2012 NLCA 21, 2012 NLCA 21

Date: 2012040 2 Docket: 10/128 , 10/129, 10/131, 11/17 and 11/28 Citation: BAE-Newplan Group Limited v. Dalton , 2012 NLCA 21 IN THE SUPREME COURT OF NEWFOUNDLAND AND LABRADOR COURT OF APPEAL BETWEEN : BAE-NEWPLAN GROUP LIMITED APPELLANT/ RESPONDENT BY CROSS-APPEALS AND : BRIAN DALTON, D. HARRY DOBSON, STEPHEN POSFORD, JOHN A. BAKER and JONATHAN COMERFORD FIRST RESPONDENTS/ APPELLANTS BY CROSS-APPEAL AND : BRIAN DALTON, GEOFFREY J. THURLOW, FRED MIFFLIN, DON WARR, SUSAN SHERK, JOHN A. BAKER and ROLAND W. BUTLER SECOND RESPONDENTS/ APPELLANTS BY CROSS-APPEAL AND : BRIAN DALTON, GEOFFREY THURLOW, JOHN A.

BAKER and ROLAND W. BUTLER THIRD RESPONDENTS/ APPELLANTS BY CROSS-APPEAL Coram: Welsh and Rowe JJ.A. and Handrigan J. ( ex officio ) Court Appealed From: Supreme Court of Newfoundland and Labrador

Trial Division (General) 200801T4170 Appeal Heard: October 13 and 14, 2011 Judgment Rendered: April 2, 2012 Reasons for Judgment by Welsh J.A. Concurred in by Rowe J.A. and Handrigan J. ( ex officio ) Counsel for the BAE-Newplan Group: Gregory Smith Counsel for the First Respondents: Kevin Stamp Q.C. Counsel for Second and Third Respondents: Sheri Wicks Welsh J.A.: [ 1 ] BAE-Newplan filed a statement of claim naming, among others, the directors of three companies as defendants.

On applications by the directors, the Trial Division judge struck out portions of the statement of claim as against some of the defendant directors on the basis that the pleadings do not disclose a reasonable cause of action. The issues raised in the appeal and cross-appeals relate to whether the defendant directors are proper parties against whom BAE-Newplan may have a claim for monies owing as a result of work done pursuant to a contract with one of the companies.

The possible liability of directors at common law and under the Corporations Act is considered in the context of striking portions of a statement of claim as against a defendant and removing a defendant who is not a proper party (rules 14.24 and 7.04 of the Rules of the Supreme Court, 1986 ). The appeal involves multiple parties and multiple causes of action. BACKGROUND [ 2 ] Newfoundland and Labrador Refining Corporation (“NLRC”) contracted with BAE-Newplan for engineering services in relation to an oil refinery development project.

Between June 2007 and February 2008, BAE-Newplan invoiced NLRC for services provided under the contract, and was paid on a monthly basis an amount totaling approximately $14,500,000. However, the company alleges that a balance of approximately $20,600,000 remains unpaid for work done during latter months when NLRC ceased making the required monthly payments.

In June 2008, NLRC was petitioned into bankruptcy and, therefore, is not named as a defendant in these proceedings. [ 3 ] The statement of claim sets out claims by BAE-Newplan against two companies, Altius Minerals Corporation and Altius Resources Inc. (first and second defendants), as well as Brian Dalton (third defendant), and the directors, including Brian Dalton, of NLRC and the two Altius companies (fourth, fifth and sixth defendants). The Altius companies and their directors are sued based on their relationship to NLRC.

The applications on appeal to this Court relate only to the fourth, fifth and sixth defendants, that is, the directors of the three companies. [ 4 ] NLRC was established as “a development-stage equity investment company to assess the feasibility of building an oil refinery in Placentia Bay, Newfoundland and Labrador” (decision of the applications judge, 2010 NLTD(G) 133, 301 Nfld. & P.E.I.R. 214, at paragraph 2 ). Altius Minerals Corporation is the parent company of, and holds all the voting shares in, Altius Resources Inc. which, in turn, is a significant, but minority shareholder in NLRC.

The Altius companies, as a single entity, along with three European entrepreneurs provided equity financing for the project and are shareholders in NLRC. In October 2007, the three European entrepreneurs ceased providing funding. As a result, NLRC encountered some difficulty in meeting its financial obligations. However, there was other money available to NLRC from a share offering and an anticipated loan.

In December 2007, “Altius Minerals took $30,092,865.00 of the November 2007 share offering proceeds and advanced it to NLRC as debt financing, to be used by NLRC to make a milestone payment to IJK Consortium to secure the heavy walled vessels fabrication contract” (paragraph 81 of the statement of claim).

In addition, “[t]hroughout the latter part of 2007, Dalton, Altius Minerals, Altius Resources and NLRC had been negotiating with a US finance company specializing in construction project component financing, with a view to securing specific asset backed bridge finance funding to secure the IJK contract until such time as the capital finance funding for the project construction was in place” (paragraph 83 of the statement of claim). The bridge financing was not expected to be in place until at least February 2008.

BAE- Newplan claims that monies that should have been used to pay for its contract were misdirected to the IJK contract, and that it should have been advised when the European entrepreneurs ceased providing funding. [ 5 ] The claims against the directors set out in the statement of claim are based on allegations of oppression, breach of duty of care, negligent misrepresentation and deceit.

Prior to filing statements of defence, the directors of NLRC and the Altius companies brought applications to be removed as parties pursuant to rule 7.04, or, in the alternative, to have the statement of claim struck out as against them under rule 14.24 on the basis that the pleadings do not disclose a reasonable cause of action. The conclusions of the applications judge may be summarized as follows:

(1) With respect to the claims based on oppression: (

a) the pleadings were struck out as against all the directors of both Altius companies; but

(

b) the pleadings were not struck out as against the directors of NLRC;

(2) With respect to the claims based on duty of care, negligent misrepresentation and deceit: (

a) the pleadings were struck out as against the directors of NLRC and both Altius companies, with the exception of Brian Dalton; but (

b) the pleadings were not struck out as against Brian Dalton as a director of NLRC and both Altius companies. I note that, where the applications judge struck out the pleadings as against directors under rule 14.24 in respect of specified claims, healso ordered those defendants removed as parties in respect of the same claims pursuant to rule 7.04.

ISSUES [6] BAE-Newplan appeals the decision of the applications judge striking out the portions of the statement of claim based onoppression as against the directors of the Altius companies, and those based on breach of duty of care, negligent misrepresentation anddeceit as against the directors of NLRC and the Altius companies, with the exception of Brian Dalton. [7] The directors of the Altius companies cross-appeal the decision of the applications judge refusing to strike the portions of thestatement of claim based on breach of duty of care, negligent misrepresentation and deceit as against Brian Dalton in his capacity as adirector of those companies. [8] The NLRC directors cross-appeal the decision of the applications judge refusing to strike the portions of the statement ofclaim based on oppression as against them, and the claim based on breach of duty of care, negligent misrepresentation and deceit asagainst Brian Dalton as an NLRC director.

ANALYSIS Leave to Appeal [9] This is an interlocutory appeal requiring leave of this Court pursuant to rule 57.02 of the Rules of the Supreme Court, 1986. Based on the nature of the appeal, leave was granted on December 14, 2010. Rules 14.24 and 7.04 [10] Rule 14.24 of the Rules of the Supreme Court, 1986, provides for the striking out of all or part of a statement of claim. The rulestates, in relevant parts:

(1) The Court may at any stage of a proceeding order any pleading, …, or anything therein, to be struck out … on the ground that (

a) it discloses no reasonable cause of action …; [11] Applying this rule, all or part of a statement of claim will be struck only if it is plain and obvious that it cannot succeed (Walshv. TRA Co. et al., 2007 NLCA 50, 268 Nfld. & P.E.I.R. 111, at paragraphs 13 to 16).

In addition, Wells C.J.N.L., for the Court in Walsh,explained: [16] I conclude, therefore, that if there is any possible basis whatsoever on which a plaintiff might successfully argue entitlement atlaw, it is inappropriate to anticipate any defence a defendant may plead, even though it may be a very strong one, and, on the basis ofevaluating that defence, strike the Statement of Claim as having no chance of success. … On an application under rule 14.24(1)(a), it isnot appropriate to make a preliminary determination of the success of any defence the defendant might plead.

If a plaintiff has pleadedfacts on which a cause of action can reasonably be argued, a plaintiff is not to be “driven from the judgment seat” by anticipatingdefences that might be successful. [12] Unless the court orders otherwise, an application under this rule is restricted to the facts stated in the statement of claim, whichwould include replies to demands for particulars and any amendments. Evidence by affidavit or otherwise is not permitted (rule14.24(2)). To provide a context for the analysis, it is assumed that the facts set out in the statement of claim can be proved (HumbyEnterprises Ltd. v. A.L.

Stuckless & Sons Ltd., 2003 NLCA 20, 225 Nfld. & P.E.I.R. 268, at paragraph 13). [13] Rule 7.04 deals with removal of a party: ...

(2) At any stage of a proceeding the Court may, on such terms as it thinks just and … on application of any party to the proceeding, (

a) order any party who is not a proper or necessary party to cease to be a party; … [14] In this case, the question turns not on whether the defendants seeking to be removed are “necessary” parties, but whether theyare “proper” parties. The test to ascertain whether a party is a proper party under rule 7.04 is essentially the same as the test that appliesunder rule 14.24; that is, whether it is plain and obvious that the claim cannot succeed as against that party (SNC-Lavalin Inc. v.Newfoundland and Labrador Hydro-Electric Corp. et al. (1998), (NL CA), 162 Nfld. & P.E.I.R. 172 (NLCA), atparagraph 23).

I note in passing that it is important to ascertain the basis for an application under rule 7.04 since the test for a“necessary” party is not the same as for a “proper” party (Vardy v. Dufour, 2008 NLCA 22, 275 Nfld. & P.E.I.R. 247). [15] Unlike rule 14.24, evidence is permitted in an analysis under rule 7.04. In SNC-Lavalin, Green J.A., for the Court, explained:

[21] While, by contrast [to rule 14.24], applications to remove a party under rule 7.04 may be evidence-based, it is incumbent on theapplicant for such removal to lead sufficient evidence to show that, against that background, no causes of action could exist. … [16] The appropriate remedy in the circumstances is, of course, central in choosing whether to proceed under rule 7.04 or 14.24.

For example, if the party seeking to be removed is the sole defendant, assuming there is no need for evidence, rule 14.24 would providethe appropriate remedy since to remove the defendant would essentially eliminate the cause of action. However, if the intention is toremove one defendant, leaving others or substituting another, rule 7.04 would achieve the purpose of removing the incorrect party whilemaintaining the cause of action. (See, for example, N.S.E.J. v.

Moravian Union (Inc.), 2003 NLCA 28, 226 Nfld. & P.E.I.R. 128, atparagraph 16.) [17] Where, as here, there are multiple causes of action and multiple defendants, and a particular defendant may not be a properparty for purposes of some, or all, of the claims, that party may apply to be removed with respect to the relevant portions of the statementof claim. In such circumstances, relying on rule 7.04 is generally preferred to striking out portions of the statement of claim under rule14.24 with respect to that defendant. I note in passing that, where an order has been made removing a party pursuant to rule 7.04(2)(

a) ora claim has been struck in respect of that party pursuant to rule 14.24, in limited circumstances, subject to application of the law,particularly the law regarding cause of action estoppel as discussed in Avalon Bookkeeping Services Ltd. v. Furlong, 2004 NLCA 46, 239Nfld. & P.E.I.R. 97, a subsequent application to add that party in accordance with rule 7.04(2)(

b) is not precluded.

The Appeal Statement of Claim – Context for the Analysis [18] The applications judge summarized the foundation on which BAE-Newplan proceeded: [49] … The basis of these allegations from my reading of [BAE-Newplan’s] pleadings appears to be focused as follows: 1) That the directors of NLRC and the Altius companies represented to [BAE-Newplan] that NLRC was able to make its paymentobligations based upon committed pre-development funding from the equity investment partners; 2) That the directors of NLRC and the Altius companies remained silent and did not inform [BAE-Newplan] when the Europeaninvestors decided to no longer provide pre-development investment funding to NLRC in December 2007, meaning NLRC was insolventat that time, while at the same time authorizing further work at an accelerated level by [BAE-Newplan]; and 3) That the directors of NLRC and the Altius companies improperly and without notice to [BAE-Newplan] diverted funds, raised for thepurpose of meeting pre-development costs incurred by NLRC, to the vessel development contract. [50] Specifically with regard to the directors of NLRC and the Altius companies, the Second Amended Statement of Claim indicatesas follows: 1) At paragraph 47: That they represented to [BAE-Newplan], directly or indirectly, by words and conduct, that NLRC was able to meetits financial obligations for pre-development work on the project through committed incremental equity financing from the equityinvestment partners; 2) At various paragraphs: That Brian Dalton, the Project Director and/or Roland Butler, represented various things to [BAE-Newplan] onbehalf of each of the Defendants, including the directors of NLRC and the Altius companies and that the directors authorized, condonedand approved of these representations; 3) At paragraph 54: That each of the directors knew or ought to have known that the representations were made to induce [BAE-Newplan] to perform its services pursuant to its contract with NLRC; 4) At paragraph 80: That each of the directors of the Altius companies decided that Altius Minerals and Altius Resources would nolonger provide pre-development financing by December, 2007 and failed to disclose this to [BAE-Newplan]; and 5) At paragraph 86: That each Defendant, including the directors of NLRC and the Altius companies, decided to allocate a portion of theproceeds of the sale of shares of NLRC to secure the vessel contract contrary to representations made to the public as well as [BAE-Newplan]. [51] While not encompassing all of [BAE-Newplan’s] allegations against the individual directors, this is a good

summary of the basis for[BAE-Newplan’s] claims against them. … General Principles – Personal Liability of a Director [19] It is helpful to begin the analysis of this appeal with general principles that apply to possible personal liability of corporatedirectors. In Montreal Trust Co. of Canada v.

ScotiaMcLeod Inc. (1996), (ON CA), 129 D.L.R. (4th) 711 (ONCA),leave to appeal refused (1996), 205 N.R. 313, Finlayson J.A., for the Court, explained limits on the scope of personal liability ofdirectors, at pages 720 to 721: … A corporation may be liable for contracts that its directors or officers have caused it to sign, or for representations those officers ordirectors have made in its name, but this is because a corporation can only operate through human agency, that is, through its so-called“directing mind”.

Considering that a corporation is an inanimate piece of legal machinery incapable of thought or action, the court canonly determine its legal liability by assessing the conduct of those who caused the company to act in the way that it did. This does notmean, however, that if the actions of the directing minds are found wanting, that personal liability will flow through the corporation tothose who caused it to act as it did. To hold the directors of Peoples personally liable, there must be some activity on their part that takesthem out of the role of directing minds of the corporation. …

[ 20 ] The Court in ScotiaMcLeod also noted that assessing the personal liability of directors in the context of the relevant case law requires a “fact-specific” analysis, and that the facts giving rise to personal liability must be “specifically pleaded” (page 720).

In addition, the actions of the directors “must exhibit a separate identity or interest from that of the company so as to make the act or conduct complained of their own” (page 720). [ 21 ] The directors of the Altius companies and NLRC submit that nowhere does the statement of claim allege that the directors were acting personally or outside their role as directing minds of the companies. This submission forms the foundation of their response to BAE-Newplan’s appeal.

Claims Based on a Duty of Care – Altius Directors [ 22 ] In assessing whether the applications judge erred, it is necessary to review, in brief, principles of law relevant to the claims. Section 203(1) of the Corporations Act , RSNL 1990, c. C-36, addresses the fiduciary duty and duty of care required of corporate directors: A director and officer of a corporation in exercising his or her powers and discharging his or her duties shall (

a) act honestly and in good faith with a view to the best interests of the corporation; and (

b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. [ 23 ] In Peoples Department Stores Inc. (Trustee of) v. Wise , 2004 SCC 68 , [2004] 3 S.C.R. 461, Major and Deschamps JJ., for the Court, considered section 122(1) of the

Canada Business Corporations Act , R.S.C. 1985, c. C-44, which is virtually the same as paragraph 203(1)(

b) of this Province’s Corporations Act . They concluded that “directors owe a duty of care to creditors, but that duty does not rise to a fiduciary duty” (paragraph 1). In the subsequent decision in BCE Inc. v. 1976 Debentureholders , 2008 SCC 69 , [2008] 3 S.C.R. 560, the Court further discussed directors’ duties under the

Canada Business Corporations Act . The Court commented: [37] … Often the interests of shareholders and stakeholders are co-extensive with the interests of the corporation. But if they conflict, the directors’ duty is clear – it is to the corporation: Peoples Department Stores [ supra ]. [66] The fact that the conduct of the directors is often at the centre of oppression actions might seem to suggest that directors are under a direct duty to individual stakeholders who may be affected by a corporate decision.

Directors, acting in the best interests of the corporation, may be obliged to consider the impact of their decisions on corporate stakeholders, such as the debentureholders in these appeals. This is what we mean when we speak of a director being required to act in the best interests of the corporation viewed as a good corporate citizen. However, the directors owe a fiduciary duty to the corporation, and only to the corporation. People sometimes speak in terms of directors owing a duty to both the corporation and to stakeholders.

Usually this is harmless, since the reasonable expectations of the stakeholder in a particular outcome often coincide with what is in the best interests of the corporation. However, cases (such as these appeals) may arise where these interests do not coincide.

In such cases, it is important to be clear that the directors owe their duty to the corporation, not to stakeholders, and that the reasonable expectation of stakeholders is simply that the directors act in the best interests of the corporation. (Emphasis added.) [ 24 ] As to this appeal, the applications judge concluded that the directors of the Altius companies, other than Brian Dalton, did not owe BAE-Newplan a duty of care under section 203(1) (b): [60] The same can be said [that there is no possibility of a successful claim] with regard to the claims made under the Corporations Act in my opinion.

Firstly, a breach of the duty set out in section 203(1)(

a) or (

b) of the Act , even if found as against the Altius directors, would not permit a court to order compensation pursuant to section 371(3) of the Act .

In any event, on the facts as pleaded, I am satisfied that [BAE-Newplan] cannot be a creditor of either of the Altius companies so as to ground a possible duty as regards [BAE- Newplan] for the directors personally. [BAE-Newplan] does not fall within the class of persons to whom the directors of the Altius companies owed a duty … . (Emphasis added.) [ 25 ] In submitting that the applications judge erred in concluding that the claim against the Altius directors based on a duty of care cannot succeed, BAE-Newplan relies on four factors: first, the Altius companies established NLRC as a “non-operating, project development-stage, equity investment company of Altius Minerals to investigate the feasibility of constructing a new oil refinery”; second, Altius Minerals referred to the oil refinery project as “Altius’ NLRC Project”; third, Altius Resources, a major shareholder of NLRC, was wholly owned by Altius Minerals; and, fourth, “the business decisions made by NLRC were controlled by the Altius companies in concert and acting together with the European entrepreneurs”. [ 26 ] However, these factors do not support the conclusion proposed by BAE-Newplan because no recognition or effect is given to the separate corporate entities.

The applications judge determined, and BAE-Newplan concedes, that “there is no foundation set forth in the pleadings to warrant a conclusion that NLRC was set up as a sham” (paragraph 15). Further, it is clear that, while BAE-Newplan is a creditor of NLRC, it is not a creditor, or other stakeholder, of the Altius companies. [ 27 ] Nonetheless, BAE-Newplan alleges that the directors of the Altius companies owed it a duty of care because of a relationship of proximity based on the factors set out in paragraph 25, above. Again, this submission is not persuasive.

There is no basis on which to conclude that NLRC was managed other than by its directors. The fact that Altius Resources was a minority shareholder in NLRC could not impose a duty of care on the directors of the Altius company in respect of the management of NLRC. The distinction between a shareholder and a director is referenced in Peoples Department Stores , supra : [31] … Although the shareholders are commonly said to own the corporation, in the absence of a unanimous shareholder agreement

to the contrary, s. 102 of the [

Canada Business Corporations Act ] provides that it is not the shareholders, but the directors elected by the shareholders, who are responsible for managing it. This clear demarcation between the respective roles of shareholders and directors long predates the 1975 enactment of the [

Canada Business Corporations Act ] [authorities omitted]. [ 28 ] To hold the Altius directors liable for the actions of NLRC or its directors by imposing upon them a duty of care to BAE- Newplan would make the Altius directors responsible for conduct over which they had no control. It has been accepted that NLRC is not a sham corporation. With the exception of Brian Dalton and John Baker who were directors of the three companies, NLRC had a different slate of directors than either Altius company.

In the absence of control over the operations of NLRC, or some specifically pleaded activity occurring outside their role as directors of the Altius companies, the Altius directors could not be held liable for the conduct of NLRC or its directors. [ 29 ] BAE-Newplan referred to the applications judge’s statement that there “may be some foundation or “skeleton” of a claim set out in the pleadings as against both of the Altius companies” (paragraph 57).

Counsel construed this as a conclusion that the applications judge was “satisfied” that there was a potential cause of action against the Altius companies and that this could transfer responsibility to the Altius directors. This is an erroneous construction of what the applications judge wrote. The Altius companies did not make an application to be removed as defendants.

Read in context, this statement was made in order to emphasize that, even if the company should be found to be liable, there remains no basis on which to extend liability to the directors. [ 30 ] In the result, based on the pleadings, it is not possible that the directors of the Altius companies could be found to owe a duty of care to BAE-Newplan. The applications judge did not err in concluding that it is plain and obvious that a claim based on a duty of care under

section 203 of the Corporations Act or the common law cannot succeed as against the Altius directors.

Accordingly, the directors of both Altius companies are not proper parties for purposes of this claim. (The question of whether Brian Dalton, in his capacity as an Altius director, is properly treated differently from the other directors is discussed below.) Claims Based on Negligent Misrepresentation and Deceit – Altius Directors [ 31 ] The applications judge determined that BAE-Newplan could not succeed in the claim against the directors of the Altius companies on the basis of negligent misrepresentation or deceit.

He explained: [57] Specifically, with regard to the causes of action alleged related to negligent misrepresentation and deceit/fraud, the facts set out in the pleadings refer to a contract for services as between [BAE-Newplan] and NLRC.

While Altius Resources is alleged to be a shareholder and held two of five seats on the NLRC Board of Directors, and while Altius Minerals held a subscription letter regarding NLRC shares, there is no sufficient linkage as between the individual directors of Altius Resources or Altius Minerals to establish a possibly successful claim. … [ 32 ] Negligent misrepresentation could be established against the Altius directors only if they owed a duty of care to BAE- Newplan. As discussed above, based on the pleadings, such a duty cannot be demonstrated.

It follows that it is plain and obvious that a claim in negligent misrepresentation as against the Altius directors cannot succeed. Therefore, the applications judge did not err in ordering, pursuant to rule 7.04, removal of those directors as defendants with respect to the claim based on negligent misrepresentation. [ 33 ] A similar result obtains in respect of the claim based on deceit. As discussed above in the context of duty of care, the pleadings disclose no basis on which to conclude that the Altius directors had any control over the management of NLRC or any direct relationship to BAE-Newplan.

The deceit complained of by BAE-Newplan is based on silence or a failure to disclose information.

The claim that the directors of Altius Resources, a minority shareholder in BAE-Newplan, and the directors of Altius Minerals, the parent company of Altius Resources, had a duty of disclosure, or could be liable for a claim in deceit, to BAE-Newplan cannot succeed. [ 34 ] In the result, BAE-Newplan’s appeal against the applications judge’s decision removing the Altius directors as defendants regarding the claims based on duty of care, negligent misrepresentation and deceit is dismissed. (Again, the question of whether Brian Dalton, in his capacity as an Altius director, is properly treated differently from the other directors is discussed below.) Claims Based on Duty of Care – NLRC Directors [ 35 ] The applications judge concluded that, with the exception of Mr.

Dalton, the claims based on the duty of care, negligent misrepresentation, and deceit cannot succeed as against the directors of NLRC personally: [64] What I have stated above as regards [BAE-Newplan’s] claims against the Altius directors for the negligent misrepresentation and deceit/fraud claims applies similarly to the individual directors of NLRC.

The actions of NLRC and the representations allegedly made by Brian Dalton, the Program Director, Roland Butler and/or Altius Minerals and the pleadings generally do not provide a sufficient foundation for a possibly successful claim as against the individual directors of NLRC. While obviously not fully determinative here, there is a lack of compliance with rule 14.11 [pleading necessary particulars of a claim] as regards any misrepresentation claimed to have been made by any of those directors as well as any claim for deceit or fraud.

The mere fact that the directors were collectively the controlling mind of NLRC is not, of itself, a sufficient basis for a claim as against them in the circumstance pleaded . As such, the claims made as against the directors of NLRC for negligent misrepresentation and deceit/fraud must be struck. … (Emphasis added.) [ 36 ] Section 203(1) of the Corporations Act requires a director, in relation to the duties associated with that position, to exercise the care of a reasonably prudent person in comparable circumstances. As discussed above, directors do owe a duty of care to creditors of the corporation.

That duty is circumscribed by the director’s overriding duty to the corporation (paragraph 23, above). [ 37 ] In this case, where the pleadings allege that BAE-Newplan is a creditor of NLRC based on a contract for engineering services, a duty of care may be established under the Corporations Act . Whether that duty may result in a possible cause of action against the directors of NLRC depends on a consideration of the claims of breach of that duty based on negligent misrepresentation or deceit.

Claims Based on Negligent Misrepresentation and Deceit – NLRC Directors [38] The analysis must begin with a recognition that the directors’ primary duty is to the corporation, that the directors are thedirecting mind and voice of the corporation, and that there must be some basis pleaded to support a claim that the directors arepersonally liable for the alleged negligent misrepresentation and deceit.

A claim against the directors personally can succeed only if thepleadings provide a basis for concluding that the directors were acting other than on behalf of, and in the exercise of their fiduciary dutyto, the corporation. (See paragraph 19, above.) [39] BAE-Newplan submits that personal liability flows from collective action by all the directors of the three companies.

Moreparticularly, in BAE-Newplan’s submission, reliance is placed on several factors: the three defendant corporations and their directorsconsidered it necessary to proceed with the engineering services contract in order to maintain project value during efforts to put in placethird party capital finance funding for the construction phase of the project; the three defendant companies and their directors knew that,if project value was not maintained, the third party financing would be negatively affected; without the third party financing, the equityinvestment partners would not see a return on their investment; the project equity investment partners were unwilling to risk furtherequity investment; and by their silence, the directors of the three defendant companies shifted the financial risk to BAE-Newplan.

As aresult, BAE-Newplan submits that “there was true value and benefit to the Respondent directors or the interests they represented at theexpense of BAE-Newplan”. [40] The above factors and conclusion submitted by BAE-Newplan provide no basis on which a claim against the NLRC directorspersonally could succeed. The identified factors relate to activities and decisions made by the directors as directing minds of thecorporation. There is nothing to support a claim of personal liability on the part of the directors.

As stated by the applications judge, the“mere fact that the directors were collectively the controlling mind of NLRC is not, of itself, a sufficient basis for a claim as against themin the circumstance pleaded” (paragraph 35, above). [41] The decision in C.C. Petroleum Ltd. v. Allen (2003), (ON CA), 36 B.L.R. (3d) 244 (ONCA), relied on byBAE-Newplan, must be distinguished. In that case, two brothers operated Payrite Petroleums which was in the business of supplyinggasoline to retailers. They were constantly in debt to their supplier.

Although they knew that they could not continue as a going concern,they continued to order gasoline “as if it was business as usual” (paragraph 13). The trial judge found that they had “used moneygenerated by the sale of the unpaid for gasoline to pay themselves, to repay debts owed to [their spouses], and to pay legal fees knowingfull well that Budget would not be paid” (paragraph 13).

This was fraudulent in the circumstances. [42] By contrast, in the case now before this Court, the pleadings support the conclusion that the directors of NLRC wereproceeding so as to maintain project value for the benefit of the corporation, not to obtain a personal benefit.

The fact that NLRC wouldbenefit if the project succeeded does not mean that the directors’ attempts in this regard amounted to acting for their personal benefit. [43] A further indication in the pleadings that the NLRC directors were acting in the interests of the corporation in respect offinancial issues is the response to a request from BAE-Newplan which resulted in payment to some subcontractors (paragraph 123 of thestatement of claim): In June 2008, [BAE-Newplan] asked Dalton to consider paying the local subcontractors who performed services under the [BAE-Newplan] contract.

The amount involved was about $803,890.09. Dalton and Altius Minerals agreed. Dalton arranged for AltiusMinerals or Altius Resources to provide the required funding to NLRC, and NLRC or Altius Minerals or Altius Resources made thepayments directly to the local subcontractors.

NLRC’s total indebtedness to [BAE-Newplan] under the [BAE-Newplan] contract wasreduced accordingly. [44] The conclusion follows that the applications judge did not err in determining that it is plain and obvious that the claim againstthe NLRC directors personally based on negligent misrepresentation could not succeed, and that those directors are not proper parties forpurposes of that claim. [45] A claim in deceit as against the NLRC directors requires a degree of wrongdoing that goes beyond the negligence involved in aclaim for negligent misrepresentation. Deceit requires a deliberate intention to mislead.

There is nothing in the pleadings to supportsuch a claim as against the directors of NLRC. [46] Accordingly, the applications judge did not err in determining that the claim against the NLRC directors personally based onnegligent misrepresentation or deceit cannot succeed, and in ordering that they be removed as defendants in that regard.

The appeal onthis issue is dismissed. (The question of whether Brian Dalton, in his capacity as a director of NLRC, is properly treated differently fromthe other directors is discussed below.) Claims Based on Oppression – Altius Directors [47] BAE-Newplan’s claim based on oppression is grounded in

section 371 of the Corporations Act:

(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 or an affiliate (

a) an act or omission of the corporation or an affiliate effects a result; (

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

c) the powers of the directors of the corporation or an affiliate 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, thecourt may make an order to rectify the matters complained of.

… [48] The applications judge explained his conclusion that an oppression remedy was not available as against the Altius companies: [61] With regard to

section 371, the oppression provision, I am satisfied that [BAE-Newplan] cannot succeed as against the individualdirectors of both of the Altius companies as [BAE-Newplan] is not a “creditor” or other appropriate stakeholder of these corporations. As well, the pleadings show that neither of the Altius companies possessed control, direct or indirect, of NLRC. The fact that they couldhave taken more shares in NLRC does not change this with regard to the timing of what is alleged or based upon the ability for the Altiuscompanies to have such control. There is also a lack of appropriate factual foundation with regard to the directors of both of the Altiuscompanies coming within the ambit of

section 371 as regards [BAE-Newplan]. There is nothing to show that there could be a possiblysuccessful claim in this regard based upon NLRC and the Altius companies being affiliates. Furthermore, even if there were sufficientfacts set out to properly allege affiliation, this, in my view based upon the pleadings, would not permit me to conclude [BAE-Newplan]would have a possibly successful claim as against these directors personally.

There is no sufficient foundation set out in the pleadingsthat would allow a conclusion that any of the claims alleged could ultimately succeed as against the individual directors of both of theAltius companies. [49] In submitting that the applications judge erred in these determinations, BAE-Newplan points to the definition of “complainant”in

section 368(b)(ii) of the Corporations Act, which provides, in relevant parts: (b) “complainant” means (

i) a registered holder or beneficial owner, and a former registered holder or beneficial owner of a security of a corporation or an affiliate, … (iv) another person who, in the discretion of a court, is an appropriate person to make an application under this Part [which includessection 371]. [50] BAE-Newplan’s submission relies on a conclusion that Altius Resources is an affiliate of NLRC.

Section 7(1) of theCorporations Act defines an affiliate as a subsidiary corporation: One body corporate is affiliated with another body corporate where 1 of them is the subsidiary of the other or both are subsidiaries of thesame body corporate or each of them is controlled by the same person. Section 9(2) of the Act defines a subsidiary in terms of corporate control: A body corporate is a subsidiary of another body corporate where it is controlled by that other body corporate. Finally,

section 8 defines when a corporation is controlled by another: A body corporate is controlled by a person where shares of the body corporate carrying voting rights sufficient to elect a majority of thedirectors of the body corporate are held, directly or indirectly, except by way of security only, by or on behalf of that person. [51] Therefore, a critical factor, control, is determined by the ability to elect the majority of the directors of a corporation. In DuhaPrinters (Western) Ltd. v.

Canada, (SCC), [1998] 1 S.C.R. 795, Iacobucci J., for the Court, discussed the question ofcontrol, drawing a distinction between the control exercised by shareholders and the management duties of directors: [36] Thus, de jure control has emerged as the Canadian standard, with the test for such control generally accepted to be whether thecontrolling party enjoys, by virtue of its shareholdings, the ability to elect the majority of the board of directors.

However, it must berecognized at the outset that this test is really an attempt to ascertain who is in effective control of the affairs and fortunes of thecorporation. That is, although the directors generally have, by operation of the corporate law statute governing the corporation, theformal right to direct the management of the corporation, the majority shareholder enjoys the indirect exercise of this control through hisor her ability to elect the board of directors.

Thus, it is in reality the majority shareholder, not the directors per se, who is in effectivecontrol of the corporation. … While Duha dealt with the Income Tax Act, R.S.C. 1952, c. 148, the above statement of principle would apply equally in the context ofthe Corporations Act. (See, for example, Regulvar Canada Inc. v. Ontario (2004), (ON CA), 70 O.R. (3d) 641(ONCA), at paragraph 14.) [52] BAE-Newplan submits that the applications judge erred by failing to consider that the Altius companies were affiliates ofNLRC through “joint action” control with the three European partners.

There is no basis in the pleadings on which to conclude that theAltius companies spoke for or controlled the votes of the remaining NLRC shareholders. Altius Resources was a minority shareholderand clearly could not be said to meet the Duha test for effective control of NLRC. [53] The applications judge correctly applied the law, succinctly explaining why the claim against the Altius directors based onoppression could not succeed. He did not err in concluding that the Altius directors should be removed as defendants with respect to thatclaim.

The Cross-Appeals Claims Based on Oppression – NLRC Directors [54] The application to remove the NLRC directors as defendants in the claim based on oppression was dismissed by theapplications judge, who explained:

[65] … Here, the facts pleaded suggesting a failure to disclose the decision of the equity investment partners to cease further involvement in the pre-development funding along with actions taken to accelerate the work being done by [BAE-Newplan] permits [BAE-Newplan] to at least argue a claim for oppression in my opinion. As well, NLRC’s decision to fund the vessel contract may well be reviewable under the oppression provisions. As NLRC is not in a position to pay any claims of [BAE-Newplan], it may be appropriately argued that some or all of the directors of NLRC should be held personally liable .

Based upon paragraph 66 in the BCE case referred to earlier, whether [BAE-Newplan] will succeed may be a live question but I am unable to conclude at this stage that the claim cannot succeed in the circumstances as pleaded. [66] While the pleadings deal with the directors of NLRC collectively as opposed to individually, there is in my opinion a “skeleton” of a claim for oppression pleaded by [BAE-Newplan] as against them. There are allegations in the pleadings that allege that the directors of NLRC involved themselves in certain acts or participated in decision-making that form the basis of the oppression claim.

There is also a sufficient basis to be found in the pleadings to possibly justify rectification of the alleged oppression by requiring those directors to compensate [BAE-Newplan] personally .

Again, here I am not saying that personal liability will be the result, only that it could be the result based upon the full circumstances alleged and bearing in mind the threshold to be met at this stage by [BAE-Newplan]. … (Emphasis added.) [ 55 ] The applications judge erred insofar as these comments may be taken as stating that, because NLRC as a corporation is potentially liable for a claim based on oppression and the company is not in a position to compensate BAE-Newplan, the directors may, as a consequence, be personally liable.

Liability by the directors depends on their actions taken in the context of their duties to the corporation under section 203(1) of the Corporations Act , not on the possible inability of the corporation to compensate a creditor. The directors cannot be held personally liable if they acted in accordance with their fiduciary duty to the company and their responsibility to “exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances” (section 203(1) of the Corporations Act ).

As interpreted in BCE , the directors’ first duty is to the corporation, not to creditors or other stakeholders, and, indeed, the reasonable expectation of creditors “is simply that the directors act in the best interests of the corporation” ( BCE , at paragraph 66, paragraph 23, above). [ 56 ] Here, the pleadings allege that the European equity investors had ceased to provide funding for the engineering study, and that, despite this development, NLRC had requested that BAE-Newplan continue with the engineering study at an accelerated rate.

In its factum, BAE-Newplan submitted that the pleadings disclose that the directors of NLRC and the Altius companies “considered it necessary that [BAE-Newplan] perform the ongoing engineering services as and when requested in order to maintain project value while efforts were underway to put in place third party capital finance funding necessary for the construction stage of [the project] to proceed”, and that the directors knew that obtaining such funding would be negatively affected if project value was not maintained. The pleadings state that NLRC was seeking access to financial resources.

As noted above, NLRC had obtained a loan from Altius Resources which was being directed to the vessel acquisition phase of the project; it was attempting to obtain bridge financing for the construction phase of the project; and, at the request of BAE-Newplan, some of the subcontractors were paid (paragraphs 4 and 43, above).

The pleadings, therefore, acknowledge the attempt by NLRC to maintain project value for the purpose of preventing loss of the project. [ 57 ] Nonetheless, BAE-Newplan’s claim is that the directors of all three companies, including the directors of NLRC, are personally liable because they acted in a manner that unfairly disregarded BAE-Newplan’s interests as a creditor by spending monies on the construction phase of the project before ensuring that there would be sufficient funds to satisfy the debt on the engineering services contract, or by failing to notify BAE-Newplan that the original funding arrangements were no longer in place.

Paragraph 171 in the statement of claim is indicative of the general nature of the pleadings: In the circumstances, each of the Defendants [including NLRC and both Altius companies and all their directors] violated [BAE- Newplan’s] reasonable expectation, as follows: (

a) Each of the Defendants, by their corporate actions and decisions, authorized, directed, condoned, permitted, allowed or otherwise enabled NLRC to request [BAE-Newplan] to perform ongoing engineering services for completion of the project development and acceleration of the overall project

schedule without first disclosing that the project equity investment partners and shareholders of NLRC had discontinued the committed incremental equity finance funding for NLRC and NLRC no longer had the ability to meet its payment obligations to [BAE-Newplan], unless and until efforts to put in place the capital finance funding required for the project construction were successful. (

b) The corporate actions and decisions of each of the Defendants were “oppressive” or “unfairly prejudicial to” or “unfairly disregarded” the interests of [BAE-Newplan], within the meaning of s. 371(2) of the Corporations Act . [ 58 ] However, the pleadings do not indicate how the NLRC directors, in particular, were acting in an oppressive manner for which they may be held personally liable, rather than discharging their duty to act in the best interests of the corporation as required under

section 203 of the Act. While it is true that NLRC and the shareholders in that company would benefit if the project were successful and that this was an objective of NLRC, this factor does not support the conclusion that the directors, for their part, were acting other than in the best interests of the corporation. This scenario is different from the situation in the C.C.

Petroleum case discussed above where the individuals knew that the business could not continue as a going concern and acted so as to gain personal benefit knowing the supplier would not be paid. [ 59 ] In the result, BAE-Newplan has failed to plead a basis on which the directors of NLRC could be held personally liable for a claim based on oppression. Accordingly, the cross-appeal by the directors of NLRC is allowed.

Liability of Brian Dalton as a Director of NLRC and the Altius Companies [ 60 ] The applications judge concluded that Brian Dalton, as a director of NLRC and the Altius companies, should be treated differently from the other directors of those companies with respect to the claims based on duty of care, negligent misrepresentation and deceit. No reason was given for this determination, though reference was made to Mr. Dalton’s status as the third defendant.

[ 61 ] BAE-Newplan submitted in its factum that the directors of the three defendant companies had acted collectively and in so acting “gave direction to Brian Dalton” to have BAE-Newplan proceed with the contract work. Further, BAE-Newplan submitted that, if Mr. Dalton committed a wrongful act, it would follow that all the directors may be jointly liable. These submissions lead to the conclusion that there is no basis on which to treat Mr.

Dalton, when acting in his capacity as a director of NLRC or the Altius companies, differently from the other directors. [ 62 ] Paragraphs 32.6, 52 and 126 of the statement of claim are illustrative: 32.6 Each of the Defendants knew or ought reasonably to have known that Brian Dalton made the statements in question to [BAE- Newplan] (paragraph 32.4) and that such statements had the effect of reinforcing the representations in question made by the Defendants to [BAE-Newplan] (paragraph 32.5). 52.

Each of the directors of each of Altius Minerals, Altius Resources and NLRC authorized, condoned and approved of the representations made by Dalton to the Project Manager. 126. Each of the directors of each of Altius Minerals, Altius Resources and NLRC by their words, conduct, acts and omissions, authorized, condoned and approved the representations in question, each time, and from time to time, the representations in question were made and given. [ 63 ] The fact that Mr.

Dalton did not apply to be removed as the third defendant is not a valid basis on which to treat him differently from the other directors of NLRC and the Altius companies when he was acting in his capacity as a director of those companies. If a claim against Mr. Dalton personally can succeed, it must be on some basis that distinguishes him from the other directors, and would be based on his status as the third defendant. [ 64 ] In the result, the cross-appeals by the directors of NLRC and the Altius companies against the applications judge’s decision that Mr.

Dalton should be treated differently from the other directors of those companies, when he was acting in his capacity as such a director, are allowed.

SUMMARY AND DISPOSITION [ 65 ] In

summary, regarding the claims based on breach of duty of care, negligent misrepresentation and deceit:

(1) The applications judge did not err in concluding that a claim on this basis cannot succeed as against the directors of NLRC and both Altius companies;

(2) The applications judge erred in concluding that Brian Dalton should be treated differently from the other directors and that he should not be removed as a defendant when he was acting in his capacity as a director of NLRC and the Altius companies. [ 66 ] With respect to the claims based on oppression:

(1) The applications judge did not err in concluding that a claim on this basis cannot succeed as against the directors of the Altius companies;

(2) The applications judge erred in concluding that the directors of NLRC should not be removed as defendants with respect to this claim. [ 67 ] In the result, all the directors of NLRC and the Altius companies, including Mr. Dalton when acting in his capacity as a director of those companies, shall cease to be defendants with respect to the claims based on oppression, duty of care, negligent misrepresentation and deceit. [ 68 ] The appeal by BAE-Newplan is dismissed. The cross-appeals by the directors of NLRC and the Altius companies are allowed.

The directors of NLRC and the Altius companies shall have their costs. ______________________________ B. G. Welsh J.A. I Concur: ______________________________ M. Rowe J.A. I Concur: ______________________________ G. Handrigan J.