AMFAM Trust v Tallahassee Petroleum Inc, 2017 ABQB 16

Court of Queen’s Bench of Alberta Citation: AMFAM Trust v Tallahassee Petroleum Inc, 2017 ABQB 16 Date: 20170111 Docket: 1601 03418 Registry: Calgary Between: AMFAM Trust, Hussein Amery, Omar Investments Ltd., Nehme Jeha, Mike Jomaa and Suliman Amery Plaintiffs (Applicants) - and - Tallahassee Petroleum Inc., Mohammad Ghazanfar Zafar and Tallahassee Drilling Inc. Defendants (Respondents) _______________________________________________________ Memorandum of Decision of A. R.

Robertson , Q.C., Master in Chambers _______________________________________________________ Background [ 1 ] There are two applications before the Court. The first is an application by the plaintiffs for an interim order to provide financial information relating to the operation of a corporation, Tallahassee Petroleum Inc. (“TPI”). The plaintiffs are (

a) AMFAM Trust, which is one of the two shareholders of TPI; (

b) some beneficiaries of AMFAM Trust; and (

c) one of the directors of TPI. [ 2 ] The second application is by the defendants. They seek

summary dismissal, based on a limitations defence.

[ 3 ] The plaintiffs collectively constitute one of two discrete groups of investors in TPI’s affairs. The individual plaintiffs invested through AMFAM Trust, which is the actual shareholder. Their nominee director of TPI is Suliman Amery, one of the individual plaintiffs. He is also a co-trustee of AMFAM Trust, with his brother Hussein Amery. [ 4 ] The defendant Mohammad Ghazanfar Zafar is the other director of TPI. The defendant Tallahassee Drilling Inc. is an unrelated company with which Mr. Zafar is involved. The other discrete group of investors is made up of investors he apparently assembled.

They are not parties to the dispute and there is no meaningful information before the Court about that group. [ 5 ] I have concluded that the application for

summary dismissal must be dismissed and that interim relief to require the preparation and production of financial statements is in order. The Claim and the Defence [ 6 ] The basic assertion by the plaintiffs is that although TPI was set up with two shareholders (being Mr. Zafar and AMFAM Trust) and two directors (being Mr. Zafar and Suliman Amery as the nominee director for the Trust), Mr. Zafar was the controlling mind of TPI. The claim asserts that he took large sums of money from the plaintiffs using TPI as the conduit for oil and gas investments.

The plaintiffs describe him as the “managing director” of TPI. [ 7 ] They allege that he looked after all of its investments, but he has not properly accounted for them. They allege that he promised to provide corporate financial statements, but he has not done so. They allege oppression and other wrongs. [ 8 ] The response, summarized, is that although this claim is advanced as an oppression claim as well as styled in other fashions, if the plaintiffs wanted to exercise their rights under the Business Corporations Act (Alberta), R.S.A. 2000, chap.

B-9 (the “ ABCA ”), they could simply have had AMFAM Trust call a meeting of shareholders of TPI, or Suliman Amery could call a directors’ meeting. [ 9 ] Furthermore, the defendants argue that the directors resolved not to provide audited financial statements when the company was set up, and that resolution is said to remain in effect until the next annual general meeting. But it is now about eight years later, and there still has been no annual general meeting. Therefore, the defendants argue that the resolution of directors remains in place.

They say that no audited financial statements are required until an annual general meeting is held. However, there is no indication that there are any plans to call one. [ 10 ] The defence also is to the effect that the failure to follow corporate requirements is a failure that is at least shared by Suliman Amery and AMFAM Trust, who could have insisted upon meetings but did not. [ 11 ] Finally, the defendants say that the claim for financial information is statute barred. The plaintiffs knew of their complaints more than two years prior to commencing proceedings.

The defendants ask that the claim be summarily dismissed. Discussion [ 12 ] The directors’ resolution about audited statements does not address the central request, which is for financial statements, audited or not. To the extent there was a waiver, it was of the audit or yearly audits. It was not a waiver of the production of financial statements. [ 13 ] Another problem with this defence is that it was a resolution of directors, not shareholders, and it is a resolution of shareholders and that is required to avoid audited financial statements:

section 163 , ABCA . Counsel for the defendant says that in the circumstance it is the same thing: Suliman Amery was the nominee of the Trust, and although he signed the resolution as director, he would have signed for the Trust if the resolution were that of the shareholders. [ 14 ] It is apparent that the incorporating documents were bought as a package from a stationery store, no legal advice was obtained, and the investments were made very casually as regards legal relations. Little paper work was done, and the evidence from Mr.

Zafar is that the plaintiffs asked for oral reports, apparently with an intention that there be as little in writing as possible. [ 15 ] A further problem with the resolution is that it continues until the next annual general meeting, which might never be held based on the corporation’s history to date. But

section 132 of the ABCA requires that the directors call an annual general meeting be held within 18 months of incorporation and not later than 15 months after the last meeting. If the directors wanted an extension of time, they could have applied to the court. But no such application has been made. [ 16 ] The corporation and the directors are offside the requirements of the ABCA .

As mentioned, one of the directors is the plaintiff Suliman Amery. [ 17 ] Although Suliman Amery was nominally a director, the evidence indicates that he was thought of as a “co-director” of the company with his brother Hussein Amery, a concept which is foreign to the legislation. The conclusion that can be drawn for the purposes of this interim application is that the plaintiffs’ understanding of corporate law was fuzzy at best. [ 18 ] The defendants also argue that the plaintiffs are actually asking for

summary judgment, not interim relief, at least for part of their claim, because they are asking for an order for financial statements. They argue that there is no basis for

summary judgment, that is not how the application has been styled, and the relief sought in the brief filed for the special application varies significantly from the application as it was originally framed. They argue that if I grant the relief now sought they will be prejudiced as a result. [ 19 ] However, a review of the application filed May 2, 2016 does not suggest a dramatic variance with the arguments now put forward by the plaintiffs.

Admittedly, the header says it is an application by Hussein Amery, but the text of the application (paragraphs 3, 8, 17, 19 and 20) and the supporting affidavits make it clear that the application was brought on behalf of all the plaintiffs, and the application references the lack of financial statements (paragraph 21

e) as well as audited statements, oppression, and many other specifics.

[20] The argument that requiring the production of financial information requires a final determination in an oppression claim isone the Court has seen before: see Honourable Patrick Burns Estate Memorial Trust v P Burns Resources Limited, 2015 ABQB 459,although the information sought there was more extensive than here. [21] This argument is not consistent with either the nature of an oppression claim, the Alberta Rules of Court, or the ABCA.

Tosome extent, the argument presumes that a plaintiff claiming oppression is not entitled to the information that is necessary to determinewhether the plaintiff has been oppressed until the plaintiff has proven that he has been oppressed. This seems to assume that the plaintiffwho alleges oppression is not entitled to production of relevant and material records that may prove oppression, which in effect presumesthat

Part 5 of the Alberta Rules of Court does not apply to oppression claims. And here the argument is that if the requirements of theABCA are ignored long enough, they need not be complied with. [22] Counsel for the plaintiff argues that his clients have been asking for information for years, and it has been promised but neverdelivered. He points out that the beneficiaries of the Trust have to file income tax returns, TPI has to file tax returns and has not, and ifthe limitations defence is successful, it would create an odd anomaly because there is not the same limitation to filing tax returns.

Thebeneficial owners would be required to file tax returns - but unable to do so because they could not get the necessary information fromthe directors of the company who sat on the information long enough for the limitation to demand them to run, and thus allow non-disclosure. [23] Regardless of how informal the arrangements were made at the outset, there are certain basic obligations under the BusinessCorporations Act. Directors are required to present financial statements at annual general meetings:

section 155 ABCA. They arerequired to call annual general meetings:

section 132.

The waiver of audited financial statements is to be done by the shareholders, notthe directors, and the defendants’ argument does not just blur the difference between shareholders and directors – it also mistakenlypresumes that there was never an obligation to call an annual general meeting. [24] The defendants argue that the Court must take into account the reasonable expectations of the investors at the outset. [25] The reasonable expectations of participants in a corporation as an approach to dispute resolution was mentioned in BCE v.1976 Debentureholders, 2008 SCC 69 , [2008] 3 S.C.R. 560 at para. 74.

However, the important caveat in what was said thereby the Supreme Court of Canada is that the Court was discussing “strict formalities”, not basic expectations of directors’ performance. [26] The discussion in BCE (para. 74 to 81) contemplates that when considering “reasonable expectations” a court would take intoaccount: (

a) the nature of the corporation, (b) “the personal relationships between the claimant and other corporate actors”, (

c) past practice, (

d) whether the claimant could have taken steps to prevent itself from the prejudice it claims to have suffered, and (

e) representations made at the outset and possible fair resolution of conflicting interests, because directors must often must balance andresolve conflicting interests of the corporation and its stakeholders. [27] However, the Court also stated (para. 73) that, “A departure from normal business practices that has the effect of underminingor frustrating the complainant’s exercise of his or her legal rights will generally (although not inevitably) give rise to a remedy.” [28] It is general business practice for persons who take money from others for purposes of investment on their behalf to let themknow what happened to their money.

That is a fundamental aspect of holding funds within any kind of trust other than a “blind trust”. [29] In corporate law, although there may not be a formal trust relationship between corporation and its shareholders, therelationship is not dissimilar. The obligations regarding the management and reporting on the investment are spelled out in the sectionsof the ABCA referenced above: the directors are required to present annual financial statements to the shareholders. If they do not thinkthey should be audited, they require a unanimous resolution of shareholders to dispense with the audit.

If they want an extension of timeto present the financial statements at a meeting, they need court approval. [30] In the absence of some very clear written agreements amongst all of the stakeholders here, it is a significant leap of faith toconclude that the basic expectation of receiving financial statements was agreed to be compromised. Furthermore, there is evidence tothe contrary: the plaintiffs have been trying to get the written information for years, Mr. Zafar has given indications that he would lookafter it, but has not done so. [31] Furthermore, Mr.

Zafar acknowledged in his affidavit that the corporation held the investments in trust, so technicalarguments of rights and defences that arise under the ABCA must be viewed in this context. [32] Mr. Zafar does not acknowledge that he was the “managing partner”, as asserted by the plaintiffs, although in cross-examination he was somewhat evasive as to his role. What is clear from the evidence in the affidavits and the evidence given in cross-examinations is that Mr.

Zafar had significant oil and gas technical experience and he managed the investment. [33] In cross-examination (pages 83 to 85) he described his role as “sweat worker” for $1,000 a month while the Amery brotherswould handle all the corporate expenses. In describing one investment (page 108) he said he did not need instructions from the brothersHussein Amery and Suliman Amery, because he was a 50% shareholder, although he said they had the right to object. These admissionsare consistent with the understanding that he was the one in charge. [34] Overall, the evidence discloses that Mr.

Zafar handled the money, he provided what reporting there was, he retained and

instructed the accountants, and he became aware that the sole financial statements prepared by the accountants was wrong but evidently he did not have them corrected. Accordingly, the evidence suggests that he was the operating mind of TPI.

He was personally managing the investments and he was getting paid $1,000 a month for doing so, as an employee or an independent contractor to TPI. [ 35 ] It is clear that TPI has not filed income tax returns as it should have, and it has not provided to the shareholders sufficient information for them to file their own tax returns, while significant amounts of money have gone through the corporation and not properly been accounted for. [ 36 ] These facts would seem to merit some kind of interim relief. But what is the legal entitlement and what is the proper form of relief at this stage?

And has the limitation for seeking it run? [ 37 ] The defendants rely on English v Sylvan Lands Development Corp. , [2004] A.J. No. 1387 to point out that the correct remedy for the plaintiffs is to use their positions (as 50% shareholder, and as one of only two directors) to seek enforce their rights under the ABCA . In Sylvan Lands Development , the Court commented that the parties had equal positions.

They both had signing authority (presumably this was signing authority at the bank), they were equal shareholders and directors and they both had made the same financial contribution. “Both were entitled to equally participate in all matters pertaining to company business”: para. 24. [ 38 ] The Court reviewed earlier cases dealing with when the oppression and unfair remedies in modern corporate legislation are available. In Munro v Nopper , [2002] A.J.

No. 1114 , the Court dealt with a similar situation and seemed to state that the applicant “on the face of it … is not entitled to statutory oppression remedies” because they were equal shareholders. [ 39 ] However, the definition of “complainant” in

section 239 (

b) of the ABCA is not limited to minority shareholders, or directors who do not control the board of directors. A complainant may be another who, in the discretion of the Court is found to be a proper person to make an application for oppression remedies - even if that person does not fit neatly into the defined categories. And a “complainant” might be a beneficial owner of a corporation or any of its affiliates, not just a shareholder or a director. [ 40 ] That would seem to allow the application to be brought here at least by the beneficiaries of AMFAM Trust, some of whom are named as plaintiffs.

They are not directors and not shareholders. They are not in the same position as Mr. English in Sylvan Lake Developments . [ 41 ] Furthermore, here there is the clear evidence that regardless of proper corporate authority Mr.

Zafar was the one who accepted the investments, looked after them, signed most of the cheques, and retained and instructed the accountants, although he said in cross-examination (page 32) that he “never took too much interest” in the financial statements. [ 42 ] The plaintiffs, including the 50% shareholder and the other director, have been attempting to get financial information for years, but so far they have not been successful. What should they have done, given their 50% positions? Should they have called a shareholders meeting? That is what the defendants argue should have happened.

The Court has the authority to call a meeting “if it thinks fit”: ABCA

section 143. But a shareholders’ meeting would be deadlocked. [ 43 ] On the other hand, if a shareholders’ meeting were called, the respondents’ argument about the waiver of audit would disappear entirely, at least going forward. The corporation would clearly be required to provide audited statements. An auditor would have to go back at least one year, and in the circumstances probably much farther, to understand the financial history of a company that has not produced financial statements at all in many years. [ 44 ] Is that a fair resolution on an interim basis?

There would be an enormous cost to an audit in this case. [ 45 ] As mentioned above, the respondents argue that any relief granted by the Court at this stage would be in the nature of a

summary judgment application, and since

summary judgment is neither sought (at least, not expressly) or appropriate, no relief should be granted. Aside from my comments above about financial disclosure in the context of an oppression claim, section 242(3) of the ABCA specifically provides for the interim relief sought. It says: In connection with an application under this section, the Court may make any interim or final order it thinks fit, including … (

k) an order requiring a corporation, within a time specified by the Court, to produce to the Court or an interested person financial statements in the form required by

section 155 or an accounting in any other form the Court may determine. [Emphasis added.] [ 46 ] Such an order may be made “in connection with” an application for relief from oppression. The provision clearly does not require the Court first to make a final decision of oppression or unfairness, because if it did the reference to an “interim” order would be unnecessary. [ 47 ] The nature of an oppression action requires the production of basic information in order for the plaintiff to properly evaluate the claim.

And the refusal of the controlling party to allow access to another director and to a 50% shareholder, particularly where promises have been made, tends to demonstrate that there has been oppression. [ 48 ] But is it too late to ask for relief? The defendants say that the limitation has run, because more than two years passed after the plaintiffs felt that the defendants had failed to provide them with proper and sufficient accounting information before proceedings were begun. They argue that the plaintiff’s witness admitted that they felt that way no later than March 25, 2013.

The originating application that began these proceedings was not filed until June 23, 2015. [ 49 ]

Section 3 of the Limitations Act , RSA 2000 chap. L-12 provides for a two year limitation that runs from “the date on which the claimant first knew, or in the circumstances ought to have known, ... that the injury had occurred ... and ... that the injury, assuming liability on the part of the defendant, warrants bringing a proceeding.”

[ 50 ] Although some authorities state that the test for whether injuries “warrant” bringing a proceeding is “whether a reasonable person would consider that someone in the plaintiff’s position ... could – not necessarily should – bring an action” and that “purely tactical considerations have no place in this analysis” (see Owners: Condominium Plan No 0125764 v Amber Equities Inc , 2015 ABQB 235 , par. 96 and the cases cited there), the question must also be asked whether there were circumstances that did not warrant bringing an action ( Amber Equities , para. 97.

In Stewart Estate v TAQA North Ltd , 2013 ABQB 691 , at para. 211 Clackson, J. said that “What warrants bringing a proceeding embraces a consideration of the extent of the injury in comparison to the economics of a prospective action. This assessment involves a blended objective/subjective analysis”. [ 51 ] Mr. Zafar admitted in cross-examination (page 143) the 2010 financial statements had still not been corrected although the assets continue to produce some money. He blamed that on “lack of leadership, lack of responsibility from all the directors’ ends” and that the company is dormant.

However, his affidavit discloses that TPI still owns three oil and gas properties, and as TPI earns money he still takes management fees, although the income does not cover his $1,000 a month fee (pages 144-145). He deposes that more than two years prior to the commencement of proceedings he proposed that the plaintiffs take over the affairs of TPI and choose their own management, but they declined.

Implicit in this statement is the acknowledgement that he still manages the affairs, which is confirmed by the fact that he still pays himself for his management of TPI’s affairs from the modest income that is received. [ 52 ] Finally, at pages 55 to 58 of the transcript of his cross-examination, his evidence was that he wanted the Amery brothers to stop asking for the financial statements, because he was trying to “help out” at his own pace and that their requests were distracting him.

That clearly suggests that at some point they were allowed to believe that there would be financial statements provided, and that he was taking the lead in getting them done. [ 53 ] The burden of demonstrating that a limitation period has run, and that a claim should be summarily dismissed, lies with the defendants: Amber Equities at para. 98. The evidence presented to the Court here demonstrates that the plaintiffs might have sued earlier, because they had a claim then.

But that ignores the question of whether the complaints warranted bringing a proceeding, especially where the obligation to provide financial statements arises every year; it is on-going. [ 54 ] The argument put forward by the defendants could lead to an absurd result in more than one way: firstly, the inability of the investors to provide proper tax information in their returns, mentioned above; secondly, the financial statements from recent years requires some review of financial statements of prior years in order to have a proper starting point and comparison; and thirdly, the consequence of the defence as argued here would be that once directors of a company holding funds in trust for others had allowed more than two years to pass without providing financial statements, they would never again be required to provide financial statements (audited or not) despite the fact that the company still earns income.

That cannot be right. Conclusion [ 55 ] The entitlement to financial information is on-going. Where the managing director continues to manage the company, he has a continuing obligation to account. While there may yet be a valid argument for trial that some information that is more than two years old is protected from disclosure by the Limitations Act , the facts here are not clear enough at this stage to allow

summary dismissal. [ 56 ] Accordingly, the application for

summary dismissal is denied. [ 57 ] The proper interim remedy here is set out in section 242(3) (

k) of the ABCA , which allows the Court to make, an order requiring a corporation, within a time specified by the Court, to produce to the Court or an interested person financial statements in the form required by

section 155 o r an accounting in any other form the Court may determine . [ 58 ] TPI is to provide financial statements and corrected tax returns (or proper drafts thereof, if they have not yet been filed with Canada Revenue Agency, as seems to be the case). It is in the interest of all to do this. The cost will be shared with the plaintiffs, in light of the fact that Suliman Amery is a director. [ 59 ] However, the funds taken by Mr. Zafar in the 24 months preceding the commencement of the originating proceedings that led to this action should be used first for this purpose.

He is required to account for the funds taken by him as fees for the 24 months preceding the date of this memorandum of decision and re-pay those funds to a trust account, discussed below. [ 60 ] As further TPI income becomes available, it shall be paid into trust to be available to be applied to this purpose as well. [ 61 ] Once those funds are applied, the balance would be split 50/50 between the plaintiffs and defendant Mr.

Amery. [ 62 ] The intent would be that an estimate would be obtained from the accountants who have in the past prepared financial statements and a reasonable amount collected in excess of that estimate to allow for contingencies. These funds would be collected firstly by way of re-payment of monies taken by Mr. Zafar as fees, and secondly by two equal contributions by (

a) the plaintiffs, as one group, and (

b) Mr. Zafar, such funds to be added to any further income received by TPI. The funds re-paid by Mr.

Zafar and the equal contributions are all to be treated as interest-free loans by them to TPI. [ 63 ] The funds collected are to be paid into a lawyer’s trust account (and held by either the plaintiffs’ counsel or the defendant’s counsel as they may agree and if they cannot I reserve jurisdiction to decide) and the funds are to be held irrevocably for the purpose of paying for the financial statements and tax returns described above, and associated expenses and GST. [ 64 ] At trial, the Court could then direct a re-accounting for the costs of the financial statements, and possible re-payment to Mr.

Zafar for his monthly fee, depending on the outcome. That is, a final accounting for the monies paid pursuant to the order granted is referred to trial. [ 65 ] This requires further evidence before the Court can make a final direction, if the parties are not able to agree on the amounts to be collected and held.

Heard on the 9 th day of November, 2016. Dated at the City of Calgary, Alberta this 11 th day of January, 2017. A. R. Robertson, Q.C. M.C.C.Q.B.A. Appearances: Ugo Ukpabi Lacourciere, LLP for the Applicants Justin R. Lambert and Chris Hall Bennett Jones LLP for the Respondents