Valstar v Vstar Enterprise Ltd, 2021 ABQB 404

Court of Queen’s Bench of Alberta Citation: Valstar v Vstar Enterprise Ltd, 2021 ABQB 404 Date: 20210521 Docket: 2110 00436 Registry: Red Deer Between: Janice Valstar and Lila Bickford Applicants - and - Vstar Enterprises Ltd., Richard Valstar, 2306749 Alberta Ltd., John Doe and ABC Corp. Respondents _______________________________________________________ Reasons for Decision of the Honourable Mr. Justice Robert A. Graesser _______________________________________________________ Introduction [ 1 ] This matter came before me in morning chambers on April 30, 2021.

Janice Valstar and Lila Bickford (Janice Valstar’s mother) apply for oppression remedies against Richard Valstar and Vstar Enterprise Ltd (“Vstar”) as a consequence of the way Richard Valstar has managed Vstar since the Valstars separated.

[ 2 ] Mr. Valstar opposes any of the remedies sought. Background [ 3 ] Mr. and Ms. Valstar separated in 2018 after many years of marriage. Their children are grown. In 1996, the Valstars started Vstar, which operated in the logging and log hauling industry. Mr. Valstar has always been the president and has 51% of the shares. Ms. Valstar was a director until her removal by Mr. Valstar in 2019 and has 49% of the shares. There is no unanimous shareholders agreement regarding Vstar. [ 4 ] The Valstars jointly own a residential property which can be described as the family home. Ms.

Bickford became a creditor when she signed a guarantee in favour of a credit union to help finance the construction of a building located on the family home property from which the fitness business has been operated. [ 5 ] The business was apparently successful for many years. One of the Valstar’s children works in the “family business”, as does a son-in-law. [ 6 ] In addition to the logging side of the business, Vstar also operates a fitness facility, although the facility has been shut down through the Covid pandemic. [ 7 ] Until separation, Vstar provided all of the family income.

After separation, it appears that Ms. Valstar has had no income other than from Vstar. She remained in the family home. Until recently, Vstar has paid for debt servicing on the family home, costs related to it, and some funds to Ms. Valstar. Vstar has also paid Ms. Valstar’s credit card bills. According to Ms. Valstar, Mr. Valstar is threatening to stop making payments to the credit union, which will put the family home and her mother’s financial security in jeopardy. [ 8 ] Mr. Valstar says that Vstar is on the verge of bankruptcy. Because of concerns over Ms. Valstar’s spending, Mr.

Valstar essentially transferred all of the business of Vstar but for the closed fitness facility to a new corporation owned solely by himself, 2306749 Alberta Ltd. For all practical purposes Vstar ceased to operate. Recently, Mr. Valstar placed a substantial number of Vstar’s equipment with an auction house, and negotiated a minimum sale price agreement with the auction house. [ 9 ] Mr. Valstar says the there are no funds within Vstar or 2306749 to make ongoing payments to Ms. Valstar or on any debt, and he wants to force the sale of the family home. [ 10 ] Ms. Valstar says that what Mr.

Valstar has been doing with Vstar is unfairly prejudicial and amounts to oppressive conduct against her as a shareholder. Ms. Bickford joins in the application to protect her position as a creditor of Vstar. [ 11 ] The main remedy sought is the appointment of an Inspector under the provisions of the Alberta Business Corporations Act . The Applicants want an order requiring Mr. Valstar to pay for the costs of the Inspector, including an immediate payment of $30,000 to get the process started. MNP LLP has agreed to act as Inspector.

Law [ 12 ] The Alberta Business Corporations Act , RSA 2000, c B-9 (the “ BCA ”) permits the appointment of an Investigator in a number of circumstances. Section 231(1) provides: 231

(1) A security holder may apply to the Court, ex parte or on any notice that the Court may require, for an order directing an investigation to be made of the corporation and any of its affiliated corporations.

(2) If, on an application under subsection (1), it appears to the Court that there are sufficient grounds to conduct an investigation to determine whether (

a) the business of the corporation or any of its affiliates is or has been carried on with intent to defraud any person, (

b) the business or affairs of the corporation or any of its affiliates are or have been carried on or conducted, or the powers of the directors are or have been exercised, in a manner that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of a security holder, (

c) the corporation or any of its affiliates was formed for a fraudulent or unlawful purpose or is to be dissolved for a fraudulent or unlawful purpose, or (

d) persons concerned with the formation, business or affairs of the corporation or any of its affiliates have in that connection acted fraudulently or dishonestly, the Court may order an investigation to be made of the corporation and any of its affiliated corporations. Issues [ 13 ] Ms. Valstar, as a shareholder, is clearly a security holder. Ms. Bickford, as an unsecured creditor, would not fit in that definition. [ 14 ] The initial issue is whether Mr. Valstar is guilty of oppressive conduct towards Ms. Valstar’s interests, or whether his actions have been unfairly prejudicial to Ms. Valstar’s interests.

The main areas of complaint relate to the exclusion of Ms. Valstar from the family business including removing her as a director, the transfer of Vstar’s business to 2306749, and the sale or attempted sale of substantially all of Vstar’s physical assets without her consent or approval. [ 15 ] From Ms. Valstar’s perspective, Mr. Valstar took a thriving business out of Vstar, surreptitiously transferred it to 2306749,

and may have run it into the ground to avoid having to pay Ms. Valstar much by way of a matrimonial property division. [ 16 ] Mr. Valstar responds to the allegations by painting an entirely different picture of Vstar. According to him, Vstar was by 2018 struggling and was not profitable. While it had a substantial contract to deliver logs to a mill in Hinton, the contract was a term one. The term expires this June and Vstar (or 2306749) may not have the contract renewed.

It is not clear if Vstar or 2306749 are even trying to have the contract renewed. [ 17 ] In any event, there is no money within Vstar or 2306749 to pay its bills and the only prudent thing to do was to begin to liquidate assets to pay off debt. That was the motivation for the auction sale. [ 18 ] As for excluding Ms. Valstar from the business, Mr. Valstar acknowledges doing so, but explains his reasons as being related to Ms. Valstars ill health and inability to contribute meaningfully to the business, as well as concerns about her having access to business funds. [ 19 ] Additionally, Mr. Valstar says that Ms.

Valstar made costly mistakes in her work with Vstar including mistakes with the company’s health and safety plan that either cost Vstar or exposed Vstar to future losses. No amounts are mentioned. [ 20 ] Mr. Valstar suggests that Ms. Valstar’s removal of $20,000 this year to pay for an appraisal of Vstar basically broke the company. Financial Statements [ 21 ] Ms. Valstar appended Vstar’s financial statements for the 2017, 2018, 2019 and 2020 fiscal years ended July 31. [ 22 ] As at July 31, 2018 (the closest statement to the parties’ separation) Vstar made a gross profit of $1,344,213 on sales of $1,406,825.

Overall, there was a loss of $58,614 from operations. The cumulative retained earnings of $153,039 were dividended out, leaving a deficit in retained earnings of $2,961. Debt totaled $515,442. [ 23 ] For July 31, 2019 Vstar made a gross profit of $1,895,066 on sales of $2,100,521. Income from operations was $125,970. Retained earnings were $269,361. Debt had increased to $737,470 relating to equipment purchases. The figures for 2018 in the 2019 statement of income and deficit do not reconcile with the figures in the 2018 statements themselves.

I assume that is because the 2018 dividends were not paid out, leaving more in the company. [ 24 ] That takes us to the most recent statements. At July 31, 2020, Vstar showed a gross profit of $3,737,725 on sales of $3,736,424. Net income after taxes was $75,166. Dividends of $102,000 were declared, leaving retained earnings at $242,527. Debt increased to $1,353,692, included debt to “related parties”. It appears that a significant amount of equipment was purchased during this period. [ 25 ] Mr. Valstar provided internal financial statements for Vstar and 2306749 in his response affidavit.

These statements reflect liabilities of $980,500 and “equity” of $160,000 for a deficit of $820,000. [ 26 ] For Vstar, total assets of $1,079,075 include a receivable of $205,546 from 2016749. The statements suggest “total equity” of $625,836, which is difficult to understand and to relate to the accountant-prepared financial statements provided to Ms. Valstar as “retained earnings previous year” are stated as $856,034. [ 27 ] The picture painted by Mr. Valstar of their finances is a gloomy one. His valuation of Vstar as at July 31, 2020 is $1,444,265 in assets and $1,201,639 for a net (before tax) of $242,646.

The challenge with that is that figure assumes the Valstars will repay the company the shareholders loans owed by them totaling $420,000. Ultimately, this nearly year-old valuation gives Vstar very little value. [ 28 ] What I take from the two sets of financial statements is that, unless the financial statements prepared by the Vstar’s external accountants did not accurately reflect the corporation’s financial position at the relevant times, Vstar was not insolvent or in any apparent financial difficulty as at July 31, 2018. It had suffered a small loss that year, but still had retained earnings of over $150,000.

For some reason, the retained earnings were dividended out leaving Vstar with a small deficit in retained earnings. Corporate debt was $515,442. [ 29 ] Something obviously happened with those dividends and there must be some amended or restated financial statements for 2018 not in evidence. I say that because the July 31, 2019 statements show retained earnings of $269,361, yet Vstar only had earnings of $125,970. I speculate that the 2018 dividends were reversed for some reason. [ 30 ] In any event, Vstar was profitable in 2019, although debt increased by approximately 50%.

No signs of any difficulties. [ 31 ] 2020 shows a similar pattern. V-star was again profitable, dividends were declared and retained earnings after the dividends were $242,527. However, debt increased by about 80% to $1,353,672. But this was hardly a business on the eve of bankruptcy, at least from its financial statements. [ 32 ] I can only conclude from the information provided to me on this application that Mr. Valstar’s decisions since 2018 have caused Vstar to fail, at least on its internally prepared financial statements.

It is obvious that there was some sort of expansion, having regard to the equipment purchases between 2018 and 2020 and the increase in debt. If Mr. Valstar’s evidence is to be accepted, the company is now in serious financial difficulties and is struggling to pay its bills, whether on its own or consolidating its affairs with its spinoff 2306749. It is unclear whether Vstar or 2306749 will even try to have its supply contracts renewed, or whether Mr. Valstar’s intention is to simply walk away from these entities after they have been liquidated.

Analysis [ 33 ] From a decision-making point of view, this would appear to be all on Mr. Valstar. Ms. Valstar was excluded from decision-

making and was removed as a director in 2019. [ 34 ] From the point of view of oppressive conduct, Ms. Valstar has easily made out the case on a balance of probabilities. Apart from his deliberate action to exclude Ms. Valstar from management activities and her directorship, Mr. Valstar made major decisions without regard to her interests. Most importantly, transferring the contract with West Fraser to 2306749 (an entity in which he is the sole shareholder) at no consideration, is something that could be described as a misappropriation of assets.

I could end there, but decisions to expand and nearly treble Vstar’s debt, are decisions where a 49% shareholder was completely disregarded and Ms. Valstar’s interests ignored. [ 35 ] The recent sale of substantially all of what was left in Valstar required a special resolution (2/3 majority) under

section 190 of the BCA : 190

(1) A sale, lease or exchange of all or substantially all the property of a corporation other than in the ordinary course of business of the corporation requires the approval of the shareholders in accordance with subsections (2) to (6). [ 36 ] The special resolution failed, but Mr. Valstar proceeded with the sale anyway. [ 37 ] His conduct is clearly caught by

section 231 of the BCA . Section 242(3) of the BCA provides a somewhat amazing menu of remedies in the face of oppressive conduct:

(3) In connection with an application under this section, the Court may make any interim or final order it thinks fit including, without limiting the generality of the foregoing, any or all of the following: (

a) an order restraining the conduct complained of; (

b) an order appointing a receiver or receiver-manager; (

c) an order to regulate a corporation’s affairs by amending the articles or bylaws; (

d) an order declaring that any amendment made to the articles or bylaws pursuant to clause (

c) operates notwithstanding any unanimous shareholder agreement made before or after the date of the order, until the Court otherwise orders; (

e) an order directing an issue or exchange of securities; (

f) an order appointing directors in place of or in addition to all or any of the directors then in office; (

g) an order directing a corporation, subject to section 34(2) , or any other person, to purchase securities of a security holder; (

h) an order directing a corporation or any other person to pay to a security holder any part of the money paid by the security holder for securities; (

i) an order directing a corporation, subject to

section 43 , to pay a dividend to its shareholders or a class of its shareholders; (

j) an order varying or setting aside a transaction or contract to which a corporation is a party and compensating the corporation or any other party to the transaction or contract; (

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; (

l) an order compensating an aggrieved person; (

m) an order directing rectification of the registers or other records of a corporation under

section 244 ; (

n) an order for the liquidation and dissolution of the corporation; (

o) an order directing an investigation under

Part 18 to be made; (

p) an order requiring the trial of any issue; (

q) an order granting permission to the applicant to (

i) bring an action in the name and on behalf of the corporation or any of its subsidiaries, or (ii) intervene in an action to which the corporation or any of its subsidiaries is a party, for the purpose of prosecuting, defending or discontinuing an action on behalf of the corporation or any of its subsidiaries. [ 38 ] It is clear that I could appoint an Inspector as Ms. Valstar asks. My challenge here is in attempting to find a remedy that is effective and economical in the context of family litigation, which this really is. Ms.

Valstar commenced a separate action for this relief, and having a war on multiple fronts is sometimes a good strategy. It may be that the information from Mr. Valstar on the eve of the application about Vstar’s dire financial situation comes as a shock. In any event, I am concerned that the parties may spend more on inspectors and litigation than they can afford, and there will be nothing left to fight over. [ 39 ] I am unsure as to the benefit of having an Inspector appointed. There is no mystery as to what happened to Vstar. Mr.

Valstar has been forthcoming in providing banking records and accounting information. This is not a situation that appears to require a forensic investigation as to what happened to various assets or funds, or to trace funds. Those are among the usual reasons for the appointment of

an Inspector in my experience. [ 40 ] The purpose of this application is to have the corporation or Mr. Valstar fund an appraisal of Vstar and the spin-off for use in the division of matrimonial property under the Matrimonial Property Act . It would be different if Ms. Valstar was, for example, trying to overturn decisions that had been made, or to oust Mr.

Valstar from management and decision-making, or other purposes relating to trying to keep the corporation viable, or trying to return appropriate benefits to the oppressed shareholder. [ 41 ] Those sorts of issues arise when separated spouses are fighting over control of the family business. That is not the case here. Ms. Valstar wants to be paid her fair share of the matrimonial property, not take over Vstar. [ 42 ] However, Ms. Valstar has made out a strong case for an oppression remedy. I have a very broad discretion to grant a remedy that is appropriate in the circumstances.

Section 3 of the BCA authorizes the Court to make any order it thinks fit. [ 43 ] Both parties need valuation information for Vstar in order to be able to resolve their issues over the division of matrimonial property. Resolution of matrimonial property issues will likely resolve any oppressive conduct claims in this proceeding, and valuation is fundamental to any resolution. On the information before me, Ms. Valstar has no funds with which to retain an expert. Her source of funds from Vstar was cut off by Mr. Valstar. He essentially appropriated the business himself, and has run it for his own account.

The present application was an interesting attempt to have the Court appoint an expert, at Vstar’s or Mr. Valstar’s expense to provide the necessary values. Having regard to Mr. Valstar’s oppressive conduct as well as the apparently devastating impact his management of Vstar has had on its value since the parties separated, that is appropriate. [ 44 ] It may be that other remedies will become appropriate should the valuation not result in resolution of all of the issues between the parties. But valuation is a good start.

Conclusion [ 45 ] I order that Vstar be valued by a qualified expert to determine its value as at the date of the parties’ separation, and (consolidating its assets and liabilities with those of 2306789) as at the date of the valuation. The cost of this is to be borne by Vstar. If Vstar is unable or unwilling to pay these costs then Mr. Valstar must do so. I would characterize any such payments by Mr. Valstar as a shareholder’s loan to Vstar. [ 46 ] In the first instance, I leave it to counsel to agree on a suitable expert, and the terms of reference.

I assume the parties may wish to have Vstar valued on a going concern basis as at the date of separation and at the present time, unless its circumstances are as dire as indicated by Mr. Valstar and a current going concern valuation would be pointless. It should also be valued on an asset value basis as at both dates. There may be other approaches that should be taken depending on the individual parties’ theories. [ 47 ] I also direct that Mr. Valstar and Ms. Valstar cooperate fully with the appointed expert, and to provide them with all documents, records, and information requested in a timely way.

Additionally, the parties will provide all necessary consents and authorizations to allow the expert to obtain documents, records, and information from third parties which are or may be in the opinion of the expert relevant to their valuation. [ 48 ] If the parties are unable to agree on the expert, or the terms of reference, I will appoint someone and provide the necessary directions, on the application of either party. [ 49 ] The expert report should be provided to me as well as to the parties on completion.

At that stage, it would be appropriate to have a case conference to determine what use should be made of the report. It is my hope that the parties may be able to agree to accept the report for matrimonial property division purposes and avoid having to retain their own experts to challenge aspects of it. In any event, the report will provide useful information to the Court to address any further remedies that may be appropriate under the BCA in relation to Mr.

Valstar’s oppressive conduct. [ 50 ] I note as an aside that an alternate route to a similar remedy is an application for the appointment of an expert under Rules 6.40-6.43: Appointment of court expert 6.40

(1) The Court may appoint a person as a court expert to give evidence on a matter.

(2) The court expert must give independent evidence to the Court.

(3) If possible, the parties must agree on the court expert to be appointed under subrule (1).

(4) The appointment of a court expert does not affect the right of a party to call the party’s own expert as a witness.

(5) If the court expert is a health care professional, the court expert has all the authority and responsibility conferred on a health care professional by these rules. Instructions or questions to court expert 6.41

(1) If the parties do not agree on the directions or instructions to be given or questions to be put to a court expert, the Court may decide what directions or instructions are to be given or questions are to be put to the court expert.

(2) The Court may give any direction or instruction or pose any question to the court expert that the Court considers necessary, whether the parties agree or not.

(3) The court expert’s report

(

a) must be in writing, verified by affidavit, (

b) must be served on the parties by the court clerk, and (

c) is admissible in evidence. Application to question court expert 6.42

(1) Within 20 days after receipt of a copy of the court expert’s report, a party may apply to the Court to question the court expert on the report.

(2) The Court may order the questioning of the court expert before or at a hearing of an application or originating application or before or at trial.

(3) The questioning may take the form of cross-examination.

Costs of court expert 6.43 The costs of a court expert are to be paid by the parties in equal proportions unless the Court otherwise orders. [ 51 ] To my knowledge, this is a little-used process but, in my view, it bears consideration where expert evidence on an issue is undoubtedly required and the economics of the case warrant that an entirely neutral expert be retained at the start with the hope that a costly war with duelling experts might be avoided. [ 52 ] Had I been concerned about my ability to order a valuation under the BCA , I would have invited Ms.

Valstar to make an application in the divorce/matrimonial property action for the appointment of a court expert. Heard on the 30 th day of April, 2021. Dated at the City of Red Deer, Alberta this 21 st day of May, 2021. Robert A. Graesser J.C.Q.B.A. Appearances: Paul Barrette, Prowse Chowne LLP for the Applicants Allison Ross, Rowanoak Law Office LLP for the Respondent, Richard Valstar