ONTARIO – Interlocutory Remedies – Appointment of a Monitor in an action for relief from oppression – Ontario Business Corporations Act, s. 161 and Courts of Justice Act, s. 101 – The stringency of the test depends upon the precise nature of the role and mandate of the proposed court-appointed monitor.

340268 Ontario Limited v Georghiades and Georghiades v Georghiades
2024 ONSC 6168 (CANLII) (November 6, 2024)
Ontario Superior Court of Justice – Commercial List (W.D. Black J.)

Nick and George Georghiades are brothers and equal shareholders in a business, the LP Business, that they started in 2010 as a real estate investment and asset management company. The LP Business owned 46 commercial and multi-residential properties in Kitchener-Waterloo. .(para.10-15)

This was a motion by Nick to appoint a monitor and an auditor in respect of claims of oppression, misappropriation and other claims. There were irreconcilable differences between the brothers who sought a complete corporate divorce.(para.4)

Decision

The motions judge appointed an auditor and a Monitor with a prescribed mandate pursuant to s.161 of the Ontario Business Corporations Act.(“OBCA”) Black J. declined to appoint a separate inspector but left open the possibility of appointing an inspector later depending upon the extent of the cooperation with the Monitor and between the parties as the matter progressed. (para. 9)

Background

In 2014, Nick stepped back from the day-to-day business operations but remained a 50% owner. In 2017, a Memo of Understanding (“MOU”) was prepared by the external accountant that set out Nick’s role and identified the matters that would require both brothers’ approval. The motions judge held that the MOU was not binding or all encompassing. (para.31)

For a time after the MOU was made, George would provide Nick with operational report and invitations to “Principals Meetings”. However, later in 2017, the relationship between the brothers deteriorated. George considered that he had administrative control of the business, and he tightened his grip on day-to-day operations (para.36)

Nick felt more and more excluded from the business but was not interested in the corporate and accounting minutiae. (para.37–41) Trust between George and Nick eroded and Nick’s exclusion from the business increased. (para. 42–46)

The relationship continued to deteriorate .The motions judge found that the brothers’ relationship had become dysfunctional (para.47)

Nick alleged that Lexington, one of the LP corporations, received a loan from one of the other companies without his consent and that Lexington 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. Black J. held that there was evidence to support Nick’s allegations. (paras.50–55)

There were other disputes alleging breach of Nick’s fiduciary duties to LP and that Nick was disruptive, demanding and preventing LP employees from doing their jobs. (para,61–63) Nick was concerned about LP’s liquidity shortfalls and that he had no ability to protect his interests as he had no information about business and financial operations. ( paras.66–71)

Analysis

Appointment of Auditor

There is a clear body of law standing for the proposition that the obligation for a company to provide audited financial statements is one its core obligations to is shareholders pursuant to ss.153 and 154 of the OBCA.(para. 76)

The cost of the audited statements cannot be imposed on a shareholder and does not create grounds to exempt a corporation from its statutory duty to obtain and provide audited financial information. (para.77)

A consent order was reached confirming the appointment of an auditor, the scope of the auditor’s engagement and to ensure the LP Business’ CFO and Director of Finance were available to either brother bi-weekly to provide operational and financial information and to respond to “reasonable enquires”. (paras.85–97)

Appointment of Monitor

There was no formal request for the court to make a finding of insolvency despite the cash flow issues.(para.101) Black J. noted that when the appointment of a court officer is sought the order is generally interlocutory. (para.103)

The test to appoint a receiver under section 101 of the Courts of Justice Act (“CJA”) and s.161 of the OBCA is whether “it is just and convenient “ to do so. (para.104)

The motions judge compared the role and respective tests to appoint a receiver/ manager vs an “investigative receiver” vs a “monitor”. It was noted that the title “Monitor” does not appear in CJA s.101 or in ONCA s.161.

Section 161 of the OBCA relates to investigations and appointing an inspector to investigate. One of the bases of requiring an investigation and appointing an inspector is to allow for it in the setting of an oppression remedy. (para, 106-110)

The motion judge noted that “monitors’ are at one end of the spectrum and tend to be appointed when relatively non-forensic information gathering and reporting is sought and at the other end of the spectrum is the receiver/manager that is appointed to take control of the business and given powers to manage operations and/or liquidate assets. (para.110–111)

The judge reviewed several oppression case decisions where different kinds of court officers were appointed (receiver/managers, inspectors and investigative receivers) . The case law review reveals that the courts were of different opinions on whether the initial test is “strong prima facie case” of oppression or “serious issue to be tried”. (para.114-159)

The motions judge noted that in an oppression application, the extraordinary remedy of a receiver-manager should be granted sparingly and that the test is similar to the test for an interlocutory injunction as established by the SCC in RJR MacDonald Inc. V Canada ( Attorney General), namely, 1) is there a serious issue to be tried; 2) will the applicant suffer irreparable harm if the interlocutory injunction is refused; and 3) the balance of convenience favors the appointment. (para.117-118)

In an oppression case, the moving party seeking interlocutory relief must establish “strong prima facie case” which is a higher standard than “serious issue to be tried”. (para. 119)

Black J. referred to Akagi v Synergy Group 2015 ONCA 368, a case about appointing an receiver and then expanding the powers of the receiver to an investigative receiver on behalf of a judgement creditor, where the ONCA referred to the following test for an interlocutory order to appoint an investigative receiver:

• The appointment of an investigative receiver is necessary to alleviate a risk to the plaintiff’s right to recovery;
• The primary objective of the investigative receiver is to gather information and ascertain the true state of affairs concerning the financial dealings and assets of a debtor;
• Generally, the investigative receiver does not control the debtor’s assets or operate its business, leaving the debtor to continue on its business in a manner consistent with preservation of the business and property; and
• The investigative receivership must be carefully tailored to what is required to assist in the recovery of the plaintiff’s judgment while at the same time protecting the defendants’ interests, and to go no further than necessary to achieve these ends. (133-144)

The motion judge also held that the stringency of the test to be applied relative to a Proposed Appointee depends upon the precise nature of the role and mandate at issue. Where a monitor is sought as an inspector with a limited mandate to obtain and report on the company’s financial status and on transactions of interest, the initial threshold requires only evidence of prima facie case (lower threshold). If a receiver manager is sought to take control of the business the elevated test for an interlocutory injunction set out in RJR MacDonald is applied including the requirement for a strong prima facie case. (para.160)

Where a court-appointed officer is sought pursuant to s.101 of the CJA, 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 is a lower threshold depending upon the facts and specific circumstances of the case to determine whether the appointment is “just and convenient”. (para. 160)

The extent to which assets are at risk of eroding factors into the analysis of irreparable harm. (para. 160)

The balance of convenience is a factual matter to be considered in every case, and factors such as cost, disruption, alternative means of obtaining the financial information sought and whether the request is made to gain a tactical advantage must be considered. (para. 160)

In every case, the court should strive to tailor the remedy to the situation before the court 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 defendants’ interests, including allowing it to carry on business. (para. 160)

The motion judge held that Nick had met the low threshold of a prima facie case of oppression. Nick had been deprived of sufficient information in a timely manner. In addition, as there was no reasonable prospect of the brothers working effectively together the motions judge appointed a Monitor pursuant to s. 101 of the CJA and s, 161 of the OBCA. The ongoing risk to LP’s assets met the irreparable harm test and the balance of convenience requires a third-party Monitor to assist George/LP’s compliance with the OBCA with minimal disruption to the business. The judge left open the possibility of consideration of an inspector if warranted in the future.