Introduction

Does the dissolution of a corporation that is in receivership terminate the receivership? Until the recent decision of Meta Energy Inc. v. Algatec Solarwerke Brandenberg GMBH, 2012 ONSC 175, 2012 ONSC 4873, there was no previous court decision directly on point. The answer to the question is “no.”

Background

A corporation named Meta Energy Inc. (“Meta”) commenced an action in the (Ontario) Superior Court of Justice against a German corporation, Algatec Solarwerke Brandenberg GMBH, and two related entities (collectively, “Algatec”) for payment of moneys owing to Meta for its provision of expert technical consultation services to Algatec. Meta added LD Industries Ltd. (“LD”) as a defendant and sought an injunction restraining LD and Algatec from transferring outside of Ontario certain equipment that LD had manufactured for Meta and that was still in the care and control of LD. A short interim injunction was granted and thereafter a number of other motions were brought for various forms of relief, including the continuance of the injunction.

In one of the many motions in the action, the court made an order that Meta pay to LD $11,000 for the cost of storing the equipment, plus $2,000 for costs, and subsequently, after LD’s dissolution became known, the court further ordered that Meta’s lawyers hold the sum of $13,000 in trust for LD, pending further order of the court or the agreement of the parties.

Motion for Payment of Funds

The subject motion included a claim by Meta that the sum of $13,000 be paid to it. LD opposed the motion and requested that the funds be paid to its receiver. Barbra Miller, a partner in the Litigation Group at Aird & Berlis LLP (“A&B”), acted for LD. The motion was heard by Mr. Justice Peter Annis on December 13, 2011. The reasons for decision were released on January 6, 2012.

Meta’s claim to entitlement to the money being held by its lawyers was based on LD’s dissolution. Meta first argued that when LD was dissolved, it ceased to exist and could not instruct its lawyers, thereby terminating the lawyers’ retainer as of the date of dissolution. The court rejected this argument.

In his reasons for decision, Annis J. first made reference to subsection 242(1) of the (Ontario) Business Corporations Act, which provides, in part, as follows:

Despite the dissolution of a corporation under this Act, (a) a civil ... action or proceeding commenced ... against the corporation before its dissolution may be continued as if the corporation had not been dissolved; ... (c) any property that would have been available to satisfy any judgment or order if the corporation had not been dissolved remains available for such purpose; ...

Annis J. cited a decision, Malamas v. Crerar Properties Corp. (2009), 65 B.L.R. (4th) 277 (Ont. S.C.), in which Matlow J. held that subsection 242(1) implicitly recognizes that a dissolved corporation can instruct counsel to defend any claim against it, and reasoned that the same logic would apply to permit a dissolved corporation to instruct counsel “in defence of an action, particularly where it appears to have been dragged into this litigation as a bystander and forced to incur expenses and costs that have been recognized by the court as recoverable by it.”

Meta made a second argument that, because LD ceased to exist on dissolution, the receivership thereupon ceased to have effect. Annis J. noted the absence of any decision squarely on point, but rejected the argument for two reasons. First, the court made reference to subsection 242(1) above. The court reasoned that the word “proceeding” in paragraph (a) of subsection 242(1) must include “actions taken by receivers on behalf of creditors” and that, by virtue of paragraph (a), such actions “may be continued against a dissolved corporation.”

Secondly, Annis J. referred to the reasons of Farley J. of the same court, then called the Ontario Court of Justice (General Division), in Mortgage Insurance Co. of Canada v. Innisfil Landfill Corp. (1995), 3 O.T.C. 30, 1995 CarswellOnt 1653, 20 C.E.L.R. (N.S.) 19. In that case, the receiver of a corporation, which was dissolved more than two years before, brought a motion to the court to be discharged and for the termination of the receivership. The party opposing the motion, the Ontario Ministry of the Environment and Energy, did not make the argument that the receivership terminated on the dissolution and, in fact, wanted the receivership to remain in effect. Farley J. granted the receiver’s motion, but did not deal directly with the issue of termination on dissolution. Referring to the earlier case, Annis J. wrote, “Despite the dissolution of the debtor corporation, the receivership continued since the property of a dissolved corporation continues to be available to creditors.”

In the result, the court ordered that the sum of $13,000 be released to A&B in trust for LD’s receiver, and that Meta pay costs to LD in the amount of $10,000, such amount to be paid to A&B in trust for LD’s receiver.

Motion for Leave to Appeal

Meta brought a motion for leave to appeal the decision of Annis J. The motion was heard by Mr. Justice Stanley Kershman on April 26, 2012. The reasons for decision were released on August 29, 2012. Kershman J. denied the motion.

Meta made two arguments in addition to its argument that the dissolution of LD terminated the receivership: (1) that Annis J. lacked the jurisdiction to make the order in favour of the receiver of LD, and (2) that LD could not defend the action because of its dissolution.

Kershman J. rejected both arguments. Regarding the first argument, Kershman J. accepted the long-standing principle that a receiver, although appointed by a creditor, acts as agent for the debtor; noted that the order directed payment to the firm acting as receiver in its capacity as receiver, not in its personal capacity; and held that the order was correct. Regarding the second argument, Kershman J. expressed agreement with the interpretation of subsection 242(1) by Matlow J. in Malamas.

Meta’s third argument was that LD’s dissolution terminated the receivership. Kershman J. noted the “clear” effect of paragraph (c) of subsection 242(1) [set out above], namely that, notwithstanding the dissolution of a corporation, its assets are still available to its creditors, and expressed his agreement with Matlow J.’s reasoning in Malamas, that, where there are gaps in a statute, the court should interpret the statute in a way that avoids absurdity. Kershman J. concluded that “[a]ny assets of the corporation would be available to the creditors in order of priority, based on whether they were preferred, secured or unsecured.”

In reaching his conclusion, Kershman J. did not expressly rely on Mortgage Insurance Co. of Canada v. Innisfil Landfill Corp. [above]. However, he did note that, in an earlier motion in the proceeding, Mr. Justice Power had rejected the same argument and that the issue was res judicata [“a matter already judged”].

Conclusion

It is somewhat surprising that no court in Ontario had previously dealt directly with the issue of the effect of dissolution on a receivership. It is useful to have authority on point.