The Divisional Court recently upheld the Ontario Superior Court’s decision in T. Films S.A. v. Cinemavault Releasing International Inc. (“T. Films”) which granted recognition and enforcement of a successful arbitral plaintiff’s award and crafted an enforcement remedy using other legal tools (the oppression remedy and breach of trust) to foil the arbitral defendant’s “shell game” tactics. Corporate affiliates and a director were ultimately held liable for the arbitral award. These tools should be considered by parties seeking enforcement in Ontario.
In 2012, a Luxembourg film production company, called T. Films commenced an arbitration against Cinemavault Releasing International Inc. (“CRI”), an Ontario corporation distributing T. Films’ film, for unpaid distribution revenue to which T. Films was entitled pursuant to an exclusive sales agency agreement. T. Films won and was awarded USD$359,218 in damages (including interest) for unpaid distribution revenues, as well as USD$136,377 in costs, making for a total arbitral award of USD$495,595.
Failure to Pay the Award
CRI did not pay or appeal the award. According to CRI’s Director and President, Mr. S., the company ceased operations in 2011, had no assets, and was unable to pay the arbitral award. In fact, in 2011, after a dispute between CRI and T. Films regarding distribution revenues and only a few months before the arbitration was commenced, Mr. S. restructured CRI along with two of CRI’s corporate affiliates (an Ontario corporation and a Canadian corporation) (the “CRI Affiliates”), for which Mr. S. was also the directing mind. CRI’s accounts receivable relating to the distribution of films were transferred to the CRI Affiliates and CRI was wound down with no assets.
Recognition and Enforcement
In May 2013, T. Films commenced an application seeking recognition and enforcement of the arbitral award as against CRI (which CRI did not oppose). On September 13, 2013, Justice Stinson granted recognition and enforcement of the arbitral award against CRI under the International Commercial Arbitration Act (“ICAA”). Since CRI was now defunct and without assets, T. Films also sought to enforce the award against the CRI Affiliates and Mr. S. (collectively with CRI and the CRI Affiliates, the “Cinemavault Parties”) on various grounds including oppression under the Ontario Business Corporations Act (“OBCA”) and breach of trust (which the Cinemavault Parties opposed). Justice Stinson ordered that these remaining issues be transferred to the Commercial List.
“Shell Game” Tactics Foiled by the Court
On January 12, 2015, following an unsuccessful attempt by the Cinemavault Parties to stay the Commercial List application in favour of arbitration, Penny J. granted enforcement of the arbitral award against the CRI Affiliates, and Mr. S. personally as the directing mind, on the basis that their conduct constituted oppression of T. Films, a corporate creditor. Penny J. concluded that Mr. S.’ corporate restructuring of CRI and the CRI Affiliates, including the transfer of CRI’s assets to the CRI Affiliates, was “an elaborate shell game” conducted solely for the purpose of ensuring that CRI was not in a position to fulfill its obligations under the agreement with T. Films and for rendering CRI judgment proof with respect to the arbitration.
Penny J. also found that the unpaid distribution revenues (which CRI had kept for its own corporate purposes instead of paying them out to T. Films) were trust funds belonging to T. Films, for which CRI was liable to account as trustee. Given the impugned corporate restructuring, Mr. S. and the CRI Affiliates knowingly participated in breach of trust and knowingly received trust funds belonging to T. Films, making them liable in tort for the portion of the arbitral award representing unpaid distribution revenues.
Ontario as “Arbitration-Friendly” Jurisdiction
The Court’s decision in T. Films illustrates that Ontario is an “arbitration-friendly” jurisdiction. The Court sent a strong message that parties attempting to engage in “shell game” tactics to render themselves judgment proof in anticipation of arbitration will be scrutinized and will not so easily escape liability. The Court demonstrated its willingness to combine various legal remedies, such as oppression and breach of trust, to fashion an effective enforcement remedy designed to assist successful arbitral plaintiffs chasing a slippery defendant. The oppression remedy in particular may prove to be a flexible tool for recovering against a corporation’s affiliates or directors if their oppressive conduct has obstructed the corporation’s ability to pay a judgment or award. Going forward, parties seeking to enforce arbitral awards should consider these tools that can potentially be used to create an enhanced enforcement mechanism.