Docket: A-453-15
Citation:
2016 FCA 283
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CORAM:
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WEBB J.A.
NEAR J.A.
RENNIE J.A.
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BETWEEN:
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JASON SWIST, and CRUDE SOLUTIONS LTD.
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Appellants
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and
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MEG ENERGY
CORP.
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Respondent
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REASONS
FOR JUDGMENT
WEBB J.A.
[1]
This is an appeal from an Order of the Federal
Court (Docket: T-1069-14) requiring Crude Solutions Ltd. (CSL) to post security
for costs in the amount of $195,785.70 before it could take any further steps
in its proceeding before the Federal Court.
[2]
For the reasons that follow I would allow this
appeal.
I.
Background
[3]
Jason Swist and CSL commenced an action in the
Federal Court for patent infringement against MEG Energy Corp. (MEG). MEG
brought a motion for an Order requiring CSL to post security for costs. MEG was
not seeking security for costs from Jason Swist.
[4]
Rules 416(1) and 417 of the Federal Courts
Rules, SOR/98-106 (Rules) provide in part that:
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416 (1) Where, on the motion of a defendant, it appears to the
Court that:
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416 (1) Lorsque, par suite d’une requête du défendeur, il paraît
évident à la Cour que l’une des situations visées aux alinéas a) à h) existe,
elle peut ordonner au demandeur de fournir le cautionnement pour les dépens
qui pourraient être adjugés au défendeur:
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[…]
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…
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(b) the
plaintiff is a corporation, an unincorporated association or a nominal
plaintiff and there is reason to believe that the plaintiff would have
insufficient assets in Canada available to pay the costs of the defendant if
ordered to do so,
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b) le demandeur
est une personne morale ou une association sans personnalité morale ou n’est
demandeur que de nom et il y a lieu de croire qu’il ne détient pas au Canada
des actifs suffisants pour payer les dépens advenant qu’il lui soit ordonné
de le faire;
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[…]
the Court may
order the plaintiff to give security for the defendant's costs
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…
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[…]
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…
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417 The Court may refuse to order that security for costs be given
under any of paragraphs 416(1)(a) to (g) if a plaintiff demonstrates
impecuniosity and the Court is of the opinion that the case has merit
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417 La Cour peut refuser d’ordonner la fourniture d’un
cautionnement pour les dépens dans les situations visées aux alinéas 416(1)a)
à g) si le demandeur fait la preuve de son indigence et si elle est
convaincue du bien-fondé de la cause.
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[5]
There are two shareholders of CSL: Jason Swist
and his wife, Francisca Swist. In the reasons of the Federal Court Judge the
share ownership of CSL is described as follows:
[8] According to the evidence, Mr. Swist is
a 90% shareholder in CSL; the remaining shares are held by his wife. Mr. Swist
holds 100% of the voting shares.
[6]
However, in his affidavit, Jason Swist stated
that:
6. CSL is a corporation incorporated, on
June 2, 1981, pursuant to the laws of the province of Alberta. It was initially
registered as “California Coal & Carbon Corporation Ltd.” until September
9, 2005. Effective June 1989, I owned 100% of the voting shares of CSL….
[…]
10. As per the information found in Exhibit
“A”, I currently hold 90% of the voting shares of CSL. My wife, Francisca Swist
holds the remaining 10%.
[7]
Therefore, it appears that there is only one
class of shares of CSL of which Jason Swist owns 90% of such shares that are
issued and outstanding and his wife owns the remaining 10%.
II.
Decision of the Federal Court
[8]
The Federal Court Judge noted that the key
question for Rule 417 was the financial standing of CSL. In paragraph 20 of her
reasons, the Federal Court Judge found that the only assets of CSL were two
patents and a patent application. In paragraph 21 she then stated that:
[w]here a corporate
party has no assets…
[9]
Since CSL did have the two patents and the
patent application, it appears that she was referring to liquid assets or
assets that could be pledged to raise capital in paragraph 21. In any event, it
is clear that she found that CSL does not have any assets that could be used,
directly or indirectly, to post security for costs.
[10]
The Federal Court Judge also found that Jason
Swist does not have any assets that could be used to assist CSL in posting
security for costs.
[11]
The Federal Court Judge then determined that she
could look to the minority shareholder, Francisca Swist, to determine if she
had the financial means to provide funds to CSL to allow CSL to post security
for costs. The Federal Court Judge found that Francisca Swist was employed and
had some assets. As a result she was “not satisfied
that the minority shareholder is unable to provide security for costs.”
She, therefore, ordered CSL to post security for costs in the amount of
$195,785.70.
III.
Issue
[12]
The issue in this appeal is whether the Federal
Court Judge committed an error by determining that CSL had not established that
it was impecunious for the purposes of Rule 417, because there was a minority
shareholder who may have the ability to provide funds to CSL to allow it to
post an amount as security for costs.
IV.
Standard of Review
[13]
In Hospira Healthcare Corp. v. Kennedy
Institute of Rheumatology, 2016 FCA 215, [2016] F.C.J. No. 943 this Court held,
in paragraph 79, that the standards of review as set out in Housen v.
Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235 (Housen) are applicable
to appeals of discretionary decisions of Judges (palpable and overriding error
for questions of fact and correctness for questions of law).
V.
Analysis
[14]
In this case, there is no dispute that the
condition as set out in Rule 416(1)(b) is satisfied. CSL does not have
sufficient assets in Canada available to pay the costs of MEG if it is ordered
to do so.
[15]
The issue in this appeal is whether the first
condition (impecuniosity) as set out in Rule 417 has been satisfied. It should
be noted that Rule 417 is discretionary. Even if a plaintiff demonstrates
impecuniosity and the Court is satisfied that a case has merit, the Judge is
not obligated to refuse to order security. Rule 417 only provides that a Judge
may refuse to order security if these two conditions are satisfied. In this
case, the Federal Court Judge determined that the first condition was not
satisfied and therefore did not determine whether the discretion granted by
Rule 417 should have been exercised.
[16]
Rule 417 provides that it is the plaintiff who
must demonstrate that it is impecunious. There is no dispute that CSL, on its
own, is impecunious and that Jason Swist is not able to provide any financial
assistance to CSL. The issue is whether it was appropriate in the circumstances
of this case to find that CSL had not demonstrated that it was impecunious,
because it had not established that its minority shareholder could not provide the
financial assistance to allow it to post security for costs. Shareholders of a
corporation (other than an unlimited liability company) have limited liability
and, therefore, would not be obligated to provide additional funds to the
corporation to allow it to post security for costs. The issue is not,
therefore, whether any particular shareholder is obligated to provide the
security for costs but whether, in determining if a corporation is impecunious,
it is appropriate to consider that such shareholder could be regarded as a
source of financing a payment as security for costs.
[17]
The Federal Court Judge, in paragraph 21 of her
reasons, stated that:
[21] Where a corporate party has no assets,
the Court can consider the ability of a shareholder to post security; see Nicholas,
supra at paragraph 24.
[18]
In my view, this statement is too broad as it
seems to assume that all shareholders of a company should be treated equally
when determining whether a company can look to its shareholders for financial assistance.
Shareholders will share, indirectly, in the assets and profits of a company in
proportion to their shareholdings. Therefore a person who holds 10% of the
shares of a company will only, indirectly, share in 10% of the assets and profits
of the company. Why should it be assumed that a shareholder who will only share,
indirectly, in 10% of any gain that may be realized by a company if it is
successful in a lawsuit be expected to fund 100% of a security for costs in
relation to that lawsuit?
[19]
The case cited by the Federal Court Judge for
the proposition that the Court can consider the ability of any shareholder to
provide funds to a corporate plaintiff to allow it to post security for costs is
Nicholas v. Environmental Systems (International) Ltd., 2009 FC 1160, 377
F.T.R. 1. In that case, Mosley J. stated that:
[24] In the case of a shell corporation
without discoverable assets, the courts can reasonably look to the shareholders
to provide the indemnification. In the case of a non-corporate plaintiff, it is
appropriate to look at other sources of funds that may be available to the
litigant including those held by close family members.
[20]
However, the plaintiff in that case was an
individual, not a corporation. Therefore, this reference to looking to
shareholders of a shell company was simply a general comment made in obiter.
[21]
MEG referred to Continental Breweries Inc. v.
707517 Ontario Ltd., 1990 CarswellOnt 422, 46 C.P.C. (2d) 151. In that case
Master Sandler found that a company was not impecunious and in so finding, stated
that:
13 In this case, it is clear that the
plaintiff company itself has no realizable assets except this claim. If it
loses this action, the defendant might well be awarded substantial costs for
defending the claim, and the defendant could never collect them from the
plaintiff corporation.
14 So far as the shareholders are concerned,
the plaintiff is owned 51 per cent by 29 shareholders, some of whom are, by
their very names, people of substance, and 49 per cent by Calford, his wife and
Coutou who, it is clear have little assets and could not pay security. So at
least some shareholders could fund the action and post security but won't, and
others (49 per cent) might want to, but can't. Is this company thus
impecunious?
15 I think not. If those shareholders who
can, do not want to advance any more money to see this claim pursued, why
should a minority of the company be allowed to pursue the claim without posting
security? Why should the defendant be pursued by an insolvent company who is at
no risk if it loses, and could never itself pay any costs award. The best that
can be said of plaintiff's claims before me is that there is a 50-50 chance
they will win. It could well turn out that they will recover nothing because of
the defences and counterclaims of the defendants. The plaintiff and its
shareholders chose a corporate structure, and must take the consequences of
that choice. Its principal, Calford, has incorporated a new corporate entity
through which all new business will be directed so he seeks protection behind
corporations whenever he can get it.
16 I conclude that because the plaintiff is
not impecunious, as defined in Kurzela, and Smith Bus Lines v. Bank of
Montreal (1987), 61 O.R. (2d) 688 at 690, 20 C.P.C. (2d) 38 (H.C.), leave
to appeal to Ont. Div. Ct. refused (1987), 61 O.R. (2d) 688, 25 C.P.C. (2d) 255
(H.C.), and 408466 Ontario Ltd. v. Fidelity Trust Co. (1986), 10 C.P.C.
(2d) 278 at 282 (Ont. H.C.) that the plaintiff cannot avoid security.
[22]
Although there is a reference to 51% of the
shares being held by 29 people, there is no indication of the number or
percentage of shares held by any particular person “of
substance.” If each of the 29 people owned an equal number of these
shares, each person would own less than 2% of the shares. I do not agree that
it should be assumed that someone who only owns less than 2% of the shares of a
particular company should be expected to provide 100% of the amount that may be
required by that company to post security for costs for litigation being pursued
by that company. In that case it was also the minority shareholders who wanted
to continue the litigation, whereas in this case it is the majority shareholder
who wants CSL to continue the litigation.
[23]
In ABI Biotechnology Inc. v. Apotex
Inc., 142 Man.R. (2d) 80, [2000] 3 W.W.R. 217, Philp J.A., writing on
behalf of the Manitoba Court of Appeal, stated that:
[45] What, then, are the principles that
should guide the court in applying Rule 56.01(d) to the defendants'
applications for security for costs? The general rule at common law and in
equity has been, from time immemorial, that poverty is not a bar to a litigant,
and that rule remains alive and well in Manitoba. Security for costs will not
be ordered against a plaintiff who has no assets if its effect is to stifle a
genuine claim. However, as we have seen, the courts have applied the rule less
generously when a corporate plaintiff asserts insolvency or impoverishment in
response to an application for security for costs. A corporate plaintiff with “insufficient
assets” must also establish that it cannot raise the security; that its
shareholders are unable to advance funds to allow it to post security. In my
view, that is not an attack on the legal persona of a corporation or a lifting
of the corporate veil. To me, it reflects the court's recognition of its duty
to do what is just in the circumstances. Courts have determined that a
corporate plaintiff without assets, manipulated by shareholders with assets,
ought not to be able to say to the defendant, “Heads I win, tails you lose.”
[46] Underlying the decisions reviewed above
is the realization that the making of an order for security for costs against a
corporate plaintiff without assets will not have the effect of stifling the
action if its shareholders, or some of them, have the ability to provide the
necessary funds. Whether or not the action proceeds when security has been
ordered remains the decision of the shareholders who are manipulating the
plaintiff and funding the litigation. In that sense, it is a decision not
unlike the one any plaintiff or prospective litigant must face: Do the chances
of success justify the expense and exposure to costs?
[Emphasis added and footnote references have
not been included]
[24]
In deciding whether a corporation is
impecunious, it seems appropriate to distinguish between those shareholders who
are “manipulating the corporation” and those who
are not. If a corporation is controlled by one person or by a group of persons,
then it is appropriate to consider the financial resources of the person who
controls the corporation or who is part of the group of persons who control the
corporation in determining whether that corporation is impecunious.
[25]
However, if the person is a minority shareholder
and is not part of a group of shareholders controlling the corporation, then,
in my view, the circumstances related to that shareholder should be examined to
determine if it is appropriate to consider the financial resources of that
person when determining if the corporation is impecunious. One important factor
will be the percentage of shares held by that person. The smaller the
percentage of shares held by that person the less likely it is that the
financial resources of such person should be considered in determining whether
the corporation is impecunious. Since Rule 417 provides that the plaintiff must
demonstrate impecuniosity, the onus would remain on any corporate plaintiff to
establish:
(a)
that any particular minority shareholder is not
part of the group of shareholders who control the corporation; and
(b)
the circumstances related to such shareholder that
would justify not looking to such shareholder to provide financial assistance
to the corporation to fund a payment as security for costs.
[26]
In this case, Francisca Swist only owns 10% of
the shares of CSL. The only evidence submitted in relation to Francisca Swist’s
acquisition of the shares and participation in the affairs of the corporation is
that she received the shares from Jason Swist for no consideration and that she
has never been involved in the business of CSL. Jason Swist also stated that he
was informed by Francisca Swist that she is unwilling to post any security for
costs. It is not surprising that she would refuse to provide the necessary
funds to allow CSL to post security for costs as she did not pay anything for
her shares and, therefore, has nothing to lose if the action is not continued.
[27]
In my view, it was an error in law, in
determining whether CSL was impecunious, to consider whether Francisca Swist,
in the circumstances of this case, could be the sole source of the amount that
CSL would be required to post as security for costs. In my view, CSL had
demonstrated that it was impecunious for the purposes of Rule 417.
[28]
Since the Federal Court Judge found that CSL had
not established that it was impecunious, she did not consider the second part
of Rule 417 which is whether the case has merit.
[29]
As a result, I would allow the appeal with costs
in the cause, set aside the Order of the Federal Court requiring CSL to post
security for costs and refer the matter back to the Federal Court to determine
whether the case has merit for the purposes of Rule 417, and if so, whether the
discretion provided in Rule 417 should be exercised. I would also set aside the
award of costs made by the Federal Court in favour of MEG and provide that the
costs in the Federal Court would also be in the cause.
“Wyman W. Webb”
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“I agree
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D.G. Near J.A.”
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“I agree
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Donald J.
Rennie J.A.”
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