Directors held in contempt of court

It is relatively rare for British Columbia courts to hold directors or officers of a company in contempt for sins of the company. In Axion Ventures Inc. v. Bonner, 2023 BCSC 213, the BC Supreme Court did just that, holding a company’s directors in contempt for failing to abide by a court order.

The order that the defendants were accused of breaching required the defendants to place any company shares they held (it was not clear if the directors personally held shares) or controlled in trust, pending the results of the litigation. The defendants failed to do so, claiming that compliance with the order would put them in breach of their contractual obligations with their U.S. lender.  

The three-part test for civil contempt is: (a) the order alleged to have been breached must state clearly and unequivocally what should and should not be done; (b) the alleged breaching party must have had actual knowledge of the order, and (c) the party allegedly in breach must have intentionally done the act that the order prohibits or intentionally failed to do what the order compels.

The standard of proof for contempt is high and all three elements must be proven beyond a reasonable doubt and not a balance of probabilities.

The court determined Rule 22-8(2) allows for the enforcement of its order against any directors and officers found to be willfully disobeying that order. Directors and officers have a duty to do everything that is reasonable to ensure that company’s compliance with a court order. The intentions of a director or officer who is a directing mind may be considered when determining whether the company had the requisite mens rea to willfully disobey a court order.

While the court agreed that contempt of court is a “heavy, blunt tool” and should be a “last resort to obtaining compliance,” it nevertheless held the defendants in contempt. The court found that the defendants could not prove that compliance with the order would result in a breach. At best, the defendants could prove that compliance with the order may put its parent company in breach of its contractual obligations. 

While penalties for civil contempt are typically proportionate and are generally imposed with a view to enforcing compliance, jail time is an option. This decision is a powerful reminder of the risks that directors or officers could face if they fail to take all reasonable steps to ensure corporate compliance with court orders.

Family dispute or oppression dispute?

Is the oppression remedy available where the issues are the subject of a family law dispute?  In Ludwig v. Buzz Berry Production II Inc., 2016 BCSC 746, the court confirmed that the oppression remedy in the BCA is not available where the issues are the subject of a family law or personal dispute.

The plaintiff and the personal respondent were husband and wife and were the sole directors of the respondent company.  They owned 49% and 51% of the shares, respectively. The plaintiff brought an oppression action to compel the respondents to take certain steps in respect of banking and corporate records, among other things.

The parties were separated at the time of the petition. They participated in several television series projects together, through single-purpose companies. They entered in to a separation agreement that generally provided for a 49/51 split of any proceeds from two earlier projects for which the single-purpose companies had already been dissolved, despite the fact that the plaintiff was not a shareholder of the first company. 

One of the issues addressed by the court was the plaintiff’s request that a personal hard drive as well as external hard drives related to the various television productions be produced for review and copying, and further that the petitioner be provided access to certain documents. The respondents agreed to provide access to the hard drives and documents for copying at the petitioner’s expense.

As a result, the only evidence of oppression was the insistence that the petitioner bear her own costs for copying. The court decided the issues in the case were not related to the operation of the corporate respondent nor was the personal respondent using his powers as director to prejudice the minority shareholder. The court explained:

This is not a situation such as that discussed in Hui v. Hoa, 2015 BCCA 128, where the reasonably expectation of stakeholders in a corporation may be at risk of being prejudiced by analysing their rights through the lens of a family law dispute.

The court held that the oppression remedy is only available to address oppressive conduct in the person’s capacity as a shareholder, director, officer, even though the person may have other interests that are intimately connected to a transaction.  The court decided that the petitioner’s interests in the records of the dissolved corporations, as well as any interest in her personal hard drive, did not derive from her status as shareholder of the corporate respondent and so the oppression remedy was not available in the circumstances.

Family disputes within the corporation

When a family establishes a corporate structure for estate planning purposes, can the reasonable expectations of parents and children change over time?  This issue was squarely before the court in Hui v. Hoa, 2015 BCCA 128, where a son appealed a ruling that found his decision to eliminate a monthly income payment to his mother and her right to manage a company was oppressive. 

a.         Background

The mother and her late husband purchased properties when the son was a child through two holding companies (“Bon” & E&C).  They owned all of the voting shares and the son was issued a majority of non-voting shares. 

This structure was designed to give the parents control of the properties and income and to facilitate a tax advantageous transfer to the son upon the parents’ death or when they decided to give him control. 

There was no expectation that the son would manage or otherwise exercise control of Bon or E&C as a minor.  The son did not purchase any Bon or E&C shares and did not make a capital contribution to those companies.

The son was eventually appointed a director of Bon and expressed concern that his mom would leave her assets to her church.  In response, the mom cancelled the voting restrictions on his shares but otherwise maintained control and continued receiving monthly income. 

The son later requested that the mom relinquish her right to manage and to receive any income from Bon.  She refused.  

At Bon’s annual general meeting, the son used his voting control to, among other things, eliminate the payment of any compensation to his mom and remove her from management.

b.         Chambers Decision

The chambers judge noted that a shareholder’s reasonable expectations should be considered when the shareholder acquires its shares.   The chambers judge found that the son had no basis to remove his mom’s right to manage or receive income.  The son had no reasonable expectations to manage or control Bon’s affairs without his mother’s consent or until she died.

 Those expectations had to be viewed in light of the fact that he had paid nothing for those shares.  His only legitimate expectation was to take over the companies on his parent’s death or by consent.  The mom’s oppression claim was granted and she her right to manage and receive income was restored. 

c.         Appeal

The court overturned the decision as the son had not engaged in any oppressive conduct but had merely exercised his rights based on the existing corporate structure.  The mom did not have any reasonable expectations to continue receiving income in light of her decision to alter the corporate structure and provide the son with voting control.  She could have protected her expectation to a continued income stream through the creation of a trust or a shareholders’ agreement. 

The court noted that the oppression remedy “sits uncomfortably in the context of family disputes, where sometimes corporate positions are used as weapons” (at para. 38).  However, the focus must remain on the “corporate rights of the parties as stakeholders in the corporation, not as members in a family” (at para. 38). 

The focus of the chambers judge on the bona fides of the son’s conduct distorted the analysis of whether he was entitled to do what he did based on his shareholder rights. 

The rights of the mom and the son had to be analysed with reference to the existing corporate structure, not that which was originally put in place.  Initially, the mom’s expectation of receiving an income stream until her death was reflected in the estate freeze structure.  That expectation was changed when the mom transferred control to her son. 

The mom did not expect her son to cut off the income stream after making those changes.  However, those expectations were not reflected in the revised corporate structure and she did not institute any measures to ensure her expectations where protected.  In failing to do so, the mom’s “expectations of continued income from the company were no longer anchored to the corporate structure” and the chambers judge erred in concentrating on the mom’s expectation given the new structure (at para. 53).

The son’s decision to stop his mom’s income payments did not affect her rights as a shareholder.  The court noted that this conduct “may very well have been reprehensible in a family context, but this does not translate into corporate oppression” (at para. 52).