The Ontario Divisional Court’s decision in T. Films S.A.. v. Cinemavault Releasing International Inc., 2016 ONSC 404 [1] is a reminder that “judgment proofing” is susceptible to attack under the statutory oppression remedy.[2]
Films S.A. involved a situation where T. Films S.A. retained Cinemavault Releasing International Inc. (“CRI”) to act as exclusive distributor of one of its motion pictures. The sales agency agreement, giving rise to this exclusive distributorship arrangement, contained a revenue sharing formula which required CRI to remit to T. Films S.A. a certain amount of the revenue derived by CRI’s distribution efforts. The distributorship arrangement between the parties began in 2006 and ended in 2011, when CRI ceased carrying on business.
Films S. A. claimed that CRI failed to remit the full amount of the revenues to which it was entitled under the distributorship agreement. In early 2012, T. Films S.A. commenced arbitration proceedings against CRI which resulted in an arbitral award being made in favour of T. Films S.A. In May of 2013, T. Films S.A. commenced court proceedings to enforce the arbitral award against CRI. These court proceedings included claims for, among other things, an oppression remedy against certain companies related to CRI and their common director and officer.
The basis of the oppression remedy claim was that on or about September 1, 2011, CRI restructured its business such that it ceased operations and was left without any assets. In particular, the restructuring involved related companies stepping in to collect CRI’s accounts receivable, being its only material asset, and replacing it as sales agent for another related company. In short, the restructuring resulted in T. Films S.A. being unable to collect its arbitral award as CRI had become judgment proof.
There was no dispute that the CRI business had been transferred for no consideration. More importantly, the directing mind of CRI and its related companies on cross examination refused to offer a specific purpose for the restructuring. As such, the court held that there was no bona fide business purpose for the restructuring and thus that its purpose was to defeat CRI’s claim. The restructuring was found to constitute oppressive conduct and the directing mind and related companies were held to be liable for the arbitral award made against CRI.
The court in T. Films S.A. did not devote any analysis to describing the minimum requirements for when “judgment proofing” crosses the line into oppressive territory. The answer may lie in the definition of “complainant” as only a “complainant” qualifies for judicial relief under the statutory oppression remedy.
A complainant is defined as a current or former registered holder of security in a corporation, and security is defined to include a registered debt obligation, a current or former director or officer, and any other “proper person” in the “discretion of the court”. Trade and judgment creditors (like T. Films S.A.), or any corporate stakeholder for that matter, will qualify as a “proper person”:
…if the act or conduct of the directors or management of the corporation which is complained of constituted a breach of the underlying expectations of the applicant arising from circumstances in which the applicant’s relationship with the corporation arose.[3]
The threshold for when “judgment proofing” crosses into oppressive territory is therefore when the judgment proofing is inconsistent with a reasonable expectation created in the complainant arising from the circumstances of the complainant’s relationship with the other party.
This was illustrated in the case of Bulls Eye Steakhouse.[4] In that case, the court found a tenant to be a complainant where the tenant obtained partial summary judgment against its landlord and, before damages could be assessed, the landlord sold its plaza, being its only asset, and used the net proceeds to pay amounts owing to its sole shareholder. The court noted that typically a contingent creditor cannot reasonably expect a defendant corporation will be operated simply for the contingent creditor’s benefit in the event the contingent creditor becomes a judgment creditor. However, in this case the tenant had a reasonable expectation of payment of any judgment from a sale of the plaza. This reasonable expectation had been created because previously the tenant brought a failed motion to appoint a receiver over the plaza and in the context of that proceeding the landlord had filed affidavit material giving rise to a reasonable expectation that net funds from a sale of the plaza would be available to satisfy any judgment obtained. As such, having found a reasonable expectation that the plaza would be available to satisfy any judgment awarded, the court held that the sale of the plaza and payment of the net sale proceeds to the sole shareholder crossed the “judgment proofing” line.
It is instructive to note that the Supreme Court of Canada has said that the following factors are to be considered in determining the existence of reasonable expectations to be protected by the court:
General commercial practice; the nature of the corporation; the relationship between the parties; past practice; steps the claimant could have taken to protect itself; representations and agreements; and the fair resolution of conflicting interests between corporate stakeholders.[5]
In conclusion, “judgment proofing” ventures into oppressive territory where a reasonable expectation, that an opposing party will not engage in “judgment proofing”, is breached.
Angelo C. D’Ascanio
[1] T. Films S.A.. v. Cinemavault Releasing International Inc., 2016 ONSC 404.
[2] See: Ontario Business Corporations Act, R.S.O. 1990, c. B. 16, as amended, section 248; and Canada Business Corporations Act, R.S.C. 1985, c. C-44, as amended, section 241.
[3] First Edmonton Place Ltd. v. 315888 Alberta Ltd. (1988), 60 Alta. L.R. (2d) 122 (Q.B.) at 152.
[4] 1413910 Ontario Inc. (c.o.b. Bulls Eye Steakhouse & Grill) v. McLennan (2008), 53 B.L.R. (4th) 115 (Ont. S.C.J.), additional reasons (2008), 53 B.L.R. (4th) 125 (Ont. S.C.J.), aff’d (2009), 309 D.L.R. (4th) 756 (Ont. C. A.)
[5] BCE Inc. v. 1976 Debentureholders, [2008] 3 S.C.R. 560 at para. 72.
Tags: CBCA, judgments, OBCA, payments, procedure, trust