Sunner v. A-Z Foam Ltd., 2018 BCSC 1113

IN THE SUPREME COURT OF BRITISH COLUMBIA Citation: Sunner v. A-Z Foam Ltd., 2018 BCSC 1113 Date: 20180615 Docket: S176252 Registry: Vancouver Between: Jagjit Singh Sunner and Sukhi Sunner Plaintiffs And A-Z Foam Ltd., 0777334 BC Ltd., A1 Sponge & Foam Fabrications Ltd., Navjot Singh Gill, Surinder Kaur Gill, Rupinder Kang and Kashmir Kang Defendants Before: The Honourable Madam Justice Iyer Oral Ruling Re Appointment of an Inspector and Interim Injunctive Relief In Chambers Counsel for the Plaintiffs: D.F. Hepburn D.S. Parlow Counsel for the Defendants A-Z Foam Ltd., 0777334 BC Ltd. and A1 Sponge & Foam: J.K.

Lamb D. Winterton, Articled Student Place and Date of Hearing: Vancouver, B.C. June 12, 2018 Place and Date of Ruling: Vancouver, B.C. June 15, 2018 [ 1 ] THE COURT: In this application the plaintiffs seek appointment of an inspector under the Business Corporations Act, S.B.C. 2002, c. 57 (the “ Act ”), and interim injunctive relief. By way of background, the plaintiffs, Mr. and Ms. Sunner, are spouses. Mr. Sunner is the nephew of the defendants, Mr. Gill and Mr. Kang, and their spouses are also individual defendants. The three couples are all shareholders in the three family businesses.

All six have been employed by one or more of the companies, but Mr. Sunner and his uncles have been most active in running them as compared to their spouses. All three worked in them full time. [ 2 ] The three businesses are A-Z Foam Ltd. (“A-Z Foam”), which makes and sells foam and was the original business; A1 Sponge & Foam Fabrications Ltd. (“A1 Sponge”), which the families acquired in 2012; and a numbered company, 0777334 BC Ltd., which owns property in British Columbia and elsewhere.

The three couples have an equal shareholding interest in all companies and receive roughly equal income from employment and dividends from them. The businesses were profitable, and the families did well. I refer to the three companies collectively as the “corporate defendants” and to Mr. and Ms. Gill and Mr. and Ms. Kang as the “individual defendants.” [ 3 ] At some point in 2015 or 2016 there was a falling out between Mr. Sunner and his uncles. The relationship became extremely acrimonious. Mr. Gill, as CEO of A-Z Foam, issued Mr. Sunner a termination notice from the company on June 20, 2016.

There were some efforts to patch up the relationship, but they failed and Mr. Sunner left A-Z Foam for good on December 2, 2016. The defendants say Mr. Sunner left. He says he was ousted. [ 4 ] In July 2017 the Sunners commenced a petition seeking relief from oppression, appointment of an inspector and other remedies against all of the defendants in this action.

They then commenced the present application seeking appointment of an auditor, appointment of an inspector, an interlocutory injunction restraining the defendants’ operation of the companies, leave to commence a derivative action and conversion of the petition to a civil claim. [ 5 ] On January 9, 2018, by way of consent order, Mr. Justice McEwan ordered the corporate defendants to appoint an auditor within 14 days and for the auditor to prepare audited financial statements. He also directed that the matter proceed by way of civil claim and adjourned generally the other relief sought.

I refer to this as the “McEwan order.” The proceeding before me is the hearing of the remainder of the application before Justice McEwan.

[6] Before me, the Sunners seek the appointment of a named inspector under ss. 248 and 251 of the Act to investigate the financialaffairs of the corporate defendants and to report to the court, and interlocutory relief to prevent the defendants and their agents fromdepleting the assets of the corporate defendants under s. 227(3) of the Act. They propose specific terms relating to each. The corporatedefendants oppose the appointment of an inspector but consent to an interlocutory injunction on more limited terms than those sought bythe Sunners.

The individual defendants did not file a response to the application and did not appear. [7] There is no significant dispute about the applicable legal principles. The parties relied on Rosemont Enterprises Ltd. v. MercuryIndustrial Inc., 2005 BCSC 1339, as setting out the principles that apply to relief under s. 248, and on RJR-MacDonald Inc. v.

Canada(Attorney General), (SCC), [1994] 1 SCR 311, as setting out the principles that apply to interlocutory injunctive relief.Although there was some argument about the weight to be given to irreparable harm, I am satisfied that in British Columbia irreparableharm must be considered in assessing the balance of convenience, as has been stated in British Columbia (Attorney General) v.Gitanmaax Band, (1986) (BC CA), 9 B.C.L.R. (2d) 333 (BCCA) and in Mayer v. Mayer, 2012 BCSC 1264. [8] To summarize, appointment of an inspector under s. 248 of the Act is a discretionary remedy.

The discretion may be exercisedwhere it appears to the court that there are reasonable grounds for believing that under subsection (3)(a): The affairs of the company are being or have been conducted or the powers of the directors are being or have been exercised in a mannerthat is oppressive or unfairly prejudicial to one or more shareholders within the meaning of s. 227(1), including the applicants. [9] Rosemont clarifies that this remedy should not be ordered when the disclosure and other pre-trial procedures attendant uponordinary litigation would be as effective (at para. 67).

It also establishes that the standard of proof is one of appearance or “outwardshow” in the sense that there is a good reason to think that the conduct complained of may have taken place, not that the applicant mustprove that it did take place (paras. 18 and 19). [10] The test for an interlocutory injunction requires the applicant to prove first that there is a serious question to be tried.

Second,the balance of convenience must favour the applicant, which includes assessment of whether the applicant will suffer irreparable harm.As in most cases, the focus of argument in the present application was on the balance of convenience and specifically irreparable harm. [11] The Sunners claim that the evidence shows that there are five events that individually and collectively meet the test forobtaining the relief they seek. They are:

a) the sale of all of the assets of A1 Sponge to the individual defendants’ son’s company RN Fibres;

b) the diversion of a corporate opportunity to purchase a feather-casing business to RN Fibres;

c) the failure to provide audited financial statements in compliance with the McEwan order;

d) diversion of cash to the individual defendants; and

e) undisclosed or off-the-book cash transactions. [12] It is noteworthy that at the hearing the corporate defendants focused almost exclusively on the last of these, the cashtransactions, which they vehemently deny. I am cognizant that the present application is limited to assessing whether the relief soughtshould be granted. It is not a determination or even a foreshadowing of the outcome of what is likely to be a hotly contested andprotracted litigation.

The numerous affidavits presented to me contain conflicting evidence and allegations of falsehood, deceit andimpropriety that I cannot and will not resolve. [13] I am not satisfied that the plaintiffs’ evidence relating to the purchase of the feather-casing business or the undisclosed cashtransactions satisfies the test for relief sought.

I am satisfied, however, that evidence relating to the sale of assets of A1 Sponge, thefailure to obtain the audit and the diversion of cash, has established that some relief is appropriate, although on more limited terms thanthose sought by the Sunners. [14] With respect to the sale of assets of A1 Sponge, the evidence establishes that its sales were approximately $2 million in 2016. InMarch 2017, Mr. Gill and Mr. Kang sold all of its assets to RN Fibres. The net sale price after applying the three months free rent alsoprovided by A1 Sponge to RN Fibres for taking over the premises of A1 Sponge was roughly $100.

No notice of this transaction wasgiven to the Sunners as shareholders of A-Z Foam as is required under the Act. They learned about it only after the fact. Essentially aprofitable company in which the plaintiffs are one-third shareholders has been given away.

This evidence was not seriously contested bythe corporate defendants. [15] Turning to the audit, the terms of the McEwan order required that an auditor be appointed within 14 days of January 9, 2018.On January 15, 2018, counsel for the corporate defendants wrote to counsel for the Sunners expressly stating that auditors had beenretained and providing their contact information. Time passed. The Sunners sought information about the progress of the audit andfinally learned from auditor directly on May 14, 2018, four months after the date of the McEwan order that A-Z Foam never engagedthat auditor.

Counsel for the corporate defendants apologized for this and confirmed that a new auditor has been retained and is expectedto provide audited financial statements by the end of July 2018. In my view, the evidence establishes serious misconduct. An auditordered by the court to commence in January 2018 has been delayed by six months without any justification. [16] Finally, with respect to the diversion of cash, based on the evidence relating to A-Z Foam, which is the only evidence that theplaintiffs have so far obtained, the Sunners, Gills and Kangs each received dividends of $90,000 in 2016.

In 2015 the Sunners alsoreceived $90,000 in dividends, but the amount of dividends received by the Gills and Kangs in that year has not been disclosed. In termsof total employment and dividend income from A-Z Foam for 2016, which is the only year for which the Sunners have information, theincome each couple received, taking into account that Mr. Sunner left at the beginning of December, was in the $180,000 to $200,000range with $90,000 in dividends and the balance in salary. In stark contrast, no dividends at all were paid in 2017.

Instead, the Gills werepaid $279,125 in salary as compared to $104,750 in 2016, and the Kangs were paid $255,125 in salary as compared to $112,750 in 2016.

The only explanation provided by Mr. Gill when asked about this during his examination for discovery was that they gave themselves a wage increase because they “were working harder and longer.” This is no explanation at all. [ 17 ] In their response to the application, the corporate defendants emphasized that Mr. Sunner is now working for a competitor to A-Z Foam. Mr. Sunner’s evidence is that this is the only business he knows and he needed employment when he left A-Z Foam. There is no evidence that Mr. Sunner has a management role in the competitor.

Counsel for the corporate defendants did not press that point in oral argument. While I take this into account in crafting the terms of the orders, this evidence does not in any way suggest that the orders sought by the plaintiffs are unnecessary or inappropriate. [ 18 ] Dealing first with the appointment of an inspector. I am satisfied within the meaning of s. 248(3)(

a) that the affairs of the corporate defendants have been and may be being conducted, and the powers of the directors are being or have been exercised, in a manner that is oppressive or unfairly prejudicial to the Sunners. That said, this remedy is discretionary, and I am not satisfied that it is presently warranted. The conversion of the proceedings into a civil action will provide the plaintiffs with significant access to information, as will the auditor’s reports that will be completed by the end of July. Accordingly I decline to make this order. However, I do not dismiss this aspect of the application.

Rather, I adjourn it with liberty to the plaintiffs to renew their request for appointment of an inspector on August 1, 2018, or on a later date if there is evidence that their access to information through the litigation process is being delayed unreasonably, or the audits required by the McEwan order have not been completed. [ 19 ] I am satisfied that injunctive relief is warranted. I take counsel’s point that an injunction must be crafted so as not to interfere with ongoing business. However, it appears that A1 Sponge has no ongoing business because of the actions of the defendants.

It is important that the other companies not meet the same fate. I am satisfied that there is a serious issue to be tried as between the parties, and the defendants do not contest this. I am also satisfied that the balance of convenience favours the Sunners, including consideration of irreparable harm.

The failure to comply with the McEwan order until that fact was discovered by the plaintiffs and the consequent period of six months in which the defendants operated without the oversight of an ongoing audit satisfy me that there is a sufficient likelihood of irreparable harm to warrant a properly crafted injunction. I also note that the corporate defendants consent to four of its five terms. [ 20 ] The contested aspect of the proposed injunction order is the plaintiffs’ request that, unless the court orders otherwise or Mr.

Sunner consents, the corporate defendants may not take any moneys over $25,000 out of the companies “except in payment made in the ordinary course of business for the purchase of raw materials or supplies necessary for the manufacture or production of salable goods.” As counsel for the corporate defendants points out, this qualifying clause was not in the relief sought in the original application. She says that this change is unfair because she has not had the opportunity to canvass this particular wording with her clients as they had had no notice of it. I disagree.

The original clause was more restrictive to the corporate defendants because it did not contain any exception. Further, Mr. Gill’s second affidavit made on June 1, 2018, expressly responds to the clause in the original notice of application. He deposes that A-Z Foam regularly makes payments in excess of $25,000 “for the purchase of raw materials to make foam and foam products” and that its suppliers require advance payment. Mr. Gill’s affidavit does not say that payment in excess of $25,000 to entities other than its suppliers will adversely impact its business.

In my view, the plaintiffs’ revision of this clause responds to the concern expressed by Mr. Gill in his affidavit. There is no evidence that requiring consent or court order for other payments in excess of $25,000 will adversely affect the corporate defendants. [ 21 ] Accordingly I make the following orders. Until further court order or written consent of the parties, the defendants and their respective agents, officers and employees are hereby restrained and enjoined from causing the corporate defendants or any of them:

a) from issuing any cheques, bills, notes, drafts, wire transfers, withdrawals or other bank instruments in an amount in excess of $25,000 except in payment made in the ordinary course of business for the purchase of raw materials or supplies necessary for the manufacture or production of salable goods;

b) from buying or selling any real property except the sale by 0777334 BC Ltd. of the property located in California described in the letter of intent dated March 23, 2018, and attached as Exhibit A to Mr. Gill’s affidavit no. 2 made on June 1, 2018, in this proceeding;

c) from disposing of any assets or equipment except in the ordinary course of business;

d) from causing the corporate defendants to pay or become obligated to pay any remuneration to any officers, shareholders or directors of the companies or to non-arm’s length parties thereof in an amount exceeding all such sums paid in the 2017 financial year, provided, however, that this clause will not restrict payment of market salaries to employees for work performed; or

e) from accepting payment for sales other than by cheque, bank draft or credit card made out to the corporate defendants or by way of direct bank deposit or transfer to the corporate defendants’ bank accounts and documented by invoices recorded in the said company’s books and records without the prior written approval of two authorized corporate representatives provided that one such representative had been the plaintiff, Jagjit Sunner. [ 22 ] The plaintiffs shall abide by their undertaking as to payment of damages by the reason of the making of this order, which will be filed with the registrar.

Approval of the form of this order by counsel for the individual defendants is dispensed with. [ 23 ] As the plaintiffs have had substantial success in this application, they shall have their costs in the cause [ 24 ] MR. HEPBURN: My Lady, thank you. I have one point of clarification, please. [ 25 ] THE COURT: Yes. [ 26 ] MR.

HEPBURN: With respect to the California property, the way Your Ladyship read the order I took it that you said that they would -- cannot sell their property other than the property referred to in the letter of intent, but what I did not hear in the order was that it would be pursuant to those terms or something like that, in other words --

[ 27 ] THE COURT: Excuse me. Yes, I had intended to say pursuant to the terms of the letter of intent. [ 28 ] MR. HEPBURN: Thank you. [ 29 ] THE COURT: Thank you, counsel. “IYER, J.”