495187 Ontario Limited v. Her Majesty the Queen, [1994] 2 CTC 398, 94 DTC 6593

Giles A.S.P.:— The action in which this motion is brought may arise out of the income tax assessment of a numbered company. The numbered company has been dissolved by the Province of Ontario.

The Business Corporation Act, R.S.O. 1990 c. B. 16, section 242 provides for the continuation of actions commenced before dissolution and the bringing of actions against corporations within 5 years of the dissolution. If a plaintiff takes advantage of the statute to bring an action, the cases indicate those interested in the assets of the company ma defend. This is even if the defence takes the form of an appeal and is commenced by a statement of claim.

However any such defensive measures must be taken within the time limits and in accordance with the other procedural requirements of the Income Tax Act and Federal Court Rules. There appear on the surface to be a number of reasons why the claim as drafted could be struck out. It may be that the time for bringing an appeal in this Court had run out. It may be that the appeal portion of this order duplicates an appeal already on foot. It may be that the interests of the numbered company should be represented by a solicitor. Before finding with respect to any of these matters, I would prefer to have had representations from the plaintiff and so I will at this stage make no finding with respect to them. I note however that damages of $5,000,000 are claimed. Such a claim cannot be included in an income tax appeal. If this is not an income tax appeal, it can not be the continuation of an action commenced by an assessment or the defence to an action commenced after dissolution. The statement of claim will therefore be struck out and the action dismissed.

Order

The statement of claim is struck out and the action is dismissed.

Application allowed.

Polyco Window Manufacturing Limited v. The Prudential Assurance & Door Company (1963) Limited and the Director of Labour

[Indexed as: Polyco Window Manufacturing Ltd. v. The Prudential Assurance Co. Ltd.]

Sask. Q.B. (Halvorson J.) March 21, 1994 (Q.B. No. 95).

Income tax—Federal—Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63)—224(1.2), 227(10.1)—Requirement to pay—Priorities.

The plaintiff suffered a fire loss to its manufacturing plant in November 1991. Liability was acknowledged by the insurer; however, the quantum of damage was not resolved. An initial advance was paid towards the loss. On May 17, 1993, an umpire awarded the plaintiff an additional $179,500. However, by that time, numerous execution creditors and garnishors made claims to the $179,500. In addition to those claims, Revenue Canada made a claim based on a requirement to pay and the Director of Labour Standards made a claim with respect to wages owing to a former employee of the plaintiff who had been dismissed without notice. The particulars of the Revenue Canada claim were as follows. The Minister asserted a prior right to $33,108 being unremitted source deductions, penalty and interest owing by the plaintiff pursuant to subsection 227(10.1) of the Income Tax Act. A requirement to pay was served on the insurer on October 29, 1993.

HELD:

Revenue Canada had the first claim on the $179,500. The requirement to pay had the effect of transferring the $33,108 to the Crown as provided in subsection 224(1.2). Moreover, as stipulated in that subsection, the money became the property of the Crown ”. . . notwithstanding any security interest in those moneys. . . .” Accordingly, claimants who were assignees respecting the $179,500 ranked after the Crown. In addition, even claimants relying on garnishees, had to line up behind the Crown. This was a consequence of the opening words of subsection 224(1.2) which state: “Notwithstanding. . .any enactment of a province. "In effect, any alleged priority to a garnishor under provincial legislation had to yield to the Crown preference in the Income Tax Act. (It was also conceded that the claim of the Director of Labour Standards ranked after the Crown.) Order accordingly.

Maurice Swertz, an officer of the plaintiff, for the plaintiff.

C.A. Sherbo for the defendant.

Cases referred to:

Mills v. Harris & Craske (1914), 7 W.W.R. 968;

F.W. Woolworth Co. v. Zimmer (1978), 94 D.L.R. (3d) 766;

Hale v. Ross (1958), 26 W.W.R. 47;

Barsi v. Farcas, [1924] 1 W.W.R. 707, [1924] 1 D.L.R. 1154;

O'Driscoll v. Manchester Insurance Committee, [1915] 3 K.B. 499, 85 L.J.K.B. 83:

Sandy v. Yukon Construction Co. (1960), 33 W.W.R. 490, 26 D.L.R. (2d) 254:

Shierman v. Harris & Craske (1915), 8 W.W.R. 514, 22 D.L.R. 694:

Randall v. Lithgow (1884), 12 Q.B.D. 525, 53 L.J.Q.B. 518;

Hartt v. Edmonton Steam Laundry Co. (1909), 10 W.L.R. 664, 2 Alta. L.R. 130;

Bonavista (Town) v. Atlantic Technologists Ltd., January 10, 1994 (Nfld. S.C. Doc.

No. St. J. 2761/93), Orsborn J. (unreported);

Royal Bank v. Sask. Power Corp. [1991] 1 W.W.R. 1, [1991] 1 C.T.C. 532;

Meyers v. Walters Cycle Co. (1990), 85 Sask. R. 222, 71 D.L.R. (4th) 190.

Halvorson J.:— This was a hearing to determine the priority among claimants to insurance money paid into Court by the defendant, The Prudential Assurance Co.

Execution creditors contend the money should be shared pro rata pursuant to the Creditors' Relief Act, R.S.S. 1978, c. C-46. Garnishors assert prior rights under the Attachment of Debts Act, R.S.S. 1978, c. A-32. If the latter Act governs, there is an issue concerning the date upon which the insurance money became due and therefore attachable.

Facts

For the most part, the facts are not contentious. The plaintiff, Polyco Window Manufacturing Ltd., suffered a fire loss to its manufacturing plant in November, 1991. Liability was acknowledged by the insurer, Prudential; however, the quantum of damage was not resolved. An initial advance was paid towards the loss.

By January 1992, creditors of Polyco had become anxious for their money. Some were aware of a pending second insurance advance and obtained directions to pay from Polyco. By agreement, these creditors in due course, shared that advance.

Eventually, creditors began to sue Polyco and garnishee Prudential. In response to the summonses, Prudential routinely informed the Court there was no "debt due or accruing due” from it to Polyco as contemplated by subsection 5(1) of the Attachment of Debts Act. Prudential maintained that any balance which might be owing to Polyco was unascertained because of the ongoing dispute respecting quantum of damages. Polyco sued and Prudential invoked the statutory dispute resolution condition of the insurance policy. Finally, on May 17, 1993, an umpire awarded Polyco an additional $179,500. Numerous garnishees were served on Prudential before and after that date.

The claimant, Berlinex Polymers Inc., was first to garnishee. Its summons was served on February 11, 1992. Accordingly, Berlinex says its claim on the $179,500 should be paid in priority to other unsecured creditors. Berlinex contends the $179,500 was a "debt due or accruing due" from Prudential to Polyco at the time of the garnishee.

Creditors of Polyco who garnisheed after the date of the umpire’s award, claim priority to the insurance money on the grounds it was only then that there was a "debt due or accruing due" from Prudential.

Execution creditors argue all this is irrelevant because there must be a rateable division of the money as dictated by the Creditors' Relief Act.

To extricate itself from these rival claims, Prudential applied under section 116 of the Saskatchewan Insurance Act, R.S.S 1978, c. S-26, for leave to pay the money into Court together with any further sums which might become due to Polyco under the policy. Berlinex objected arguing that the priority of its garnishee should be determined first pursuant to its motion under subsection 11(2) of the Attachment of Debts Act.

The chambers judge agreed with Prudential and fixed a date for this hearing at which all claimants to the $179,500 could present their cases. Prudential paid the funds into Court on December 24, 1993. Thereafter, a claimant applied under section 31 of the Creditors' Relief Act for an order that the $179,500 be paid over to the sheriff for distribution according to the provisions of that statute. The chambers judge adjourned that motion to be dealt with at this hearing.

The Creditors' Relief Act

Most of the claimants are both execution creditors and garnishors. Out of a sense of fairness, most would be content with a pro rata division of the money. To achieve that end, they seek to invoke the Creditors' Relief Act. This raises jurisprudence problems which initially appear formidable.

Wearing their execution creditor hats, these claimants argue that the insurance money is a "fund" envisaged by section 31 of that Act. It reads:

31. Where there is in a court a fund belonging to an execution debtor or to which he is entitled, the fund or a sufficient part thereof to pay the executions and certificates in the sheriff's hands may, on application of the sheriff or any party interested, be paid over to the sheriff and the fund shall be deemed to be money levied under execution within the meaning of this Act.

[Emphasis added.]

By their reasoning, the $179,500 is a fund caught by the section and therefore payable to the sheriff for distribution.

These claimants say their submission is enhanced by the fact the money was paid into Court under the Saskatchewan Insurance Act and not in response to garnishees under the Attachment of Debts Act. There is a countervailing argument that the chambers judge merely selected the Saskatchewan Insurance Act vehicle for resolving the competing claims because it was more expedient in the circumstances than the resolution scheme provided for in the Attachment of Debts Act.

I conclude the $179,500 is a fund in Court envisaged by the plain meaning of section 31, and the statute under which the money was paid in is not determinative of the issue. This conclusion does not necessarily derail the claim of priority asserted by the garnishors in view of authority corroborating their position. The question must be answered whether the garnishors have some binding common law or statutory right which outranks the clear intention of section 31 to catch the $179,500 and share it rateably.

It may be said at the outset that nothing in the Attachment of Debts Act grants priority to a garnishor. The Act is silent on the point. Nor is there any other statutory basis for the alleged preference. There is however, the decision in Mills v. Harris & Craske (1914), 7 W.W.R. 968 (Sask. T.D.), where the court said garnishors have priority over execution creditors. The binding effect of this judgment is called into question by the claimants.

In Mills the chambers judge was faced with a procedural problem. A garnishee paid money into court in response to a summons, and in so doing disclosed rival iens, assignments and garnishees claiming the debt. Like the instant situation, it was argued the money was a “fund” under the Creditors' Relief Act and must be paid over to the sheriff. The chambers judge refused. He concluded the garnishee rules of court, under which the money was paid in, provided the established procedure for settling these competing claims, rather than the little used procedure sanctioned by the Creditors' Relief Act. That is the rationale of the decision. However, the judge, Parke M. went on to state at page 969:

In this province the Creditors’ Relief Act abolishes priority among execution creditors, but not among garnishors. That priority still exists and until these priorities are determined together with the priorities of the lien holders and the assignees I do not think the money should be paid over to the sheriff.

This comment must be classed as obiter. The chambers judge was not asked to rule on the priority of the garnishors and other claimants. He was called upon to answer a procedural question, and he did. Moreover, he quoted no authority for this observation. The judge seems to have simply drawn a conclusion of priority based on the fact the Saskatchewan creditors' relief legislation did not contain a provision like other jurisdictions whereby a judgment creditor is deemed to attach for the benefit of all creditors. The judge put it this way at page 969:

We have no provision in our Act similar to that in the Alberta Act, Statutes of Alberta 1910 (2nd Sess.) c. 4, section 4, or in the Ontario Act, R.S.O. 1897, c. 78. These Acts provide that any judgment creditor, who attaches a debt shall be deemed to do so for the benefit of himself and all execution creditors and express provision is made that any debt so attached by a garnishee summons shall be paid direct to the sheriff and shall be distributed by him in the same manner as moneys levied by him under the provisions of these Acts.

Apparently, his thinking was that a garnishor had priority if the Creditors' Relief Act did not remove it. How the garnishor attained a priority in the first place was not mentioned. Nor was there any attempt to explain why the garnishee money was not encompassed in the plain word "fund" used in the Act.

Notwithstanding the deficiency in the Mills rationale, the decision seems to have gone unchallenged. Indeed, Dunlop, in his text Creditor-Debtor Law in Canada (Toronto: Carswell, 1981), stated at page 428 that: ”. . Saskatchewan. . . [has] taken the opposite course of eliminating garnishment entirely from the creditors’ relief legislation with the result that the first come, first served rule operates unabated”’.

Contrary authority finally surfaced in 1982, and the execution creditors rely heavily upon it. In Re Yancey's Men's Wear Ltd. (1982), 17 Sask. R. 287 (Q.B.) the Court ordered that a garnishor must share the attached fund pursuant to the Creditors' Relief Act. This decision is not as conclusive as the execution creditors suggest. There, the court was required to rule on the priority of Crown claims to the garnisheed fund. After fixing the Crown preference, the Court stated at page

Section 15 of the Attachment of Debts Act, supra, provides that ”. . .a judge may order the third person or any other person to appear and state the nature and particulars of his claim.” Here, no such order was sought or made and the nature and particulars of the several claims of the judgment creditors are already a matter of record and on file. As between the plaintiff and the other judgment creditors there is no priority in the monies which will remain after payment of costs and the claims of the federal and provincial Crowns and in said balance of monies the plaintiff and the other judgment creditors will share pari passu.

Apparently, Mills was not cited, but the court simply assumed the Creditors' Relief Act intervened to outrank the rights of the garnishors.

In any event, I agree with the decision in Yancey's. Apart from obiter comments in Mills, there is no authority for ruling that a garnishor has priority over execution creditors. The clear intent of the Creditors' Relief Act to abolish priority among execution creditors must prevail. If a garnishor is to be rewarded for his diligence, beyond a preference in costs, it must be through legislative enactment not judicial pronouncement.

It is fitting as well, that a garnishor should not receive a preference inasmuch as service of a summons does not give the garnishor an interest in the attached money. He has no claim in the nature of a lien. All he acquires is the right to have the money diverted away from the debtor and into court. This is apparent from subsection 5(1) of the Attachment of Debts Act which stipulates that the summons “shall bind any debt due or accruing due". The right escalates to a proprietary interest when the court orders payment out to the garnishor.

Furthermore, it is fitting that there should be rateable sharing where, as here, numerous creditors proceeded against Polyco over an extended period of time. Garnishees were served randomly on Prudential. It would be purely fortuitous if certain garnishors were more successful than others.

A ruling favouring priority for garnishors would be hollow in most situations under the Creditors' Relief Act. Disappointed execution creditors could easily launch insolvency proceedings against the debtor. This would result in all the attached funds being paid to the trustee for distribution among all creditors. The garnishors would have no priority in bankruptcy. This reinforces the conclusion that the garnishors never acquired priority in the first place, by service of their summonses.

Two other judgments were cited, but neither is very helpful in resolving the issue of preference to garnishors. In F.W. Woolworth Co. v. Zimmer (1978), 94 D.L.R. (3d) 766 (Sask. Q.B.) the Court held that as between garnishors, they ranked according to date of service of the summonses. There were no execution creditors involved, so the Creditors' Relief Act was not part of the mix.

As well, the British Columbia case of Hale v. Ross (1958), 26 W.W.R. 47 (B.C. S.C.) was referred to for corroboration of the submission that execution creditors and garnishors must share. There, the court commented that a garnishor has priority only if there are no writs of execution in the hands of the sheriff at the time of attachment, otherwise the intercepted money would be divisible under creditors' relief legislation.

Hale does not reflect the law in Saskatchewan. As previously alluded to, creditors' relief legislation in British Columbia and other provinces, specifically dictates that a garnishor is deemed to have attached money for the benefit of all creditors. However, the case is troublesome from another perspective. It too, seems to assume a garnishor has some inherent priority which has been taken away by statute.

Be that as it may, there will be an order that the $179,500 be paid over to the sheriff for distribution pursuant to the provisions of the Creditors’ Relief Act. This will be subject, of course, to what I shall say shortly respecting Crown preference and assignments.

The foregoing will not affect garnishors in requesting orders to pay out funds under the Attachment of Debts Act in ordinary situations because the Creditors' Relief Act is not usually triggered. Unless an execution creditor specifically invokes that Act or applies under section 15 of the Attachment of Debts Act, the funds will routinely be released to the garnishor.

Debt due or accruing due

The ruling that the garnishors must share the $179,500 rateably under the Creditors' Relief Act renders academic the competition for priority among the various garnishors based on the date the Prudential money became a "debt due or accruing due” to Polyco.

Considerable effort was extended by Berlinex in an attempt to establish its priority to the money. The effort deserves an answer, obiter as it may be.

Berlinex contends it has first right to the $179,500 based on its prompt garnishee. As Berlinex assesses the situation, the insurance was a "debt due or accruing due” from Prudential to Polyco at the time of service of the summons on February 11, 1992, and the garnishee was not vitiated by the fact the amount owing was not ascertained until May 17, 1993, the date of the award.

Berlinex began its rationale by referring to the venerable judgment in Barsi v. Farcas, [1924] 1 W.W.R. 707, [1924] 1 D.L.R. 1154 (Sask. C.A.) where the Court of Appeal explained the meaning of the phrase "debt due or accruing due”. Among other observations, the Court stated at W.W.R. page 709:

. . .To constitute an attachable debt, there must be an actual debt, legal or equitable, due from the garnishee to the judgment debtor. His debts must be either presently payable, or presently due though payable at a future date. Lindley L.J. said, in Webb v. Stenton, 11 Q.B.D. 518, 52 L.J.Q.B. 584:

An accruing debt is therefore a debt which is not yet actually payable but is represented by an existing obligation.

(See also judgment of Brett M.R.) The moneys garnished, therefore, in order to be bound must constitute an existing obligation, payable either presently or at a future date.

Essentially, Berlinex must establish two elements: firstly, that the insurance money was a debt, and secondly, that at the time of the garnishee, the money constituted an existing obligation by Prudential, payable either presently or at a future date.

The Berlinex submission goes on to assert that because Polyco had filed a proof of loss and Prudential had admitted liability, an existing obligation therefore arose which Prudential was bound to satisfy albeit, at a future date when damages had been fixed. Significantly as well, Prudential had already made advances towards the loss. A number of authorities were cited including O'Driscoll v. Manchester Insurance Committee, [1915] 3 K.B. 499, 85 L.J.K.B. 83 (C.A.) and Sandy v. Yukon Construction Co. (1960), 33 W.W.R. 490, 26 D.L.R. (2d) 254 (Alta. C.A.). In both cases unascertained amounts owing were successfully garnisheed.

In O'Driscoll, fees payable to a doctor by a health insurance committee were attached although the precise balance due had to await further calculation. In Sandy, money owing by a contractor to his subcontractor was effectively intercepted by a creditor of the latter despite the fact an architect's certificate was needed before the amount due to the subcontractor could be ascertained.

These decisions are helpful to Berlinex insofar as they confirm that an obligation payable at a future date is attachable provided it is an existing obligation. The decision does not particularly assist Berlinex in overcoming the first hurdle of showing the insurance money owing is a debt as distinguished from damages.

In both O'Driscoll and Sandy, the obligation of the garnishee to the debtor sounded in debt, not damages. Present debts may be attached even though the precise amount owing is not yet ascertained. The remedy of attachment is allowed because the amount owing can be measured accurately by use of objective standards. For example, an architect does a calculation. Damages are quite different. They are the result of a subjective analysis and are, for that reason, imprecise. The law does not permit attachment of unliquidated damages because the garnishee does not know the exact amount of his obligation, Of course, once the damages are fixed, they are attachable because they take on the complexion of a debt.

Berlinex attempted to explain away a number of adverse decisions where garnishees of insurance money were deemed inappropriate. Among these cases were: Shierman v. Harris & Craske (1915), 8 W.W.R. 514, 22 D.L.R. 694 (Sask. C.A.); Randall v. Lithgow (1884), 12 Q.B.D. 525, 53 L.J.Q.B. 518 (Chamb.) and Hartt v. Edmonton Steam Laundry Co. (1909), 10 W.L.R. 664, 2 Alta. L.R. 130 (Master).

As Berlinex points out, these judgments are all distinguishable on their facts. In Shierman, liability under the policy was not admitted at the time of the garnishee. In Lithgow, the garnishee had failed to plead "no debt" in response to the summons. In Hart, there was no proof of loss or admission of liability. Berlinex concludes that the insurance money would have been attachable in those cases had there been proofs of loss and admissions of liability. Another view is that the garnishees would have failed anyway, because the obligation was to pay damages which could not be attached until the amount was ascertained.

This comment in Shierman, page 515 (D.L.R. 695) appears to be as valid today as it was in 1915:

The law is well settled that a claim against an insurance company under a policy of fire insurance for loss suffered is not a debt due or accruing due until the amount is fixed and liability therefor admitted by the company.

There is a further argument why the $179,500 was not a "debt due or accruing due" on February 11, 1992, or at any time before May 17, 1993. It is found in the policy conditions prescribed by section 128 of the Saskatchewan Insurance Act. Condition 11 reads:

11. In the event of disagreement as to the value of the property insured, the property saved or the amount of the loss, those questions shall be determined by appraisal as provided under the Saskatchewan Insurance Act before there can be any recovery under this contract whether the right to recover on the contract is disputed or not, and

independently of all other questions. There shall be no right to an appraisal until a specific demand therefor is made in writing and until after proof of loss has been delivered.

[Emphasis added.]

Seemingly, by a demand term of the policy, Polyco could not enforce "any recovery" of insurance “whether the right to recover on the contract is disputed or not", until the value of the lost property was determined by the statutory appraisal process. This value was not known until May 17, 1993.

There remains the argument too, that while Prudential accepted liability to pay certain sums under the policy, and indeed, paid these by way of advances, Prudential did not admit an obligation to pay any further money, so no debt was due.

There is a ring of artificiality to the reasoning which traditionally precludes garnishment of insurance money prior to the damages being fixed. This is not lost on Berlinex. So, Berlinex asks this Court, in effect, to break new ground and find the insurance money was "due or accruing due” on February 11, 1992. There is merit to this request. Once an insurance company has admitted liability for damages and in particular, where advances have already been paid towards the loss, there would I be no prejudice if the insurer was then obliged to respond to a garnishee acknowledging a debt due and agreeing to pay the amount into court once the quantum of damages is ascertained.

The obligation to the assured in these circumstances takes on all the characteristics of a debt as outlined in Barsi, supra. The assured could sue for his money. The claim would accrue to a trustee in bankruptcy. There is nothing more for the assured to do save participate in ascertaining the balance due. Payment of the insurance money is not conditional upon some performance by the assured.

In the situation here, the unliquidated damages owing by Prudential to Polyco assumed the appearance of a debt, for all intents and purposes, and should be recognized as such under subsection 5(1). It would be perverse to maintain the unpaid damages are not a debt because the quantum is not yet ascertained, when unascertained sums are treated as debts if there is a prior debtor-creditor relationship between the debtor and the garnishee.

Assignments

Berlinex also advanced a priority position by virtue of an alleged assignment of the insurance proceeds arising from a series of directions to pay executed by Polyco. On January 13, 28 and 29, 1992, Polyco signed documents directing the Weyburn Credit Union (a secured creditor of Polyco) to pay a specified amount:

[F]rom insurance proceeds payable jointly to Polyco and Weyburn Credit Union. . . (or "payable either to Polyco or to Weyburn Credit Union or to any or all of Polyco, Weyburn Credit Union”) from Prudential. . . .

Seemingly, the purpose in directing Weyburn Credit Union to make payment was the fact it held a security interest on the Polyco business damaged in the fire. Therefore, the Weyburn Credit Union was entitled to the insurance proceeds. The directions were given in anticipation of the pending aforesaid, second advance of insurance money which would be forthcoming to the Credit Union, and indeed, was received March 2, 1992.

The question arises whether Prudential was bound by the direction given to the Credit Union. Berlinex argues it had at least an equitable assignment if not a legal one, and that Prudential was given notice of this on February 25, 1992.

I do not agree with this submission. The direction to pay was not an assignment of insurance. As it stated, the document simply required the Credit Union to pay over a share of insurance money to Berlinex, when received. Berlinex had no right to insurance money not disbursed by Prudential to the Credit Union. Indeed, the circumstances surrounding the taking of the directions do not support an intention by the parties to effect an assignment of insurance.

A similar rationale applies to the virtually identical directions to pay obtained by some of the other claimants.

This is quite unlike the clear assignment given to the claimant, Advance Door Systems Ltd., on February 25, 1992. There, a true assignment of insurance was intended and perfected. The document provided that Polyco:

2. . . .for value received, hereby assigns and sets over to Advance Door Systems Ltd. insurance proceeds due to the company under a policy of insurance with Prudential of America General Insurance Company Canada or Prudential Assurance, as the case may be.

3. The company further undertakes to take all steps necessary to give notice and claim insurance and to do, perform and execute every act necessary to claim and obtain insurance proceeds as a result of a fire.

[Emphasis added.]

Prudential became aware of the assignment through its counsel, by March 13, 1992. Seemingly, this is a valid assignment which outranks all other claimants herein except Crown preferences.

A potential priority problem was alluded to regarding this assignment. Subsection 4(b) of the Personal Property Security Act, S.S. 1979-80, c. P-6.1 specifies the Act does not apply to the assignment of an interest under a policy of insurance except for loss to collateral. Apparently, the advance assignment does not fall within the exception, so the document is not governed by that Act. What effect that might have on the priority of the assignment was not developed in argument.

More significantly, the assignment may be void as a preference under the Fraudulent Preferences Act, R.S.S. 1978, c. F-21 in light of the probable insolvency of Polyco. However, this point was not argued, nor is there sufficient evidence presently before the Court upon which the Act could be invoked. Creditors may choose to explore this route if Advance does not accept pro rata sharing.

Revenue Canada

There are two claims to the $179,500 which are conceded as superior. The Minister of National Revenue asserts a prior right to $33,108 being unremitted source deductions, penalty and interest owing by Polyco pursuant to subsection 227(10.1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

A “requirement to pay" was served on Prudential on October 29, 1993. This had the effect of transferring the $33,108 to the Crown as provided in subsection 224(1.2). Moreover, as stipulated in that section, the money became the property of the Crown "...notwithstanding a security interest in those moneys. . . ." In the result, claimants who are assignees respecting the $179,500 must rank after the Crown. (See also Bonavista (Town) v. Atlantic Technologists Ltd. (unreported), Nfld. S.C. Doc. No. St. J. 2761/93, Orsborn J., January 10, 1994; and Royal Bank v. Sask. Power Corp. [1991] 1 W.W.R. 1, [1991] 1 C.T.C. 532 (Sask. C.A.).

As well, even claimants relying on garnishees, must likewise, line up behind the Crown. This is a consequence of the opening words of subsection 224(1.2) which state: “Notwithstanding. . . any enactment of a province. . .". In effect, any alleged priority given to a garnishor under provincial legislation must yield to the Crown preference in the Income Tax Act.

There will be an order that the Minister of National Revenue has first claim to the $179,500.

Labour Standards Act

The second uncontested, preferred claim arises out of proceedings under the Labour Standards Act, R.S.S. 1978, c. L-1. A long-time employee of Polyco made a complaint under the Act when he was dismissed without notice. His entitlement to pay in lieu of notice was assessed at $6,000. The Director of Labour Standards issued a certificate for that sum under section 60, and it was entered as a judgment of this Court on February 2, 1994.

By virtue of subsection 56(1.2) wages due to an employee "... are deemed to be secured by a security interest upon the property and assets of the employer. . . payable in priority to any other claim or right in the property. . .” of the employer By section 82 "All money payable by an employer to an employee under this Act shall be deemed to be wages. . . ." (See Meyers v. Walters Cycle Co. (1990), 85 Sask. R. 222, 71 D.L.R. (4th) 190 (C.A.).

Clearly, the $6,000 judgment under the Labour Standards Act is subordinate only to the Revenue Canada claim. The amendment increasing the debt to $6,300 is not a proven claim because no certificate was filed respecting the added amount.

Costs

Prudential requested costs of its application to pay the $179,500 into Court. These are calculated to be $2,770.54. By its reasoning, the application was in the nature of an interpleader for the benefit of the competing claimants, so the costs should be borne by the fund.

Polyco and several claimants oppose an order for costs to Prudential on the grounds Prudential held the $179,500 from May 17, 1993, the date of the award, until December 24, 1993, when the money was finally deposited in Court. During these seven months, Prudential retained the interest the money could have generated. Prudential denies this and says there are extenuating circumstances. Anyway, in its application Prudential reserved the issue of interest for further resolution.

There is an additional problem. The $2,770.54 includes $650 in travelling expenses for the Winnipeg counsel of Prudential to appear in this jurisdiction. Seemingly, this could have been avoided by using local counsel, as agent. Further, other claimants seek costs. Some want Berlinex to be penalized. A variety of cost structures is proposed.

Weighing all these factors leads me to conclude that my discretion regarding costs is best exercised by awarding costs to no one in this proceeding or on the applications leading up to this hearing.

Prudential is discharged in respect of the $179,500.

Disbursing funds

These claims were proved at the hearing:

Funds otherwise payable to Advance shall remain in Court to the credit of the action between Advance and Polyco, until such time as that defended lawsuit is resolved.

Funds payable to the Director of Labour Standards shall be retained by him in trust pending determination of the appeal mounted by Polyco against the award to the employee.

Order accordingly.

Leo Gray and 616575 Ontario Inc. v. The Attorney General of Canada,

[Indexed as: Gray (L.) v. Canada (A.G.)]

Ontario Court (General Division) (Farley J.), October 23, 1993 (Court Doc. No. RE2505/93).

Income tax—Federal—Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72,

c. 63)—231, 232(1)(a), (3.1), (4), (9), (10)—Canadian Charter of Rights and Freedoms—8—

Revenue Canada commenced a single investigation with respect to the applicants. The applicants were dealing with two law firms in respect of the transaction in question, L firm and D firm. The two law firms were notified of the investigation about the same time. Dealings with respect to the documents at the L firm proceeded more quickly and the applicants made an application pursuant to subsection 232(4) to initiate the determination of whether any documents were protected by solicitor-client privilege in a timely fashion. However, action with respect to the D firm documents proceeded on a more leisurely basis so that the seizure of the documents in the possession of the D firm was not effected until several months later, on July 15, 1993. It was the intention of L, the applicants’ solicitor, to amend the application concerning the L firm documents to include any D firm documents which he considered after inspection would be within the scope of solicitor-client privilege. A draft amended notice of application and application record were, in fact, prepared on July 19, 1993. L then attempted to notify X, the solicitor in Department of Justice, to tell him about his (L's) proposed course of conduct. However, X was on vacation at the time and his colleague, who was in charge of the file during X's absence, suggested that L wait until X's return to contact X directly. L followed this advice and contacted X on August 3, 1993, at which time, X agreed with L's proposal. X subsequently had a change of heart and initiated a counter application on August 9, 1993 to require a turnover of all D firm documents notwithstanding that X knew that L was asserting there was privilege concerning some documents. The applicants applied for leave to amend their application concerning the L firm documents to include the D firm documents notwithstanding that the 14-day limitation period in subsection 232(4) had expired.

HELD:

The course of conduct by counsel in the Department of Justice operated as a functional waiver of the 14 day period. Furthermore, the respondents suffered no prejudice as a result of the delay; the delay was minimal, incurred in good faith and not for any tactical ulterior motive; and there never was any intention to abandon or waive privilege. Accordingly, special circumstances existed and the Court had the power pursuant to subsection 232(10) to exercise its discretion to allow the amendment sought. Application allowed.

Colin Campbell, Q.C., for the applicants.

Henry A. Gluch for the respondents.

Cases referred to:

R. v. McKinlay Transport Ltd., [1990] 2 C.T.C. 103, 90 D.T.C. 6088;

Barony. Canada, [1993] 1 S.C.R. 416, [1993] 1 C.T.C. 111, 93 D.T.C. 5018;

Descoteaux et al. v. Mierzwinski and A.G.(Que.) et al. (1982), 141 D.L.R. (3d) 590;

Basarsky v. Quinlin (1971), 24 D.L.R. (3d) 72;

Fagan v. Emery Investments Ltd. (1986), 64 O.R. (2d) 615;

Schachar v. Bailey (1989), 69 O.R. (2d) 726;

Gracey v. Thomson Newspaper Corp. (1991), 1 C.P.C. (3d) 21;

Palermo Bakery Ltd. v. Dominion of Canada General Insurance Co. et al. (1976) /

12 O.R. (2d) 50.

Preliminary matters

With the consent of both sides, I have approved this matter for the commercial list.

Mr. Campbell acknowledges that if the applicants fail on this motion, they must arrange for delivery up for inspection by the tax department of all documents retained by their lawyer, Jonathan Lisus, on July 15, 1993 at the offices of their former legal counsel, Diamond, Fairbairn pursuant to subsection 232(3.1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

Mr. Campbell also advised that the applicants consented to deleting the names of all respondents, save for the Attorney General of Canada, from the title of proceedings.

Can the applicants shield the documents from immediate inspection?

With these preliminaries out of the way, we can concentrate on the significant question of this motion. The applicants had 14 days to make an application pursuant to subsection 232(4) to initiate the determination of the question of whether any of the documents are protected by solicitor-client privilege. Subsection 232(4) provides:

232(4) Application to judge.—Where a document has been seized and placed in custody under subsection (3) or is being retained under subsection (3.1), the client, or the lawyer on behalf of the client, may

(a) within 14 days after the day the document was so placed in custody or commenced to be so retained apply, on three clear days notice of motion to the Deputy Attorney General of Canada, to a judge for an order

(i) fixing a day, no later than 21 days after the date of the order, and place for the determination of the question whether the client has a solicitor-client privilege in respect of the document, and

(ii) requiring the production of the documents to the judge at that time and place;

(b) serve a copy of the order on the Deputy Attorney General of Canada and, where applicable, on the custodian within 6 days of the day on which it was made and, within the same time, pay to the custodian the estimated expenses of transporting the document to and from the place of hearing and of safeguarding it; and

(c) if he has proceeded as authorized by paragraph (b), apply at the appointed time and place for an order determining the question.

The documents from the Diamond firm were seized on July 15, 1993 but no independent application required was made in time. If this were the bare bones of this question, Mr. Campbell does not dispute that the applicants would be dead in the water. However, there is a history to this which requires examination. It is this history which the applicants say permits them to ask this court to grant leave to amend a previous application to include these later documents. The respondents acknowledged that they would suffer no prejudice by such an amendment but only that they strictly rely on the technical aspects of the limitation period invoked in subsection 232(4).

It was agreed by both sides that the applicants had been dealing with two law firms with respect to the transaction in question — Lang Michener as well as the Diamond firm. The two law firms were notified by the Tax Department at about the same time. Dealing with respect to the documents at the Lang firm proceeded more quickly and a subsection 232(4) application was made on a timely basis. However action with respect to the Diamond firm documents proceeded on a more leisurely basis so that the seizure was not effected until several months after.

It was Mr. Lisus' evidence (with his affidavit not being tested by cross- examination) that he intended to amend the application concerning the Lang firm documents to include any Diamond firm documents which he considered after inspection would be within the scope of solicitor-client privilege. Not only would this procedure appear functionally logical but it would also permit the claim for privilege to be heard together as to both the Lang and Diamond firm documents on the previously arranged Lang firm documents date of August 20, 1993. A draft amended notice of application and application record was prepared on July 19, 1993. Immediately after the seizure of the Diamond firm documents and prior to the draft material bein prepared, Mr. Lisus did a very reasonable thing — he consulted counsel for the other side concerning his proposed course of action. I am of the view that the paragraphs of his affidavit concerning this should be set out in full but deleting the name of the Department of Justice lawyer:

27. On or about July 16, 1993 I called the solicitor of record on the application, Mr. X, at the Department of Justice to discuss this proposed way of advancing the claim for privilege in respect of the Diamond, Fairbairn documents. When I called Mr. X I found that he was on vacation. In his absence, I spoke to a colleague of Mr. X and reviewed with him, in general terms, the way I proposed to deal with the matter. I did not review with him at that time the specific date on which the claim of privilege in relation to the Diamond, Fairbairn documents were made. Mr. X's colleague indicated that, while he thought in principle that it was reasonable to deal with the Lang Michener and Diamond, Fairbairn documents at one hearing and to proceed by way of amendment to the original application, he stated that Mr. X had carriage of the matter and suggested that I contact Mr. X on his return from vacation.

28. I telephone Mr. X on August 3, 1993, the date I understood him to be returning from vacation, to propose that the claim for privilege in relation to the Diamond, Fairbairn and Lang Michener documents be heard together on August 20, 1993 and that we make an arrangement whereby we could waive our claim of privilege in respect to some of the Diamond, Fairbairn documents sealed on July 15, 1993 and arrange for the delivery to the Department of National Revenue of those documents.

29. In the conversation I told him that I thought it best to deal with the Diamond, Fairbairn and Lang Michener documents in one hearing, and he agreed with this proposal.

Mr. Gluch acknowledged in this hearing that Mr. X's colleague was in charge of the file while Mr. X was away on vacation. I find it an inescapable conclusion that his colleague would have known Mr. X's vacation schedule, a schedule which had him back in the office after the ostensible 14 day limitation period of any separate application.

One would have thought that this course of conduct by counsel in the Department of Justice would have operated as a functional waiver of the 14 day period. I am still of that view. In any event, I will proceed to discuss the other aspects of this matter.

However it appears that some time soon after Mr. X's return and his subsequent dealings with Mr. Lisus (which dealings appear to be coordinate with Mr. Lisus' being able to proceed with the claim for solicitor-client privilege as to certain of the Diamond firm documents, with the balance to be turned over to the Tax Department forthwith), Mr. X had a change of heart. He initiated a counter application on August 9, 1993 to require a turnover of all Diamond firm documents notwithstanding that he knew that Mr. Lisus was asserting there was privilege concerning some after his previous review of the files. I find this change of heart rather amazing and quite disappointing.

Is there judicial discretion concerning this part of the Income Tax Act?

Clearly the respondents do not advance the proposition that sections 231 and 232 are intended to act as a procedural trap for bona fide claimants. The notification served upon the Lang and Diamond firms authorized a seizure within the meaning of section 8 of the Charter of Rights and Freedoms. The applicants have an expectation of privacy in the documents identified in the notification and over which privilege has been claimed: see R. v. McKinlay Transport Ltd., [1990] 2 C.T.C. 103, 90 D.T.C. 6088. This privacy interest in privileged document is protected by section 8 which is an entrenched constitutional provision. Thus it is not vulnerable to encroachment by legislative enactments in the same way as common law protections: see Baron v. Canada, [1993] 1 S.C.R. 416, [1993] 1 C.T.C. 111, 93 D.T.C. 5018, at page 435 (S.C.R.); McKinlay, supra. It seems to me that it is within the principles enunciated in both these cases that the judiciary retain a residual discretion notwithstanding the presence of mandatory language in the Income Tax Act. Even still subsection 232(10) further confirms the existence of the judiciary's discretion in regard to these seizure sections:

232(10) Where any question arises as to the course to be followed in connection with anything done or being done under this section, other than subsection (2), (3) or (3.1), and there is no direction in this section with respect thereto, a judge may give such direction with regard thereto as, in his opinion, is most likely to carry out the object of this section of allowing solicitor-client privilege for proper purposes.

A judicial discretion in this regard should be guided by the rule that legislation which authorizes an interference with solicitor-client privilege must be interpreted restrictively: see Descoteaux et al. v. Mierzwinski and A. G. (Que.) et al. (1982), 141 D.L.R. (3d) 590, at page 595.

Amendment of original application to include diamond firm documents

An application of this nature arising in Ontario is brought, as this one was, in the Ontario Court (General Division) as the superior court having jurisdiction in the province where the matter arises: paragragn 232(1 )(a). Thus such an application is governed by the Ontario Rules of Civil Procedure. R.26.01 provides that the court has a general power to amend pleadings in an action.

R.26.01 On motion at any stage of an action the court shall grant leave to amend a pleading on such terms as are just, unless prejudice would result that could not be compensated for by costs or an adjournment.

[Emphasis added.]

The “shall” imports the concept of manditoriness. While an application is not an action it is an originating process in the same way as an action: R.1.03. Pursuant to R.14.09:

R.14.09 An originating process that is not a pleading may be struck out or amended in the same way as a pleading.

R.5.03(4) Enables the court to add any person to a proceeding, notwithstanding the expiry of a limitation period, if their presence is necessary to enable the court to adjudicate effectively and completely on the issues in the pleadings. In this regard the applicants are permitted to add an additional related party. Further one should not lose sight of R.1.04(1 ):

R.1.04 These rules shall be liberally construed to provide the just, most expeditious and least expensive determination of every civil proceeding.

The Court has a general discretion to permit the amendment of a pleading and the addition of a party notwithstanding the expiry of a limitation period if special circumstances exist and no prejudice is created by the amendment. See Basarsky v. Quinlin (1971), 24 D.L.R. (3d) 72 (S.C.C.); Fagan v. Emery Investments Ltd. (1986), 64 O.R. (2d) 615 (C.A.); Schachar v. Bailey (1989), 69 O.R. (2d) 726 (H.C.J.); Gracey v. Thomson Newspaper Corp. (1991), 1 C.P.C. (3d) 21 (Ont. Gen. Div.). The respondents acknowledge there is no prejudice to them outside the limitation period question. This is a single investigation by the Tax Department. The notifications relate to the same transactions. Both sides were proceeding along on a reasonable and cooperative manner. They did this until the respondents suddenly and without warning changed course 180 degrees and, rather than proceeding in parallel in the dynamic tension required of litigation, attempted to ram and sink the applicants’ ship. This was without even a whisper of a warning shot across the bow. I acknowledge that a caution is not required in ordinary circumstances but in my view it is required where the other side has been following a discussed course of action. International law has stern sanctions against pirates posing as peaceful merchantmen before suddenly hoisting the Jolly Roger. The delay was minimal, incurred in good faith and not for any tactical ulterior motive. There was never any intention to abandon or waive privilege. I have no difficulty in determining that special circumstances exist here for the exercise of my discretion generally and in respect of subsection 232(10) in relation to the nature of the interest affected by the Court's role as a “balance wheel” in the application and administration of the Income Tax Act.

Mr. Campbell further submitted that the rights of a client ought not be jeopardized by the inadvertence or omissions of his solicitor and that in such circumstances the Court ought to exercise its discretion in favour of affording the adjudication of a litigant’s claim on the merits. Citing Re: Palermo Bakery Ltd. v. Dominion of Canada General Insurance Company et al. (1976), 12 O.R. (2d) 50 (H.C.J.) and Gary D. Watson, "Amendment of Proceedings After Limitation Periods", The Canadian Law Review, 1975 Vol. III page 237 at pages 276-79, he maintained that this was particularly true when the omission occurred in good faith and the reservation of the litigant's rights can be achieved through the amendment of a proper commenced proceeding without prejudicing the rights of the respondent. Mr. Gluch objects on the basis that the triggering event — the seizure of the Diamond firm documents on July 15, 1993 — which allowed the applicants to make an application under subsection 232(4) did not take place until after the Lang firm documents application had been made. I do not see this as an insurmountable hurdle, particularly in light of R.1.04(1) and the general principle that matters should be dealt with on their merits rather than trapped by legislative procedural snares. It must be recognized that the Diamond firm application could be made when those documents were seized and they could nave been seized at the same time as those of the Lang firm. There was no magic to the timing; it was merely a matter of chance that there was not a contemporaneous seizure or that the Diamond firm seizure did not precede that at the Lang firm by a day or a month. This is not an artificial amendment — it is a logical graft.

Conclusion

There is then to be an order allowing amendment of the Lang firm document application as follows:

D. 792459 Ontario Ltd. is added as a party applicant;

E. the documents in question as to the privilege are to include the Diamond firm documents as now held by McCarthy Tétrault;

F. the hearing relating to the determination of solicitor-client privilege will take place before me in the commercial list at a time and date to be arranged with the Court Office on a day in January 1994 when I I am sitting;

G. the superfluous respondents are deleted with only the Attorney General of Canada remaining in the title of proceedings.

Costs

It is only because of the provision of subsection 232(9) that there are no costs awarded:

232(9) No costs may be awarded upon the disposition of any application under this section.

I do however commend counsel for their finely tuned and presented arguments.

Application allowed.

Nicholas C. Pirruccio, Granitile Inc. and Granitile Limited Partnership [Indexed as: Pirruccio (N.) v. Canada]

Ontario Court of Justice (General Division) (Keenan J.), February 3, 1994 (Court File No. 93- CQ-38340CM).

Civil procedure—Malicious prosecution—Action for malicious prosecution cannot be

This was a motion by the defendant Crown to dismiss the plaintiff’s action for malicious prosecution. According to the materials filed, a referral was made on July 31, 1990 to a business auditor of Revenue Canada. An audit revealed irregularities in the tax reporting of assets acquired by a limited partnership which was one of the plaintiffs. A full-scale investigation was ordered on September 28, 1990. A search warrant was obtained on February 18, 1991 and records of the partnership and associated companies of P, one of the plaintiffs, were seized on February 27, 1991. The investigation of Revenue Canada culminated in an information being sworn on December 16, 1992 which contained nine counts of evasion of taxes, filing false or deceptive information, using foreign documents to extinguish tax liability and attempt to defraud the public of tax revenues. On June 4, 1993, P and his associated company and partnership commenced an action for malicious prosecution, trespass and related relief against the Crown. A preliminary inquiry into the criminal charges against P was set for February 14, 1994.

HELD:

The cause of action in a claim for malicious prosecution does not arise until there has been a determination of the prosecution favourable to the accused. In order to disclose a cause of action, any claim alleging malicious prosecution must assert that there has been a determination of the prosecution favourable to the accused. Accordingly, the plaintiffs had no cause of action at the present time. Motion granted and action dismissed without prejudice to the right to bring the action if the determination of the prosecution was favourable to P.

S. Laufer for the plaintiffs.

P. Christopher Parke for the defendent.

Cases referred to:

Bosada v. The Queen, [1979] 2 F.C. 335 (F.C.T.D.); aff'd [1980] 2 F.C. 744 (F.C.A.);

Nicely v. Basse (1991), 79 D.L.R. 414;

Montreal (City) v. Hall (1885), 12 S.C.R. 74;

Terra Communications Ltd. v. Communicomp Data Ltd. (1973), 1 O.R.(2d) 682;

Stickney v. Trusz (1973), 45 D.L.R. (3d) 275, 2 O.R. (2d) 469 (H.C.); aff'd (1974),

46 D.L.R. (3d) 80, 3 O.R. (2d) 538 (Div. Ct.);

Seaway Trust Co. v. Kilderkin Investments Ltd. (1986), 55 O.R. (2d) 545, 29 D.L.R.

(4th) 456;

Event Sales Inc. v. Rommco Group Inc. (1987), 17 C.P.C. (2d) 318;

Buxbaum v. Buxbaum (1988), 29 C.P.C. (2d) 161.

Keenan J.:— At issue in this motion is whether the plaintiff should be allowed to continue a case of malicious prosecution or whether that claim should be stayed or dismissed pending the determination of the subject prosecution. It is well established that an essential prerequisite to a successful claim of malicious prosecution is that the outcome of the prosecution has been in favour of the claimant.

In this case the prosecution is one by the federal tax authorities. The claim of malicious prosecution against the Crown asserts that the prosecution was in retaliation for a claim that an agency of the Crown has breached a contract made with Granitile Incorporated, a company controlled by Mr. Pirruccio. The materials filed on the motion and cross-motion have not been challenged. If they survive the test of future examination and cross-examination, the chronology of events would cast doubt on the claim of malicious prosecution. On the other hand, the fact that they have not been fully tested makes any such conclusion improper.

According to the materials filed, a referral was made on July 31, 1990 to the business auditor at the Sydney District Office of Revenue Canada. An audit had revealed irregularities in the tax reporting of assets acquired by a limited partnership which is one of the defendants. A full-scale investigation was ordered September 28, 1990. A search warrant was obtained February 18, 1991 and records of the partnership and associated companies of Mr. Pirruccio were seized on February 27, 1991.

Actions for breach of contract and damages related thereto were commenced by Pirruccio and the associated companies on May 17, 1991 in the Ontario Court, General Division and on July 11, 1991 in the Trial Division of the Federal Court of Canada. The parties named in the two actions are identical and the claims in the statement of claims are almost identical.

The investigation by Revenue Canada culminated in information being sworn on December 16, 1992 which contains nine counts of evasion of taxes, filing false or deceptive information, using foreign documents to extinguish tax liability and attempting to defraud the public of tax revenues. On June 11, 1993, another action was commenced by Mr. Pirruccio and associated companies which claim the same relief as in the other previous actions but named a different group of defendants which I am told was as a result of an agreement that the liability, if any, of certain individual defendants would be accepted as liability of agents of the Crown.

By notice of action issued June 4, 1993, the plaintiffs brought an action for malicious prosecution, trespass and related relief against the Queen in the Right of Canada which is the subject matter of this application.

A statement of defence was filed on September 24, 1993 and a reply on October 8, 1993. The date for completion of discovery in the action was scheduled for February 2, 1994. A preliminary inquiry into the criminal charges under the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") is set for February 14, 1994.

Counsel for the Crown has referred me to the cases of Bosada v. The Queen, [1979] 2 F.C. 335 (T.D.); aff'd [1980] 2 F.C. 744 (C.A.) and Nicely v. Basse (1991), 79 D.L.R. 414. On the question of an action for malicious prosecution, both cases refer to and rely on the decision of the Supreme Court of Canada in Montreal (City) v. Hall (1885), 12 S.C.R. 74. That case remains the authority for the proposition that an action for malicious prosecution cannot be maintained until the result of the prosecution has shown that there was no ground for it. No prescription which is measured from the date of the commencement of the prosecution will operate to bar the action. The cause of action does not arise until there has been a determination of the prosecution favourable to the accused. In order to disclose a cause of action, any claim alleging malicious prosecution must assert that there has been a determination of the prosecution favourable to the accused. As stated in Montreal (City) v. Hall at pages 104-5 by Gwynne J.:

The meaning of a malicious prosecution is that a party, from a malicious motive, and without reasonable or probable cause, sets the law in motion against another; and as the want of probable cause for instituting the legal proceeding complained of is the essential foundation for the action, the termination of such proceeding in favour of the plaintiff must be alleged in the declaration.

Mr. Laufer for the plaintiffs, has referred me to the following cases: Terra Communications Ltd. v. Communicomp Data Ltd. (1973), 1 O.R. (2d) 682 (H.C.); Stickney v. Trusz (1973), 45 D.L.R. (3d) 275, 2 O.R. (2d) 469 (H.C.); aff'd (1974), 46 D.L.R. (3d) 80, 3 O.R. (2d) 538 (Div. Ct.); Seaway Trust Co. v. Kilderkin Investments Ltd. (1986), 55 O.R. (2d) 545, 29 D.L.R. (4th) 456 (H.C.); Event Sales Inc. v. Rommco Group Inc. (1987), 17 C.P.C. (2d) 318 (Ont. M.C.); Buxbaum v. Buxbaum (1988), 29 C.P.C. (2d) 161 (Ont. H.C.). In each of those cases, a defendant in a civil action who was also a defendant in a criminal prosecution, had moved for a stay of the civil action pending the outcome of the criminal action. The governing principle in those cases is encapsulated in the judgment of Zuber J. in Stickney v.Trusz, supra, (Ont. H.C.) at page 471 (D.L.R. 278):

Since there is now no general rule that civil cases must be stayed because of criminal charges arising out of the same facts, and since the matter is now within the discretion of the Court, it is obvious that it is incumbent upon the applicant to show some reason why the discretion should be exercised. In that sense he must demonstrate that his case is an exception, or a case other than the ordinary.

A party who is a defendant in a civil action and also a defendant in a criminal proceeding must show that the continuation of the civil action would result in prejudice to him in the criminal proceeding.

In the instant case, the plaintiff is not a party who is a defendant in both the criminal and civil actions. He is the defendant in the criminal action and he wants to be the plaintiff in the civil action. His right to maintain his claim in the civil action does not exist until he has had a favourable determination of the criminal proceedings. Unless and until the criminal prosecution is resolved in his favour, ne has no cause of action. Accordingly, the plaintiff's action must be dismissed without prejudice to his right to bring the action if the determination of the prosecution is favourable to him.

Motion granted; action dismissed.