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FT ENE Canada Inc. (Re), 2019 ONSC 3969

In what circumstances can a director be removed during a proposal proceeding?

Finetex and FTE Canada are in the nanofiber business. Finetex is a Korean public company, and the 100% owner of FTE Canada, as well as an unsecured creditor representing 99% of FTE Canada’s unsecured obligations. FTE Canada filed a Notice of Intention to Make a Proposal in February 2019.

Park is the founder of the business, and the owner of the principal technology and intellectual property necessary to the business. He granted a license to Finetex to use that technology. He has since had a falling out with Finetex, resulting in him being removed from the office of “representative director” of Finetex, but not as a director per se. Park is also the sole director of FTE Canada.

As a result of his falling out with Finetex, Park purported to terminate the license agreement with Finetex. Finetex took the position that the termination was ineffective. Finetex sought an order removing Park as the sole director of FTE Canada, relying on four grounds: 
  • an alleged conflict of interest;
  • allegations of embezzlement and fraud at Finetex involving Park and members of his family from 2011 to 2018;
  • alleged false or misleading representations to the Court in the context of the proposal proceedings; and
  • concerns over continued misappropriation. 
The test for removing a director during proposal proceedings is set out in s. 64 of the Bankruptcy and Insolvency Act (the “BIA“). The Court may remove a director if satisfied that: 
  • the director is unreasonably impairing or is likely to unreasonably impair the possibility of a viable proposal; or
  • the director is acting or is likely to act inappropriately in the circumstances.
While s. 64 of the BIA has not yet attracted judicial consideration, s. 11.5 of the Companies’ Creditors Arrangement Act, which contains virtually identical language, has been considered. The standard of proof is on a balance of probabilities, and the bar is high. The fact that a shareholder may disagree with a decision or does not trust the director is far from being sufficient.

The Court acknowledged that Park and Finetex were in direct conflict, but was not convinced that Park had a conflict of interest with FTE Canada. While Park had purported to terminate Finetex’s license to use his technology, he had agreed to allow FTE Canada to continue doing so.

While there were concerns about Park’s past conduct while employed at Finetex, the threshold test for removal of a director is not a “triable issue” but proof on a balance of probabilities. The report as to Park’s misconduct submitted by Finetex was not properly put before the Court as expert evidence. Moreover, the report did not contain evidence of misconduct or impropriety in respect of FTE Canada’s business during the proposal proceedings. The Court noted that the proposal proceedings were not the appropriate forum for investigating Park’s alleged past wrongdoing in respect of Finetex.

In any event, Finetex’s concerns over possible ongoing misappropriation of funds out of FTE Canada could be alleviated by the fact that the Proposal Trustee is continuing to monitor FTE Canada’s financial affairs. The Trustee reported no concerns over the use and disposition of funds.
 
Finally, the NOI does not create a stay of ordinary corporate governance measures. Finetex could well have invoked its right as FTE Canada’s 100% shareholder to hold a meeting to remove Park as the director of FTE Canada, and replace him with a director of Finetex’s choosing.
 

The Court concluded that while there was some evidence giving rise to concerns, it did not relate specifically to the proposal proceedings at issue. As such, the Court was unable to conclude, on a balance of probabilities, that Park was unreasonably impairing the proposal proceedings or acting inappropriately in the circumstances. It dismissed Finetex’s motion.

Counsel: Mervyn Abramowitz of Blaney McMurtry LLP for FT ENE Canada Inc., Alexander Ilchenko of Pallett Valo LLP for MNP Ltd., the Proposal Trustee, Michael Nowina and Ben Sakamoto of Baker & McKenzie LLP for Finetex ENE Inc., creditor and Patrick Shea of Gowling WLG for Yoonjun Park.

 
 
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