ONTARIO – Shareholder Remedies – Winding Up – Winding up may not be appropriate under OBCA s. 207(1)(b)(iii) where the corporation may continue to operate profitably. The Court is obliged to consider whether there are less restrictive options available. Even where it remained to be seen whether a corporation would become profitable, depending on the facts, the Court may not be satisfied that it cannot by reason of its liabilities continue with its business.

ONTARIO – Shareholder Remedies – Winding Up – The words “just and equitable” in OBCA s. 207(1)(a) are to be given a broad interpretation. They are words of the widest significance. To order a just and equitable winding-up, the Court must find that there was a failure in the reasonable expectations of the parties.

Srivastava v. DLT Global Inc.
2023 ONSC 7103 (Commercial List) (December 21, 2023)
Ontario Superior Court of Justice (Cavanagh J.)

The Applicant sought an order winding up the Respondent DLT Global Inc. (“DLT”) pursuant to section 207(1)(b)(iii) or, alternatively, section 207(1)(a) of the Ontario Business Corporations Act (“OBCA”). The Court dismissed the application.

Background

The Applicant was a shareholder, co-founder, former director, and former Chief Technology Officer of DLT. (para. 4)

The undisputed evidence before the Court was that DLT had “substantial gross and net monthly cash expenses that significantly exceeded its revenue.” The Respondent’s evidence was that it was projected that the “burn rate” of $1.8 million per month would reduce to a target of $1.4 million by the end of the second quarter of 2023. The shortfall was being funded by investors and family offices. The evidence also showed that each member of the Board of DLT had funded the company except the Applicant. (para. 18)

In March 2023, the Applicant raised concerns about the company’s liquidity issues with the Board and the company’s co-founder Loudon Owen. On March 8, 2023, DLT brough a motion without notice that sought to restrain the Applicant from communicating with DLT customers and from taking any steps to restrict access to the company or destroy its records. The motion was granted on the condition that DLT commence proceedings by March 13, 2023. While DLT issued a statement of claim and the March 8^th order was extended, the extended order expired on March 15, 2023, and was not renewed. The claim was not served. The time to do so expired. (para. 20)

DLT terminated the Applicant for cause on March 14, 2023, alleging misconduct, which the Applicant denied. (para. 21) The Applicant alleged that the technology and intellectual property of the business he alone started (Conatus) still owns forms the basis for all DLT’s products and applications. He also alleged that he and Conatus received no compensation for the source code, architecture and design elements Conatus owned and that were used to create DLT’s products and applications. DLT denied those allegations. (paras. 22-23)

Analysis – OBCA s. 207(1)(b)(iii)

Under section 207(1)(b)(iii) of the OBCA, a corporation may be wound up by order of the court where the court is satisfied that “the corporation, though it may not be insolvent, cannot by reason of its liabilities continue with its business and it is advisable to wind it up,…” (para. 27)

The Applicant argued that there was evidence that:

1. DLT could not pay its Internet, electricity, rent and salary payments when they were due;
2. The monthly burn rate is $1.4 to $1.8 million despite it generating only $100,000 per month in revenue; and
3. DLT has extensive ongoing litigation in multiple jurisdictions. ( 29)

The Applicant also submitted that to the extent the funds were not already spent, all of the funds allegedly raised through the rights offering would still not be enough to extend DLT’s operations through next year. (para. 30)

The Respondent argued that there was no reason for the Court to order wind up where DLT was an “early-stage, scaling, technology company in a novel innovative space.” DLT submitted that there was evidence that the company had a record of meeting its commitments and continuing development, the Applicant was fully aware of DLT’s burn rate an ongoing investments, and the Court should not usurp the business judgment of the Board and management in deciding how to run the company. (para. 31)

In its analysis, the Court noted that “[w]inding up may not be appropriate where the corporation may continue to operate profitably, and the Court is obliged to consider whether there are less restrictive options available.” (para. 32)

While it remained to be seen whether DLT would become profitable and whether it would be able to raise sufficient capital to continue to meet its operating expenses, and for how long, which could not be determined on the record, the Court was satisfied that the Applicant had failed to show that DLT cannot by reason of its liabilities continue with its business. It declined to make the winding up order under section 207(1)(b)(iii). (paras. 33 and 34)

Analysis – OBCA s. 207(1)(b)(iv) or s. 207(1)(a)

Under section 207(1)(b)(iv), the court may order a corporation be wound up where it is satisfied that “it is just and equitable for some reason, other than the bankruptcy or insolvency of the corporation, that it should be wound up.” (para. 35)

Under section 207(1)(a), the court may order wind up where it is satisfied that there has been conduct that is oppressive, unfairly prejudicial to or that unfairly disregards the interests of a security holder, creditor, director or officer of the corporation. (para. 36)

The Court set out the governing principles established in Falus v. Martap Developments 87 Limited 2012 ONSC 2301 (CanLII) where wind up is sought under section 207(1)(b)(iv) of the OBCA. There, the Court held that “[a]lthough the ‘just and equitable’ ground does not require a finding of ‘oppression’, the remedial powers of the court under OBCA section 207(2) enable it to grant the wide range of discretionary remedies available to it in an oppression remedy case, even though facts justifying a determination on the ground of oppression do not exist.” The words “just and equitable” are to be given a broad interpretation as they are “words of ‘the widest significance’”. (para. 37)

In Falus, the Court held that a link between the breakdown in mutual confidence and the financial fate of the corporate enterprise was necessary. (para. 38) Also critical to an order for a just and equitable winding-up is a finding that there had been a failure in the reasonable expectations of the parties. (para. 39)

On the evidence, Justice Cavanagh was unable to determine that DLT had misappropriated the Applicant’s source code. To do so, an analysis of the technical qualities of DLT’s software products would be necessary. There were also significant credibility issues in respect of this issue. The Court found that there was insufficient evidence to make the necessary findings of fact to determine the source code ownership issue. The Court also could not determine on the evidence filed whether the Applicant had been dismissed for just cause. (para. 49)

Justice Cavanagh was satisfied that there was a breakdown in trust between the parties such that the Applicant and Mr. Own were not able to work closely together to advance DLT’s interests. However, the Court rejected the Applicant’s submission that his reasonable expectation when DLT was formed was that he and Mr. Owen intended to operate DLT effectively as equal partners and that DLT was “akin to a two-person partnership.” The Court found that the understanding from the outset was that significant additional capital would be required to grow DLT. Such capital was raised from investors who received rights in DLT in exchange for contributing capital. In the circumstances, the Court held that DLT was not a two-person company akin to a partnership. It had many other stakeholders. (paras. 50-51)

Despite there being other remedies available that the Applicant could have claimed, the only remedy he sought was a winding-up order. The Court held that he had not shown that the company was “a dysfunctional business with no prospect of becoming profitable, such that it should be wound up.” Further, the fact that investors had recently contributed more than $17 million in capital “belies this contention.” The Court found that he had “not shown that DLT Global has failed to meet the Applicant’s reasonable expectations and that such failure has resulted in unfairness or prejudice that is sufficiently serious that a winding up order is just and equitable.” (paras. 52 and 53)

Justice Cavanagh pointed to the fact that both the Applicant and Mr. Owen expected outside capital would be necessary for DLT to prosper in finding that the Court did not accept that either of them “would have regarded that disharmony between them would constitute the termination or repudiation of their business relationship through DLT Global” when they formed DLT. (para. 54)

The Court was therefore not satisfied that it was just and equitable to order a wind up. (para. 55)

Submission for Alternative Relief under OBCA s. 207(2)

The Applicant submitted that if the Court did not order winding-up, it should make an order to remedy the alleged oppression DLT committed against him under section 207(2) of the OBCA. Because the Applicant did not plead a claim for an alternative order in his Notice of Application, DLT did not respond to such alternative claim and no responses were made other than in respect of the wind-up order that was sought. Therefore, the Court declined to consider granting the alternative relief. (paras. 56-57)