2013 ONSC 903, 2013 ONSC 903

CITATION : Leggat et al v. Jennings et al, 2013 ONSC 903 COURT FILE NO.: 7135/12 DATE: 20130208 SUPERIOR COURT OF JUSTICE - ONTARIO RE: BRIAN LEGGAT and 1180330 ONTARIO INC., Applicants AND: KELLY JENNINGS, CRAIG BECK, 1393024 ONTARIO INC., PENINSULA MOTOR SALES LIMITED and 4061357 CANADA INC., Respondents BEFORE: Coats J. COUNSEL: Mr. Cameron D. Neil, Counsel on behalf of the Applicants Mr. William Dunlop, Counsel for the Respondents Kelly Jennings, Peninsula Motor Sales Limited, 1393024 Ontario Inc. and 4061357 Canada Inc., for the purposes of the issues argued on January 28, 2013 Mr.

Scott Crocco, Counsel for the Respondent Craig Beck ENDORSEMENT [ 1 ] This application first came before me on January 23, 2013. It was put over to January 28, 2013 before me for argument of the issue of the Applicants’ request for interim access to documents and records. Specifically with reference to the Notice of Application, the Applicants sought the following relief: A. From para. 1(

c) of the Notice of Application, an interim Order granting the Applicants and their accountants immediate and unfettered access to the books and records of the corporate Respondents, Peninsula Motor Sales Limited and 4061357 Canada Inc., which records shall include but not be limited to: (

i) Minute books; (ii) A list, particulars and breakdown of all loans, dividends, salaries, and bonuses paid to Brian Leggat, Kelly Jennings, Elizabeth Jennings, 1180330 Ontario Inc., 1393024 Ontario Inc. or other parties not dealing at arm’s length with Brian Leggat and Kelly Jennings for the past 5 fiscal years; (iii) A list, particulars and breakdown of all payments made to non- arm’s length parties (including family members) for services, fees and loans, provided to Peninsula Motor Sales limited; (iv) The current status and details of the loan advanced from 1180330 Ontario Inc. to 1393024 Ontario Inc.; (

v) All documents related to the unauthorized PPSA registrations referred to herein; and (vi) Particulars of the annual performance bonus paid to Kelly Jennings by Peninsula Motor Sales Limited based on pre-tax net income under

article 3 of the Unanimous Shareholders Agreement. B. From para. 1(

d) of the Notice of Application, an Order restraining the Respondents from taking any steps to prevent the Applicant’s access to the books and records of Peninsula Motor Sales Limited and 4061357 Canada Inc.. [ 2 ] On January 23, 2013 when the matter was before me, I asked Mr. Neil to prepare a specific list of the documents he was seeking that the Applicants and their accountants have immediate and unfettered access to and he prepared the list which is attached as

Schedule A to this endorsement. The relief sought in para. 1(

c) of the Notice of Application was argued in the context of the books and records listed in

Schedule A. Background [ 3 ] The Applicant 1180330 Ontario Inc. (“1180330”) is an Ontario holding corporation owned exclusively by the Applicant Brian Leggat. Through the holding company and personal holdings, Brian Leggat owns a stake in two automotive dealerships in Owen Sound; namely, Peninsula Motor Sales Limited (“Peninsula Motor Sales”) and 4061357 Canada Inc. (“4061357”). [ 4 ] The Respondent 1393024 Ontario Inc. (“1393024”) is an Ontario corporation through which the Respondent Kelly Jennings and his Family Trust holds shares in Peninsula Motor Sales. [ 5 ] Both Mr. Leggat and Mr. Jennings are officers and directors of Peninsula Motor Sales and 4061357.

[ 6 ] The Respondent Craig Beck has no ownership interest in either Peninsula Motor Sales or 4061357. He is the Chief Financial Officer of Peninsula Auto Group which includes Peninsula Motor Sales and 4061357. He is also a director of Peninsula Motor Sales and 4061357. [ 7 ] 1393024 and 1180330 are parties to a Unanimous Shareholders Agreement dated January 2, 2001 with respect to the shareholdings of Peninsula Motor Sales. Mr. Leggat and Mr. Jennings are parties to a Settlement Agreement dated September 1, 2010. Disposition [ 8 ] The Applicants and their accountants shall have immediate and unfettered access to the books and records detailed in

Schedule A attached to this endorsement of the corporate Respondents, Peninsula Motor Sales and 4061357. This is without prejudice to the Applicants seeking further access to books and records on further motion to the Court. [ 9 ] With respect to the claim made in para. 1(

d) of the Notice of Application, this claim is dismissed without prejudice. Analysis [ 10 ] The Applicants are entitled to the requested access both as shareholders and Mr. Leggat as a director. Mr. Leggat is a shareholder of Peninsula Motor Sales through his holding company 1180330 and is a shareholder of 4061357 in his personal capacity. He is a director of Peninsula Motor Sales and 4061357. [ 11 ] As shareholders, the Applicants are entitled to immediate and unfettered access under two routes. Section 20(1) of the

Canada Business Corporations Act (“CBCA”) provides that a corporation shall prepare and maintain articles and by-laws and any amendments thereto, minutes of meetings and resolutions of shareholders and copies of notices required under

section 106 or 113 of the CBCA and a securities register. Section 21(1) of the CBCA provides that shareholders and their personal representatives may examine the records in subsection 20(1). This is the first route by which shareholders are entitled to access. Directors are also entitled to access through this route.

The list of documents available through this route is limited and listed in s. 20(1). [ 12 ] The second route is through s. 155 of the CBCA which prescribes that directors of a corporation shall place before the shareholder at every annual meeting, among other things, “any further information respecting the financial position of the corporation and the results of its operations required by the articles, the by-laws or any Unanimous Shareholders Agreement”.

The Unanimous Shareholders Agreement for Peninsula Motor Sales provides at clause 3.06 that “All shareholders shall have the right to review the Corporation’s accounting records”. This term “accounting records” is not qualified in any way. This gives the Applicant, 1180330 Ontario Inc., as shareholder of Peninsula Motor Sales, the right to review Peninsula Motor Sales’ accounting records. Pursuant to s. 122(2) of the CBCA, every officer and director shall comply with any unanimous shareholders agreement. These provisions give 1180330 access to the accounting records of Peninsula Motor Sales. [ 13 ] Mr.

Leggat also has the right to access books and records as a director. Section 20(2) of the CBCA provides that in addition to those records in subsection 20(1), a corporation shall prepare and maintain “adequate accounting records and records containing minutes of meetings and resolutions of the directors and any committee thereof”. Pursuant to s. 20(4) of the CBCA, such records prescribed by subsections 20(1) and 20(2) “shall at all reasonable times be open to inspection by the directors”. [ 14 ] As set out at para. 25 of Tyler v.

Envacon Inc ., 2012 CarswellAlta 1766 Q.B., by statute a director “has an unconditional right to inspect the books and records of the corporation and is not required to provide a reason for his or her inspection....”. At para. 70, Justice Moen states that: All directors must be satisfied that the financial statements presented to the Board are accurate. There is good reason why individual directors may inspect the books. That individual director may find irregularities that should be brought to the attention of all the directors. [ 15 ] A similar determination was made in Klianis v.

Poole , 1992 CarswellOnt 3204 (Gen. Div.) . At para. 9 Justice Ground determined, applying similar provincial legislation, as follows: It is not required under either the statutory provisions or the provisions of the Pappascorp Agreement that the director or shareholder as the case may be need provide a reason for his or her inspection or audit.

In addition, the rights of inspection and audit granted by such provisions are unconditional and I have been cited no authority indicating that the corporation or its officers may impose any conditions on the rights of inspection and audit granted by the statute or by an agreement among shareholders.

Accordingly, in my view Kalentzis and Poole are entitled as of right to carry out directly or through their representatives the examination of the books and records of Pappascorp which they are entitled to examine in their capacities as directors and shareholders of Pappascorp pursuant to ss. 144 and 145 of the Act respectively. [ 16 ] Justice Flynn in Thomas v. Thomas Health Care Corp. , 2005 CarswellOnt 977 (S.C.J. ) made a similar determination, again applying the similar provisions in the Ontario Business Corporations Act .

[ 17 ] The term “adequate accounting records” in s. 20(2) of the CBCA has been interpreted expansively. Para. 21 of Tyler v. Envacon Inc. provides as follows: In terms of the meaning of the phrases “accounting records” and “adequate accounting records” pursuant to CBCA, s. 20(2) and as applicable here, I accept Ms.

Tyler’s submission that the scope “must be more extensive than financial statements which are prepared from accounting records” and consist of at least “entries from day to day of all moneys received and paid out and of the matters in respect of which these payments occurred”. [ 18 ] This paragraph 21 refers to the decision in Roles v. 306972 Saskatchewan Ltd. , 1993 CarswellSask 303 (C.A.) which applied the similar Saskatchewan Business Corporations Act, and paras. 4 to 7 of Roles v. 306972 provide as follows: 4. The applicable

section is s. 20 of the S.B.C.A. and the relevant parts of this

section are as follows: 20(1) A corporation shall prepare and maintain, at its registered office or at any other place in Saskatchewan designated by the directors, records containing: (

a) the articles and the bylaws, and all amendments thereto, and a copy of any unanimous shareholder agreement; (

b) minutes of meetings and resolutions of shareholders; (

c) copies of all notices required by

section 101 or 108; and (

d) a securities register complying with

section 46.

(2) In addition to the records described in subsection (1), a corporation shall prepare and maintain adequate accounting records and records containing minutes of meetings and resolutions of the directors and any committee thereof.

(4) The records described in subsection (2) shall be kept at the registered office of the corporation or at such other place in Saskatchewan as the directors think fit and shall at all reasonable times be open to inspection by the directors. The right which Roles sought to enforce is contained in s. 20(4). 5. We agree with counsel for Roles that the provision of annual financial statements is not what is meant by "accounting records" in s. 20(2). In fact, the kind of annual financial statements referred to by the chambers judge are the subject of s. 149 of the SBCA. That

section requires the directors to place before the shareholders at every annual meeting "comparative financial statements". Yet s. 20 of the S.B.C.A. gives directors, but not shareholders, the right to inspect accounting records. Accordingly, the accounting records which a director has the right to inspect must be more extensive than financial statements which are prepared from accounting records. 6. On this point we accept counsel's contention that what constitutes adequate accounting records is described in Palmer's Company Law, by C.M.

Schmitthoff, (23rd ed.) at Vol. 1, para. 70-01 where the author refers to the British statutory definition: The accounting records shall disclose with reasonable accuracy, at any time, the financial position of the company at that time, and shall contain a record of the assets and liabilities of the company and entries from day to day of all monies received and paid out and of the matters in respect of which these payments occurred...

It is reasonable to suppose that adequate accounting records consist at least of "entries from day to day of all monies received and paid out and of the matters in respect of which these payments occurred." 7. Accordingly, we find that the chambers judge erred in denying access to the accounting records on the basis that access had been or would be given by giving access to the financial statements alone. [ 19 ] In Johnston v.

Woodford , 2000 CarswellNB 394 (Q.B.) , the Court, in applying the provincial Business Corporations Act, looked to a Revenue Canada circular in defining “adequate accounting records” and at para. 24 included “documents or records which would be used in the preparation of financial statements”, what are normally considered as “source documents”. [ 20 ] The scope of documents that must be available to directors under the CBCA or similar provincial legislation as “adequate accounting records” is broad (see paras. 6 and 22 of Tyler v. Envacon , para. 25 of Johnston v. Woodford and para. 17 of Thomas v.

Thomas Health Care Corp. with reference to the attached Factum). The scope is broad enough to include the documents and records the Applicants are seeking access to. [ 21 ] The Respondents took the position that the Applicants already had access to the financial information they seek through the Reynolds System and EDM System (see paras. 23-28 of Mr. Jennings’ Affidavit sworn January 21, 2013 and para. 8 of Mr. Beck’s Affidavit sworn January 27, 2013). It is unclear to me whether there are hard copy source documents in addition to the electronic systems or to support the electronic systems.

To the extent these documents exist, the Applicants must be permitted access to them. [ 22 ] The Respondents also took the position that the Applicants have the financial statements for both corporations. The financial statements do not include the source documents and records and neither do the KPMG documents. [ 23 ] The Respondents also take the position that some of the document categories are too broad, i.e. copies of all contracts. In my view, there is no lack of clarity given the broad scope of “adequate accounting records” as this has been defined by other courts.

[24] The Respondents have filed several cases with respect to the test to be applied for interim relief. In my view, none of thesecases are of assistance in the determination of the issues before me. In 1384034 Alberta Ltd. v. 1180263 Alberta Ltd, 2011 ABQB 599,the Court granted some interim relief, including access to financial statements of the corporation consisting of weekly accounting reportsand monthly financial statements. No test for interim relief was articulated. In Dee Ferraro Ltd. v. Pellizzari, 2010 ONSC 3013, againno test for interim access to financial records was set out.

On a short motion list it was not possible to make such a determination. InPadda v. 2074874 Ontario Inc., 2010 ONSC 2872, the interim relief requested was the appointment of a receiver. This is completelydifferent than a request for a declaration enforcing a statutory right to access to books and records. I do note that in Padda v. 2074874 atpara. 20 it is clear that Justice Gray had ordered as a term of the previous adjournment that business records in the possession of eitherparty were to be provided to the other party forthwith. In Le Maitre Ltd. v. Segeren, (ON SC), [2007] O.J.

No. 2047(SCJ) the interim relief sought was to restrain the Respondents from concluding a transaction. The relief sought before me is completelydifferent. The Applicants are not seeking interim relief under the oppression remedy

section at this stage of the proceeding. TheApplicants are seeking a declaration permitting access to books and records, documents to which Mr. Leggat as a director has a statutoryright to access. The relief is available under s. 247 of the CBCA and this issue easily lends itself to

summary disposition. The primaryissue before me is not in the nature of an injunction. In PADP Holdings Inc. v. Information Balance Inc., [2006] O.J. No. 5518 (O.S.C.),the primary interim relief sought was the reinstatement of employment and the standard test for injunctive relief was applied. Onceagain, the primary issue before me is not of an injunctive nature. [25] Mr. Dunlop submits that the cases Mr. Neil filed in support of the relief for access to books and records were all finaldeterminations, not interim. In my view, the case before me is such that it easily lends itself to

summary disposition and the recordbefore me was sufficient for this determination to be made. [26] The relief granted is against the Corporations. The obligations under s. 20 of the CBCA are the Corporations’. [27] With respect to the relief sought in para. 1(

d) of the Notice of Application, in my view this claim is premature at this time. Itis dismissed without prejudice to be reassessed when a more fulsome evidentiary record is available. Conclusion [28] The Applicants and their accountants shall have immediate and unfettered access to the books and records detailed inSchedule A attached to this endorsement of the corporate Respondents, Peninsula Motor Sales limited and 4061357 Canada Inc. This iswithout prejudice to the Applicants to seek further access to documents and records on further motion to the Court. This relief is grantedagainst Peninsula Motor Sales Ltd. and 4061357 Canada Inc.. [29] With respect to the claim made in para. 1(

d) of the Notice of Application, this claim is dismissed without prejudice. [30] Counsel may make arrangements to attend before me through the Trial Coordinator with regard to costs if they cannot resolvesame. Coats J. Date: February 8, 2013

SCHEDULE A ▪ Bank statements (all accounts) with cancelled cheques and backups for all EFTs (Electronic Funds Transfers) ▪ Banking agreements ▪ Copies of all third party statements with access to invoices ▪ Copies of all intercompany transactions

▪ Listings to support the Accounts Receivable and Accounts Payable and Accrued Liabilities ▪ Details of any balances written off ▪ Copies of all Journal Entries and Adjusting Entries with supporting documentations ▪ Copies of invoices supporting purchases of company Fixed Assets ▪ Year-end working papers with all supporting schedules, journals and documents ▪ Copies of 2010 and 2011 tax returns with corresponding financial statements ▪ Copies of all contracts ▪ Payroll records including T4s, T3s, T5s, calculation of taxable benefits and employment contracts ▪ Details of interest paid to any individuals or corporations ▪ Details of dividend payments, if any ▪ Copies of sub-contracting agreements, if any ▪ EHT statements, CRA remittances, WSIB statements, HST remittance confirmations ▪ Notices of Assessments or Reassessment issued by Federal or Provincial governments ▪ Inventory purchases, in particular used vehicles and parts (excluding purchases from Ford Canada) ▪ Copies of any third party audits ▪ List of automobiles owned or leased by the corporation including the name of the principal driver