Superior Court Awards Interim Costs Using OBCA in Family Litigation
In the recent decision John v John (2020 ONSC 5337), the Hon. Justice Kraft of Ontario Superior Court of Justice dealt with a request for interim costs and disbursements in a family law proceeding not only under the Family Law Rules (“FLR“), but also under the Courts of Justice Act, (“CJA“) and even under Ontario Business Corporations Act (“OBCA“). The case is unique because of the Applicant’s creativity in seeking interim costs.
In this case, the parties were married in July 1980 and separated in January 2015. During the marriage, the Wife adopted a domestic role while the Husband worked for the John Bead Corporation (“John Bead”) – an entity incorporated by the Husband’s Father. The Husband also owned two companies, 1446966 Ontario Limited (“966”), and 1581764 Ontario Limited (“764”). At the time of the motion, the Husband was a 51% shareholder, and the Wife was a 49% shareholder in both companies. Both of the parties were in their 60s.
After about five years of litigation, the Wife moved for interim costs and disbursements in the amount of $500,000.00, citing significant accounting and legal fees that she had incurred in evaluating the Husband’s income and two corporations. The Wife had spent $360,000.00 on just expert fees alone for Wayne Rudson of Rudson Valuation Group. She spent another $200,000.00 on legal fees. Although the Wife and Husband both received incomes of $80,000.00 a year from the corporations and a further $5,000.00 a month tax-free payment from shareholder loans, the Wife cited additional legal costs that required financing.
At the motion, the Wife sought interim costs and disbursements against the Husband’s two corporations under the OBCA’s oppression remedy. Alternatively, she sought interim costs and disbursements against the Husband pursuant to the FLRs and CJA. The Wife moved under both avenues because there were technically two disputes – the corporate dispute and her matrimonial fight.
As an alternative to the interim costs, the Wife sought an advance of $500,000.00 from the two corporations to be credited against the value of her shares. Notably, the Wife’s share of the corporate assets was about $11,218,000.00. The Wife sought an advance because she alleged that she had no way of accessing the corporate funds as the Husband controlled same. She also sought temporary spousal support of $33,197.00 per month retroactive to July 2019.
The Wife pleaded that her legal expenses had grown so large because of the Husband’s failure to provide proper financial disclosure. She argued that he filed two deficient Affidavits of Documents, failed to update his Financial Statement, and provided a Financial Statement filled with errors.
She also alleged that her corporate interests had been disregarded by the Husband. The Husband, sole director of both corporations, failed to hold shareholder meetings, failed to prepare proper audited financial statements, and failed to even explain how he was appointed as a director.
The Husband replied that the Wife’s requests for interim costs were overblown. The $360,000.00 that she paid for her business valuator was nearly nine times more expensive than his valuator’s bill. The Husband also explained that audited statements were not required for small businesses. Moreover, proper procedures to appoint a director need not be followed in small closely held corporations since the Wife had acquiesced to the Husband being the Officer and Director of both companies.
In her decision, the Hon. Justice Kraft did not find the Husband’s argument convincing. She awarded interim costs solely under OBCA. She did not even deal with the FLR or the CJA.
The starting point for interim costs under the oppression remedy is s. 248 of the OBCA states the following:
248 (1) A complainant and, in the case of an offering corporation, the Commission may apply to the Court for an order under this section. )
(2) Where, upon an application under subsection (1), the Court is satisfied that in respect of a corporation or any of its affiliates,
(a) any act or omission of the corporation or any of its affiliates effects or threatens to effect a result;
(b) the business or affairs of the corporation or any of its affiliates are, have been or are threatened to be carried on or conducted in a manner; or
(c) the powers of the directors of the corporation or any of its affiliates are, have been or are threatened to be exercised in a manner,
that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer of the corporation, the Court may make an order to rectify the matters complained of.
Section 249(4) then states:
In an application made or an action brought or intervened in under this Part [Remedies, Offences and Penalties, which includes an application for Oppression], the Court may at any time order the corporation or its affiliate to pay to the complainant interim costs, including reasonable legal fees and disbursements, for which interim costs the complainant may be held accountable to the corporation or its affiliate upon final disposition of the application or action.
The Court relied on the test set out in Alles v Maurice ( (1992), 5 B.L.R. (2d) 146, 9 C.P.C. (3d) 42, 1992 CarswellOnt 132 (Ont. Gen. Div.) which states that interim costs can be awarded to an oppressed person if:
- the case is of sufficient merit to warrant pursuit; and
- the complainant shareholder is in genuine financial circumstances which, but for an order under s. 249(4), would preclude the claim from being pursued.
The first prong of this test provides a low threshold – the Applicant does need to make a prima facie case, but only needs to satisfy the Court that the claims advanced are well above the “frivolous and vexatious” marker (Hames v. Greensberg, 2014 ONSC 245).
The second part of the test asks whether the complainant shareholder lacks the financial resources to fund litigation. A complainant is not required to sell substantial assets or reduce their standard of living to meet this test, but they must be in genuinely difficult financial circumstances to fund litigation. The Court must also consider the value of the shareholder’s shares. This means the Court ask itself: if the complainant fails to make out his or her case, can the Court apply the amount of interim costs awarded against the value of the complainant’s shareholdings.
The Hon. Justice Kraft ultimately concluded that the Wife was entitled to costs under s. 249(4) of the OBCA in the amount of $250,000.00. The Wife had established that her claim was far from vexatious and, based on her shareholdings, she had more than enough to repay the funds if they were advanced to her. Her honour also ordered the Husband to guarantee a mortgage that the Wife could place on one of the properties in the sum of $300,000.00.
Re the oppression defenses raised by the Husband, Justice Kraft stated that while sometimes corporate governance rules of smaller family-businesses can be overlooked, they only apply where there is trust within the family. But that did not apply here since the Husband flouted corporate rules after the parties separated. The Husband had wholly disregarded the Wife’s rights to a general meeting or to receive audited statements.
Re the Husband’s argument that the Wife’s expenses for a valuator were 9 times higher, Justice Kraft stated the Husband’s shock was “disingenuous” since his own legal fees and expenses amounted to $464,086.97. Both of them had hired senior family and corporate counsel and valuators. The Husband knew that more costs would need to be incurred to proceed to trial. Surprisingly, the Court did not comment that both parties attended the motion with four lawyers each (perhaps an uneconomical use of legal resources?).
The case serves as a good reminder that there are often several ways to accomplish a goal in litigation. Although the FLA and CJA avenues were not addressed, the litigation strategy of the Wife is instructive for lawyers seeking interim costs. Clients that are “rich on paper” but short on cash can look to obtain advancements on their shareholdings or entitlements in order to fund the litigation.