H&N Enterprise Inc. v. Novacation Inc., 2022 NSSC 88

SUPREME COURT OF Nova Scotia Citation: H&N Enterprise Inc. v. Novacation Inc. , 2022 NSSC 88 Date: 20220331 Docket: Hfx No. 499827 Registry: Halifax Between: H&N Enterprise Inc. and Brent Hering Plaintiffs v. Novacation Inc., Fred M. Kern, Stephanie Ager Kirz, Anthony E. Smith, Plum Holdings, LLC, The Kirz Revocable Trust, Whyte Dog Holdings, LLC, Odin Nutraceuticals Inc. and 11145207 Canada Inc. Defendants DECISION ON MOTION FOR APPOINTMENT OF AUDITOR Judge: The Honourable Justice Scott C.

Norton Heard: March 22, 2022, in Halifax, Nova Scotia Decision: March 31, 2022 C ounsel: Jane O’Neill and Ryan Baxter for Michelle Awad Q.C. and Peter Rogers Q.C., for the Plaintiffs Roderick (Rory) Rogers Q.C. and Sarah A. Walsh, for the Defendant, Novacation Inc. Colin Bryson, Q.C., for the Defendants, Anthony Smith, Odin Pharmaceuticals, Stephanie Kirz, Whyte Dog Holdings LLC, the Kirz Revocable Trust, and 11145207 Canada Inc. , not participating Nathan Sutherland, for the Defendants, Fred M.

Kern, and Plum Holdings, LLC, not participating By the Court: [ 1 ] In the underlying proceeding the Plaintiffs’ claim remedies for improper, oppressive and tortious conduct by the Defendants.

The Plaintiffs, in this motion, seek an Order appointing an independent auditor to complete audited financial statements of the Defendant, Novacation Inc.; to compel Novacation to provide the auditor with the information and documentation necessary to complete the audit; and requiring Novacation Inc. to pay the auditor’s fee for the preparation of the audited financial statements. [ 2 ] The motion is brought pursuant to sections 117, 119, 121, and

section 5 of the Third

Schedule of the Companies Act , RSNS 1989, c. 81 . Background The Parties [ 3 ] The Plaintiff, H&N Enterprises Inc. (“H&N”), is a shareholder in Novacation. The Plaintiff, Brent Hering (“Hering”), is the principal of H&N and a Director of Novacation. [ 4 ] The Defendant, Novacation Inc. (“Novacation”), is incorporated pursuant to the Companies Act . Novacation is the owner of Strum Island, Mahone Bay, Nova Scotia on which it has constructed a luxury house for the purpose of rental and/or resale for profit. [ 5 ] The other shareholders of Novacation and their principals are: The Kirz Revocable Trust (Stephanie Kirz), Whyte Dog

Holdings, LLC (Stephanie Kirz), and Odin Nutraceuticals Inc. (Anthony Smith). All are Defendants in the underlying proceeding. Anthony Smith is a Director and the current President of Novacation. [ 6 ] The other Defendants are a former shareholder, Plum Holding Inc., LLC, and its principal, Fred Kern. The Defendant, 11145207 Canada Inc. (“1114”), is a company incorporated by Anthony Smith to operate a cannabis company on Strum Island pursuant to a lease agreement with Novacation.

Articles of Association [ 7 ] The First Restated Articles of Association of Novacation were put in place in 2016 when H&N was the sole shareholder. The presently-in-force Second Restated Articles of Association contain the identical cash call, share forfeiture, and financial disclosure provisions. [ 8 ]

Article 1.6 of the Articles provides, in part, that the Plaintiff, Novacation, and all other Defendants, “shall be entirely subject to, and governed by, the law [sic] of Nova Scotia”. [ 9 ] The Defendants, as a block, currently represent a majority of the shares in Novacation that can be voted at shareholder meetings and control a majority of the seats that can be appointed to the Board. Financial Statements [ 10 ] Novacation’s Articles provide as follows: 4.7 REQUIRED BOOKS AND RECORDS.

The Company shall maintain at its principal office all of the following: … copies of the Company’s tax or information returns and reports, if any, for the six (6) most recent taxable years, the financial statements of the Company for the three (3) most recent fiscal years, the Company's books and records as they relate to the internal affairs of the Company for at least the current and past three (3) fiscal years. 4.8 INSPECTION OF BOOKS AND RECORDS.

Within thirty (30) days written request by or on behalf of an Owner for purposes reasonably related his/her interest as an Owner, the Financial Manager shall promptly deliver: (

i) a copy of the information described in the previous sentence; and (ii) an income statement of the Company for the initial three-month, six-month, or nine-month period of the current fiscal year ended more than thirty (30) days prior to the date of the request. Any such request, may be made by a Party or by the Party’s agent or legal counsel. [ 11 ] At no point in Novacation’s history has its shareholders appointed an auditor at any of the company’s annual general meetings.

Further, except for the 2016 financial year, the shareholders have never provided their unanimous consent at any annual general meeting to dispense with the requirement to appoint an auditor. The directors of Novacation have never appointed an auditor of the company to hold office until the next annual general meeting.

The directors have never placed audited annual financial statements or auditor reports before the shareholders of the company at annual general meetings, or otherwise. [ 12 ] Grant Thornton LLP produced an unaudited Notice to Reader Statement for Novacation’s financial year ending December 31, 2016. BDO Canada LLC (“BDO”) produced unaudited Notice to Reader Statements for Novacation’s financial years 2017, 2018, 2019, and 2020.

As of yet, there are no Notice to Reader Statements for the financial year 2021. [ 13 ] Novacation prepared an “income statement” and “balance sheet” for the financial year ending December 31, 2021. [ 14 ] None of the Notice to Reader Reports are signed by any of the directors of Novacation.

None of the Notice to Reader Statements contain a statement that the shareholders of Novacation unanimously waived the requirement of an auditor. [ 15 ] On February 1, 2021, H&N, a minority shareholder, through legal counsel, demanded that the directors of Novacation appoint an auditor pursuant to subsections 117(2) and 117(5) of the Companies Act .

On the same date, H&N, through legal counsel, demanded disclosure of audited financial statements of Novacation containing all information mandated by the Regulations made under the Companies Act for 2017 through 2019, and production of Novacation’s financial statements for 2020 once available. [ 16 ] On February 7, 2021, Mr. Hering, as a director of Novacation, through legal counsel, demanded disclosure of audited financial statements of Novacation. [ 17 ] On March 8, 2021, Mr.

Hering made a motion during a directors’ meeting requiring management convene a general meeting of the shareholders to select a duly qualified auditor to audit the financial statements of Novacation in accordance with the demands made by H&N. Neither of the other two directors seconded the motion. [ 18 ] On January 26, 2022, Mr.

Hering and H&N, through legal counsel, again demanded disclosure of financial statements for the financial years 2016 to 2021 inclusive, together with any notes convention to such statements, such as noted in relation to any non-arm’s length or related party transactions or debts. [ 19 ] On February 17, 2022, Novacation’s counsel replied to this request providing detailed disclosure including the Notice to Reader Statements for the financial years 2016-2020, and an internal draft statement for the 2021 fiscal year; a detailed description of the cost sharing arrangements between Novacation and 1114; clarification of party loans including loans to 1114; and a complete list of capital assets with a value over $5,000. [ 20 ] To date, Novacation has not complied with the demands of Mr.

Hering and H&N to appoint an auditor to prepare audited financial statements of Novacation.

[ 21 ] Prior to February 2021, neither Mr. Hering nor H&N asked for an auditor to be appointed. [ 22 ] Since 2017, Novacation has prepared and issued detailed operating budgets to its shareholders in accordance with

section 4.3(

a) of the Second Restated Articles of Association. Except for the budget for 2020, each of the budgets from 2017 to 2021 were reviewed by the Board of Directors at a Board of Directors’ meeting. [ 23 ] On May 12, 2017, Mr. Hering, through H&N as the majority shareholder of Novacation, unanimously waived the audit requirements of

Section 117 and Sections 119 - 119B of the Companies Act for the 2016 year. On the same date the Board of Dirctors (Hering, Kern and Kirz) reviewed and approved the capital budget for 2017. [ 24 ] The budgets for 2017 through 2020 contained a line item for “accounting” (with the exception of 2017 wherein “accounting and legal” were combined in a single line item). The amount budgeted for accounting expense is either $3,000 or $3,500. Mr. Hering and the other directors met, reviewed, and approved the budget in each of these years with no objection to the lack of audited financial statements. [ 25 ] Mr.

Smith prepared unaudited financial statements for Novacation in respect of the 2017-2019 fiscal years without any objection from Mr. Hering or H&N to the absence of an audit. [ 26 ] The first time Mr. Hering or N&N raised the objection that Novacation’s statements be audited was after this litigation had been commenced.

The Parties’ Positions Plaintiff [ 27 ] At the outset of the hearing of the motion argument, counsel for the Plaintiffs conceded the express consent by unanimous shareholders’ resolution to waive the requirement for audit of the 2016 financial statements and withdrew the motion in respect of that financial year. [ 28 ] As to audited financial statements for the financial years 2017 through 2021, the Plaintiffs say that Novacation, a limited company incorporated under the Companies Act , is and has been in breach of the fundamental statutory requirements to appoint an auditor and arrange for the preparation of audited financial statements and auditor reports.

Further, in the circumstances of this case, this failure constitutes oppressive conduct further warranting the Order sought for appointment of an auditor and preparation of audited financial statements. Novacation [ 29 ] Novacation asserts that the audit requirements contained in the Companies Act were expressly waived by unanimous shareholders’ resolution in respect of the 2016 financial year and that the audit requirements were also waived for the 2017, 2018, and 2019 financial years by implied consent or otherwise through the conduct of the Novacation shareholders.

Novacation is willing to facilitate the preparation of audited statements for the 2020 and 2021 financial years on condition that the auditor’s fees be split equally between Novacation and the Plaintiffs. Novacation says that the Plaintiffs’ arguments regarding oppression are premature as they are baseless, and this motion is not the appropriate forum for the Court to consider the oppression claim on its merits. In

summary, Novacation argues that this motion is an attempt by a minority shareholder to punish Novacation by leveraging a costly audit requirement he had no interest in prior to this litigation. Law and Analysis [ 30 ]

Section 117 of the Companies Act provides: Appointment, removal, remuneration and rights of auditor 117

(1) Every company shall, at each annual general meeting, appoint an auditor or auditors to hold office until the next annual general meeting.

(2) If an appointment of an auditor is not made at an annual meeting, the directors of the company shall appoint an auditor of the company to hold office until the next annual general meeting.

(3) The first auditor or auditors of the company may be appointed by the directors at any time before the first annual general meeting, and auditors so appointed shall hold office until that meeting.

(4) The directors may fill any casual vacancy in the office of auditor, but while any such vacancy continues the surviving or continuing auditor or auditors, if any, may act.

(5) The remuneration of the auditor or auditors of a company shall be fixed by the company in general meeting, or by the directors pursuant to an authorization given by the shareholders at the annual meeting, except that the remuneration of an auditor appointed before the first annual general meeting or of an auditor appointed to fill a casual vacancy may be fixed by the directors, and that the remuneration of an auditor appointed by the Governor in Council may be fixed by the Governor in Council.

(6) The members may, except where the auditor has been appointed by order of the court pursuant to subsection (9), by resolution passed by a majority of the votes cast at a special meeting duly called for the purpose, remove an auditor before the expiration of the auditor’s term of office and shall, by a majority of the votes cast at that meeting, appoint another auditor in his stead for the remainder of the term.

(7) Before calling a special meeting for the purpose specified in subsection (6) or an annual general or special

meeting where the directors are not recommending the re-appointment of the incumbent auditor, the company shall, fifteen days or more before the mailing of the notice of the meeting, give to the auditor (

a) written notice of the intention to call the meeting, specifying therein the date on which the notice of the meeting is proposed to be mailed; and (

b) a copy of all material proposed to be sent to members in connection with the meeting.

(8) An auditor has the right to make to the company, three days or more before the mailing of the notice of the meeting, representations in writing concerning (

a) the auditor’s proposed removal as auditor; (

b) the appointment or election of another person to fill the office of auditor; or (

c) the auditor’s resignation as auditor, and the company, at its expense, shall forward with the notice of the meeting a copy of such representations to each member entitled to receive notice of the meeting.

(9) If a company does not have an auditor, the court may, upon the application of a member or the Registrar, appoint and fix the remuneration of an auditor to hold office until an auditor is appointed by the members.

(10) The company shall give notice in writing to an auditor of the auditor’s appointment forthwith after the appointment is made.

(11) A resignation of an auditor becomes effective at the time the written resignation is sent to the company or at the time specified in the resignation, whichever is later. [ 31 ] Corporate legislation across Canada provides shareholders with the right to appointment of an auditor and audited financial statements. However, through the operation of consent provisions, shareholders may exercise the ultimate discretion over whether audited statements are produced.

This allows the shareholders to weigh the cost of having the statements audited against the enhanced level of disclosure that an audit provides. [ 32 ] Unlike other corporate statutes in Canada, the Nova Scotia Companies Act does not require that the right to audited financial statements be exempted in writing or by formal resolution.

Section 118 of the Companies Act states as follows: Exemption from Sections 117 and 119 to 119B 118 In respect of a financial year of a company, the company is exempt from the requirements of

Section 117 and Sections 119 to 119B regarding the appointment and duties of an auditor where (

a) the company is not a reporting issuer or a reporting company; and (

b) all of the members consent thereto in respect of that year. [Emphasis added] [ 33 ]

Section 192 of the Management of a Company Limited by Shares Regulations made under the Companies Act further describes the exemption as follows: 192

(1) If all of the members of the Company consent thereto, the provisions of these Articles and Sections 117 and 119 to 119B of the Act regarding the appointment of auditors and duties of auditors do not apply with respect to the financial year in respect of which the consent is given .

(2) Sub-article (1) shall not apply if the Company is a reporting issuer or a reporting company. [Emphasis added] [ 34 ] In contrast, for example, the Ontario Corporations Act , RSO 1990 c.38, s.96.1, and the British Columbia Business Corporations Act , SBC 2002 c57, s.203(2) , each require that “all of the shareholders consent, in writing ” to a waiver of the audit requirement. The

Canada Business Corporations Act , RSC 1985 C-44, s.163(3) and the Saskatchewan Business Corporations Act , RRS 1978 b10, s.157(1) require that the shareholders waive the requirement by formal resolution. [ 35 ] I agree with Novacation that the absence of the particular requirement that an exemption from audit by consent be “in writing”, or by formal resolution, ought to be interpreted as a reflection of the Nova Scotia legislature’s intent to allow the consent to be implied. In B. v. Ontario (Human Rights Commission) , 2002 SCC 66 , at para. 42 , the Supreme Court of Canada stated: …we agree that statutory language from other jurisdictions may aid in the

interpretation process… and, in that case before it: …the express exclusion of particular identity in the Saskatchewan Code and the absence of that exclusion in the Ontario Code lends itself more easily to the conclusion that the broader meaning of status was, in fact, intended in Ontario.

Accordingly, the authorities cited by the Plaintiff relying on the Federal, Ontario and British Columbia legislation ( Labatt Brewing Co. v. Trilon Holdings , 1998 CarswellOnt 3106 ; Merrill v. Afab Security , [2007] O.J. No. 1133 ; and, Li v. Global Chinese Press Inc. , 2014 BCSC 700 ) are distinguishable. [ 36 ] The conduct of H&N and Mr. Hering prior to this litigation commencing provides, in my view, clear indication of their satisfaction and consent that no auditor was appointed, and no audited financial statements were prepared. In 2017, Mr. Hering signed the Novacation tax return.

Schedule 141 to that return expressly represented that no audited statements were prepared. In 2017, 2018, and 2019, Mr. Hering attended Board of Directors meetings at which the annual budget was approved with minimal spending on accounting expenses, far less than would be expected for audited statements. At the December 17, 2020, Board meeting, Mr. Hering moved to reduce the accounting expense line to zero because he did not see how such an expense was “necessary”. Collectively, this conduct is strong evidence of the consent of Mr. Hering and H&N to not incur the expense of an audit for the years up to 2020.

I am satisfied on the evidence that the requirement for the appointment of an auditor and the preparation of audited statements was consented to by the shareholders of Novacation within the requirements of

section 118 of the Companies Act for the financial years 2017, 2018, and 2019. [ 37 ] The Plaintiffs argued in the alternative that the failure to produce audited financial statements for the years 2017 through 2019 amounted to oppression. If the Defendants are compliant with the legislative requirements regarding the appointment of an auditor, this argument is significantly weakened. The Plaintiffs rely upon the decision of this Court in MacDonald v. D’Aubin , 2019 NSSC 389 , affirmed on appeal, 2021 NSCA 55 , at para. 47 . In my view, D’Aubin is distinguishable on the facts.

The lack of disclosure of financial information in that case was particularly egregious. Financial records were not kept up to date, no financial records whatsoever were made available to the claimant for a period of three years, and the company’s tax returns for 2013-2015 were not filed until 2017. [ 38 ] In the matter before me, aside from the contested audit requirement, there has been no issue with Novacation’s financial record keeping and disclosure. The evidence before me does not establish that Mr.

Hering or H&N had a reasonable expectation of audited financial statements. [ 39 ] In conclusion on the oppression argument, the Plaintiffs have provided no basis for me to conclude that the lack of financial disclosure amounts to oppression. [ 40 ] Novacation concedes that there is no evidence of unanimous consent to dispense with the statutory audit requirements for the financial years 2020 and 2021. Accordingly, Novacation shall be required to appoint an auditor for those financial years and have that auditor prepare audited financial statements.

As this is a statutory requirement, the cost of the audit shall be borne by Novacation.

Whether there is any basis to claim this cost as damages or a disbursement in the underlying litigation is best left to the trial judge for determination. [ 41 ] At the hearing, the parties agreed that the court appointed auditor should be BDO Canada LLP, who prepared the Notice to Reader financial statements for the financial years 2017-2019. [ 42 ] The Order shall provide that on or before April 30, 2022 Novaction shall appoint BDO Canada LLP as auditor for the financial years 2020 and 2021 and that Novacation produce to the auditor any information or documentation within its possession or control and provide its full cooperation necessary for the audit to be completed.

Novacation shall pay the auditor’s fee for the preparation of the audited financial statements. At the request of the parties, the Order shall contain a caveat provision that its operation is subject to the parties’ unanimous agreement otherwise. [ 43 ] Each party seeks costs. I fix the quantum of costs of this motion at $750 inclusive of disbursements. The costs shall be payable in the cause. Norton, J.