As your business develops and grows over the years, your corporate structure may need to change. Certain parties may have a change in their circumstances that limit their ability to be as involved in the corporation’s management. But when individuals remain named as directors or officers, it doesn’t matter if they stop working for the corporation itself. Under their title, they still have access to corporate finances.
In a recent case before the Ontario Superior Court of Justice, one director claimed the other used his title in an oppressive manner, negatively impacting the corporation’s future prospects.
Defendant director started using the corporation’s money for personal expenses
In the case of Stefanescu v. Decena, the parties were shareholders, directors and officers of RE Stats Inc. They created the real estate statistics company in 2005. They equally shared an interest in the corporation without a shareholder agreement. They each owned one common share of the company and served as the sole directors and officers.
Between 2005 to 2014, the plaintiff was responsible for developing the company’s product, while the defendant built up its customer base and established a sales team. The team he assembled primarily consisted of his family and friends. The defendant often travelled to the United States to attend trade shows and to help promote the company. He used his personal credit cards and would be reimbursed by RE Stats Inc. However, he eventually started using company credit cards for this purpose. In time, he began making personal expenses with those company credit cards. These expenses grew to the point of causing problems for RE Stats Inc.
The plaintiff took over the company’s finances in 2012. He made several changes to the company’s arrangements so that between 2012 and 2015, the company was able to amass nearly $180,000 in cash. He wanted this to be reserved to help buffer expenses and to help with the company’s growth.
Plaintiff started managing the corporation on his own
From 2010 to 2013, the defendant did not pay taxes on his payments from RE Stats Inc. As a result, he owed $116,050. When the Canada Revenue Agency notified the company about this outstanding amount in 2015, the plaintiff arranged for the corporation to pay it on the defendant’s behalf with corporate funds. However, in exchange, the plaintiff told the defendant that the corporation could no longer pay his regular salary. This was done for accounting purposes, as the tax payment was considered part of the defendant’s director’s fees.
In 2014, the defendant gradually began to attend the office less regularly while withdrawing funds from the corporation. By February 2015, he had stopped going into the office altogether. He did not discuss the situation with the plaintiff, who began managing the corporation on his own. By July 2015, the plaintiff arranged to stop paying the defendant.
Defendant still had access to corporate accounts as director
In 2016, the plaintiff increased his director’s fee without consulting the defendant. In the same year, he paid an additional $30,000 to the CRA towards the defendant’s taxes. Meanwhile, the defendant continued to make withdrawals from RE Stats Inc. without consulting the plaintiff. In August 2017, the defendant withdrew $10,000 to make a payment on his personal credit cards. Other withdrawals went to casinos and other personal expenses. The plaintiff continued to increase his director’s fees from 2017 to 2019. A further notice came from the CRA to pay the defendant’s taxes in June 2019, but the plaintiff refused to pay this time.
By 2019, RE Stats Inc. did not have enough funds to pay out dividends. The defendant withdrew an additional $20,000, which the plaintiff could not offset with a dividend payout for himself. Since 2019, the plaintiff has continued to manage the corporation independently. The employees hired by the defendant left, and most were replaced in 2021 by employees hired by the plaintiff. Although the defendant was effectively no longer part of the corporation, he still had access to the corporate accounts as a director.
Plaintiff wanted to remove the defendant from the corporation and be paid back for the expenses
In this action, the plaintiff sought to remove the defendant as shareholder, director and officer of the corporation. He also wanted the defendant to repay the corporation for amounts he allegedly took from the company in a breach of his fiduciary obligations.
The defendant took no issue with giving up his shareholding interest. However, he disputed the amount the plaintiff claimed he owed. He also submitted that the claim was started after the limitation period.
Was the claim issued outside the limitation period?
The defendant’s first argument against the plaintiff’s claim was that it was barred by section 4 of the Limitations Act. The basic limitation period set out in that section limits claims “after the second anniversary of the day on which the claim was discovered.” Based on this section, the defendant submitted that the claim could not include any conduct before May 10, 2018. This included the plaintiff’s claim for an oppression remedy.
However, the defendant was unsuccessful in attempting to bar the claim under the Limitations Act. The Court found that as he did not bring this up until the end of the matter, the timing was too prejudicial to the plaintiff.
What is an oppression remedy?
An oppression remedy is a shareholder remedy available when a corporation, its board, or its affiliate acts in a way that is oppressive, unjustly prejudicial, or in disregard of the shareholders’ interests. This remedy allows courts to provide a plaintiff relief to ensure fairness through the enforcement of the law.
Oppression remedies depend on the facts of each case to determine whether they will be granted. The success of the remedy hinges on the reasonable expectations of the shareholder. The specific remedy is contained within the Canada Business Corporations Act and the Ontario Business Corporations Act.
Defendant’s conduct deemed oppressive
The Court found that the defendant’s conduct was indeed oppressive. Although he was an officer and director, he made cash withdrawals from corporate accounts without considering the corporation’s financial position. He also withdrew this money with little regard for other stakeholders.
As a result, the Court held that the defendant had “been oppressive, unfairly prejudicial to and with unfair disregard to the interests of RE Stats Inc. and to the interests of Gabriel Stefanescu [the plaintiff] as a shareholder, director and officer of RE Stats Inc.”
To avoid further risk to corporation, defendant removed as director and officer
Additionally, the Court found that the plaintiff’s increases to his own salary were reasonable given his expanded responsibilities.
The defendant’s ongoing relationship with RE Stats Inc. as director and officer was deemed to create risk for the corporation. The Court concluded that “a corporate divorce is warranted to prevent any future risks to the Corporation”. The defendant’s share in RE Stats Inc. was ordered to be cancelled, and the value of the share transferred to the plaintiff. The defendant was also removed as director and officer of the corporation and was prohibited from taking any further money from RE Stats Inc.
Contact Bader Law in Mississauga for Trusted Representation in Shareholder Disputes
Bader Law provides comprehensive business organization advice and helps clients choose the appropriate legal structure to reduce liability and maximize income. Our business lawyers secure clients’ financial interests in a variety of issues, including share purchase options, buy-sell arrangements, corporate reorganization and restructuring, and shareholder disputes. To schedule a consultation, contact us online or call 289-652-9092.