1199918 Alberta Ltd. v. Raymond C.S., 2011 ABQB 506

Court of Queen ’ s Bench of Alberta Citation: 1199918 Alberta Ltd. v. TRL Holdings Inc., 2011 ABQB 506 Date: 20110812 Docket: 1103 04034 Registry: Edmonton Between: 1199918 Alberta Ltd. and Raymond C.S. Liu Applicants (Plaintiffs) - and - TRL Holdings Inc., Terry Regenwetter and 1199935 Alberta Ltd. Respondents (Defendants) _______________________________________________________ Reasons for Judgment of the Honourable Mr. Justice R.A. Graesser _______________________________________________________ Introduction [ 1 ] The plaintiffs, Raymond C. S. Liu and 1199918 Alberta Ltd. (Mr.

Liu’s holding company) are minority shareholders of TRL Holdings Inc. (“TRL”). They own 25% of the outstanding shares between them. They are seeking leave to commence a derivative action against Terry Regenwetter, 1199935 Alberta Ltd. and Right Time Investments Inc., amongst other parties. [ 2 ] Terry Regenwetter and 1199935 Alberta Ltd. (Mr. Regenwetter’s holding company) are the majority shareholders of TRL. Together, they own the remaining 75% of the shares in TRL. Right Time Investments Inc. is owned and controlled by Mr. Regenwetter.

Background [ 3 ] Raymond C. S. Liu is a chartered accountant, and practices through his professional corporation, Raymond C. S. Liu Professional Corporation. Terry Regenwetter was a client of Mr. Liu’s. They formed TRL to invest in real estate, including construction of projects on real estate. [ 4 ] It does not appear that Mr. Liu or his Professional Corporation contributed any capital to TRL. Mr. Regenwetter or his holding company loaned funds to TRL for its acquisitions. Mr. Liu’s Professional Corporation continued to do accounting for Mr.

Regenwetter, TRL and other related entities, for which he charged professional fees. [ 5 ] Despite a unanimous shareholders agreement for TRL entitling Mr. Liu to be a director, Mr. Regenwetter remained the sole director and officer of TRL during the relevant times. [ 6 ] In 2006, Mr. Regenwetter and Regan Ostermayer came together to acquire land and construct a 38 unit residential duplex project on the land. Together, they incorporated 1252104 Alberta Ltd. to carry out the project, which was known as McLeod Gardens. The shares in 1252104 were held equally by Mr.

Ostermayer’s company, Cornerstone Home Builders Inc. and Right Time Investments Inc. Right Time held its shares in trust for TRL. [ 7 ] While Mr. Liu and Mr. Regenwetter remained on good terms, TRL became a 50% shareholder in four other real estate projects. [ 8 ] The intention with McLeod Gardens was to have Mr. Regenwetter’s company, Cornerstone Home Builders, construct the duplexes on the lands. Mr. Regenwetter was to raise capital for the project, and do the marketing. Mr.

Liu’s Professional Corporation was to provide financial and administrative services to the project, including bookkeeping, accounting functions, preparation of financial statements, budgeting, financial planning, projections and preparing a business plan for financing purposes. Services were performed by the Professional Corporation from the fall of 2006 to June, 2008. [ 9 ] 1252104 was invoiced for the Professional Corporation’s services, and some amounts were paid. In June, 2008, the Professional Corporation was fired.

The Professional Corporation then filed a builder’s lien for its outstanding invoices, and has since commenced action against 1252104 on its builder’s lien and debt claim. There is a pending bankruptcy application by the Professional Corporation against 1252104. To effect a discharge of the builder’s lien, 1252104 paid approximately $138,000.00 into court. [ 10 ] 1252104 completed the McLeod Gardens project, and the last of the duplexes were sold in 2009. 1252104 has apparently conducted no other business and has been inactive since 2009. [ 11 ] Mr.

Liu alleges that all of TRL’s trade creditors have been paid in full, with the exception of his Professional Corporation. It claims to be owed a total of $238,000.00. 1252104 apparently has no assets other than its interest in the builder’s lien fund in court, and there is approximately $125,000.00 owed to the Canada Revenue Agency for unremitted GST. [ 12 ] According to Mr. Liu, the bankruptcy petition against 1252104 is intended to reverse the deemed trust in favour of CRA so that 1252104 can use on the builder’s lien fund to pay its obligations to CRA. [ 13 ] From the work Mr.

Liu’s Professional Corporation did for Mr. Regenwetter, his companies, TRL and the companies such as 1252104 which TRL invested in, Mr. Liu believes that TRL has realized over $1,279,000.00 in profits and that a total of at least $2,000,000.00 was diverted from TRL to Mr. Regenwetter or entities related to him.

[ 14 ] Much of Mr. Liu’s claim relating to McLeod Gardens arises out of the project agreement. Cornerstone, Mr. Ostermayer’s construction company apparently gave a guaranteed maximum price of $95.00 per square foot, and any cost overruns were to come out of Mr. Ostermayer’s share of profits in 1252104. On that basis, the project was initially projected to generate $3,500,000.00 in profits. [ 15 ] Mr. Regenwetter swore an affidavit in opposition to this application. He denied that McLeod Gardens was profitable as suggested by Mr.

Liu, although he appears to have little or no personal knowledge of the project accounting. The Applicants object to those portions of Mr. Regenwetter’s affidavit, seeking to have them struck. [ 16 ] The Applicants cite Rule 13.18(1) which requires that an affidavit be sworn on personal knowledge or on information and belief disclosing the source of the information. If the application is not interlocutory, and may dispose of “all or part of a claim”, the affidavit is to contain only personal knowledge of the deponent R. 13.18(3). [ 17 ] U.F.C.W., Local 401 v.

Westfair Foods Ltd. , 2009 CarswellAlta 639 (Q.B.) , aff’d 2010 CarswellAlta 639 (C.A.) is relied on in support of the Applicants’ position. [ 18 ] The Applicants argue that they have met the tests under s. 240(2) of the Alberta Business Corporations Act , R.S.A. 2000, c. B-9 , and they seek an order giving them leave to commence action in the form attached to Mr. Liu’s affidavits well as an order requiring that the shareholders of TRL bear the cost of the derivative action on a proportionate basis. That would have Mr. Liu and his holding company pay 25% of the costs, and Mr.

Regenwetter and his holding company pay 75% of the costs. [ 19 ] The Applicants note that Mr. Justice Park ordered that costs be paid in this manner in the oppressive conduct application brought by Mr. Liu in 2009, in the event the Applicants there required that TRL prepare audited financial statements. [ 20 ] Mr.

Regenwetter and 1199935 Alberta Ltd. oppose the application on the basis that the Applicants have failed to meet the tests under s. 240(2) of the ABCA, which require notice to the directors of the corporation, that the applicant be acting in good faith, and that the action appear to be in the best interests of the corporation. [ 21 ] In particular, the Respondents allege that the Applicants are not acting in good faith, as there are already three other proceedings involving Mr. Regenwetter and McLeod Gardens brought by Mr.

Liu, including the builder’s lien action, the bankruptcy proceedings and a previous oppressive conduct application. [ 22 ] The Respondents dispute the value of the services provided by Mr. Liu and his Professional Corporation. They also dispute that the McLeod Gardens project was profitable, noting that Mr.

Liu’s claims are largely based on 2005 or 2006 projections, and the cost of the project and its ultimate profitability were highly affected by the boom which lasted until late 2007 or so, and the economic slowdown thereafter. [ 23 ] They point out that there is a $500,000.00 counterclaim in the builder’s lien action, and nothing has happened in that action but for the recent bankruptcy proceedings. [ 24 ] They note that the Applicants brought a shareholders’ oppression relief action in March, 2009, seeking accounting records and audited financial statements and an investigation of TRL under

Part 18 of the ABCA. In that application, Mr. Justice Park ordered disclosure of financial information relating to 1252104 and the four other entities TRL invested in while Mr. Liu was active in the company. [ 25 ] The Respondents state that nothing more has been done in that action. [ 26 ] The Respondents object to the use of documents and information produced in that application for the purposes of the present application, and argue that the Applicants are in contempt of court for breach of the implied undertaking and in breach of Park J.’s order of July 28, 2009.

[ 27 ] In support of that position, the Respondents cite Rule 5.33, Wirth Ltd. v. Acadia Pipe & Supply Corp. , 1991 CarswellAlta 62 (C.A.) and Hunter Financial Group Ltd. v. Maritime Life Assurance Company , 2009 ABQB 448 . [ 28 ] Further, the Respondents dispute that the intended action is for TRL’s benefit, and question the terms proposed in the draft statement of claim. Issues 1. Are portions of Mr. Regenwetter’s affidavit inadmissible because they are on information and belief and the source of the information is not disclosed? 2. Are portions of Mr.

Liu’s affidavit inadmissible because they are in breach of the implied undertaking? 3. Are portions of Mr. Liu’s affidavit inadmissible because they are in breach of Park J.’s order? 4. Have the Applicants met the test for leave to commence a derivative action? 5. Should the derivative action be funded by the shareholders in proportion to their respective shareholdings? 1. Admissibility of Mr. Regenwetter’s Affidavit [ 29 ] It is clear that Mr. Liu’s claims are disputed by Mr. Regenwetter.

His affidavit of April 29, 2011 has a number of specific allegations as to costs and profits in various companies and on various projects. When questioned on his affidavit, it was obvious that numbers in the affidavit came largely from Mr. Regenwetter’s accountant, who was not identified in the affidavit. [ 30 ] There is undoubtedly technical non-compliance with Rule 13.18. To the extent Mr. Regenwetter provided information that was not within his personal knowledge but was based on information and belief, he failed to indicate the source of the belief. [ 31 ] That is not obvious on the face of the affidavit.

It is written as if all matters in it are within Mr. Regenwetter’s personal knowledge. When tested on questioning, that did not turn out to be the case on some matters. [ 32 ] It was not argued that this was a final matter and not an interlocutory matter such that all information in the affidavit had to be stated on personal knowledge. The application could be treated as involving a final decision, in the event the Applicants are unsuccessful.

But the point was not argued at the application. [ 33 ] As submitted by the Applicants, there is a risk that the opposing party and perhaps the Court might be mislead by an affidavit that purports to be on personal knowledge, but which is actually based partly on information from an undisclosed source. [ 34 ] To that end, nothing in this application turns on the numbers. Mr. Liu alleges there were significant profits that were diverted; Mr. Regenwetter denies that there were profits. That dispute is not to be resolved here. So arguments about the Court being mislead are moot.

[ 35 ] Further, the Applicants chose to question Mr. Regenwetter on his affidavit. The questioning disclosed the problems with the affidavit, but also answered the problems: the matters based on information and belief were identified, as were the sources. By the time of the application, the Applicants had been able to establish what Mr. Regenwetter claimed to know of his own knowledge, and what he had been informed of. [ 36 ] As a result, there was no mischief caused by the irregularity, other than, perhaps, a lengthier time spent questioning Mr.

Regenwetter. [ 37 ] In the U.F.C.W . case, an affidavit was ruled inadmissible and was struck, when on cross-examination, it appeared that little of the affidavit was based on personal knowledge, and that the affiant had not disclosed any sources. [ 38 ] That decision was affirmed by the Court of Appeal, primarily on the basis that the application for judicial review was a final proceeding and there should have been no hearsay at all.

The Court noted that little if anything turned on the affidavit, but expressly affirmed its agreement with Miller J.’s decision below. [ 39 ] On the basis that the questioning identified the source of the information, it seems academic to strike the offending paragraphs or to ignore them. Having Mr. Regenwetter swear a new affidavit before the application, correcting the matters, seems unnecessarily formalistic, and contrary to the objectives of the new Rules of Court, which emphasize proportionality amongst other things. [ 40 ] I accordingly reject the Applicants’ arguments on this point.

That is not to say that there are other circumstances where improperly constructed affidavits may be struck in whole or in part. It is an error for a judge to accept inadmissible evidence, and if the evidence is critical to the application, acceptance may be a basis for reversal. There may be other consequences such as costs which might befall an affiant who fails to disclose that information is from another source and identify the source. But those do not arise here. 2. Breach of the implied undertaking by the Applicants [ 41 ] Mr.

Liu acknowledged on questioning on his affidavit in support of this application that some of the information contained in his affidavit came from the documents and records that were provided as a result of Park J.’s order of July 28, 2009 in the earlier oppressive conduct application.

That application involved the same parties as are in this application, although Right Time was added as a Respondent in order to require Right Time to transfer to TRL the shares in 1252104 it held in trust for TRL. [ 42 ] In Wirth , the implied undertaking at common law not to use oral or documentary information obtained on discovery for any collateral, ulterior or improper purpose was confirmed by Lutz J.

The new Rules of Court confirmed the implied undertaking in Rule 5.33(1) in relation to any information provided or disclosed by one party to another pursuant to Division 1 of Rule 5 - the disclosure provisions. [ 43 ] As noted by the Respondents, in Hunter v.

Maritime , Thomas J. held the individual respondents in contempt of court for breaching the implied undertaking when they communicated information from the discovery process in an action commenced in Edmonton against Maritime to their solicitor in Calgary for the purpose of assisting him to prepare pleadings in a new action against Maritime. [ 44 ] The individual respondents were also in breach of an express commitment of confidentiality in an undertaking given to the Court to obtain access to records and other information in the Edmonton action. [ 45 ] In that case, the Edmonton action had been commenced by the receiver-manager of Hunter.

The individual respondents were the principals of Hunter. The Calgary action was commenced by the individual respondents in their own right, and not by or on behalf of

Hunter. There was no full commonality of parties. [ 46 ] With respect to the facts in this case, the parties are identical. In the earlier action, the Applicants were the minority shareholders in TRL. They were seeking relief against TRL, Mr. Regenwetter and his holding company on the basis of oppressive conduct in the management of TRL. The information and documents were ordered to be produced to Mr. Liu’s counsel as a result of allegations of oppressive conduct on the part of Mr. Regenwetter. One of the logical consequences of finding evidence of oppressive conduct is the commencement of a derivative action.

Mr. Regenwetter surely cannot be surprised that Mr. Liu’s discontent did not end with the production of TRL’s financial records. [ 47 ] It is arguable that there has been a breach of the implied undertaking. While Rule 5.33 and Wirth refer specifically to discovery (now questioning) and the production of records under the mandatory disclosure provisions of the Rules of Court and at common law, production of records pursuant to a court order is certainly analogous.

I can think of no good reason to differentiate between something required to be produced or disclosed under the Rules of Court and something required to be produced under different legislation such as the ABCA. A similar conclusion was reached by Mason J. at para. 269 in Alberta Treasury Branches v.

Leahy , 2000 ABQB 575 . [ 48 ] In court-ordered disclosure, there is the opportunity to specify the conditions of disclosure, but I do not think that the failure to specify confidentiality in the order itself has the result of putting the disclosure into the public domain. [ 49 ] Wirth limits use of the mandatory disclosure to the “subject proceeding”. In the ordinary course, if the disclosure leads the recipient to conclude that it has found evidence of a new cause of action or defence, an application might be made to amend its pleadings.

In such circumstances, the disclosing party has no complaint about the “collateral” or “ulterior” use of the disclosed information, as it will be used in the same proceeding. If the recipient wanted to commence a new proceeding, or involve new parties, an application should be made for leave to use the information for that purpose. [ 50 ] Here, Mr. Regenwetter could hardly have objected if Mr. Liu had filed a further amended originating notice in the original action to seek leave to commence a derivative action. Instead, Mr. Liu filed a new originating notice.

Had the new originating notice sought leave to use the information from the earlier application in support of this application, there would have been no issue about contempt. [ 51 ] Essentially, that is the essence of the new application. Mr. Liu and his company seek leave to commence a derivative action, relying in part on the information that has been disclosed to them under the earlier application.

They have not yet “used” the information for collateral or ulterior purposes; they require the court’s permission to do so. [ 52 ] There may be theoretical non-compliance with the implied undertaking, but in the circumstances of this case, I do not find it to be a contempt. There is no prejudice to the Respondents, and giving any effect to the respondents’ arguments puts form over substance that does nothing to advance either party’s position in this matter.

In Leahy , Mason J. held that the implied undertaking did not apply to production of information under a Norwich order, but stated at para. 277 that even if the implied undertaking did apply, it had not been breached because the purpose of the use of the information was essentially the same as the purpose of the order in the first place: to “investigate the extent of the alleged bribery and who had paid the bribes”. [ 53 ] The same reasoning is applicable here to find no breach of the implied undertaking. [ 54 ] To the extent that leave to use the information for the purposes of this application is necessary, it is, in any event, granted. 3.

Was there a breach of Park J.’s order by the Applicants? [ 55 ] The relevant provisions of Park J.’s order of July 28, 2009 is as follows:

4. All of the financial information that would be required to prepare audited financial statements for Broadband Investments Inc., Limitless Horizons Inc., Topos Investments Inc., High Energy Investments Inc., and 1252104 Alberta Ltd. shall be provided by the Respondents to counsel for the Applicants on the following conditions: a. The documents referred to in paragraph 4 are being provided on a review basis only, and no copies shall be made, b. The Applicants may only review the documents at the offices of their counsel, Bryan & Company, and c.

Should any expert analysis be required, it will be on notice to counsel for the Respondents, indicating the name and address of any expert retained. [ 56 ] It can be inferred that paragraph 4 was aimed at confidentiality and sought to prevent the collateral use of the information by Mr. Liu. There is, however, no obvious breach of the specific provisions of the order by the Applicants in this application.

They may well be using information gleaned from the records produced, but they do not appear to have put forward copies of any such records. [ 57 ] The answer to the issue here has really been addressed by my applying the implied undertaking of confidentiality to information and records produced under compulsion of court order (subject of course to the specific provisions of any such order or the legislation under which the order was made).

However, allegations of breach of court order are usually made in the context of seeking contempt remedies. [ 58 ] I am doubtful that a party can be guilty of contempt for breach of the spirit of an order as opposed to the specific wording of the order. The application of the implied undertaking to the disclosure ordered by Park J. put the recipient of such disclosure at risk pursuant of consequences for improper use of the disclosure outside the order itself. For practical purposes, that addresses the matter for the purposes of this application. I do not, in any event, find that Mr.

Liu or the Applicant are in breach of Park J.’s order. There is nothing express in his order that was violated in this application. 4. Have the Applicants satisfied the tests under s. 240(2) of the ABCA? [ 59 ]

Section 240 of the ABCA provides: 240(1) Subject to subsection (2), a complainant may apply to the Court for leave to (

a) bring an action in the name and on behalf of a corporation or any of its subsidiaries, or (

b) intervene in an action to which a corporation or any of its subsidiaries is a party, for the purpose of prosecuting, defending or discontinuing the action on behalf of the corporation or subsidiary.

(2) No leave may be granted under subsection (1) unless the Court is satisfied that (

a) the complainant has given reasonable notice to the directors of the corporation or its subsidiary of the complainant’s intention to apply to the Court under subsection (1) if the directors of the corporation or its subsidiary do not bring, diligently prosecute, defend or discontinue the action, (

b) the complainant is acting in good faith, and (

c) it appears to be in the interests of the corporation or its subsidiary that the action be brought, prosecuted, defended or discontinued.

(3) Notwithstanding subsection (2), when all the directors of the corporation or its subsidiary have been named as defendants, notice tothe directors under subsection (2)(

a) of the complainant’s intention to apply to the Court is not required. [60] The parties essentially refer to the same authorities in this regard. The Applicants cite Mackenzie v. Craig, (AB KB), [1997] A.J. No. 855 (Q.B.) and Winfield v. Daniel, 2004 ABQB 40. [61] The Respondents refer to Primex Investments Ltd. v. Northwest Sports Enterprises Ltd., 1995 CarswellBC 958 (S.C.) and1996 CarswellBC 2505 (C.A.), and Valgardson v. Valgardson, 2006 CarswellAlta 428 (Q.B.). [62] Primex was applied in Mackenzie on the issue of good faith.

Medhurst J. stated at para. 28: What constitutes good faith is discussed in First Edmonton Place, supra. The Court held that good faith is shown if the action is notmotivated by a private vendetta, and if it is not frivolous or vexatious.

Further, Primex Investments Ltd., supra, held that mere selfinterest does not constitute bad faith if the interests of the applicant and the corporation simply coincide; there must be othercircumstances suggesting that the application is not brought in good faith. [63] As for the standard to be applied to the “chance of success”, Medhurst J. stated at para. 39: I find that there is little difference between a claim that has a "reasonable chance of success" and one that is not "obviously spurious,"lacking in foundation", "frivolous and vexatious", or "bound to fail." If a claim is not bound to fail, then it stands to reason that there issome chance that it will succeed.

Likewise, if a claim is lacking in foundation, then it is bound to fail and has no reasonable chance ofsucceeding.

As the burden of proof at this stage of the proceedings is lower than "on a balance of probabilities", any uncertainty as to theapplicant's chances of success should weigh in his favour as the uncertainty suggests that there is a chance that the action will succeed.This is not to say that any evidence supporting the applicant's position will satisfy this onus; the Court must be convinced that, havingregard to everything presented by all parties, the applicant is not bound to fail. [64] Medhurst J.’s decision was affirmed by the Court of Appeal in an unreported decision. [65] In Winfield v.

Daniel, Gallant J. held that the absence of formal notice should not be fatal to the application. He found thatWinfield had raised “triable issues” and thus the proposed derivative action “would appear to be in the interests” of the corporation (atpara. 50). [66] Primex dealt with allegations that the applicant for a derivative action was pursuing a personal vendetta and was onlyattempting to maximize Northwest’s profits and was not concerned about Northwest’s best interests.

Tysoe J. differentiated between selfinterest and bad faith (at para. 42). [67] He held that there was essentially no difference between the “reasonable prospect” test and the “arguable case” test, and alsoconsidered whether the action was “bound to be unsuccessful” or “could reasonably succeed” (at para. 47). [68] In Valgardson, Thomas J. found that the applicant had not met the “high onus” of establishing that the proceeding is broughtin good faith. [69] He held at paras. 21 - 23: 21 In reaching this conclusion I am particularly influenced by the existence of the ongoing 2003 Action where similar declarations and

accountings are sought. That lawsuit is moving forward; the Respondents have new legal counsel and it appears that the pace of that litigation is picking up. I draw two important inferences from the 2003 Action. Firstly, the very existence of the action is evidence of some animus between the parties and must be taken into account in determining the good faith aspect of this proposed proceeding.

Secondly, the 2003 Action shows to some extent a duplication of the relief sought in the proposed action. 22 I am concerned that if leave were given to allow a derivative action, it may unnecessarily complicate the 2003 Action and could impede its progress.

The Applicant Blair Valgardson must be taken to know this. 23 The attempt to launch a duplicate action in which Vauxhall and Rivers may be called upon to pay the costs also raises the inference that Blair Valgardson is attempting to shelter himself from the costs of the proposed lawsuit at the expense of the corporations which he seeks to enlist as co-claimants. Application of Law to Facts [ 70 ] There is no issue about the Applicants’ status to bring this application. They are minority shareholders in TRL. [ 71 ] The remaining tests are (

a) reasonable notice; (

b) good faith; and (

c) best interests of the corporation. (

A) Reasonable Notice [ 72 ] It is conceded that proper notice has been given to TRL, Mr. Regenwetter and 1199935. Counsel for the Respondents argue that notice has not been given to 1252104. [ 73 ] In that regard, I am persuaded by the Gallant J.’s logic in Winfield to the effect that had notice been given, the directors would not have commenced the requested action in any event. The same can be said here. Mr. Liu had a falling out with Mr. Regenwetter and Mr. Ostermayer. He is in litigation with 1252104 in the builder’s lien and bankruptcy litigation.

It would have been a waste of a piece of paper and a stamp to have requested Mr. Regenwetter and Mr. Ostermayer to commence action against themselves at Mr. Liu’s request. If notice to 1252104 was required in the circumstances of this case, I conclude that its absence should not be a bar to the relief claimed by the Applicants. (

B) Good Faith [ 74 ] The presence of good faith appears to be the equivalent of the absence of bad faith. Mr. Liu is certainly acting in his own interests here, but there is no support for the Respondents’ allegation that Mr. Liu is pursuing a vendetta. Why is it a vendetta to vigorously pursue a debt claim? Their strongest argument against the granting of leave to commence a derivative action is in the multiplicity of actions brought by Mr.

Liu and his companies in relation to McLeod Gardens, and the fact that none of those actions has been brought to completion as yet. [ 75 ] But a derivative action is the only way a shareholder can get any effective remedy against the directors of a corporation for breach of fiduciary duty or other wrongdoing. The builder’s lien action is not against TRL; it is a debt claim against 1252104. It is only for the amount claimed to be due for services rendered to that company. The bankruptcy application is merely a strategic move in that action.

The previous oppressive conduct application cannot be viewed as a distinct proceeding from the present leave application. This application is, in essence, the next step following relief such as was granted by Park J. [ 76 ] Unlike the situation in Valgardson , none of the other actions will resolve the issues Mr. Liu seeks to put forward in the proposed derivative action. I do not see that the derivative action will impact on the ability of the Respondents to defend the other proceedings.

[ 77 ] The fact that relationships have deteriorated, and one party wants to collect money he claims to be owed by the other and seeks profits from a corporation he has shares in which was under the management of the other, does not amount to a vendetta. [ 78 ] There is nothing in the evidence that suggests that Mr. Liu is not acting in good faith. That part of the test is met by him. (

C) Best Interests of TRL [ 79 ] To the extent that Mr. Liu’s interests are in ensuring that the revenues and assets of TRL not be improperly diverted from the corporation, an action to recover assets for the corporation would certainly appear to be in its best interests as well. Holding directors accountable for their actions is an important function of corporate law and is at the root of s. 240 of the ABCA. [ 80 ] I am satisfied that some of the matters raised by the Applicants are not bound to fail. It is arguable that 1252104 should have held Cornerstone and Mr.

Ostermayer to the maximum per square foot cost for the construction of the units for McLeod Gardens. That may have resulted in profits for TRL albeit at Mr. Ostermayer’s expense. There are payments from TRL to Mr. Regenwetter or entities related to him that may have been made contrary to the unanimous shareholders agreement or otherwise made to divert funds from TRL. It is curious and suspicious that all creditors of 1252104 have been paid but for Mr.

Liu’s Professional Corporation and CRA, and the latter in an amount similar to the amount of security placed for the Professional Corporation’s builder’s lien. [ 81 ] Of course these are only allegations on the part of the Applicants. The merits are denied by the Respondents. It is not my function to try the case.

My role is that of gatekeeper; to ensure that the tests specified in s. 240 of the ABCA and the cases which have interpreted it are met. [ 82 ] Regardless of the precise test for the applicable standard, the Applicants have satisfied the onus of establishing that they have a reasonable prospect of success. They have an arguable case. They could reasonably succeed and they are not bound to fail. Conclusion [ 83 ] The Applicants have satisfied all branches of the test under s. 240. Leave to commence a derivative action in the form attached to Mr. Liu’s affidavit is granted. 5.

Funding [ 84 ] The Respondents allege that neither TRL nor 1252104 has any assets. Those corporations cannot fund the litigation. Mr. Liu seeks an order requiring the shareholders to fund the costs of the litigation in proportion to their respective shareholdings. [ 85 ] Apart from the order granted by Park J. directing the shareholders to fund the cost of preparing audited financial statements if required, counsel were unable to provide me with authority for the type of funding order they seek. The cases they did cite, JMLR Holdings Ltd. et al v. Simon Sochatsky et al (unreported) and Crescent

(1952) Ltd. v. Jones , 2011 ONSC 756 , involve apparently solvent corporations and cost orders dividing litigation costs between the applicant and the corporation. [ 86 ] Counsel for the Respondents argue that the litigation is not in TRL’s best interests as it exposes the corporation to substantial costs, and the risk of being liable for substantial costs if the allegations of fraud, breach of fiduciary duty and conspiracy are unsuccessful. They cite Intercontinental Precious Metals Inc. v. Cooke , 1993 CarswellBC 418 (S.C.) and Discovery Enterprises Inc. v.

Ebco Industries Ltd. , 1999 BCCA 749 to support their argument that should the derivative action be allowed to proceed, Mr. Liu should bear the costs in the first instance.

[87] Essentially, however, if the corporation has no assets other than the potential proceeds of the derivative action, thecorporation itself risks nothing by pursuing the litigation if others bear the costs. That by itself is no reason to allow a derivative action toproceed. It must have sufficient merit to meet the statutory test. [88] In the case of a solvent corporation required to fund litigation, the nature of the action and the potential exposure for costsmay lead to a very careful review of the statement of claim to be issued by way of derivative action.

Each allegation might be reviewedon the s. 240 test before it is allowed to proceed. [89] There is merit to the Respondents’ argument that Mr. Liu is attempting to “hide behind the skirts of the corporation”. Theproposed derivative action seeks remedies from a number of proposed defendants. There is insufficient information in the materialsbefore me to conclude that there is an arguable case against any of the proposed defendants other than Mr. Regenwetter, Right Time,Cornerstone, Mr. Ostermayer and 1252104. [90] Mr.

Liu has brought no evidence forward to suggest that he is unable to pay for the litigation himself. The court has a verywide discretion to order costs, which includes a discretion to order advance costs. Mr.Liu’s application relating to costs resembles anapplication to require Mr. Regenwetter to pay advance costs to him. [91] The question of advance costs has been dealt with most recently by the Supreme Court of Canada in Little Sisters Book andArt Emporium v. Canada (Commissioner of Customs and Revenue), 2007 SCC 2 , [2007] 1 S.C.R. 38.

Suffice it to say that therequirements for advance costs have not been met here. [92] Requiring shareholders to personally fund litigation on behalf of the corporation certainly pierces the corporate veil andoffends the principles of Salomon v. A Salomon & Co Ltd., [1897] A.C. 22 (H.L.). Such a power is not expressly mandated by theBusiness Corporations Act, and would be an extraordinary remedy. It may be appropriate in some circumstances, such as those caseswhere advance costs have been ordered. It is not appropriate here. [93] Mr. Liu’s dispute is with Mr. Regenwetter, Mr. Ostermayer and their entities.

It would be highly unusual for Mr. Liu to beable to proceed with litigation against a number of different defendants and have Mr. Regenwetter fund 75% of the litigation costs inadvance. Counsel for Mr. Liu offers up indemnification to Mr. Regenwetter should the litigation fail. [94] In the result, I do not order TRL or Mr. Regenwetter to bear any of the costs of pursuing the derivative action. It is essentiallyfor Mr. Liu’s (and creditors’ if there are any) real benefit.

The Applicants should bear the costs of pursuing the litigation, subject ofcourse to the eventual determination of the trial judge as to costs. [95] I agree with the logic in Intercontinental and Discover Enterprises. [96] It is a condition of granting leave to commence the derivative action that the Applicants be responsible for any costs whichmight ultimately be ordered in favour of any of the defendants in the action. Investigation [97] An issue arose during argument over the earlier application for oppressive conduct. These Applicants sought an investigationof TRL under

Part 18 of the ABCA, amongst other relief. That was apparently not pursued before Park J. The Applicants now suggestthat it may be appropriate to allow them to bring an Originating Notice for an investigation of 1252104. [98] I agree that such a procedure may be a practical way of ascertaining whether there have been any unauthorized orinappropriate transactions to the detriment of 1252104's stakeholders. In the context of this matter, there is the same problem with

funding. An investigator will be a somewhat expensive process, and I see little prospect that the Applicants would be more successful requiring 1252104's shareholders to pay for the costs of an investigation by injecting new money into 1252104 than they have been on this application, although I note that s. 232 of the ABCA gives the court a very wide power with respect to the costs of an investigation, including the power to direct that any person pay such costs under s. 232(1)(k). [ 99 ] If the Applicants want to pursue this route, they are certainly entitled to do so.

It would, however, require either a formal amendment to the present Originating Notice or a new Originating Notice. To the extent necessary, I give the Applicants leave to use the information they learned from the disclosure under the Park J. order for the purposes of such an application. They would thus not run afoul of the implied undertaking. Any such application, however, would have to be properly served on 1252104. Conclusion [ 100 ] The Applicants are given leave to commence a derivative action in the form attached to Mr. Liu’s affidavit.

Any such action is to be at the Applicants’ cost in the first instance. It is a condition of granting leave to commence the action that the Applicants be liable for any costs which might be awarded to any of the defendants in that action. [ 101 ] Leave is given to the Applicants to use information disclosed to them by reason of Park J.’s July 28, 2009 order for the purpose of making an application for the appointment of an inspector for 1252104. [ 102 ] Costs of this application shall be in the cause. Heard on the 24 th day of June, 2011. Dated at the City of Edmonton, Alberta this 11 th day of August, 2011. R.A.

Graesser J.C.Q.B.A. Appearances: Michael R. Kinash, Q.C. Sara E. Hart Bryan & Company LLP for the Applicants

Darren R. Bieganek Duncan & Craig LLP for the Respondents