Legal Blog

Persistence

At times, persistence is the best attribute to collect a debt. At other times, an unusual attack works best. In Pillar Sausages & Delicatessens Ltd v. Cobb, a 2003 decision of the Ontario Superior Court of Justice, the plaintiff had or used both. 

Oppression

Under section 241 of the Canada Business Corporations Act and section 248(2) of the Ontario Business Corporations Act, the court has a broad remedy if it determines that any corporate act or omission is “oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer of the corporation.” This remedy is usually invoked by minority shareholders of a corporation, but, as is readily apparent, it also applies to protect creditors.

Fast Dealings 

A purchaser ordered a machine from a vendor and paid for it in advance. Big mistake! The vendor did not deliver the machine and, after the purchaser’s demand in May 1998, did not return the money. The purchaser sued and, after a trial, obtained judgment for approximately $100,000. We were not told the nature of the defence, but we assume there was one. Indeed, the vendor must have thought there was a good defence, because it appealed the decision at trial. The appeal was dismissed in 2001.

The purchaser attempted to collect the judgment and held a judgment debtor examination. It determined that:

1.   The vendor had no seizable assets. However, in October 1998, the vendor had retained earnings of $187,000.

2.   In October 1998, after the purchaser demanded repayment of its purchase money, the vendor declared a dividend of $184,000 to its sole corporate shareholder.

3.   In November 1999, the vendor declared another dividend of $18,000.

4.   In October 2000, the vendor sold a large part of its inventory to a sister corporation for $241,000. The sister corporation sold the inventory at a profit, but still owed the vendor $135,000.    

5.   Cobb was the sole director and officer of the vendor. The vendor had one corporate shareholder. Cobb was the sole shareholder, director, and officer of that corporation. He was also a shareholder, director, and officer of the sister corporation.

The purchaser brought an application for an oppression remedy against the sister corporation of the vendor, the corporate shareholder of the vendor, and Cobb.

Arguments 

The vendor argued that:

1.   It had set up its corporate structure in 1966 on advice from its accountants because it knew that its venture capital business was risky. It would be unfair to pierce the corporate veil that had been set up for just this eventuality.

2.   The purchaser could have taken other steps to protect its interests, such as insist on guarantees, and therefore should not now be able to rely on the oppression remedy.

3.   The sale of the assets was made with normal mark-ups and therefore cannot be attacked simply because the goods were resold at a profit.

4.   The corporate structure was set up 30 years before the impugned transactions and, accordingly, was not done to treat creditors, 30 years hence, oppressively.

Reply 

The judge dealt with each of these arguments.

1.   Just because the vendor realised that it was in a risky business, does not mean that the purchaser realised it. If the vendor expected the purchaser to share in the risk, it should have said so in the purchase and sale documents; it did not.

2.   Why should a purchaser enter into a contract assuming that the vendor will conduct itself in a manner that would favour its shareholders rather than complying with the contract?

3.   The complaint was not that normal mark-ups were used. The complaint was that the sister corporation sold the goods, pocketed the money, and did not pay the vendor in full for the inventory, a payment that would have allowed the vendor to pay the judgment against it.

4.   The means by which and the time at which the vendor was organised are irrelevant if there is oppression. The oppression remedy trumps basic corporate law dealing with separate existence of corporations and shareholders.

The judge held that the defendants had acted in such a manner as to strip the vendor of its assets and their actions constituted oppression to the vendor’s creditors. The judge decided that the appropriate remedy was to hold the sister corporation, the shareholder corporation, and Cobb liable to pay the judgment debt of the vendor.

The judge will not decide upon an award of costs until after he has received submissions from the parties. However, we suggest that the judge may well award costs on a substantial indemnity basis, because the actions of the defendants were so blatantly oppressive. 

Strategy 

We always try to mount an attack on the debtor’s easiest seizable assets. However, if the debtor has no easy assets to attack, a judgment debtor examination is necessary to determine whether the corporate debtor has had its assets stripped away or whether it lost its assets through financial reverses in the normal course.