and appointing another person in his place, and (ii) pursuant to s. 241 of the CBCA, that certain acts of Ko and/or Happysona were and have been oppressive, unfairly prejudicial to and unfairly disregarded the interests of Spass Korea as a shareholder and Kim as a director of SpassMed;

(b) An order requiring the respondents to immediately produce all records of SpassMed to which they are entitled;

(c) Appointment of an interim monitor to investigate the financial and corporate affairs of SpassMed; and

(d) An interim and interlocutory order restraining Ko and his agents from holding Ko out as President and CEO of SpassMed or entering into transactions as a signing officer of SpassMed or making decisions or transacting on behalf of SpassMed.

[7] Ko and Happysona commenced a separate application under s. 241 of the CBCA by notice of application issued on August 19, 2024. The Respondents are Spass Co., Ltd., Spass Korea, Kim, Sanghoon Lee, and SpassMed.

[8] In their notice of application, Ko and Happysona seek:

(a) a declaration that the Respondents have acted in a manner that is oppressive or unfairly prejudicial to, or that unfairly disregards the interests of Ko and Happysona;

(b) an order for preservation and return of confidential information and intellectual property of SpassMed;

(c) an order requiring the Respondents to preserve and produce all financial records of SpassMed;

(d) an order requiring the Respondents to preserve and produce all records relating to the ownership of SpassMed's intellectual property in their power, possession or control and to preserve and produce all records of SpassMed including financial records, corporate records, and a list of shareholders;

(e) an interim order appointing a Monitor to investigate the financial and corporate affairs of SpassMed including any misappropriation of SpassMed's confidential information and intellectual property;

(f) declaratory relief in relation to corporate governance actions by the board of directors of SpassMed and declaring that Ko is the CEO and President of SpassMed;

(g) interlocutory injunctive relief ensuring that SpassMed continues to operate in the usual and ordinary course of business.

Order for Production of Documents and Appointment of Interim Monitor

[9] By Order dated August 21, 2024 made on consent in the application commenced by Kim and Spass Korea, all parties were ordered to produce all corporate records of SpassMed in their possession, control, or power and to preserve all documents relevant to the matters in issue in the proceeding. The Court, on consent, appointed Grant Thornton Limited as interim monitor to monitor and investigate the business and financial affairs of SpassMed.

Order of Steele J. Dated September 3, 2024

[10] Following a case conference held on September 3, 2024, Steele J. released an endorsement on September 20, 2024 referring to advice given to her at the case conference and a consent order that the parties requested. The consent Order dated September 3, 2024 provides (i) for consolidation of the applications so that they would proceed as one application; (ii) that the issues to be heard in the consolidated application are set out in (1) the notice of application in the Spass Korea application issued on July 24, 2024 and (2) the notice of application issued on August 19, 2024 in the application commenced by Ko and Happysona (a company he owns); and (iii) for a timetable for the consolidated application with a hearing date on November 28, 2024.

Endorsement of Osborne J. Dated November 14, 2024

[11] A case management conference was held before Osborne J. on November 14, 2024.

[12] At this case management conference, Ko and Happysona noted that the parties differ on numerous fundamental factual questions relevant to the applications and they submitted that it is doubtful that the issues in dispute can be determined by way of application. Ko and Happysona noted that at the time the hearing date was set on September 3, 2024 (for a hearing on November 28, 2024), SpassMed was operating as a going concern. They submitted that Happysona was not prepared to continue funding SpassMed's operations without any contribution from Spass Korea, which was not forthcoming. Ko and Happysona advised Osborne J. that, as a result, SpassMed is no longer a going concern.

[13] In his endorsement, Osborne J. adjusted the timetable for this consolidated application and required cross-examinations to be completed by November 29, 2024. Osborne J. adjourned the hearing date from November 28, 2024 to December 20, 2024 for one full day.

Ko and Spass Korea Amend Their Notice of Application

[14] On December 9, 2024, after the case conference before Osborne J. and after the Monitor delivered its First Report, Kim and Spass Korea amended their notice of application relying on rule 26.02(a), which allows an amendment, without leave or consent, before the close of pleadings. This requisition was submitted to the Registrar even though this is a consolidated application and not an action, and all affidavits had been delivered. The Registrar of the Court allowed the amended notice of application to be filed under this rule.

[15] The amended notice of application significantly expands the relief sought by Kim and Spass Korea. The following claims were added:

(a) A declaration that Ko acted in breach of his common law and statutory duties to SpassMed and/or Spass Korea including his fiduciary duties, and that his conduct fell below the standard of care of officers, directors and trusted advisors;

(b) A declaration that Spass Korea is the owner of all right, title and interest in SpassMed trademarks, tradenames and associated goodwill;

(c) An order for production of the legal file of the law firm which acted as corporate counsel to SpassMed;

(d) Orders against the Ko Respondents or any one of them, as applicable, for:

(i) an order removing Ko as a director of SpassMed;

(ii) damages in the amount of $3,000,000 for oppression, breach of contract, misappropriation of corporate assets, breach of fiduciary duty, conversion, breach of trust, and/or negligence;

(iii) punitive damages in the amount of $150,000;

(iv) an accounting and tracing of all amounts paid to any of the Ko Respondents, directly or indirectly, for or on account of SpassMed, during the period October 1, 2019 to date;

(v) in respect of the Participation Agreement dated as of October 1, 2019 and the Business Agreement dated as of October 27, 2020,

(1) rescission of or in the alternative a declaration that the foregoing agreements are void based on non est factum, and/or failure of consideration;

(2) a declaration of the foregoing agreements are voidable on the basis of material misrepresentation;

(3) rectification of the Business Agreement to conform to the oral agreement arrived at with Spass Korea, if any; or

(4) an order varying or setting aside the foregoing agreements under section 241(3)(h) of the CBCA;

(vi) in the further alternative, an order

(1) directing the Ko Respondents to return their shares in SpassMed and/or otherwise divesting them of those shares; or

(2) permitting Spass Korea or Kim to purchase the shares held by the Ko Respondents in SpassMed and Spass Korea and/or an order that the Ko Respondents sell their shares at a price to be determined by this Honourable Court;

(vii) a permanent injunction restraining the Ko respondents, directly or indirectly from

(1) holding Ko out as the President and CEO of SpassMed, entering any transactions as a signing officer of SpassMed, or making any business decisions or transactions on behalf of SpassMed;

(2) using all SpassMed tradenames, trademarks, and associated goodwill or otherwise in association with their businesses;

(3) passing off their businesses as that of SpassMed, or falsely suggesting any association between their businesses and that of SpassMed.

[16] Kim and Spass Korea did not seek a further case conference before Osborne J. or another judge of the Commercial List to advise of the significant amendments to their notice of application and to request leave for the expanded issues now raised in the consolidated application to be heard on a paper record in the time originally allotted for the hearing that was set before the amendments were made.

[17] Kim and Spass Korea submit that the claims made by the amendments to their notice of application are justified based on the evidentiary record and should be adjudicated in the consolidated application.

[18] In their factum for these applications, the Kim parties seek an order granting the relief set out in the amended notice of application.

[19] Kim and Happysona submit that given the amended claims made by Kim and Spass Korea and the record that has developed, it is not appropriate for the consolidated application to be adjudicated as an application on a paper record, and that the consolidated application should be converted to an action. In the alternative, they submit that the application by Kim and Spass Korea be dismissed and that the application by Ko and Happysona be granted.

[20] I heard submissions from counsel on all issues and reserved my decision.

[21] I have carefully considered the submissions of counsel in the context of the evidentiary record before me. I have concluded that I cannot fairly and justly decide the issues raised in the consolidated application on this paper record. The consolidated application should be converted to an action.

[22] To provide context for my decision in this respect, I set out below a brief summary of the evidentiary record in relation to the issues raised in the consolidated application. I have not referenced the affidavit evidence in detail in this summary.

Factual Background

Parties

[23] Kim is the CEO of Spass Korea, a Korean company. Kim's evidence is that he founded Spass Korea in 2017 to increase the use of artificial intelligence in medical care. Spass Korea developed medical technology to diagnose and predict shock, sepsis and ultimately septic shock. Kim's evidence is that Spass Korea's technology is now being used to help patients in numerous hospitals in Korea.

[24] Kim and Ko met in late 2018. Kim's evidence is that Kim and Ko agreed to form a company in Canada as the Canadian extension of Spass Korea to operate as a joint venture to provide Spass Korea with a Canadian research capacity and access to the U.S. consumer market.

[25] SpassMed was incorporated in October 2020. Kim's evidence is that Spass Korea allowed SpassMed to access its AI technology so that SpassMed could assist in the development.

[26] Kim is a shareholder and one of SpassMed's three directors. Ko is also a shareholder of SpassMed and a director.

[27] Happysona is a company run by Ko that promotes itself as a startup "accelerator" for Korean companies interested in the Canadian market.

[28] Lee is a director of SpassMed. He was formerly SpassMed's Chief AI Officer, responsible for managing SpassMed's other developers working on Spass Korea's artificial intelligence technology. He was originally hired by Ko as Happysona's Chief AI Officer.

Formation of SpassMed and Execution of the Participation Agreement and the Business Agreement

[29] Kim's evidence is that he wanted to expand Spass Korea's operations into Canada and Ko was entrusted with advising Kim on and setting up the structure that would allow Spass Korea to do so. Kim's evidence is that SpassMed was to be the Canadian extension of Spass Korea's business.

[30] Ko's evidence is when he and Kim agreed to partner together through SpassMed, they agreed that the Canadian company would be the vehicle to bring the technology to market. He disputes that SpassMed was to be an extension of Spass Korea's business.

[31] Shortly after SpassMed's incorporation, on October 1, 2019, Spass Korea and Happysona executed a participation agreement (the "Participation Agreement"). This agreement contained a provision (written in Korean) that the Canadian joint venture to be created with Happysona (a company owned and controlled by Ko) would be established with shares held 60-40 by Spass Korea and Happysona, respectively. The Participation Agreement provides that "the specific details are subject to mutual agreement".

[32] Ko brought in investments from investors, half of which was directed to Spass Korea and half of which was deployed to SpassMed. Kim sold Ko a 10% interest in the shares of Spass Korea in exchange for his assistance in raising funds for Spass Korea.

[33] A "Business Agreement" dated October 27, 2020 was made between SpassMed and Spass Korea. The Business Agreement provides that SpassMed's business would be set up as a joint venture between Spass Korea and SpassMed. 111,000 Class A shares would be issued to Spass Korea and 74,000 Class B shares would be issued to Happysona. The Class B shares had twice the voting rights of the Class A shares. Kim's evidence is that he was not told this when the Business Agreement was signed and, had he known this, he would not have signed it. This is disputed.

[34] Under the Business Agreement, Spass Korea would grant SpassMed rights to its "Background Intellectual Property" and the parties would own any intellectual property generated by the venture in accordance with their shareholding.

[35] Kim disputes that the Business Agreement is valid and enforceable in accordance with its terms. He relies on evidence of what Ko told him when the Business Agreement was proposed which, he contends, was untrue. Kim also contends that Ko did not pay for the Class B shares.

[36] Ko disputes Kim's evidence and contends that the two agreements are valid and enforceable.

Business Operations of SpassMed

[37] Kim's evidence is that Ko and Lee were SpassMed's only employees in 2020 and, from 2020-2022, SpassMed's only work consisted of working on Spass Korea's application for product approval with the U.S. Food and Drug Administration, which was approved in June 2023.

[38] Kim's evidence is that SpassMed never produced a product that produces any verifiable results despite significant sums invested for research. Kim asserts that the invested funds were largely dissipated by Ko. Ko disputes this.

[39] Ko's evidence is that by June 2023 SpassMed had developed code that could process data in near real-time and curate datasets for testing. Ko's evidence is that SpassMed developed a large language model program so the software could explain its results in plain language. Ko's evidence is that in June 2023, SpassMed attended the Toronto Machine Learning Summit and presented its model and a working demonstration of the program. Ko's evidence is that Kim was sent a draft of the paper for the Summit and then Spass Korea applied for a Korean patent which was registered in January 2024 and, he says, shows that Spass Korea used SpassMed's research for its application. Ko deposes that from December 2023 to August 2024, Spass Korea filed another 11 patent applications which seem to use SpassMed research.

[40] Kim disputes Ko's evidence with respect to development of any usable product and contends that his evidence in this regard is self-serving and contrived.

Kim's Allegations Against Ko

[41] Kim's evidence is that he learned from Ko in March 2024 that SpassMed had only $177,750 in its bank accounts after having received investment capital of $3.5 million. He relies on a recorded conversation with Ko in which, he says, Ko acknowledged that he had mismanaged SpassMed.

[42] Kim's evidence is that in April 2024, he discovered that Ko had breached the obligations he had as a director and officer of SpassMed and that he had acted contrary to Kim's and Spass Korea's reasonable expectations. Kim alleges that Ko improperly sold his own shares in SpassMed (and those of Happysona) for a personal gain of $665,091, to the detriment of Spass Korea and SpassMed, and that the share transactions were contrary to SpassMed's Articles of Incorporation.

[43] Kim asserts that Ko depleted over $3 million of funds invested in SpassMed, with no viable technology to show for it. Kim alleges that almost one-third of this capital was diverted to the personal benefit of Ko or Happysona.

[44] Kim's evidence is that after discovering Ko's depletion of SpassMed's money, Kim decided to block SpassMed's access to Spass Korea's GPU servers which stored the database on which SpassMed's software was run.

June 7, 2024 Board Meeting

[45] Kim's evidence is that he sent a notice for a meeting of SpassMed's Board of Directors for June 7, 2024 for the purpose of discussing removal and replacement of Ko as president and CEO of SpassMed. At the meeting, the parties agreed to appoint an interim monitor. Ko left the meeting and, after he did, the Board voted to remove him as SpassMed's President and CEO and to appoint a replacement. Ko has not accepted the validity of the June 7, 2024 Board meeting and vote.

Appointment of Monitor

[46] By Order dated August 21, 2024 made on consent in the application commenced by Kim and Spass Korea, all parties were ordered to produce all corporate records of SpassMed in their possession, control, or power and to preserve all documents relevant to the matters in issue in the proceeding. The Court appointed Grant Thornton Limited as interim monitor to monitor and investigate the business and financial affairs of SpassMed.

[47] The Monitor delivered its First Report that was first issued on November 15, 2024 and was amended and re-issued on December 10, 2024. Both Kim and Ko rely on this report in support of their positions on these applications.

Analysis

Should These Applications Be Converted to an Action?

[48] Rule 38.10(1)(b) of the Rules of Civil Procedure provides that on hearing an application the presiding judge may order that the whole application or any issue proceed to trial and give such directions as are just. Rule 38.10(2) provides that where a trial of the whole application is directed, the proceeding shall thereafter be treated as an action, subject to the directions in the order directing the trial.

[49] In Obolus v. International Seniors Community Care Inc., 2023 ONCA 708, para 11, the Court of Appeal, at para. 11, confirmed the test for converting an application into an action:

There is no dispute as to the test for converting an application into an action. In Fort William Indian Band v. Canada, paras 28-31, 76 O.R. (3d) 228 (S.C.), at paras. 28-31, G.P. Smith J. outlined the principles underlying this determination:

[28] As a general principle, it is well-established that an application should be used when there is no matter in dispute and when the issues to be determined do not go beyond the interpretation of a document.

[29] An application proceeding will not be converted into an action unless there is good reason to do so, such as when the judge who will hear the matter cannot make a proper determination of the issues on the application record.

[30] When issues of credibility are involved or when viva voce evidence is required, a matter should proceed as an action.

[31] When a factual dispute simpliciter is involved, this by itself is not sufficient to convert an application into an action. The fact(s) in dispute must be material to the issues before the court. [Citations omitted.]

[50] The evidentiary record consists of six affidavits totalling over 700 paragraphs and 4,300 pages (including exhibits). There are three cross-examination transcripts of examinations conducted by translation and the Monitor's report. There are thousands of pages of answers to undertakings.

[51] The evidentiary record is lengthy and complex. Provided that an application judge can fairly and justly decide the issues on a paper record, the fact that the record is fulsome will not necessarily require an application to be converted to an action.

[52] On this record, however, the material facts are very much in dispute. Kim and Ko disagree about virtually all of the key events in their business relationship, including the purpose of their venture together using SpassMed, the discussions surrounding the formation of SpassMed, the discussions in relation to the Participation Agreement and the Business Agreement, whether SpassMed developed any intellectual property or confidential information, and whether Spass Korea used any of SpassMed's work for its own patent applications. The existence and scope of SpassMed's intellectual property, if any, is contested, and neither side provided expert evidence in this respect. Determination of these issues will require many findings of credibility with respect to the competing versions of events given by Kim and by Ko.

[53] The causes of action advanced by Kim and Spass Korea are not limited to statutory oppression. In their amended notice of application, they plead causes of action for damages and permanent injunctive relief including breach of contract, breach of fiduciary duty, conversion, breach of trust, and negligence. Kim and Spass Korea claim substantial damages including reimbursement of the amount they allege was wrongfully appropriated to their own use by Ko and Happysona, and they rely on the Monitor's report for this claim. Ko disputes that the Monitor's report should be read as contended by Kim and Spass Korea, and he disputes that he wrongfully misused the money of SpassMed. Credibility findings will be necessary to adjudicate these disputes.

[54] Kim and Spass Korea seek rescission of the written Participation Agreement and Business Agreement, relying on non est factum, and misrepresentation. They also plead that these agreements should be rectified to conform to the oral agreement that Ko and Happysona made with Kim and Spass Korea. These claims will also require findings of credibility between the evidence given by Kim and the evidence given by Ko.

[55] When the consolidated application was adjourned and scheduled to be heard at a one day hearing, Kim and Spass Korea had not yet amended their notice of application and the claims made through the amendments were not in the materials before Osborne J. In addition, when the consolidated application was first scheduled to be heard, SpassMed was an operating business, and there was more urgency for this shareholder dispute to be resolved to avoid disruption of its business. By the time of the hearing before me, SpassMed was no longer actively carrying on business because of lack of funding. The remaining claims seem to mainly be those involving claims for monetary remedies and ownership of SpassMed's trademarks, tradenames and other property. These types of claims are commonly decided in an action and do not have the same urgency where SpassMed is no longer carrying on business.

[56] I also note that the day before cross-examinations, Spass Korea advised that it was amending its notice of application to add additional claims. The affidavits that had been delivered were based on the issues raised by the original notices of application. I do not regard it to be fair to decide the many issues raised in the consolidated application where significant amendments were made to the notice of application of Kim and Spass Korea that were not pleaded when the responding affidavits were delivered.

[57] I have carefully considered the evidentiary record before me to determine whether I am able to fairly and justly decide the issues raised in the consolidated application on a paper record, based on submissions made in a one day hearing. I have concluded that I am unable to make the necessary findings of credibility and fairly and justly decide the facts in issue on this record.

Disposition

[58] For these reasons, I direct that the consolidated application be converted to an action, with pleadings, and proceed in accordance with the Rules of Civil Procedure as they apply to an action. I encourage counsel to confer about the process to be followed, and including whether the procedural steps taken so far may be used in the action.

[59] I ask counsel to confer about the timetable to be followed in the action and arrange a case management conference with me to advise of their agreed upon timetable for pleadings and next steps.

[60] I am inclined to have the costs of this hearing be decided by the trial judge. If a party wishes to make submissions concerning costs, a case conference with me should be arranged through the Commercial List Office.

Sean F. Dunphy
Date: March 6, 2025