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.
Court Holds 45 Day Lien Period Can Be Met Despite Subcontractor Not Being on Site For More than 45 Days Due to Scheduled Winter Shut Down.
What happens to a subcontractor’s 45 day lien rights when the work on site is interrupted due to a scheduled winter shut down? This is the issue Mr. Justice DiTomaso decided on July 9, 2016, in Toronto Zenith Contracting Limited v. Fermar Paving Limited, 2016 ONSC 4696.
The facts were straightforward. Fermar was the general contractor on a major road construction project. It subcontracted some of the work to Zenith. The subcontract contemplated three winter shutdowns with Zenith thereafter returning to the site to recommence its subcontract work. Zenith started its work in 2013. The project went through the first winter shutdown. Zenith recommenced its work and worked on site until December 19, 2014, at which time the second winter shutdown began. During the second winter shut down, Zenith performed offsite work intended to become part of the improvement of the Project, in that it prepared and submitted shop drawings, and certain materials were fabricated and picked up by Fermar in February 2015 for the site. Furthermore, Zenith’s temporary shoring system was left in place on site during the winter shut down period and Zenith’s concrete forms installed before the winter shut down were used by Fermar to pour concrete after the winter shut down.
As a result of a dispute over delays and payment, Zenith issued a notice of termination of subcontract on February 6, 2015, and registered a construction lien on March 18, 2015.
Fermar contest the timeliness of registration of the lien, on the basis that the last day of work on the site was December 19, 2015, and, as such, Zenith registered its lien outside the 45 day lien period.
Mr. Justice DiTomaso rejected Fermar’s position and held that Zenith’s lien was registered within 45 days of “the date on which the person last supplied services or materials to the improvement”. In particular, Mr. Justice DiTomaso accepted Zenith’s contention that:
…Fermar’s submission regarding the timeliness of Toronto Zenith’s lien makes no practical or commercial sense. It would require parties to register claims for liens within 45 days of the date of their last supply of material or labour whenever a construction project was shut down for a significant period of time (whether it by weather, stop work order, scheduling issues or coordination requirements) even though the contractor, subcontractor or material supplier knew that there was ongoing progressive work or substantial quantities of material to be supplied or delivered as required at a later date.
His Honour ultimately concluded that Zenith’s lien had not expired, and was for a lienable supply of services and materials, given that the subcontract contemplated scheduled winter shutdowns, and the extent of offsite activity being performed during the winter shutdown for the Project.
The practical effect of this decision is that a contractor’s lien rights will be kept alive during a scheduled shut down that is longer than 45 days if the contractor continues to perform off site services for the Project during that shut down. The more interesting question is what will the Court say about a contractor’s lien rights if the nature of the Project is that no off site work is required during the scheduled shut down.