Joe Thorne¹ and Clara Linegar²

As joint owners of a business, what do you do when the business relationship falls apart? And what if one owner undermines the business in the process?

In Smith v Hillier,³ Justice Paquette dealt with the situation that arises when a business relationship turns sour and the only two shareholders are at a standoff.

Background

Bradley Smith and R. Wayne Hillier were the only shareholders of the corporation SMART! Industrial Solutions Inc. (“SMART!”). SMART! was in the business of design and installation of industrial shelving and storage systems. It also leased and serviced forklifts.

Both parties were involved in other businesses separate from SMART!. Smith owned and operated 3 businesses, including one that sold and serviced forklifts and another that was the landlord for the rental property in which SMART! operated. Hillier was a long-time sales manager for a large company, working in the area of industrial storage systems.

In general, Smith acted as the financier for SMART! and had little direct input, while Hillier, with his considerable experience in the field, maintained primary operational and day-to-day control of the business.

Based on their past experience, they assumed roles within the corporation naturally. Smith was in charge of accounting and financial operations while Hillier worked full time focusing on client relationships and business operations. Things were going well and the business had early success.

The Breakdown

Despite its early success, friction arose between Smith and Hillier, which led to SMART!’s rapid collapse. While it is unclear how matters reached a head so quickly, there is some indication that it was related to business disagreements over SMART!’s purchase of forklifts, in particular purchases from companies other than Smith’s forklift operation.

In April of 2014 Smith texted Hillier, “We need to have a chat. I want out or we close down the company. Friday morning 10 a.m.”.⁴ That initial text set into motion a series of events that included allegations that Smith:

• stole or borrowed SMART! forklifts without authorization,
• forced SMART! out of its rental space in his role as landlord,
• spied on Hillier’s email communications, and
• refused to authorize payroll and business cheques.

Smith filed numerous lawsuits against Hillier and SMART!, seeking forced purchase of his shares, damages for alleged unpaid bonuses, injunctions and specific performance of business contracts, and other relief.

Separately, Smith also applied to dissolve SMART!, which led to the decision below.

Decision of Justice Paquette

The issue before the Court was whether it was appropriate to dissolve SMART!.

The parties consented to have the company wound up (or rather dissolved, in accordance with the statutory regime in the Corporations Act). However, they could not agree on how the dissolution should take place. Smith proposed the appointment of a receiver to carry on the business until SMART! was sold as a going concern. Hillier opposed such an appointment and argued that he could liquidate SMART!’s assets and resolve its debts himself.

Section 343(1) of the Corporations Act deals with corporate dissolution. Section 343(1)(b)(ii) provides that such an order is available where it is “just and equitable” for the corporation to be liquidated and dissolved.

Following review of other Canadian cases, Justice Paquette noted that the advantage of the “just and equitable” approach is the broad discretion available to the Court to make any order that is appropriate in the circumstances. Justice Paquette concluded that such a circumstance included where there was “incompatibility or quarrelling” amongst shareholders.⁵  A finding of a complete deadlock – more than just an oppressive act or imbalance of power between the parties – was also sufficient to warrant a dissolution order.

Justice Paquette, following the approach from other Canadian jurisdictions, proceeded with corporate dissolution. Justice Paquette held that the business relationship was “irretrievably broken down” and that it was just and equitable to liquidate and dissolve SMART!.⁶

Justice Paquette had strong words for Smith with respect to his conduct leading to the breakdown:

Mr. Smith, a 49 percent shareholder and director conducted himself in a manner which is contrary to SMART!’s competitiveness in the marketplace including efforts to impair the company’s reputation with clients, competing with the company through the vehicle of his other companies, imposing warehouse lease rates on higher terms than available in the marketplace, to the advantage of his other company, removing forklifts necessary to SMART!’s business, refusing to sign supplier’s remittances and “forgetting” to sign payroll cheques for the company’s employees, until ordered by the Court. All the while Mr. Smith had full access to each of SMART!’s business transactions through the accounting software he installed.⁷ 

Justice Paquette then turned to how the dissolution should be effected. Should the Court order sale as a going concern (as sought by Smith), or appoint a liquidator (as sought by Hillier)?

• In Moos v Vendage Corp., 2013 ONSC 2430, the court determined that the most suitable remedy was to “place the company on the market as a going concern, followed by liquidation if there were no buyers”.⁸  In that case, the court described the relationship between the parties as dysfunctional. Two of the three shareholders sought an order for the third shareholder to buy them out. However, the court concluded that this was not reasonable because the third shareholder had been a financier and not involved in the operations of the business.
• In Waxman v Waxman (2005), 142 ACWS (3d) 85, [2005] OJ No. 3773 (Sup. Ct.), the applicant shareholder wished to have the family business ordered sold as a going concern. The opposing shareholder, who had already been ordered to repay $10 million wrongly taken from the company, argued that a family business should not be sold. The court concluded selling the business as a going concern was the most appropriate remedy describing the company “as a ‘rather sizeable business with established name recognition, other business goodwill, substantial operating asserts and viability’ all irrespective of the current top management, with the result that a sale as a going concern constituted a suitable outcome”.⁹

Justice Paquette then considered the factors referenced in Waxman v Waxman: the business’s name recognition, goodwill, its operating assets, and its viability. Justice Paquette concluded:

Mr. Smith’s insistence that SMART! be sold as a going concern by a professional receiver is difficult to reconcile in the context of the evidence and the case law he provided to the court. The sole management employee, responsible for client development and industrial storage design, is leaving the company. Mr. Smith provided no evidence respecting SMART!’s viability without Mr. Hillier other than to suggest all that is required is ‘any salesperson’. Clear evidence confirmed Mr. Smith’s dedicated efforts to shut down the company and interfere with its viability.¹⁰

Justice Paquette added that there was no evidence to support placing the business on the market as a going concern due to the time delay and costs associated with the process. Quoting Smith’s text message to Hillier, Justice Paquette held that it was Smith who wanted “out” and for SMART! to be “closed down”.¹¹

Although Justice Paquette held that it was just and equitable for SMART! to be dissolved via a court-appointed liquidator, Hillier’s request to carry out the liquidation himself was refused:

The law requires independence and impartiality in the carrying out of these duties which the liquidator fulfills as an officer of the court. The parties are engaged in litigation relating to corporate bonuses, and Mr. Hillier will be leaving SMART! to establish his own storage solutions business. I am satisfied that this disqualifies Mr. Hillier from assuming the role of liquidator given the potential for his interests and duties to conflict.¹²

Justice Paquette did, however, order that the appointed liquidator retain Hillier’s services as the primary operating mind of SMART!. Further, Smith was given the option to purchase Hillier’s shares at the valuation Smith himself advanced in litigation.

Conclusion

Corporate dissolution is an extreme remedy, but will be ordered where there is a breakdown in the business relationship and the business cannot be salvaged by sale.

In a dispute over the breakdown of a business the owners’ behaviour will often be scrutinized by the court. In conducting oneself as an owner and director of a company, one should always keep in mind the statutory and common law duties you owe to the company and to other shareholders.

¹ Joe Thorne is a senior associate with Stewart McKelvey’s St. John’s office. He may be reached at joethorne@stewartmckelvey.com.

² Clara Linegar is a summer student with Stewart McKelvey’s St. John’s office. She may be reached at clinegar@stewartmckelvey.com.
³ 2016 NLTD(G) 80.
⁴ Para 16.
⁵ Paras 48 and 50.
⁶ Para 65.
⁷ Para 63.
⁸ Para 54.
⁹ Para 56.
¹⁰ Para 64.
¹¹ Para 82.
¹² Para 76.