Patel v Chief Medical Supplies Ltd, 2019 ABQB 690

On what basis can professional fees be challenged?

CMS specializes in the development and manufacture of dialysis fluids sold in Canada and internationally. Paul Tulan owned 60% of the issued share capital of CMS through a holding company of which he was the sole shareholder.

The Applicants were minority shareholders of CMS. They sought to appoint an Inspector pursuant to s. 242(3) of the Business Corporations Act, alleging that Tulan used his position as manager of CMS for his own benefit and to their detriment. On January 19, 2016, the Court appointed Ernst & Young Inc (“EY”) as the Inspector.

EY was appointed, empowered and directed through a number of Orders that set out the Inspector’s mandate. Robert Taylor, then employed by EY, was directed to act as team lead. The majority of the Inspector’s work was done via four Inspector’s Reports. EY issued its first Inspector’s Report on July 8, 2016. By subsequent Order, EY was replaced by Deloitte Restructuring Inc. (“Deloitte”) as Inspector when the lead partner on the file moved firms.

Deloitte issued three further Inspector’s Reports. In its Fourth Report, Deloitte noted that no extraordinary events had come to its attention, and the Inspector had taken no further action since issuing its Third Report. Accordingly, the purpose of the Fourth Report appears to have exclusively been to support the Inspector’s application for an Order directing payment of its fees and those of its counsel.

The Inspector and its counsel sought approval of their respective accounts for the period October 26, 2016 to October 25, 2018. Pursuant to the January 19, 2016 Order, the Inspector and its legal counsel were to pass their accounts from time to time. This application marked the Inspector’s attempt to comply with this direction, albeit some 34 months after the issuance of the Order directing periodic passings.

CMS sought to have the accounts of Deloitte and its counsel reduced significantly on the basis that they were not reasonable.

The Court considered whether:

  • Counsel could recover fees associated with the Applicant’s receivership application;
  • Deloitte could recover fees incurred from assisting a professional valuator conduct a valuation;
  • Deloitte could recover monitoring fees associated with its Second Report;
  • Deloitte’s fees ought to be reduced since it did not regularly pass its accounts;
  • Deloitte’s fees associated with the Third Report should not be paid or should be significantly reduced on account of not providing value; and
  • Deloitte could recover costs incurred to pursue payment of its accounts.
On the issue of counsel’s fees for the receivership application, the Court held that the Inspector assisted with the receivership application at the request of the Applicants, without any consultation with CMS or a direction of the Court. Discussions relating to a possible receivership application fell outside of the Inspector’s mandate set out by the Court. As such, CMS could not be expected to pay Deloitte’s or its counsel’s fees.

Second, while all parties agreed that the valuation and the Inspector’s role were separate matters, the Inspector did provide information to the valuator in an effort to avoid duplication of work and, consequently, duplication of charges. As such, the Court held that the Inspector’s participation in the valuation process was reasonable, even though the reasonableness of the fees themselves still stands to be ascertained.

Third, the Court considered whether the Inspector did more work than it was directed to do under a March 16, 2017 Order. It held that the Inspector had drawn a reasonable inference from the March 16th Order that it was to continue its investigative activities. Furthermore, subsequent Orders explicitly directed the Inspector to continue its monitoring of CMS’ business affairs. As such, monitoring was, in fact, part of the Inspector’s mandate and the Inspector’s fees were reasonable in the circumstances.

Fourth, the Court considered the Inspector’s delay in passing its accounts. It found that CMS had not suffered any loss as a result. CMS would have been in the same position if the accounts had been passed more regularly because the Inspector’s fees would have needed to be paid at one point or another.

Fifth, the Court found that the Inspector’s work related to the Third Report had been redundant and, consequently, should not be charged to CMS.

Finally, the Court saw no principled reason as to why the Inspector should not be entitled to recover the costs it incurred to secure payment of its accounts. While the Inspector did some work outside of its mandate, it did not commit any dishonest or reprehensible actions in carrying out its duties. Therefore, the Court held that the costs incurred by the Inspector in pursuit of its fees were broadly within the Inspector’s mandate.

CounselMatthew Kuhl of Burnet, Duckworth & Palmer LLP for the Defendants, Chief Medical Supplies and 1134853 Alberta Ltd. and Afshan Naveed and David Mann of Dentons Canada LLP for Deloitte Restructuring Inc, the Inspector

 

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