



COURT OF APPEAL FOR BRITISH COLUMBIA




Citation:



Holdyk v. Adolph,









2012 BCCA 37




Date: 20120126

Docket: CA038534

Between:

William Johannes
Holdyk and Jason Lorraine

Appellants

(Petitioners)

And

Lauretta Adolphina
Adolph and William Marshall Burgess

Respondents

(Respondents)




Before:



The Honourable Madam Justice D. Smith





The Honourable Madam Justice Garson





The Honourable Mr. Justice Hinkson




On appeal from:  Supreme
Court of British Columbia, October 6, 2010
(
Holdyk v. Adolph
, 2010 BCSC 1411, Smithers Docket 15639)




Counsel for the Appellant:



T. R. Buri, Q.C.





Counsel for the Respondent:



A. Aguilar





Place and Date of Hearing:



Vancouver, British
  Columbia

November 23, 2011





Place and Date of Judgment:



Vancouver, British
  Columbia

January
  26, 2012





Written Reasons by:





The Honourable Mr. Justice Hinkson





Concurred in by:





The Honourable Madam Justice D. Smith
The Honourable Madam Justice Garson










Introduction

[1]

This is an appeal from the dismissal of an application by the appellants
for leave to commence a derivative action in the name of Aurora Peace
Contracting Inc. against the respondents. The reasons for judgment of the
Chambers Judge dismissing the application are indexed as 2010 BCSC 1411.

Background

[2]

Aurora Peace Contracting Inc. (the Company) is involved in the
silviculture and forestry business. The appellants and the respondents were the
sole shareholders and directors of the Company. The Chambers Judge found that
on June 30, 2008, the respondents opened an account in the name of the Company
at the Chetwynd branch of TD Canada Trust. The proposed claim would assert that
the account was opened by the use of documents that were forged to indicate
that all four of the parties authorized its opening and subsequently, the
respondents deposited and then removed approximately $340,000 of Company funds
from the account in the space of approximately two months.

[3]

The appellants contend that they did not authorize the opening of the
account, and were unaware of it until October, 2008. Once aware, they commenced
an oppression action on October 15, 2008 against the respondents and the
Company in the Vernon Registry of the Supreme Court of British Columbia (the
Vernon action).

[4]

In the Vernon action the appellants are seeking, amongst other relief,
an accounting of all profits, income and sales of the Company within Canada,
alleging, amongst other things, that:

In or about the month of May,
2008, the Defendants Adolph and Burgess, opened, without authority and for no
proper purpose, a bank account with the TD Canada Trust Branch in Chetwynd,
British Columbia. The Defendants thereafter wrongfully and without colour of
right, diverted considerable funds due and owing to the Defendant, Aurora, to
their own benefit. The Defendants Adolph and Burgess, deposited the funds in
the approximate amount of $360,000.00 into the account without the knowledge or
authorization of the Plaintiffs. The particulars of the diversion of funds,
including the dates, times, and amounts are within the knowledge of the
Defendants. The Defendants have refused to provide access to the account and to
provide the Plaintiffs with details of the amounts wrongfully diverted from the
Defendant, Aurora.

[5]

The respondents in these proceedings have filed a statement of defence and
counterclaim in the Vernon action on their own behalf and as well on the
Companys behalf. The Vernon action remains unresolved.

[6]

The appellants then brought a petition in the Smithers Registry of the
British Columbia Supreme Court on May 5, 2010, seeking orders for leave to
commence the proceedings that are the subject of this appeal, and for leave to
commence proceedings in the name of the Company against TD Canada Trust,
pursuant to ss. 232 and 233 of the
Business Corporations Act
, S.B.C.
2002, c. 57 [
BCA
] for damage and loss that they allege that the Company
suffered as a result of TD Canada Trusts negligence in allowing the
respondents to open an unauthorized account in the name of the Company. Due to
potential limitation issues, the application for leave to commence proceedings
against TD Canada Trust was heard, and allowed, on June 24, 2010, but the
application for leave to commence proceedings in the name of the Company
against the respondents was not resolved at that time.

[7]

Although the pleadings in the action against TD Canada Trust were not
before us, it is common ground that those proceedings are underway, and that TD
Canada Trust has taken third party proceedings against the respondents for contribution
and indemnity in the event that the action succeeds against it.

[8]

The appellants application for leave to bring a derivative action in
the Companys name against the respondents was heard by a second Chambers Judge
on September 16, 2010, and his decision is the subject of the appeal before us.

[9]

At paras. 2428 of his reasons, that Chambers Judge found:

[24]      In the present matter, it is evident that the
petitioners no longer view the Company as a legitimate going concern. For
example, in the prayer for relief in the statement of claim, the petitioners
have specifically requested an order that "the Defendant, Aurora, be
liquidated and dissolved pursuant to Section 324 of the
Business
Corporations Act
." This is an indication that, unlike the petitioner
in
Primex
, [
Primex Investments Ltd. v. Northwest Sports Enterprises
Ltd.
[1996] 4 W.W.R. 54, (1995), 13 B.C.L.R. (3d) 300, (S.C.); varied,
[1997] 2 W.W.R. 129, 26 B.C.L.R. (3d) 357 (C.A.); leave to appeal refd [1997]
S.C.C.A. No. 4] the petitioners here are not interested in the best interests
of the Company.

[25]      Another indication that the petitioners are
pursuing this action in bad faith is found in the notice of motion of the
Vernon Action. There, the petitioners request security for costs against the
Company based on the argument that the Company does not have the resources to
pay legal costs if unsuccessful in its counterclaim. If the Company succeeds in
the proposed action, the Company may be in a better position to fund its
pursuits in the Vernon Action, which could ultimately benefit the petitioners.
This tends towards a finding that the petitioners are likely pursuing the claim
on their own behalf rather than on behalf of the Company.

[26]      It is apparent that there was a delay in the
bringing of the derivative action. The respondents submit that the petitioners
took no action in the Vernon Action for almost a full year, but have now
revived an application for security for costs to force the respondents to
respond on two separate fronts.

[27]      Delay in bringing this application can be an
indicator of bad faith:
Bennett
[
Bennett v. Rudek
, 2008 BCSC 1278,
51 B.L.R. (4th) 207], at para. 61. The petitioners submit that "no
derivative application was made because the respondents had removed the
petitioners as directors shortly before the Vernon Action commenced."
However, the petitioners were not barred from pursuing a derivative action in
2008. The
BCA
permits "a shareholder or director of the
company" to apply under s. 233 to pursue a derivative action on behalf of
a company. If the petitioners had the best interests of the Company in mind
then a derivative action should have been brought around the time of the Vernon
Action. The primary difference between 2008 and the present is the petitioners'
financial situation. In my opinion, this is an indication that the petitioners'
primary motivation in advancing the claim is their own self-interest.

[28]      In my opinion, the
evidence presented by the petitioners on this hearing is not sufficient to
clearly establish that this application is brought in good faith.

[10]

The Chambers Judge recognized that the matter is essentially a dispute
between the four individual shareholders, and that if the proposed derivative
action were to be successful, the funds that were alleged to have been taken
from the Company by the respondents would be returned to a company that the appellants
intend to see wound up. He also considered that if the funds were returned to
the Company and it were wound up, its secured creditors would take priority
over the shareholders when the Company's assets are distributed.

[11]

The Chambers Judge found the evidence indicates that the appellants have
a vested interest in Backwoods Contracting Ltd. ("Backwoods"). He reasoned
that if the funds in issue were returned to the Company, and if Backwoods is
the Companys single largest creditor, then Backwoods would benefit ahead of
the Company if the funds were returned. He thus concluded that the appellants
hold a personal interest in the success of the proposed action that outweighs
the best interests of the Company.

[12]

Despite his view that the appellants allegations are believable enough
to be arguable and that there is evidence upon which an arguable case for
fraudulent conversion can be shown to exist, he concluded it is not in the best
interests of the Company for the derivative action to proceed.

Issue on Appeal

[13]

The appellants contend that the Chambers Judge drew inferences of fact
that he used as the basis for finding a lack of good faith in the proposal for
the derivative action without an evidentiary basis for those inferences, and
that those inferences led him to err in the exercise of his discretion in refusing
the application.

[14]

In addition, the appellants contend that the Chambers Judge erred in
concluding that the proposed derivative action was not in the best interests of
the Company.

Discussion

[15]

The parties agree that an order denying leave to commence a derivative
action is a final order. In the absence of a palpable or overriding error on
the part of the Chambers Judge, his order cannot be overturned; see
British
Columbia (Minister of Forests) v. Okanagan Indian Band
,

2003 SCC 71,
[2003] 3 S.C.R. 371 at para. 43.

As I observed in
R. v. Regan
,
[2002] 1 S.C.R. 297, 2002 SCC 12, however, discretionary decisions are not
completely insulated from review (para. 118). An appellate court may and should
intervene where it finds that the trial judge has misdirected himself as to the
applicable law or made a palpable error in his assessment of the facts. As this
Court held in
Pelech v. Pelech
, [1987] 1 S.C.R. 801, at p. 814-15, the
criteria for the exercise of a judicial discretion are legal criteria, and
their definition as well as a failure to apply them or a misapplication of them
raise questions of law which are subject to appellate review.

[16]

The relevant parts of ss. 232 and 233 of the
BCA
set out the
criteria for leave to bring a derivative action on behalf of a company and provide:

232(1)  In this section and section 233,

"complainant" means, in relation to a company, a
shareholder or director of the company;

"shareholder" has the same meaning as in section 1
(1) and includes a beneficial owner of a share of the company and any other
person whom the court considers to be an appropriate person to make an
application under this section.

(2)  A complainant may, with leave of the court, prosecute a
legal proceeding in the name and on behalf of a company

(a) to enforce a right, duty or obligation owed to the
company that could be enforced by the company itself, or

(b) to obtain damages for any breach of a right, duty or
obligation referred to in paragraph (a) of this subsection.

(3) Subsection (2) applies whether
the right, duty or obligation arises under this Act or otherwise.

...

233(1) The court may grant leave under section 232(2) or (4),
on terms it considers appropriate, if

(a) the complainant has made reasonable efforts to cause the
directors of the company to prosecute or defend the legal proceeding,

(b) notice of the application for leave has been given to
the company and to any other person the court may order,

(c) the complainant is acting in good faith, and

(d) it appears to the court that it is in the best interests
of the company for the legal proceeding to be prosecuted or defended.

[17]

It is apparent that the respondents did not raise the criterion in s. 233(1)(a)
of the
BCA
as a basis for the dismissal of the appellants application.
Understandably, with the directors split into two opposing camps, they were
deadlocked and the respondents could not be expected to approve the prosecution
of a claim against themselves.

[18]

No issue was taken with regard to the notice of the application. It is
unclear from the material before us whether the Company was served with the
appellants applications as required by s. 233(1)(b) of the
BCA
, but no
issue was taken that it was not, and in any event, as all directors and
shareholders were parties to the applications, the Company can be taken to have
been given notice of the applications.

[19]

It was upon the requirements in s. 233(1)(c) and (d) that the
application failed before the Chambers Judge. The applicable legal principles
and authorities relied upon are not disputed by the appellants. The Chambers
Judge referred, among others, to the following authorities listed at paras. 9
and 15 of his reasons:

[9]        In
Bennett
, Smith J. summarizes the law
regarding the good faith requirement under s. 233(1)(c) of the BCA:

[45]      The applicant for derivative leave bears the onus
to show positively that the application is brought in good faith:
Primex
Investments Ltd. v. Northwest Sports Enterprises Ltd.
, [1996] 4 W.W.R. 54,
13 B.C.L.R. (3d) 300 (S.C.) at para. 32, varied, [1997] 2 W.W.R. 129, 26
B.C.L.R. (3d) 357 (C.A.);
Tkatch v. Heide
(1996), 29 B.L.R. (2d) 266,
[1996] B.C.W.L.D. 1481 (S.C.) at para. 24. Good faith is ultimately a question
of fact to be determined on all of the evidence and with attention to the
particular circumstances of the case.

[46]      The test for good faith is whether the action is
primarily for the purposes of pursuing a claim on the company's behalf, and
factors to be considered in applying this test include the applicant's belief
in the merits of the proposed claim, existing disputes between the parties, and
alleged ulterior motives:
Discovery Enterprises Inc. v. Ebco Industries Ltd.
(1998), 50 B.C.L.R. (3d) 195 (C.A.), 177 W.A.C. 255 at para. 5;
Gartenberg
v. Raymond
, 2005 BCCA 462, 8 B.L.R. (4th) 227 at para. 25.

...

[15]      Tysoe J. (as he then was) enunciated the interests
of the company test in
Primex
. At para. 39, he referred to an extract
from
Re Marc-Jay Investments Inc. and Levy
(1974), 50 D.L.R. (3d) 45 at
47 (Ont. H.C.):

It is obvious that a Judge hearing an application for leave
to commence an action, cannot try the action. I believe it is my function to
deny the application if it appears that the intended action is frivolous or
vexatious or is bound to be unsuccessful. Where the applicant is acting in good
faith and otherwise has the status to commence the action, and where the
intended action does not appear frivolous or vexatious and could reasonably
succeed; and where such action is in the interest of the shareholders, then
leave to bring the action should be given.

Tysoe J. continued at para. 41:

[T]he Court should not attempt to try the case when deciding
whether the requirement in s. 225(3)(c) has been satisfied. The Court should
determine whether the proposed action has a reasonable prospect of success or
is bound to fail. If it is asserted that the proposed defendants in the
derivative action have a defence to the claim, the Court must decide whether
such a defence is bound to be accepted by a trial judge following the
completion of the trial of the derivative action. It is not necessary for the
applicant to show that the action will be more likely to succeed than not. As
noted in the Dickerson Report, the Court should also be satisfied that the
potential relief in the proposed action is sufficient to justify the
inconvenience to the company of being involved in the action.

[20]

The chartered accountant and
chartered business evaluator retained on behalf of all of the Companys
shareholders to consider issues of concern between them reported his
conclusions in a letter dated February 20, 2010. The conclusions included:

a)       That the account
in question was opened based upon a directors resolution that purported to be
signed by all four directors as the result of a meeting of June 19, 2008 that
the appellants and the respondent Ms. Adolph deny attending;

b)       That handwriting
experts who have examined the directors resolution have concluded that the
appellants did not sign the document;

c)       That total funds
of $340,115.42 were deposited into the account;

d)       That at least
$302,396.98 of the funds deposited were withdrawn to the accounts of the
respondents, but not for the day-to-day requirements of the Company;

e)       That the
Companys cash flow was significantly impaired as a result of the diversion of
funds to the account; and

f)        That as a result
of the significant and negative effect of the diversion of funds from the
Companys cash flow, Backwoods has paid out some $249,322 to cover the
Companys bills to enable it to continue as a going concern.

[21]

The same consultant also recognized
that the respondents raised a concern that perhaps excess profits were unduly
transferred from the Company to Backwoods during the years 20042008, but
concluded that the Company, not Backwoods, received excess profits of
$28,766.

[22]

In light of these conclusions, it is
not surprising that the Chambers Judge found that there is evidence upon which
an arguable case for fraudulent conversion can be shown to exist, and that the
petitioner's allegations are believable enough to be arguable. On this basis,
it is difficult to contend that the applicants did not believe in the merits of
the proposed claim. Thus, that factor in the test for good faith can be taken
to have been met.

[23]

There was, of course, an existing
dispute between the parties, but the Chambers Judge accepted that the proposed
claim was capable of standing alone from the other proceedings.

[24]

The first
indicium
upon which the
Chambers Judge drew an inference of bad faith was the fact that the appellants,
in the pleadings in the Vernon action, seek to have the Company liquidated and
dissolved.

[25]

With respect, I am unable to accept
that such an inference can reasonably be drawn from the mere fact that the
liquidation and dissolution of the Company was sought. Such an ultimate goal is
not inconsistent with also wanting to advance the interests of the Company
before it is wound up.

[26]

It is abundantly clear from the
pleadings in the Vernon action that the Company can no longer operate in any
effective manner. It is therefore in the interests of all of its shareholders
that the Companys interests be maximized and that it then be liquidated and
dissolved, to avoid any further operating expenses, and to provide its
shareholders with the highest possible return on their investment.

[27]

The second
indicium
of bad
faith identified by the Chambers Judge was the appellants request in the
Vernon action, for the Company to pay security for costs. The Chambers Judge described
this request as tending to show that the petitioners are likely pursuing the
claim on their own behalf rather than on behalf of the Company.

[28]

The appellants contend that the
Chambers Judge erred in considering this issue at all, as there was no evidence
of the application before him, and his source of this information could only
have come from the submissions of counsel for the respondents. I see no
difficulty with the reliance on the statements of counsel on this fact by the
Chambers Judge. The application was a matter of record. Reliance on the
statements of counsel for a matter of this nature is permitted; see, for
example,
Nichols v. Gray
(1978), 9 B.C.L.R. 5 (C.A.) at para. 11 and
Astels
v. Canada Life Insurance Co.,
2006 BCCA 110, 223 B.C.A.C. 138 at para. 27
.

[29]

I am unable to find that the reliance
of the Chambers Judge on the application in the Vernon action for the Company
to pay security for costs was incorrect, or that it could not be regarded, as
he found, as some attempt by the appellants to prefer the interests of a
creditor of the Company, in which they had a vested interest, over the interests
of the Company.

[30]

With respect, however, I am unable to
understand how the Company cannot be better off with more resources than less
if it is already embroiled in another stand alone action, and thus I do not
consider that the second
indicium
of bad faith identified by the
Chambers Judge can reasonably be so construed.

[31]

The third
indicium
of bad
faith identified by the Chambers Judge is the delay in seeking leave to bring
the proposed action. He concluded that, as no derivative action was pursued
when the applicants were removed as directors of the Company, this is an
indication that the petitioners' primary motivation in advancing the claim is
their own self-interest.

[32]

The Chambers Judge addressed this
matter in paras. 2627 of his reasons for judgment, as set out above.

[33]

With respect, it does not appear to me
that the Chambers Judge considered the reason offered by the appellants for the
delay. Their explanation was that it was not until they received the report of
the chartered accountant and chartered business evaluator that they were in a
position to responsibly seek leave to commence the derivative action that they
wished to pursue on the Companys behalf against the respondents. As I have
already said, the report was dated February 20, 2010 and the petition seeking
leave to commence the proposed proceedings was brought May 5, 2010.

[34]

It is my view that, had the Chambers
Judge considered this explanation, he would not have found that the delay in
bringing the application for leave to bring the derivative action indicated bad
faith on the part of the appellants.

[35]

The failure of the Chambers Judge to
consider relevant evidence is justification for appellate intervention; see
Housen
v. Nikolaisen,
[2002] 2 S.C.R. 235; 2002 SCC 33. I would therefore accede
to the appellants first ground of appeal.

[36]

That, however, is not dispositive of
the appeal itself. To succeed on the appeal the appellants must also overcome
the finding of the Chambers Judge
at para. 30 of his reasons that ... it
is not in the best interests of the Company for the derivative action to
proceed.

[37]

Regrettably, the Chambers Judge did not explain the basis upon which he
arrived at that finding.

[38]

While it is doubtless the case that the appellants
hope and intend to benefit from any derivative action, one must not lose sight
of whether such an action is truly in the best interests of the Company.
Clearly the Company stands to gain considerably if it succeeds in showing that
the respondents fraudulently converted some $340,000 to their own use and so
recovers those funds.
Even if these monies are used to pay creditors or
to fund the Companys defence in the Vernon action, the Company will be better
off with more resources than less.

[39]

In the Vernon action, the Company is a co-defendant along with the
respondents. The Companys defence in that action is being directed by the
respondents, and the Company has no claim against them.

[40]

In the derivative action by the Company presently against only TD Canada
Trust, the respondents are third parties, but the Company has no direct means,
through that action, of recovery against the respondents, if indeed they have
wrongfully diverted funds belonging to the Company.

[41]

At paras. 1819 of his reasons for judgment, the Chambers Judge found:

[18]      The respondents submit that this application seeks
to litigate the same issues as the Vernon Action, but without the counterclaim
for the wrongful conversion of funds. In the Vernon Action, the Company is
named as a defendant in the action and the petitioners do not seek to recover
any funds on behalf of the Company. In the present matter, the Company seeks
the return of $340,000 fraudulently converted by the respondents for their own
use; damages and loss suffered as a result of the wrongful conversion of funds;
and, costs and all other ancillary relief.

[19]      In my opinion, these
are not the same issues and the Company's claim for fraudulent conversion as
against the respondents could be determined as a stand-alone from the Vernon
Action.

[42]

In
Johnston v. West Fraser Timber Co
. (1982), 37 B.C.L.R. 360
(C.A.), leave to appeal refd (1982), 45 N.R. 538 n; 40 B.C.L.R. xxx, as it was
the Company that was wronged, the Court concluded that a derivative action was
best suited to resolve the issue (as opposed to an oppression remedy). Writing
for the Court, Bull J.A. found:

[77]      In my opinion, like that of the trial judge, any
wrong done, if it was done, would not be the proper subject of relief under
sec. 224 [an oppression claim] ... the real complaint here is not for
oppression or unfair dealing of a shareholder but for West Fraser to recover
any excessive commissions or brokerage paid over a four year period to the
associated or allied United States corporation Dimension Lumber Co. Inc.

[78]      I think that any relief
to be granted, if relief be justified, would be to and for West Fraser. Should
the Company refuse to pursue the matter to recover that to which it may be
entitled, a derivative action or proceedings under sec. 225 of the Company Act
would appear available.

[43]

In
Furry Creek Timber Corp. v. Laad Ventures Ltd
. (1992), 75
B.C.L.R. (2d) 246 (S.C.) at p. 254, Newbury J. (as she then was) found breach
of a duty owed to the corporation can give rise to both a derivative action and
an oppression claim if the breach results in the unfair treatment of a
shareholder. Newbury J. concluded that, in addition to a derivative action, an
oppression action could also be brought on the same breach:

... provided the complaining
shareholder has been affected by the breach in a manner different from or in
addition to the indirect effect on the value of all shareholders shares
generally.

(See also
Discovery Enterprises Inc. v. Ebco
Industries Ltd.
(1998), 50 B.C.L.R. (3d) 195 at para. 21 and
Pasnak v.
Chura
, 2004 BCCA 221 at para. 33, 27 B.C.L.R. (4th) 50.)

[44]

In the oppression action the appellants ask for an accounting of all
profits, income and sales within Canada and damages based on the business
affairs of the Company having been conducted in a way oppressive to them or
unfairly prejudicial as a result of the alleged fraudulent conversion, and seek
to recover as shareholders
qua
individuals in that action.

[45]

The reasoning in
Furry Creek
is consonant with that of Mr.
Justice LaForest in
Hercules Managements Ltd. v. Ernst & Young
,
[1997] 2 S.C.R. 165 at para. 62 where he concluded:

62        One final point should be made here.  Referring to
the case of
Goldex Mines Ltd. v. Revill
(1974), 7 O.R. (2d) 216 (C.A.),
the appellants submit that where a shareholder has been directly and
individually harmed, that shareholder may have a personal cause of action even
though the corporation may also have a separate and distinct cause of action. 
Nothing in the foregoing paragraphs should be understood to detract from this
principle.  In finding that claims in respect of losses stemming from an
alleged inability to oversee or supervise management are really derivative and
not personal in nature, I have found only that shareholders cannot raise
individual claims in respect of a wrong done
to the corporation
. 
Indeed, this is the limit of the rule in
Foss v. Harbottle
.  Where,
however, a separate and distinct claim (say, in tort) can be raised with
respect to a wrong done to a shareholder qua individual, a personal action may
well lie, assuming that all the requisite elements of a cause of action can be
made out.

[Emphasis in original.]

[46]

A derivative action for what the Chambers Judge described as the stand
alone issue of the Companys claim for fraudulent conversion can thus be
viewed as the most appropriate remedy as, taken in isolation it does not appear
that the alleged conversion has affected the appellants in a manner different
from or in addition to the indirect effect on the value of all the
shareholders shares generally:
Furry Creek
, at p. 254.

Conclusion

[47]

I would allow the appeal, set aside the order of the Chambers Judge and
substitute therefore an order granting leave to prosecute the proposed derivative
action in the name of and on behalf of the Company against the respondents.

[48]

I would therefore grant leave to the appellants to apply to the Supreme
Court of British Columbia under 233(3)(b) of the
BCA
to have the interim
costs in the derivative action paid for by the Company. After the final
disposition of the action, further orders for costs may be made by the Supreme
Court under 233(4) of the
BCA
as and if appropriate.

The Honourable Mr. Justice Hinkson

I agree:

The
Honourable Madam Justice D. Smith

I agree:

The Honourable Madam Justice
Garson


