ONTARIO – Oppression Remedy – Interim injunctive Relief – Where there were serious issues to be tried as to self-dealing and financial irregularities by the CEO, director and 25% shareholder of a restaurant franchise business and where the business was at risk of insolvency, the Court held that the test for injunctive relief was met and the risk of financial collapse and potential insolvency constituted irreparable harm.
To break a deadlock, the Court temporarily suspended a 50-50 voting rights agreement and ordered another director to be appointed, in addition to the CEO, whose knowledge and experience was still needed to run the business. The Court ordered the preparation of consolidated financial statements, an independent accounting of contributions and related party transactions, and the appointment of an independent inspector to recommend future steps.
Fakih v. AHM Investments Corporation
2022 ONSC 7001*
December 29, 2022
ONSC (Justice Michael A. Penny)
* As of the date of this summary, this case did not appear on CanLII
Paramount is a group of 30 corporations that operate a chain of restaurants specialized in Middle Eastern cuisine. The Defendants, holders of 75% of the shares, made a motion for interim injunctive relief from oppression under the OBCA against the Plaintiff (“Fakih”), the founder, president, and owner of 25% of the shares, (paras. 1, 3) consisting of:
- Removing Fakih as officer and director, or appointing a third director;
- Declaring that a voting rights agreement, which gave Fakih a 50% vote, be suspended for three months; and
- Directing that shareholder meetings be held on three days’ notice, and dispensing with quorum requirements.
Justice Penny found that Paramount was in financial crisis and might even be insolvent and that its financial reporting was in disarray. Based on an accounting report prepared by the Defendants’ expert, there were no consolidated financial statements and the business did not make a profit for five fiscal years. While all parties agreed that consolidated financial statements were necessary and that an independent inspector should recommend a path forward, this was not done because Paramount could not afford the cost of these services. (para. 7)
At the heart of the motion were allegations of self-dealing, misuse of expense accounts, and Fakih’s failure to maintain accurate records , involving millions of dollars. For example, while Fakih had contributed $10 million to Paramount, there was $9 million of partly unexplained transfers back to Fakih or his corporations. (para. 22) Penny J. also found evidence of many questionable transactions, including:
- Paramount paying the $2.3 million mortgage on Fakih’s home;
- Fakih causing Paramount to transfer funds to non-Paramount entities (owned by a friend of Fakih’s) to help them make payroll;
- The same friend “loaned” a down payment of over $100,000 to consummate Paramount’s March 2022 lease of a high-end Mercedes (total lease costs of $400,000);
- Paramount also paid the lease costs for a high-end Range Rover used by Fakih’s wife (who did not work for Paramount); and
- Fakih charged expenses of $1,138,966.81, which included a $485,669.30 wage adjustment, $414,669.30 in retroactive travel expenses, and $133,417.08 in retroactive car expenses.
Penny J. held that the relief sought was in the nature of an interlocutory injunction. There were serious issued to be tried as to the parties’ reasonable expectations and whether those expectations were defeated by Fakih’s conduct, which amount to oppression. (para. 25)
Justice Penny also held that financial collapse and insolvency qualified as irreparable harm, and that there was evidence that, among other matters, Paramount did not have the working capital resources to finance the business on a go-forward basis. On this basis, the motion judge concluded that irreparable harm would result unless an order is made. (para. 31)
The court further held that the balance of convenience favoured the Defendants on the basis that if the status quo were permitted to continue, the business was likely to fail. However, the motions judge concluded that Fakih would not suffer material harm if the interim order was made. (para. 33)
Justice Penny exercised the broad discretion in s. 248 of the OBCA “to make any interim or final order it thinks fit,” which included an order to regulate a corporation’s affairs by amending the articles or by-laws or creating or amending a unanimous shareholder agreement, the removal or addition of a director, and the power to order an investigation and to appoint an inspector. (para. 35)
To break the deadlock between the parties, the court suspended the 50-50 voting rights agreement for three months and directed that a third director be appointed to manage the affairs of the business. If the parties could not agree on the third director, the court would appoint them. (paras. 36, 38) The parties were also ordered to identify a suitable person to conduct a financial analysis and present a plan for insolvency or a return to profitability. Justice Penny also ordered that the cost of this analysis be paid equally by Fakih and the Defendants (paras. 39-43)
Despite Fakih’s alleged self-dealing and financial irregularities, Penny J. did not remove Fakih as a director on the basis that it was not the least invasive or disruptive option. Penny J. held that Fakih had knowledge of Paramount that no one else has and that he had managed to keep the enterprise going in very adverse circumstances.
Editor’s Note: For an earlier interim decision in this case, please see Fakih v. AHM Investments Corporation, 2022 ONSC 2384, an April 26, 2022 decision of Penny J., in which dealt with pleadings, financial disclosure issues and dismissed a motion for security for costs. An appeal to the Divisional Court of that decision was dismissed on July 15, 2022, see 2022 ONSC 3992.