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Misappropriation of Funds by a Shareholder – the Oppression Remedy

Date: September 17, 2020
(A) is a minority shareholder of a company, named, AMCO, and (B) is the majority shareholder of the same company. (A) and (B) are the only shareholders of AMCO.
Let’s say (A) decided to take money in the amount of $100,000.00 from AMCO’S bank account and tells (B) that this money is going to be utilized to pay the contractor that completed renovation work at the company premises. In fact, (B) had put $75,000.00 into AMCO’s bank account to pay for the renovation work in order to expand the company business. Instead, (A) decided to use the funds to make renovations to his personal home. (B) later finds out that (A) utilized the funds for his personal purpose and demanded (A) to return the money back to AMCO’s bank account. (A) fails to comply with (B’s) demands. What recourse does (B) have against (A) in this type of situation?
It is submitted that making a report of theft to the police would be a thinkable option, however, the police may decide not to pursue any criminal charges against (A), because the police, may in exercising their discretion, conclude that this is a business dispute between shareholders, which should be dealt with by the commercial or civil court. Even if the police do charge (A) with the offence of theft over $5,000.00, (B) would still not be able to recoup the monies from (A) that (A) took through the criminal justice system. It is the writer’s submission that making an application to the Court and seeking the oppression remedy against (A) is a suitable option.
Oppression Remedy

Under Section 248 (1) of the Business Corporations Act, R.S.O. 1990, c. B.16 (“Act”):
“A complainant and, in the case of an offering corporation, the Commission may apply to the court for an order under this section. 1994, c. 27, s. 71 (33).”
Pursuant to Section 245 of the Act, “complainant” means,

a)   a registered holder or beneficial owner, and a former registered holder or beneficial owner, of a security of a corporation or any of its affiliates,
b)   a director or an officer or a former director or officer of a corporation or of any of its affiliates,
c)   any other person who, in the discretion of the court, is a proper person to make an application under this Part. (“plaignant”) R.S.O. 1990, c. B.16, s. 245.
(B), the shareholder, in the above example is “a registered holder or beneficial owner” of a security in the corporation and satisfies the definition of a complainant for the purposes of bringing an application for the oppression remedy before the Court.
With respect to the oppression remedy itself, Section 248 (2) of the Act states:

“Where, upon an application under subsection (1), the court is satisfied that in respect of a corporation or any of its affiliates,
a)   any act or omission of the corporation or any of its affiliates effects or threatens to effect a result;
b)   the business or affairs of the corporation or any of its affiliates are, have been or are threatened to be carried on or conducted in a manner; or
c)   the powers of the directors of the corporation or any of its affiliates are, have been or are threatened to be exercised in a manner,
that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer of the corporation, the court may make an order to rectify the matters complained of. R.S.O. 1990, c. B.16, s. 248 (2).”
The Test
The Supreme Court of Canada in the decision of B.C.E. Inc. v. 1976 Debenture Holders, 2008 S.C.C. 69 [“B.C.E”] laid down a two-part test to establish oppression:

(i)   First, a claimant must identify the expectations claimed to have been violated and establish that such expectations were reasonably held;
(ii)  Second, a claimant must show that those reasonable expectations were violated by conduct falling within the terms “oppression”, “unfair prejudice” or “unfair disregard”.
In B.C.E. the Supreme Court of Canada held that a shareholder’s expectations can be formed in a number of ways and the Court will consider factors such as:

i.   general commercial practice;
ii.  the nature of the corporation;
iii. the relationship between the parties;
iv.  tpast practice;
v.   steps the claimant could have taken to protect itself;
vi.  representations and agreements; and
vii. a fair resolution of conflicting interests between corporate stakeholders.
With respect to the first part of the test in B.C.E., it can be said that (B’s) reasonable expectation was to see that the money that (A) took was to be paid to the contractor that performed the renovation work at the company premises as (A) had told him, and that (A) should return such money back to where he took it from. Further, (B’s) reasonable expectation was that (A) was not to use the money for his own personal benefit.
In regards to the second part of the test, the Supreme Court of Canada in B.C.E. explained the meaning of “oppression” as follows:
“The original wrong recognized in the cases was described simply as oppression, and was generally associated with conduct that has variously been described as “burdensome”, harsh and wrongful”, "a visible departure from standards of fair dealing", and an "abuse of power" going to the probity of how the corporation's affairs are being conducted . . . . a wrong of the most serious sort.”
It can also be said that (B’s) reasonable expectations were violated by the wrongful conduct of (A), which falls with the meaning of oppression, in misappropriating funds from AMCO’s bank account, when $75,000.00 out of the funds belonged to (B). (A’s) conduct was deceitful in that he had told (B) that the money was going to be utilized to pay for the company renovations knowing that he intended to use it for a different purpose, which was to renovate his property. It is submitted that (B) satisfies the two-fold test in the decision of B.C.E., but what is the remedy?
The Remedy
It has been held that the purpose of the oppression remedy is corrective, not punitive (Maneff v. Concrete Holdings Ltd. (1996), 1996 CanLII 7987 (ON SC), 28 O.R. (3d) 641 (Ont. Ct. (Gen. Div.)).
Section 248 (3) of the Act sets out the orders that the court can make upon a finding of oppression under Section 248 (2) of the Act. Of particular relevance are Section 248 (3) (f) and Section 248 (3) (j) of the Act, which states that the court may make (f) an order directing a corporation, subject to subsection (6), or any other person, to purchase securities of a security holder; and that the court may make (j) an order compensating an aggrieved person.
It is this writer’s submission that the oppression remedy is a powerful tool used by litigants that have been wronged by the conduct of other individuals during the course of business. As the Supreme Court of Canada had said in the decision of Wilson v. Alharayeri, 2017 SCC 39 (CanLII), [2017] 1 SCR 1037:
“Fairness requires that, where “relief is justified to correct an oppressive type of situation, the surgery should be done with a scalpel, and not a battle axe” (Ballard, at para. 140).”
It can be argued that as a corrective measure, and as a means of removing (A) from the company for such oppressive conduct that (B), given that he owns the majority of shares of AMCO, should be able to purchase all of the shares of the minority shareholder, (A), for an amount to be determined by a qualified appraiser pursuant to subparagraph (f).
Moreover, the Court can order that (A), upon a finding of oppression, that (A) compensate (B) in the sum of $75,000.00 and AMCO in the amount of $25,000.00 or, alternatively, AMCO alone in the sum of $100,000.00 for the money that (A) took from the company bank account in accordance with subparagraph (j).
It is this writer’s view that (A’s) conduct amounted to a flagrant and blatant disregard for his duties as a shareholder of AMCO. The oppression remedy acts as a safeguard to protect the other security holders from such dishonest conduct. The Supreme Court of Canada in B.C.E. said that:
“First, oppression is an equitable remedy. It seeks to ensure fairness — what is “just and equitable”. It gives a court broad, equitable jurisdiction to enforce not just what is legal but what is fair:…”
What is “just and equitable” in the example of (A) and (B) above is seeing that (A) be punished from the Court for his behaviour by his removal as a minority shareholder from AMCO through an order for the purchase of his shares and an order of compensation made against him. It is this writer’s view that the law of equity will prevail to condemn conduct to remedy the wrongs of others for acts committed during the course of business.
Anthony Rabba (Author)

Barrister & Solicitor