Debtor's principal liable for costs of receivership?

BMO v. Can United Consulting Corporation, 2023 ONSC 4773
What is the test for holding a non-party liable for the costs of a receivership?

Overview: In this case, the Court held the debtor’s principal liable for the bank’s costs of the receivership on the basis that his conduct in failing to comply with the receivership order and subsequent orders of the Court amounted to an abuse of process.

The Receiver sought an order, among other things, discharging the Receiver and granting BMO, the Applicant, its costs of the proceeding in the amount of $50,000, payable by the Respondents’ principal, Kai Wu, personally. Mr. Wu was, at all material times, the directing mind of all three Respondents, which had operated as an immigration consulting firm and the authorized signatory on each account of the Respondents.

The Respondents had borrowed $2,100,000 from BMO as part of the federal government pandemic assistance program, particularly the Highly Affected Sectors Credit Availability Program (HASCAP). Pursuant to HASCAP, the loans were extended by Canadian banks, but the principal (not interest, fees or costs) was guaranteed by the federal government through the Business Development Bank of Canada (BDC). After BMO’s receivership order was granted, BDC repaid BMO in full the principal amount outstanding but no interest, fees or costs. BDC subsequently stepped into the shoes of BMO for the purposes of enforcing the loans. The funds advanced were not repaid, and the Respondents did not appear to have any assets whatsoever. Accordingly, BDC advised the Receiver that it did not intend to fund the receivership further and the Receiver sought to be discharged.

The discharge of the Receiver was unopposed, and the Court approved same. The Court also approved the fees and disbursements of the Receiver and its counsel. Finally, the Receiver sought BMO’s costs of the proceeding in the amount of $50,000, to be payable by Mr. Wu personally. BMO argued that Mr. Wu, in his capacity as an officer, director and controlling mind of each of the Respondents, had failed entirely to respect the receivership process and to obey or comply with the orders made in the proceeding or to cause the Respondents, which were under his direct control, to comply with any of their obligations. Mr. Wu’s conduct and, consequently, the conduct of the Respondents, amounted to an abuse of process, and since an order against the Respondents would have no practical effect as they had no assets, Mr. Wu should be personally responsible for the payment of this amount as a non-party.

The Court has the discretion to award costs of Bankruptcy and Insolvency Act proceedings pursuant to section 197 of the BIA, and has the discretion to award costs in any civil proceeding pursuant to section 131 of the Courts of Justice Act. The discretion under both statutes includes the discretion to determine whether costs should be paid, and if so by whom, and to what extent, and the discretion extends to non-parties.

Costs against non-parties who are directors, shareholders or principals of corporations may be ordered in exceptional circumstances if the non-party commits an abuse of process. To constitute an abuse of process, conduct need not require the instigation or commencement of frivolous or vexatious litigation. Rather, conduct of a non-party during litigation can, in appropriate circumstances, amount to an abuse.

The evidence showed that none of the Respondents appeared to be carrying on active business operations. There were numerous bank accounts opened by each of the Respondents, as well as several related companies, for all of which Mr. Wu was the signing authority. Approximately $344,000 was transferred to Mr. Wu personally, $200,000 was transferred to an entity controlled by an individual who appeared to reside at the same address as Mr. Wu, and yet another $10,000 was transferred to a second individual who appeared to reside at the same address as Mr. Wu. One of the Respondents had purchased a Porsche automobile for approximately $30,000 in 2002 and paid a deposit of $30,000 to a realtor, in trust. Bank records also disclosed other payments made by the Respondents, such as disbursements for alcohol and payments to a debt Centre, all of which appeared to be unrelated to the stated business of the Respondents.

The Respondents did not cooperate nor comply with the various orders and endorsements issued by the Court. There was no evidence that Mr. Wu had attempted to comply with the orders or endorsements issued in the proceedings, including by instructing his legal counsel to do so. The Respondents failed to explain what happened to the monies advanced, and did not adduce any evidence to support their bald assertion that the entirety of the funds advanced was used for proper purposes, particularly in circumstances where the record showed significant proportions of the funds advanced being transferred to Mr. Wu personally or to other entities controlled by him. The Respondents did not appear to maintain proper books and records, or if they did, none were produced. Any affidavits submitted by the Respondents were sworn by parties purporting to be employees of the Respondents, but none by Mr. Wu himself.

Having considered the totality of the record, the Court was satisfied that the conduct of Mr. Wu amounted to an abuse of process. This was not a case where Mr. Wu has done nothing other than hold positions as an officer and director of the corporate Respondents at an unfortunate or unlucky period in time. He simply refused and failed to comply with the terms of the original receivership order and the subsequent directions of the court, notwithstanding that those terms were clearly explained to his counsel. This all occurred while counsel confirmed that they were taking instructions from him. Accordingly, the Court held that Mr. Wu was personally liable for costs in the amount of $50,000.

Judge: Justice Osborne

Counsel: Miranda Spence of Aird & Berlis for KSV as Receiver

Stefan Juzkiw of Juzkiw Law Professional Corporation for the Respondents