2018 NLCA 60, 2018 NLCA 60

David Rees (appellant) v. David J. Fong (respondent) (17/59) Indexed As: Rees v. Fong 2018 NLCA 60 3 C.A.N.L.R. 437 Court of Appeal of Newfoundland and Labrador Green C.J.N.L., Welsh and Harrington JJ.A. October 29, 2018

Summary: The parties were the directors of Quidi Vidi Brewing Company Ltd. Following a dispute between them, the respondent Mr. Fong sued the appellant Mr. Rees seeking remedies for oppression. Mr. Rees filed a counter-claim seeking a finding of oppression by Mr. Fong based on the manner in which Mr. Fong pursued his litigation . The trial judge allowed Mr. Fong’s claim on three grounds: first, when it was discovered that Mr. Fong had not been formally appointed as a director, Mr. Rees refused to accommodate the appointment; second, Mr.

Rees failed to provide timely financial information to Revenue Canada to ground tax appeals by the Company; third, the Company incurred financial penalties when Mr. Rees failed to pay tax arrears. The judge dismissed Mr. Rees’ claim of oppression. Mr. Rees appealed arguing the judge erred in granting Mr. Fong’s claim and dismissing Mr. Rees’ claim, and erred by ordering Quidi Vidi Brewing Company Ltd and not Mr. Fong to pay for a forensic audit of the company’s financials.

The question of whether the appeal is moot also arose because the parties had proceeded with the court-ordered shotgun buyout of the Company and an appeal regarding that issue was withdrawn. Held: Appeal allowed in part. Welsh J.A. (Green C.J.N.L. and Harrington J.A. concurring): The appeal is moot as there are no longer live issues between the parties. However, the Court should exercise the discretion to hear the appeal.

While it would have been more efficient from the perspective of judicial economy for the parties to address any issues of compensation or adjustments by means of the buyout, that appeared to be impossible due to the animosity between the parties. A sufficient adversarial context is present. The Corporations Act , RSNL 1990, c. C-36 addresses rectification of oppression in

section 371 . That

section provides that oppression may occur when the business or affairs of the corporation have been carried on or conducted in a manner, or the powers of the directors of the corporation have been exercised in a manner, that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of a director. To establish oppression one must demonstrate 1) a breach of a reasonable expectation of a stakeholder; and 2) whether the conduct complained of amounts to “oppression”, “unfair prejudice” or “unfair disregard”. As to the first issue, the appointment of Mr. Fong as director, Mr.

Fong clearly had a reasonable expectation that he had a right to be a director of the Company. However, in the circumstances, Mr. Rees’ conduct could not be said to rise to the level of “oppression”, “unfair prejudice” or “unfair disregard” of interests under the second prong of the analysis. The judge was satisfied that Mr. Rees’ conduct had no long term effect and he did not identify any specific harm or prejudice related to the directorship issue. As to the second issue concerning the failure to file timely tax appeals, not every unmet reasonable expectation will amount to oppression.

The judge failed to explain how the failure to file a tax appeal in the circumstances would amount to “unfair prejudice” to Mr. Fong, as contemplated under

section 371 of the Act . The judge found that the failure to file a tax appeal occurred on one occasion and was the result of either negligence or oversight by Mr. Rees. Mr. Rees did not obtain a personal benefit and there is no evidence that he acted in bad faith. As to the third issue, the failure to pay tax arrears, Mr. Rees was relying on advice of a member of an accounting firm regarding a dispute with Revenue Canada and the potential availability of tax credits. The issue was resolved well before Mr. Fong initiated the oppression litigation. The delay in paying these taxes could not be attributed to Mr.

Rees acting with unfair disregard for Mr. Fong’s interests as a shareholder. The judge erred in finding oppression by Mr. Rees against Mr. Fong on this basis.

In ordering the Company to pay for the audit, the judge was satisfied that the vitriol and total lack of trust between the two men and theallegations by one against the other with respect to financial matters supported his conclusion that there was an objective reason forconducting the audit which served the interests of the Company. There is no basis on which to conclude that the applications judge erredin his analysis of this issue. Nor did the judge err in dismissing Mr. Rees’ claim of oppression against Mr. Fong. The judge was satisfied that, while Mr.

Fong’slitigation approach was high-handed, it did not amount to an abuse of process that would ground a finding of oppression under section371 of the Act. The judge analyzed the manner in which the two men dealt with each other over the years, relying on that analysis to givecontext to Mr. Rees’ allegation of abuse of process. Given the animosity and distrust between the two men, an action in court was avirtually certain outcome. In

summary, neither claim of oppression succeeds. The applications judge did not err in ordering the Company to pay for the forensicaudit. The appeal regarding oppression by Mr. Rees against Mr. Fong should be allowed, but the appeal regarding oppression by Mr.Fong against Mr. Rees should be dismissed. Cases cited: New Brunswick (Minister of Health and Community Services) v. G.(J.), (SCC), [1999] 3 S.C.R. 46 BCE Inc. v. 1976 Debentureholders, 2008 SCC 69, [2008] 3 S.C.R. 560 Wilson v. Alharayeri, 2017 SCC 39 , [2017] 1 S.C.R. 1037 Counsel: Ernest Gittens and Michael Cabot, for the appellant; Jerome P.

Kennedy Q.C., for the respondent. This appeal was heard on September 13, 2017 before Green C.J.N.L., Welsh and Harrington JJ.A. The following judgment was delivered on October 29, 2018 by Welsh J.A. for the Court. ______________________________________________________________ Welsh J.A.: [1] In 1995 David Rees and David Fong incorporated Quidi Vidi Brewing Company Ltd. for the purpose of producing craft beer forthe local market. Disputes arose and, on February 7, 2014, Mr. Fong filed an originating application seeking remedies under theoppression provisions of the Corporations Act, RSNL 1990, c. C-36. Mr.

Rees contested Mr. Fong’s allegations, and claimed oppressionby Mr. Fong. [2] The applications judge found oppression by Mr. Rees against Mr. Fong, but dismissed Mr. Rees’ claim of oppression againsthim by Mr. Fong. Mr. Rees appeals. Ultimately, the judge ordered a mandatory shotgun buyout under specific terms and conditions. The Court was advised at the hearing of the appeal that disputes about the buyout had been resolved, and that it was unnecessary for theCourt to rule on the ground of appeal related to the mandatory buyout. BACKGROUND [3] Mr. Rees and Mr.

Fong intended that they would be the sole directors of Quidi Vidi Brewing Company Ltd. (“the Company”).

Neither had experience in such a venture. The Company’s common shares were held equally by DF 51 Consulting, controlled by Mr. Fong, and DGR Holdings Limited, controlled by Mr. Rees. Regarding the parties to the litigation, the applications judge explained (2017 NLTD(G) 37): [310] The original application by Fong was in his personal capacity as against David Rees in his personal capacity.

By way of an interlocutory application filed June 29, 2015, Fong sought the adding of DF 51 Consulting Ltd. as a second applicant and adding to Fong’s oppression the holding company of Rees namely DGR Holdings Limited as second respondent. That amendment to Fong’s pleadings was ordered by this Court. I am satisfied that it brought before the Court the proper parties to Fong’s application. However, the litigation was carried on, and the appeal proceeded, in the names of Mr. Rees and Mr. Fong without reference to these two companies. [ 4 ] The applications judge relied on three bases for finding oppression by Mr.

Rees against Mr. Fong. First, when it was discovered that Mr. Fong had not been formally appointed as a director, Mr. Rees refused to accommodate the appointment. Second, Mr. Rees failed to provide timely financial information to Revenue Canada to ground tax appeals by the Company. Third, the Company incurred financial penalties when Mr. Rees failed to pay tax arrears. [ 5 ] Further, in his originating application, Mr. Fong alleged misappropriation by Mr. Rees of more than $400,000.

He sought, and was granted, an order for a “full forensic audit of the company for the financial years commencing on January 1, 2002, to the current date” (order filed February 27, 2014, at clause 1). The judge did not accept Mr. Rees’ submission that, given Mr. Fong’s rationale for requesting the audit, if Mr. Rees was vindicated, Mr. Fong, not the Company, should be required to pay for the audit. Rather, the judge ordered that the costs of the forensic audit were to be paid by the Company (order dated June 8, 2017). [ 6 ] Finally, the applications judge dismissed Mr.

Rees’ claim of oppression based on the manner in which Mr. Fong pursued his litigation. ISSUES [ 7 ] At issue is whether the applications judge erred:

(1) In finding oppression by Mr. Rees against Mr. Fong based on: (

a) Mr. Rees’ refusal to formally have Mr. Fong appointed as a director of the Company; (

b) Mr. Rees’ failure to provide financial information to Revenue Canada to ground tax appeals; and (

c) Mr. Rees’ failure to pay tax arrears, thereby incurring penalties;

(2) In dismissing Mr. Rees’ claim of oppression based on the manner in which Mr. Fong pursued his litigation; and

(3) In ordering that the Company, not Mr. Fong, should bear the cost of the forensic audit. [ 8 ] The question of whether the appeal was moot as a result of the buyout order is also considered. ANALYSIS

Is the Appeal Moot? [9] The question of whether the appeal is moot arises because the parties proceeded with the court-ordered shotgun buyout of theCompany and the appeal regarding that issue was withdrawn. Accordingly, it may be argued that the questions on appeal are no longerlive issues as between the parties. [10] The exercise of discretion to hear an appeal that may be considered moot is discussed in New Brunswick (Minister of Health andCommunity Services) v. G.(J.), (SCC), [1999] 3 S.C.R. 46.

Lamer C.J.C., for the majority, explained: [41] … A moot case is one in which a decision of the court “will not have the effect of resolving some controversy which affects ormay affect the rights of the parties”: see Borowski [ (SCC), [1989] 1 S.C.R. 342], at p. 353. As a general rule, the Courtwill not decide moot cases. However, the Court may exercise its discretion to decide a moot case in certain circumstances. In Borowski,Sopinka J. set out the following test at p. 353: The approach in recent cases involves a two-step analysis.

First, it is necessary to determine whether the required tangible and concretedispute has disappeared and the issues have become academic.

Second, if the response to the first question is affirmative, it is necessaryto decide if the court should exercise its discretion to hear the case. … [43] … In Borowski, Sopinka J. identified three criteria relevant to the Court’s exercise of discretion: the presence of an adversarialcontext, the concern for judicial economy, and the need for the Court to be sensitive to its role as the adjudicative branch in our politicalframework. [11] In this case, regardless of the buyout, the effect of which was to remove one of the two from the business, both parties madevigorous and full submissions on the questions of oppression and payment for the forensic audit.

Mr. Rees submits that terms of thebuyout would not necessarily address the question of the cost of the audit since, under the court order, those costs are payable by theCompany, a factor that could affect the value of the Company for purposes of determining a fair price for the sale.

Further, both partiesseek vindication from the allegations of oppression or wrongful action by the other. [12] In the circumstances, while it would have been more efficient from the perspective of judicial economy for the parties to addressany issues of compensation or adjustments by means of the buyout, that appeared to be impossible due to the animosity between theparties. I am satisfied that a sufficient adversarial context is present, and given the adjudicative role of the Court, on balance, it would beappropriate to exercise the Court’s discretion to hear the appeal. The Law [13]

Section 371 of the Corporations Act addresses rectification of oppression and provides, in relevant parts:

(1) A complainant may apply to a 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 … …

(

b) the business or affairs of the corporation … are or have been carried on or conducted in a manner; or (

c) the powers of the directors of the corporation … 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, creditor, director or officer, the court may make an order to rectify the matters complained of.

(3) In connection with an application under this section, the court may make an interim or final order it thinks appropriate including … (

j) an order compensating an aggrieved person; …

(7) An applicant under this

section may apply in the alternative for an order under

section 343. (Emphasis added.) “Complainant” is defined in

section 368(b)(ii) of the Act to mean “a director or an officer or a former director or officer of a corporation”. [ 14 ]

Section 343 of the Act authorizes a court order to liquidate and dissolve a corporation based on oppression:

(1) A court may order the liquidation and dissolution of a corporation … upon the application of a … director or officer (

a) where the court is satisfied that, in respect of a corporation …, … (ii) the business or affairs of the corporation … are or have been carried on or conducted in a manner, or (iii) the powers of the directors of the corporation … 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, creditor, director or officer; …

(3) Sections 371 and 372 apply to an application under this section. [ 15 ] The analytical approach to

section 371 is discussed in BCE Inc. v. 1976 Debentureholders , 2008 SCC 69 , [2008] 3 S.C.R. 560 , which dealt with the comparable provision in the

Canada Business Corporations Act , RSC 1985, c. C-44,

section 241. The Court

explained: [56] … One should look first to the principles underlying the oppression remedy, and in particular the concept of reasonable expectations. If a breach of a reasonable expectation [of a stakeholder] is established, one must go on to consider whether the conduct complained of amounts to “oppression”, “unfair prejudice” or “unfair disregard” as set out in s. 241(2) of the CBCA . … [62] As denoted by “reasonable”, the concept of reasonable expectations is objective and contextual. The actual expectation of a particular stakeholder is not conclusive.

In the context of whether it would be “just and equitable” to grant a remedy, the question is whether the expectation is reasonable having regard to the facts of the specific case, the relationships at issue, and the entire context, including the fact that there may be conflicting claims and expectations. … [67] Having discussed the concept of reasonable expectations that underlies the oppression remedy, we arrive at the second prong of the s. 241 oppression remedy. Even if reasonable, not every unmet expectation gives rise to claim under s. 241 . The

section requires that the conduct complained of amount to “oppression”, “unfair prejudice” or “unfair disregard” of relevant interests. “Oppression” carries the sense of conduct that is coercive and abusive, and suggests bad faith. “Unfair prejudice” may admit of a less culpable state of mind, that nevertheless has unfair consequences. Finally, “unfair disregard” of interests extends the remedy to ignoring an interest as being of no importance, contrary to the stakeholders’ reasonable expectations: see Koehnen [ Oppression and Related Remedies , (Toronto; Thomson/Carswell, 2004)], at pp. 81-88.

The phrases describe, in adjectival terms, ways in which corporate actors may fail to meet the reasonable expectations of stakeholders. … [92] The original wrong recognized in the cases was described simply as oppression, and was generally associated with conduct that has variously been described as “burdensome, harsh and wrongful”, “a visible departure from standards of fair dealing”, and an “abuse of power” going to the probity of how the corporation’s affairs are being conducted … [93] The CBCA has added “unfair prejudice” and “unfair disregard” of interests to the original common law concept, making it clear that wrongs falling short of the harsh and abusive conduct connoted by “oppression” may fall within s. 241 . “Unfair prejudice” is generally seen as involving conduct less offensive than “oppression”.

Examples include squeezing out a minority shareholder, failing to disclose related party transactions, changing corporate structure to drastically alter debt ratios, adopting a “poison pill” to prevent a takeover bid, paying dividends without a formal declaration, preferring some shareholders with management fees and paying directors’ fees higher than the industry norm: see Koehnen, at pp. 82-83. [94] “Unfair disregard” is viewed as the least serious of the three injuries, or wrongs, mentioned in s. 241 .

Examples include favouring a director by failing to properly prosecute claims, improperly reducing a shareholder’s dividend, or failing to deliver property belonging to the claimant: see Koehnen, at pp. 83-84. [ 16 ] The issue of rectification following a finding of oppression under

section 241 of the

Canada Business Corporations Act is discussed in Wilson v. Alharayeri , 2017 SCC 39 , [2017] 1 S.C.R. 1037 . Côté J., for the Court, explained: [27] Any order made under s. 241(3) exists solely to “rectify the matters complained of”, as provided by s. 241(2). The purpose of the oppression remedy is therefore corrective: “… in seeking to redress inequities between private parties”, the oppression remedy seeks to “apply a measure of corrective justice” [citations omitted]. In other words, an order made under s. 241(3) should go no further than necessary to correct the injustice or unfairness between the parties.

The question of personal liability of a director under the oppression remedy is discussed in detail in Wilson , at paragraphs 28 to 57 .

Oppression by Mr. Rees Against Mr. Fong Appointment of Mr. Fong as a Director [ 17 ] In finding there was “short term oppression” by Mr. Rees against Mr. Fong, the applications judge explained: [292] In approximately 2010-2011 Rees discovered that when [the Company] was incorporated Fong had not formally been appointed director. Fong alleges that Rees refused to make him a director which resulted in Fong having to retain legal counsel to attempt to rectify this oversight.

In Exhibit DF #14 which is a letter from Rees to Fong’s legal counsel, Rees confirms that he was hesitant to agree to the appointment of Fong as a director of the company as Fong’s past involvement had negatively impacted the smooth running of the company’s operations. Rees went on to cite his view of incidents of where Fong’s conduct had run up significant deficits of almost $1,000,000 when Fong was in effect running the company.

Here Rees complains about Fong not acting in the best interest of the company and that Rees has an even more significant investment of time and money in the company than Fong and that he would not let Fong jeopardize Rees’ investment or the jobs of the 16 people employed by [the Company]. While this action on the part of Rees had no long term oppressive result, it was improper of him to resist rectifying the omission to have Fong appointed as director. To rectify the oppression, the judge awarded Mr.

Fong damages equivalent to the legal fees he expended to correct the oversight. [ 18 ] Regarding the first prong of the analysis, Mr. Fong clearly had a reasonable expectation that he had a right to be a director of the Company. This was the original intention of the parties and the failure to formally appoint him was an oversight. As noted by the applications judge, it was improper for Mr. Rees to resist rectifying the omission. [ 19 ] However, in the circumstances, Mr.

Rees’ conduct could not be said to rise to the level of “oppression”, “unfair prejudice” or “unfair disregard” of interests discussed in BCE under the second prong of the analysis. The judge was satisfied that Mr. Rees’ conduct had no long term effect and he did not identify any specific harm or prejudice related to the directorship issue. Further, it was not until 2010 that the oversight regarding Mr. Fong’s appointment as a director was raised. While the matter was not rectified until 2012 after Mr.

Fong’s legal counsel became involved, the issue was resolved well before litigation was commenced and allegations of oppression were made by Mr. Fong. [ 20 ] In the circumstances, I am satisfied that the applications judge erred in concluding that Mr. Rees’ conduct was such as to warrant a remedy under

section 371 of the Corporations Act . Tax Appeals to Revenue Canada [ 21 ] In finding oppression by Mr. Rees against Mr. Fong on the basis that Mr. Rees failed to file timely tax appeals with Revenue Canada, the applications judge wrote: [269] … With respect to tax obligations, clearly there were a number of incidents of [the Company] failing to pay instalment payments due to Canada Revenue Agency and the failure to properly file returns on HST. These failures resulted in interest on overdue accounts and thus caused prejudice to the company by reason of these accruing interest obligations.

However, I am not satisfied that this failure arises from a failure to keep records. These obligations were not hidden from Fong but he may not have been aware of them. However, there was one occasion where the company failed to file in time appeals of certain tax obligations to Canada Revenue Agency with the result that the ability to make those appeals was precluded by the passage of the relevant limitation period for making such appeals.

It is not known if these appeals would have been successful or not. [270] I conclude that it is not the failure to pay tax assessments which would constitute oppression against Fong. If the funds weren’t available to pay the taxes, what was Rees to do? However, I am satisfied that the failure to make the appropriate appeal to Revenue Canada for a reassessment occurred by negligence or oversight on the part of Rees.

Even though what the ultimate outcome of the appeal would have been in terms of reduction of tax liability is unknown, this failure does constitute unfair prejudice with respect to the interests of Fong.

[ 22 ] As set out in BCE , not every unmet reasonable expectation will amount to oppression. In this case, good business practice may have warranted a timely tax appeal. The Company was in financial difficulties and a potential opportunity to reduce tax owed by the Company would fall within the reasonable expectation of stakeholders. [ 23 ] However, under the second prong of the BCE analysis, the judge failed to explain how the failure to file a tax appeal in the circumstances would amount to “unfair prejudice” to Mr. Fong, as contemplated under

section 371 of the Act .

Examples of unfair prejudice in BCE are: “squeezing out a minority shareholder, failing to disclose related party transactions, changing corporate structure to drastically alter debt ratios, adopting a “poison pill” to prevent a takeover bid, paying dividends without a formal declaration, preferring some shareholders with management fees and paying directors’ fees higher than the industry norm” (decision in BCE , at paragraph 93, paragraph 15, above.) These suggest that conduct more serious than neglecting to file one timely tax appeal is necessary to constitute “unfair prejudice”. [ 24 ] It is clear from the analysis set out in BCE that not every omission or poor decision or even negligent conduct by a director will amount to oppression.

In this case, the judge found only that the failure to file a tax appeal occurred on one occasion and was the result of either “negligence or oversight” by Mr. Rees. Mr. Rees did not obtain a personal benefit and there is no evidence that he acted in bad faith. [ 25 ] The conclusion follows that the applications judge erred in finding oppression by Mr. Rees against Mr. Fong based on the failure on one occasion to pursue tax appeals with Revenue Canada.

Failure to Pay Tax Arrears [ 26 ] Regarding the non-payment of tax arrears for 2007 to 2009, the applications judge wrote: [298] … Fong accuses Rees of not informing him or Hugh McDermott [the general manager] when Rees came into knowledge of the tax arrears problem in 2012. The failure to pay tax installments would be expected to trigger interest being applied to the unpaid installments.

While I am satisfied that the failure to pay was not made mala fide it is another example where the result of non-payment may unfairly disregard the interests of Fong as a shareholder. [299] In the absence of evidence of any interest costs on these tax arrears, I am unable to order any relief to Fong in relation thereto. I am satisfied however, that by the time Rees resigned as Managing Director of [the Company] there was sufficient cash flow in the company to allow complete or partial payment of these past due installments prior to his resignation.

His failure to do so is negligent, and constituted oppression of Fong by Rees. [ 27 ] Mr. Rees submits that the applications judge made a fundamental mistake as to the evidence, and that this amounted to a palpable and overriding error. The un-contradicted evidence of Mr. Rees was that he was relying on advice of a member of the accounting firm of Noseworthy Chapman regarding a dispute with Revenue Canada and the potential availability of tax credits. Subsequently, Mr. McDermott became involved and addressed the matter with Revenue Canada. Mr. Rees submits that there is no evidence that Mr.

Fong was unaware of the non-payment of these taxes and the reason. Further, the issue was resolved well before Mr. Fong initiated the oppression litigation. For his part, Mr. Fong does not challenge these facts. [ 28 ] It follows that the delay in paying these taxes could not be attributed to Mr. Rees acting with unfair disregard for Mr. Fong’s interests as a shareholder. The judge erred in finding oppression by Mr. Rees against Mr. Fong on this basis. The Forensic Audit [ 29 ] Directing that the Company would pay for the forensic audit, despite Mr.

Rees’ submission to the contrary, the applications judge explained: [329] On the issue of whether the forensic audit was appropriately required, viewing the matter objectively, I conclude that based on the many “red flags” ultimately discovered by the forensic audit and based upon Sean Handrigan’s [Mr. Fong’s accountant’s] partial review

of the financial records of the company, there were reasons why the forensic audit was appropriate. Pascal Jolicoeur and Mary Jane Andrews of KPMG [who conducted the audit] regarded the forensic audit as being justified. [330] Notwithstanding my conclusion that objectively a forensic audit was appropriately required, that objective analysis is difficult to separate from the strong accusations of misappropriation made against Rees.

Rees’ opposition to Fong’s originating application centers more on the allegations made by Fong against Rees than on any objective view that the records of the company needed to be investigated and regularized. … [332] There having been sound objective reasons for requesting the forensic audit, I therefore cannot conclude that the mere bringing of the originating application requesting an order for forensic audit would, in and of itself, constitute an oppression of Rees by Fong. [ 30 ] Accordingly, the judge ordered the Company to pay for the audit. In making that order, the judge rejected Mr.

Rees’ submission that the audit was ordered solely to permit Mr. Rees to refute Mr. Fong’s allegation that Mr. Rees had misappropriated funds.

The judge was satisfied that the vitriol and total lack of trust between the two men and the allegations by one against the other with respect to financial matters, referenced throughout his lengthy decision, supported his conclusion that there was an objective reason for conducting the audit which served the interests of the Company. [ 31 ] There is no basis on which to conclude that the applications judge erred in his analysis of this issue or in ordering that the Company would bear the cost of the forensic audit. Oppression by Mr. Fong Against Mr. Rees [ 32 ] The basis for the claim of oppression by Mr.

Fong against Mr. Rees is summarized by the judge: [303] Rees expressed the opinion that his claim of oppression against Fong is very straightforward. He states that Fong, in initiating this Court action accusing Rees of theft and fraud did so with the ulterior motive of blocking Rees from the company thus preventing Rees from carrying out his legal duties as a shareholder and preventing Rees from any meaningful participation on behalf of his holding company DGR Holdings Limited, the 50% shareholder.

In the alternative, he describes Fong’s actions as harsh, burdensome or unfairly having disregarded the interest of Rees and/or DGR Holdings Limited. [304] In addition to restricting Rees’ ability to participate in the company, Rees alleges that Fong engineered this current court process which has resulted in [the Company] paying significant and unwarranted accounting fees to KPMG. [ 33 ] Mr. Rees asserted bad faith on the part of Mr. Fong in initiating the litigation.

He submitted that by commencing the application with its focus solely on misappropriation, adding other complaints later by amendment, almost as an afterthought, Mr. Fong sought to use the serious, and ultimately unproven misappropriation allegation as a means of improperly seeking interim remedies that would disable Mr. Rees’ involvement with the Company. Accordingly, Mr. Rees emphasized his submission that the manner in which Mr. Fong began legal proceedings by alleging fraud and theft by Mr. Rees amounted to an abuse of process. The applications judge was clearly aware of the importance Mr.

Rees attached to this submission and of the reasons for alleging abuse of process. [ 34 ] However, the judge was satisfied that, while Mr. Fong’s approach was high-handed, it did not amount to an abuse of process that would ground a finding of oppression under

section 371 of the Act . The judge analyzed the manner in which the two men dealt with each other over the years, relying on that analysis to give context to Mr. Rees’ allegation of abuse of process. [ 35 ] The Court considered that, in 2012, Mr. Rees retired as general manager of the Company, but retained his position as a director. Disputes continued regarding the new general manager and the employment of Mr. Fong’s son. Mr. Fong testified that Mr. Rees wanted to reinsert himself into the management of the Company and that he was not going to let that happen. In February 2014, Mr.

Fong initiated his oppression application, alleging among other things that Mr. Rees had misappropriated funds from the Company. He obtained a court order halting the income Mr. Rees was receiving from the Company. That income was based on an agreement in 2012 when Mr. Rees retired, which provided that he would receive $300,000 over five years in respect of back pay together with $75,000 annually in management fees.

[ 36 ] In dismissing Mr. Rees’ claim of oppression by Mr. Fong, the applications judge commented that “Rees’ actions and Fong’s replies were simply mirror images of Fong’s earlier complaints against Rees and Rees’ ignoring of those complaints” (paragraph 333). In addition, as set out above, the judge was satisfied that there were sound objective reasons for requesting the forensic audit. While Mr. Fong’s approach may be characterized as high-handed, particularly in seeking an order suspending the previously agreed payments to Mr.

Rees, in light of the applications judge’s findings of fact, there is no basis on which to conclude that he erred in rejecting Mr. Rees’ claim of oppression by Mr. Fong. [ 37 ] Given the animosity and distrust between the two men, an action in court was a virtually certain outcome. Since neither was willing to abandon his involvement with the Company and since neither wanted the Company liquidated under

section 343 of the Act , Mr. Fong took the step of initiating action under

section 371. The effect was to provide an opportunity to obtain a court-ordered remedy to break the deadlock. Having found oppression by Mr. Rees, which I have concluded above was not well-founded, the judge ordered a compulsory shot-gun buyout according to specific terms and conditions. The Court was advised at the hearing of the appeal that disputes about the buyout had been resolved, and that it was unnecessary for the Court to rule on the ground of appeal related to that issue.

Summary and Disposition [ 38 ] In

summary, I conclude that neither claim of oppression succeeds and that the applications judge did not err in ordering the Company to pay for the forensic audit. Accordingly, no remedy was available under

section 371 of the Act . Further, in light of the completion of the court-ordered buyout and abandonment of the appeal regarding that issue, nothing further arises for consideration by this Court. [ 39 ] Accordingly, I would allow the appeal regarding oppression by Mr. Rees against Mr. Fong but would dismiss the appeal regarding oppression by Mr. Fong against Mr. Rees. Given the partial success of each, I would order the parties to bear their own costs of the appeal. Appeal allowed.