Legal Blog

A Novel Approach

The corporation for whom you have been working owned land and other liquid assets. The corporation then fires you and you later discover that the corporation had entered into an intricate pattern of dealings that leaves it judgment-proof. You have a substantial unpaid account with your former client. What can you do? On the basis of Gignac, Sutts and Woodall Construction Co. v. Harris, a 1997 unreported decision of the Ontario Court (General Division), we suggest that you bring an oppression application pursuant to the Business Corporations Act.

Where Has All The Money Gone?

The client was the developer of a highrise condominium. The solicitors were retained to commence an action against the general contractor and its bonding company for the completion of deficiencies. The client, through the solicitors, retained an expert to complete a construction report. Various interim accounts were rendered and most were paid.

In the midst of the solicitors’ work, the client entered into a series of transactions and, in effect, stripped itself of its assets in favour of its shareholders. These assets consisted of land and accounts receivable. The client then fired the solicitors and entered into its own arrangement with the general contractor and the bonding company. The solicitors and the expert had unbilled work-in-progress at the time of the transfers of assets and ultimately delivered substantial accounts. The solicitors account was assessed in the amount of $41,000 and the expert’s account was in the amount of $40,000.

During this entire period, the shareholders of the client had been promising the solicitors that the shareholders would personally pay their account. Of course, the shareholders reneged and the client no longer had any assets. The solicitors and the expert commenced an application under section 248 of the Business Corporations Act claiming that the shareholder/directors exercised their powers in a manner that was oppressive to them, in their capacity as creditors of the client.

Long Time Passing

You may have thought that the oppression remedy in the Act is only available to shareholders. Not so. It is also available to creditors. This was recognised in a series of cases stemming back to 1989. The first issue was whether the solicitors were creditors at the time of the transactions. All accounts issued prior to that time ultimately had been paid. The judge held that a solicitor’s work is not a debt or liquidated demand, but rather a claim in quantum meruit. The judge used the dictionary definition of creditor as “one who gives credit in business transactions“. As a result, the moment that a solicitor commences any work for a client, the solicitor becomes a “creditor” under the Act.

Pay Day

The judge held that “it was reasonable for the respondents to realize that the transfer of land, the payment of whatever accounts receivable and accrued expenses were included in the figure in the balance sheets and the payments of the shareholders’ loans would result in the inability of the company to pay” the subsequent accounts. He held that the shareholders/directors exercised their powers as directors of the client in a manner that unfairly disregarded the interests of the solicitors and the expert. He held that the shareholders/directors were personally liable to pay the accounts.

An Easier Way

     Of course, it would have been much easier for the solicitors had they insisted on personal guarantees once they knew that the client had transferred the land. In the alternative, they could have insisted on being adequately retained. Their application under the Act was collection the hard way.