Lakhani v Gilla (2019) ONSC 1727
I sold my e-cigarette company to Gilla Inc. In return Gilla gave me shares in Gilla Inc. and a promissory note.
Now a year later Gilla hasn’t paid the promissory note and is selling its own business to a third party (Hystyle).
Can I get a freezing order to stop Gilla from dissipating its assets including selling its assets to Hystyle.
short answer: no (or rather highly unlikely).
what did the judge say:
Perell J. says: the common law strongly disfavours execution before judgement in a civil case. (para.30)
While statements of law are trite, strong facts are necessary. It will always be the good facts (versus equivocal facts) which determine whether you get your freezing order.
Perell agreed that there was a strong prima facie case (para 32). (the defendants had no assets in Ontario).
The plaintiff failed to prove that Gilla was dealing with other than Gilla’s own pre-existing assets. Gilla’s actions were not being done to make it judgment-proof.
Perell was impressed with the fact that Gilla was publicly traded. In other words, it was already governed by a higher level of regulation and oversight against bad faith conduct. (para 34).
The plaintiff failed to specify the assets to be frozen (para 35).
The plaintiff’s failed to show irreparable harm. (para 36).
Perell J. poured cold water on the dreams of oppression plaintiffs who thought that there was a ‘fairness’ tool in s.248 which would override standard injunction requirements (para 36). The ‘fairness’ language in Le Maitre Ltd. v Segeren [2007] O.J.No.2047 was obiter. (para 38).
Perell J. rather relied upon Amaranth LLC v. Counsel Corp. to reiterate that the court should not tie up corporate operations pre-judgment (para 39).
Conway notes:
an unreported example of the Ontario Superior Court actually granting a freezing order (Manton J.) occurred on the following facts: small four-shareholder company running a restaurant, where the president re-directed the American Express receipts into another company bank account which, of course, he exclusively owned and controlled. (01-CV-18151: 1270640 Ontario Inc. v. 1394687 Ontario Inc.
Le maître was decided upon the following strong facts (if you are close to these facts you are in good position for a freezing order)
[31]…They are 50% shareholders who had entered a unanimous shareholders’ agreement, a distribution agreement, a service agreement and a management agreement. In examining the interests of the shareholders as opposed to their strict legal rights, these agreements serve to inform the reasonable expectations of the shareholders.
[33]…The USA provided that there would be no material change in the nature of the business of the corporation nor would any action be taken which might lead to or result in such change. In addition, the corporation was not to enter into any contract or other commitment out of the ordinary course of the corporation’s business.
[34] irreparable harm: there was a proposed sale of all or substantially all of the assets, there was potential litigation from creditors and trustee in bankruptcy (accusations of disposing of assets to avoid creditors); there was no evidence of value of the transaction; there was no evidence that the deal would be lost by an injunction (although one could assume this?)
